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When should you move from equity to debt

If you need money in two years, switch from equity to debt
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First Published: Mon, Dec 24 2012. 07 59 PM IST
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I am 42 years old and I invest Rs.4,000 per month in HDFC Top 200 and Rs.60,000 every year in Public Provident Fund (PPF). But I haven’t seen any increase in my savings. My goal is to build a retirement corpus of Rs.50 lakh. I can invest Rs.10,000 every month. Where should I invest?
—Sushma
Your expectation from the portfolio appears to be quite high. Don’t build too much expectation as this will lead to chasing high returns and unnecessarily prompt you to take high risk (more than required). Your portfolio currently has 44% exposure in equity and the balance in debt, PPF, which is a mix suitable for investors with moderate to medium risk profile.
Now let’s deal with your returns. You earn an average annual income of Rs.10,800, which is an assumed return of 10% on an annual saving of Rs.1,08,000. While this may look small and may not excite you, this is the way you will be able to create wealth in the long run. And it is only after a few years that you will be able to see growth in earnings, i.e. you will start earning from the existing corpus and interest earned as well as additional annual savings. And that is what is called the power of compounding.
If you can consider taking a little more risk, you can increase your risk exposure to 60-65% as this will help you achieve inflation-adjusted returns over the long term.
As far as your existing target is concerned, with a proposed regular saving of Rs.10,000 consistently over the next 17 years, you will be able to achieve a corpus exceeding Rs.50 lakh. And this is when the principal corpus stands at Rs.20.4 lakh accumulated over these 17 years. May be this will excite you.
I am 35 years old and have invested Rs.12 lakh in equities. I will need the money in the next two years for my business. Should I remain invested in equities? If not, where can I deploy the money so that the returns don’t get eroded?
—Biswas
Your need of funds in the next two years is to be provided from the investments made in equity asset class. Hence, you need to be more prudent and should plan to redeem the equity over the next 6-12 months. It is indeed good for you that markets have rallied over the last couple of months and this is precisely the reason why you should look at getting out of equity earlier than when you require.
The redemption can be reinvested in the debt asset class. Based on the time horizon—a year or two years—you can invest in short- or medium-term debt. This will ensure that the capital is available when needed.
Queries and views at mintmoney@livemint.com
Surya Bhatia is managing partner, Asset Managers.
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First Published: Mon, Dec 24 2012. 07 59 PM IST
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