Readers' Corner: Financial Planning

A Q&A on financial planning

I have nine funds in my portfolio. Four balanced funds, two equity-oriented child plans, one short-term debt fund, one small-cap and one large-cap scheme. The child funds are for my two daughters. A year back, I invested lump sum of Rs  10 lakh for each one of them. Can you suggest if I should tinker with the portfolio? I am 35 and don't need any of this money for the next 10 years.

On the face of it all looks okay. Many questions for you to consider; why have four balanced funds? Why have a debt fund unless you have some short-term goal. You’re just 35, why invest in balanced funds at all? If the children’s investment is in unit-linked insurance plans (Ulip), consider moving them to an open-end equity mutual fund as historical performance has been visibly better. So basically there is a fair bit of alteration required. The principles that you have applied seem to be correct; however, there needs to be more work to be done on the portfolio strategy. Have one or two large-cap schemes, one or two mid- and small-cap schemes and perhaps one or two sector-oriented funds. For short-term needs use liquid and short-term funds and for medium-term needs use balance funds. For children specifically consider using mid and small-cap schemes.

I am 36 and planning to buy a three-bedroom house for Rs  1 crore. My family has two options. One, my father sells his existing smaller property for Rs  70 lakh and I take the loan for the remaining money. Two, I take a loan of Rs  75 lakh and borrow the remaining money from family. How should I choose between the two option?

These are not really options. Perhaps this is a matter of family choice and priority. I believe that if this is going to be your property and if you can afford the equated monthly instalment (EMI), then consider taking the entire loan yourself and borrowing the rest from your family as needed. The first option could also become interesting, provided you choose to borrow the maximum that you can, invest the sale proceeds of your previous property into good investments, keep bearing the EMI and when there are substantial profits in your investments, use those profits to make prepayments/repayments of your outstanding loans.

When you recommend a term plan to clients, how do you evaluate? Is price the only consideration?

Price is a key consideration when recommending term plans. So far as your disclosures are adequate and accurate, there is no reason the company should repudiate or reject your claim. The insurance policy document is an important document to be read and if you are not happy with the clauses contained therein, you have the choice returning the policy to the insurance company within 15 days.

I am planning to buy a car that costs Rs  5.5 lakh. I have investments worth Rs  13 lakh. Should I break my investments or take a loan? I am in the early thirties.

Consider that you are paying in cash to buy a car loan, you will lose an opportunity to earn returns on your investment. Secondly, when you spend cash on a car, value of such assets depreciates as soon as you drive the car out of the showroom. If the returns earned on your investment covers the financing cost, that is, EMI of a car loan, then getting a loan would be more beneficial than paying it outright. Alternatively, if you’re in a position to be able to afford the EMI of the car loan, then get the loan and use the profits of your investment to make the prepayments.