Build an equity-heavy portfolio to meet child’s education or marriage goal

Only this will ensure that you are able to meet the escalation in costs over a 15-20 year horizon For Indian parents, providing the best education that they can afford to their children is a very important goal. Getting a girl child married into a good family is another important one. In fact, many parents start saving and investing for these goals right from the day the child is born. However, besides saving adequately, having the right asset allocation and choosing the correct investment instruments is equally important. These are aspects where many parents go wrong. Before you begin to save for the education or marriage portfolio, first buy adequate term insurance for your family. This will ensure that even in the case of an unfortunate event, there will still be money for the children’s education and marriage. The next step is to begin saving any extra money that comes your way. Children get small sums of money on several occasions from relatives and friends. Parents often squander this money because they consider the amounts to be too small to be worth saving. However, if such sums are saved diligently, they can add up to a tidy sum by the time the child is ready to go to college or get married. Next comes the task of constructing the right portfolio for these goals. Since they are very significant goals, parents often err excessively on the side of caution and invest all the money in fixed-income instruments, such as recurring deposits. Actually, you should invest the bulk of the portfolio in equities, for two reasons. One, these goals would...

Adopt a safety-first principle in debt funds

At present you should stick to funds that avoid both duration risk and credit risk ? Debt funds are sold to investors as a less risky alternative to equity funds. However, investors should not make the mistake of equating these funds with instruments like fixed deposits where there is no risk of loss of capital. In debt funds, investors can suffer erosion of their capital, owing to a variety of risks. The first type of risk in debt funds is interest-rate risk. When interest rates are falling, prices of bonds rise. This results in capital gains within mutual fund portfolios, which boosts their returns. But when interest rates are rising, prices of bonds within debt fund portfolios decline. Such losses are higher in case of bonds of longer tenure, and lower in bonds of shorter tenure. Over the past year and a half, interest rates have been on the upswing in India. In such a scenario, investors should stick to debt funds that have a low average maturity. Liquid funds, ultrashort term debt funds, and short-term funds are some of the categories of debt funds that investors should stick to in a rising interest rate environment. The second type of risk that debt funds face is credit risk. When a bond that is held within a mutual fund portfolio gets downgraded, or defaults, the net asset value (NAV)of the fund declines. This is what has happened in the case of IL&FS and its group companies. This company and its subsidiaries currently have a total debt burden of around Rs. 90,000 crore. Of this mutual funds hold around Rs 2,282...