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Asset allocation of your investible corpus will depend on your risk tolerance level (Photo: iStock)
Asset allocation of your investible corpus will depend on your risk tolerance level (Photo: iStock)

Risk tolerance will decide asset allocation of your investible corpus

  • You can consider equity mutual funds and invest in a staggered manner via a systematic transfer plan (STP) by first investing in a debt scheme and then transferring the funds to equity

My wife passed away recently and I received 1 crore from her term plan policy. I wish to use this money to secure the future of my two children. My son is currently six years old and my daughter is 10. I will need 20 lakh each for their college education when they turn 18. I will also need 30 lakh each for their post graduation, and 25 lakh each for their weddings. My retirement is taken care of as I am in the army. Please tell me how this money can be invested to reach the desired goals. Kindly also factor in the inflation.

—Maheesh Singh

The asset allocation of your investible corpus will depend on your risk tolerance level. The risk tolerance can be divided in two parts- risk capacity and risk appetite. As you have a secure job, you do have the risk capacity. At the same time, being a single parent, you need to ensure protection for your children, as they are minors. So estate planning wherein doing a will appointing a guardian for them are also important issues.

The other part is the risk appetite, which needs to be determined in order to enable you to decide on the correct asset mix. Since all your financial goals are long term, it is prudent to consider equity as an asset class. However, equity does carry an inherent risk, and therefore, is recommended only for long-term goals, which does fit your profile. At the same time, it is a volatile asset class and hence needs to be carefully evaluated before investing. You can consider equity mutual funds and invest in a staggered manner via a systematic transfer plan (STP) by first investing in a debt scheme and then transferring the funds to equity. This helps in managing volatility better. You can spread out your investments across various equity asset categories, large cap, multi-cap and mid-cap. You can also consider opening a Public Provident Fund account and short-term debt mutual funds to provide stability to the portfolio. With a good asset mix you will be able to achieve your goals even after factoring in inflation.

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

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