My friend has asked me to advise her on creating a portfolio for her.

She is 33, widowed, with a 9 yr old kid. Her income just about covers her expenses with a marginal amount to spare. She recently received a lump-sum payment of Rs. 4 lakhs that she wants to invest.

She will need money after 6 years when her kid passes 10th grade to cover admission to Jr. College and then after 2 further years to cover admission to Degree college.

I guess that given her situation the portfolio has to be very conservative / low risk.

Would like advise from forum members to help out.

She has a ICICIDirect account.

I would recommend investing in fixed income schemes.

Bank interest rates are around 8% now, and have risen recently.

Or at least , a majority of the 4 lacs should be invested in fixed income schemes. With the market going at 20K, it's difficult to choose a portfolio without the risk of it not appreciating substantially.

Equities won't be a "low risk" investment for her.

If she wants to invest in equities, the right time to do so would be in a bear market.

She should put some part of her money in fixed income instruments.

I am not sure if she can do it by herself, but if she keeps applying for good quality IPOs for flipping, she will get a better return compared to fixed income instruments and that too with minimal risk.

That's what I do with my father's account. I have never bought a stock for him from the secondary market. His stock portfolio is just made up of IPO investments. I keep applying for IPOs from his account and sell them on listing.

As long as we remain in a bull market, IPOs and FPOs will keep coming.

One just needs 6-7 good IPOs in a year to beat a fixed deposit. (Those using ASBA will make an additional 2% or 2.5% from their savings account).

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True. I guess not more than 15% of the portfolio can be in equities. That too only if it is built over time in an SIP way.

She has an ICICIDirect account for over 5 years with no trades. I don't think she is capable of managing this.

The only good thing about her situation is that she has time on her side. She doesn't need the money for at least the next 5 years.

6 years is a decently long period of time to invest in Equity. I would suggest the following:

1. While the bull market is going on, you can keep 2L aside for IPOs/FPOs and sell on listing, as suggested by Alchemist.

2. With the remaining 2L, you can put them in a short term debt fund (like HDFC High Interest Fund - Short Term Plan) and then start a monthly STP (for say 10k per month) from this fund into a good equity or balanced fund (depending on risk appetite) like HDFC Equity or HDFC Prudence. Or you can split the 10k into two STPs for 5k each in both these funds.

Point 2 will prevent investing lump sum in the markets which is not a good idea anyway. But STP (which is like an SIP) will help grow the money over the 6 year horizon.

Is the money she gets on every month is fixed, I mean comes from a fixed source like pension.

I only advice if that is guaranteed monthly income then think about equities.

If she has four lakhs to invest then my view is put 3.6 lakhs in post office MIS connected to RD which yields around 10 percent after six years which beats every fixed deposit rate.

and further I advice to remain with the 40 thousands and put in equities as and when a fall comes.

Generally in December FIIs goes on Christmas vacation , markets may be subdued for the period till they come back after some time.

Lookout for some opportunistic buy in markets.

We create a separate thread for "low risk portfolio" and continue till she gets some decent return.

I wish her to make the money invested in equities will beat the remaining 3.6 lakhs over six to eight years. There are many honest good guys here who can give a opportunistic buy calls and IPO buy calls too.

I have zero idea on mutual funds and debt funds.

Ramkasi

The requirement is to generate a greater sum, minor part of which would be used after 6 years and major part after 8 years.

8 years is a substantial period for equity investments.

Should park the entire amount in in Short Term Debt funds (like HDFC HI Short Term >> last 8 yr avg return of 7.53%) .

Next start with a weekly STP of Rs 2000 for 4 years amounting to 4 lakhs in a Equity Oriented Balanced Fund ( HDFC Prudence >> last 16 years avg of 22.27%).


Investment Analysis

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1. Since she is only investing one time in HDFC MF (say) paperwork related is simple and one time. All substantial transactions can be monitored and done online.

2. Although MIS may yield a higher interest rate, there are issues like

-addition of Interest paid to Taxable Income
-low liquidity and 6 years lockin
-any premature withdrawal includes penalty as well as forfeiture of the terminal interest of 5%.

3. The liquidity in HDFC HI may be used to meet any contingencies as money is credited to bank account within 1 day of withdrawal.

4. Since she is not adept with equity markets and not been using the ICICI account for last 5 years IPO flipping would not work for her.

5. HDFC Prudence being a equity heavy fund with a mutli cap focus will yield superior returns in a phased manner.

6. Given the conditions of equity markets STPs can be modified / stopped at the click of a button from the online portal.

7. At the end of 5 years, she can start a reverse STP from HDFC Prudence to HDFC HI which will transfer the corpus back to debt in the last 3 years.

8. This way all of the equity corpus will be transferred back to debt required to serve the needs at the end of 6th and 8th year.

Why debt funds? Why not Bank FDs & PO schemes

Personally, I think debt funds are a good idea for people who are in the 20% or 30% tax bracket. For people in the 10% tax bracket, Bank FDs make a lot more sense.

Make sure you split the money across banks - Depositors Insurance covers up to 1 lakh per account per bank, including principal & interest - if you stay below that, your money is solidly safe.

Unless the person's pension & other investments put her in the 20 or 30% brackets, this makes no difference.

She is working and falls in the 20% tax bracket.

Even at 20%, I would go for a mix of debt funds along with for PO & Bank FDs.

You can get banks paying 8.5 to 9.0% on FDs. Even if you cut 20% as tax you end up with 6.5 to 7.0%. Majority of the debt funds have a ROI somewhere around this - and this is before you deduct 10% as capital gains in case of the debt fund.

Of course, you have a very small number of debt funds which have show higher returns. For e.g. Gilt funds have shown much higher returns recently - but I don't understand how or why & how they are able to generate such high returns. Plus it's not guaranteed - next year it may fall back to 7-8%.

Anyway, what does the person use for tax saving?

PF Deductions from salary and LIC premiums. I am not sure of the amounts. I will ask and post back.

I think some money (20%) should also be invested in stocks which are stable and government owned like:-

1) NHPC (available at a PE of 15 and P/BV of 1.4):-

Huge projects are scheduled to be complete in the coming 2 years and this can give the earnings a push. Also, the company is looking to get additional income from carbon credits which can give the earnings a push. Also, we may see these companies to be allowed to sell power in the open market which can significantly increase the earnings.

All this available at a PE of 15 makes for a good value buy.

I am looking to add this share to my portfolio and will do it 1-2 days.

2) Coal India- We all know about this company.

3) SJVNL - Available at a PE of 10 but new projects will take some time to complete and hence available at a discount to NHPC.

I suggested debt funds because it is easy to set up an STP, especially if the debt fund and the target equity fund are of the same AMC.

Everyone has a different view.

I think the first thing we need to do is to ask her how much can she afford to lose?

Lets say she invests Rs 4 lac in stocks and this 4 lac turns in Rs 3 lac after 6 years, will she be okay with it?

Unlike debt options like PPF, GOI Bonds, Post Office Schemes etc, there is no guarantee about equity investments.

If India goes to war with Pakistan after 3 years or the US economy collapses, she will get back only a fraction of her investment.

If she isn't currently saving much, 70%-75% of her money should go into fixed income instruments.

Another option for her can be MIPs.

MIPs have done well in the long-term and many of them have given an annualized return of over 9% in the last 5 years:

Mutual Fund :- Mutual Fund Investment, Performance, NAVs, Returns Calculator, Compare funds

These funds invest around 20% in equity and 80% in debt.

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What is the advantage of a MIP over splitting your investment across 2 funds - i.e. if you have 1 lakh - put 20000 in an equity fund & 80000 in a debt fund?

Thanks you everyone for your kind support.

Some clarifications:

1. Current investments under Section 80C (PF + LIC premiums) is Rs. 55,000

2. 4 lac turning in to Rs 3 lac after 6 years is not desirable. Better to trade returns for risk.

I guess what it effectively means is that the portfolio must satisfy two conditions:

1. Be focused primarily fixed income instruments.

2. Investments and returns must be tax efficient considering the 20% tax bracket.

A Safe and Assured return option:

Invest lump sum amount in Post office MIS (Monthly Income Scheme - 6 years scheme with 10% bonus on invested amount on maturity , 3 lakhs deposit will have monthly income of Rs 2000 ) ; Monthly Income will be transferred to Post Office Saving Bank A/c ; From saving Bank A/c money gets transferred to 5 years Post Office Recurring Deposit (RD). Maturity of RD will be after 5 years and MIS after 6 years. Walk into Post Office, Agents will open all the three accounts for you with about 0.5 to 0.75% commission payable to you.

Second is open a Kisan Vikas Patra (8 years 7 Months). Amount will double on maturity.

Third is National Saving Certificate.

How frequently does the PO revise rates? I want to open a new MIS/NSC etc, however, I feel the current rates are a little low. A lot of banks (including SBI yesterday) have raised the rates in the last couple of months. You can get 8.5/8.75 on a 1-2 year FD currently. Any chance that the PO will raise their rates anytime soon?

There is no major advantage, but it is more convenient for the investor.

Also, the fund manager has more flexibility and can reduced equity exposure to 0 if the markets become stretched or if interest rates rise too much (bonds fall too much).

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Thank you everyone.

I took a print of this thread and discussed the options at length with her. I also created a chart of monthly closing of BSE SENSEX since 1991 to date and showed her how the stock market fluctuates and the risks involved. I also discussed how SIPs work and how they can help reduce (but not eliminate) the risks inherent in investing in equities.

I also showed her data for past returns of all schemes mentioned (with caveat that past investment is not guarantee of future returns)

After much thought she felt that the suggestion from PrudentInvestor (Post 7 in this thread) would be most convenient for her.

Accordingly she will implement it at the earliest.

Thanks to everyone again.

There is a new STP structure from HDFC Mutual Fund called Flex STP which works better in falling markets, here's the link.

I changed my father's ongoing STP to this. You can advise her to do the same.

From the online portal at HDFC MF, just 5 minutes is required to cancel ongoing STP and start a Flex STP.

Hold cash or put in a FD.

I think bear wil be back with a vengeance next year!

If you want to invest in mutual funds do that too when Sensex is around 12000 or 14000.

I happened to meet my friend recently and she sends her thanks to everyone on the forum for the help extended on this thread.

So what she actually went with?

I won't comment much since i don't know where she invested.But just for sake of curiosity did she bought any term insurance.Because being a widow now her child only hope is money which is left by her.

In god forbid stake an insurance is must. Even 10 lakh amount term cover will provide some respite in worst case and might provide stairs to the child if he/she faces trouble early in life if your friend passes away.