I am 24 years old and have just started working. I want to plan for higher studies abroad in 3 years. Where should I invest so that I can save up to Rs10-15 lakh? I plan to take an education loan, and apply for scholarships. I earn Rs70,000 a month and my expenses are Rs20,000.
You have identified three ways to create a corpus—regular monthly savings for the next three years; applying for a scholarship; and based on the corpus saved and the scholarship received, the balance will decide the education loan. Within these, it is actually the first one where you need to create a systematic approach of saving regularly, as in the other two options you really don’t have much control.
There is a potential to save Rs50,000 per month, which, over 3 years will result in a principal corpus of Rs18 lakh.
Where do you save and how much return should be targeted? Before we answer these, it is good to know as how to create an asset allocation. As we have mentioned in our earlier columns, there are three pillars to any investment—safety, returns and liquidity. Any investment to be made for any specific goal needs to be prioritised on the matrix of these three pillars. So, in this case, safety has to be high being an education goal. This is followed by liquidity as the funds are required after 3 years. And lastly is the return. Equity cannot be given a high allocation considering the short- to medium-term need and also a need which cannot be altered. So, the portfolio mix can be a combination of 70-75% debt exposure and 25-30% equity portfolio. Within debt, the average maturity of the portfolio should not be more than 2-3 years, i.e., ideally short-term debt or dynamic category.
Further, as you come under the income tax bracket, you need to identify debt that can be more tax efficient. So, instead of pure equity funds, hybrid funds will be better as some exposure of debt can be created. Hybrid funds or balanced funds, as they are popularly called, are a combination of equity and debt portfolio where a plain balanced fund needs to hold at least 65% in equity and the balance in debt securities. This structure of minimum 65% equity and 35% debt offers them the tax arbitrage as their taxation is similar to a equity scheme, which currently offers nil tax on capital gains, if the fund is held for more than 12 months from the date of purchase. This will help in creating more tax efficiency for the debt portfolio also.
The investments should be on a regular monthly basis via systematic investment plan (SIP). So, a combination of debt short-term, dynamic bond and balanced funds should be a good portfolio. Also, start reducing your exposure to equity (balanced funds) as you come closer to your goal. The rationale is not to have too much in risk assets when your goal is very near.
So, if you target an average return of 10% over the next 3 years of saving, the corpus of Rs18 lakh should become Rs21.06 lakh. And at 12% the corpus will become Rs21.75 lakh. Do not target very high returns as that will make you sway from your portfolio allocation and the last thing you want is risking the principal.
Also, you should understand that even the 20-30% allocation to equity is also a risk of capital but being on the lower side can be considered. But you may decide to not take any risk to capital and take a conservative approach. In that case, target an average return of 8% (corpus becomes Rs20.40 lakh). And at 9% the corpus becomes Rs20.73 lakh. The corpus does not change much with a change of 1 percentage point. The reason is that the tenure is on a lower side. But a 3-4% difference does make a difference.
Surya Bhatia is managing partner, Asset Managers
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