Photo: iStock
Photo: iStock

Move money out of equity a year before goal

You need to understand your risk profile to determine your risk appetite and risk capacity to determine how much equity exposure should be considered

I am 42 years old and have two children—10 and 8 years old. My wife passed away recently. I’ll receive 1 crore as the sum assured from her term plans. My goals are education and marriages of both children. In today’s amount, I want 25 lakh for graduation, 50 lakh for post grad and 50 lakh for the marriage of each child. How should I invest?

— Name withheld on request

The insurance claim needs to be invested in a manner that it grows over a long period of time with adequate risk-reward ratio. But avoid undue risks.

Your financial goals are education and marriage of your two children which are at least 8 years away for the elder child and even there the need of funds is staggered. Hence, we need to consider equity as the primary asset class with the intent of reducing equity exposure when we are closer to the goal. So target to withdraw from equity the amount equal to what is required for the goal at least a year before it is due for payment. For example, if the fees for the first year of college is 8 lakh and is due to be paid in the session of year 2027, the amount should be switched out from equity and invested in ultra short- term funds or in a bank deposit by 2026. At the same time, you need to understand your risk profile to determine your risk appetite and risk capacity to determine how much equity exposure should be considered. For equity, you can spread investments between hybrid, large-cap, multi-cap and small-cap mutual funds. Short-term funds, fixed maturity plans and PPF can form part of the debt portfolio. Based on your taxation, you can consider bank deposits and similar debt instruments.

As you have a lump sum, invest in a staggered manner by first investing in a ultra short-term debt fund and then opting for a systematic transfer plan wherein a fixed amount gets debited from the debt fund and gets credited in the specified fund. This helps in achieving rupee-cost averaging and reduces volatility. STP should be adopted for equity investments.

Also, the goals mentioned can’t be achieved by the claim amount. However, there are no new savings considered from your income which if included will help in attaining them. Include your own retirement planning as a financial goal. Ensure you have a term plan along with health insurance for the family. Finally, make a Will and appoint a power of attorney to ensure your children are taken care of in case something happens to you.

Surya Bhatia is managing partner of Asset Managers. Queries and views at mintmoney@livemint.com

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