Financial Guidance

I am 38 years old, and have a six year old son and a four year old daughter. My monthly income is Rs 25000 and my monthly household expenses work out to Rs 12000.

I invest in SIPs as follows:
1. HDFC Mid-Cap Opportunities Fund at Rs 1000 since November 2011
2. DSP BlackRock Top 100 Equity Fund at Rs 2000 since August 2010
3. Fidelity Equity Fund at Rs 1000 since February 2010
4. Invested Rs 10000 in SBI Magnum Midcap Fund through an SIP
All these funds are with a Growth option.

Further, my premium paying policies are as follows:
1. LIC Jeevan Shree – Rs 5 lakh sum assured, with a  yearly premium of Rs 25000 since January 2002
2. LIC Jeevan Saral – Rs 2.5 lakh sum assured, with a yearly premium of Rs 12000 since July 2011
3. Max New York Life – Rs 6 lakh sum assured, with a yearly premium of Rs 17000 since March 2011
4. LIC Pension Plan – Rs 9.5 lakh sum assured, with a yearly premium of Rs 36000 since Dec 2011

Is my portfolio sufficient to reach my target fund for my son's higher education and my daughter's wedding?

I also take an opportunity here to sincerely thank the DSIJ team for providing valuable information.

- D Murthy

Answer -

The following table highlights the current SIPs undertaken in the portfolio:

Sr. No.	Funds	Amount (Rs)
1	HDFC Mid-Cap Opportunities Fund	1000
2	DSP BlackRock Top 100 Fund	2000
3	Fidelity Equity Fund	1000
4	SBI Magnum Midcap Fund	10000
Total		14000

I have made some assumptions for the future, since your query does not clarify how much you plan to spend for the children.

1.    Cost of daughter’s wedding (in today’s rupee terms): Rs 5 lakh
2.    Cost of son’s higher education (in today’s rupee terms): Rs 5 lakh
3.    Daughter’s age at marriage: 23 years
4.    Son’s age at graduation: 21 years
5.    Inflation rate: 10 per cent for education and 6 per cent for wedding
6.    Anticipated returns on moderate portfolio: 13-15 per cent

Given that equity funds may grow by atleast 13 per cent p.a. in the long run, the SIPs that you have could accumulate more than what you will need. Accounting for inflation, the cost of education 11 years from now could be around Rs 15 lakh, and the amount that may be required for the wedding 19 years from now may also be around Rs 15 lakh. At a conservative growth rate of 13 per cent p.a., the amounts accumulated would be around Rs 20 lakh and Rs 69 lakh (assuming that half the SIP is for your son and half for your daughter). In this scenario, you could even consider reducing the risk in the portfolio with some quantum of debt, say around 35 per cent, instead of having 100 per cent equity. This would increase the safety in your portfolio.

I would reckon that a monthly SIP contribution of Rs 8000 would suffice for both the goals – let the rest go in as savings for a rainy day. At the time of the marriage or payment of fees, draw the amount required from the corpus and let the rest grow. Unless the sums needed are far more than what is indicated here, the plan should work.

With a ‘moderate-to-aggressive’ risk profile, we recommend allocating 35 per cent of your total monthly SIPs for debt and 65 per cent for equity. You can restructure your SIP portfolio on the following lines:

Scheme	Type	Amount (Rs)	Percentage
DSP Blackrock Top 100 Fund	Large-Cap Equity	3300
Fidelity Equity Fund	Large-Cap Equity	3300
IDFC Premier Equity Fund	Mid-Cap Equity	2500
Total Equity		9100	65
Templeton India Income Opportunities Fund	Medium Term Bond Fund	4900
Total Debt		4900	35

Out of the total equity allocation of Rs 9100, Rs 6600 of SIPs can be directed into the already existing Large-Cap funds in your portfolio – DSP Black Rock Top 100 Equity Fund and Fidelity Equity Fund. Also, we recommend that you stop your SIPs in the SBI Magnum Midcap Fund and HDFC Mid-Cap Opportunities Fund, as these are higher risk funds. Instead, you can channelise the remaining Rs 2500 into the IDFC Premier Equity Fund, an outperforming Small- and Mid-Cap fund.

The remaining Rs 4900 can be invested in a debt instrument, Templeton India Income Opportunities Fund. The present yield to maturity of the portfolio is 10.09 per cent p.a., making this a sensible debt instrument with a low re-investment risk.

With regard to your life insurance plans, the total premium on your insurance policies amounts to Rs 90000 vis-a-vis a cover of only Rs 23 lakh. I suggest that you opt for a term plan instead, and reduce your premium payments. The savings on the premium payable can be invested in mutual funds instead, which will add to your wealth. Met Suraksha Plus, for example, is a term plan where the premium for a 38 year old male is only Rs 26000. Therefore, the remaining Rs 64000 can be invested in the above mentioned funds, at the same proportion of 35 per cent in debt and 65 per cent in equity.