Case 028Client portfolios and goal planningHard

A parent needs about Rs 91 lakh for college fees in 15 years and has Rs 6 lakh saved. What monthly SIP does she need, and how should the portfolio move from equity to debt in the final three years?

The situation

Aditi Joglekar, 38, wants to fund her son's engineering degree, which starts in 15 years. The course costs about Rs 25 lakh today, and she assumes education costs rise 9% a year, which puts the bill at about Rs 91.1 lakh when he starts. She already has Rs 6 lakh in an equity fund earmarked for this.

Her adviser assumes, for planning only, that equity funds return 12% a year and short-term debt funds 7%, so an 80/20 portfolio earns about 11%. She can invest monthly from her salary and does not want to touch the fund for anything else.

Your task

What monthly SIP does she need at a flat 11%? What changes once you plan a glide path out of equity in the last three years, and why is that glide path worth its cost?

Quick check

Does moving to debt in the final three years raise or lower the SIP she needs?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

At a flat 11% she needs about Rs 14,300 a month; with a three-year glide path into debt she needs about Rs 15,400. Her Rs 6 lakh grows to about Rs 29 lakh at 11%, leaving the SIP to fill the rest of the Rs 91.1 lakh goal. The glide path costs about Rs 1,140 a month, and in return a 30% equity fall in year 14 costs about Rs 9 lakh instead of about Rs 18 lakh.

Step 1What is the goal in the money of the year she pays?

Start from the bill, not the fund. A goal priced in today's rupees must be grown at its own inflation rate to the year it falls due. Rs 25 lakh at 9% for 15 years is 25 x 1.09 to the power 15, about Rs 91.1 lakh. Education inflation is the planning assumption most worth revisiting each year: at 7% the goal would be about Rs 69 lakh, at 11% about Rs 120 lakh.

Her Rs 6 lakh already works for the goal. At 11% for 15 years it becomes about Rs 28.7 lakh, so the SIP must build the remaining Rs 62.4 lakh. With monthly compounding at the equivalent of 11% a year and instalments at the start of each month, that takes about Rs 14,300 a month for 180 months.

Step 2Why take risk off before the goal, and when?

A family saving for a wedding does not keep the catering money in shares the week before the ceremony. The logic is the same here. Three years before the fees fall due, the plan stops being able to wait out a fall, so risk comes off on the goal's calendar, whatever markets are doing. Here the equity share drops from 80% to 60% in year 13, 40% in year 14 and 20% in year 15, with the fee money in debt or liquid funds by the time it is needed.

Risk comes off on the goal's timetable, not the market's1234567891011121360%1440%1520%80% equity, 20% debt for 12 yearsYearCollege fees dueRs 91.1 lakh25 lakh at 9% for 15 yrsGlide starts: 3 years outequitydebtBlended return assumed: 11% in years 1 to 12, then 10%, 9% and 8% (equity 12%, debt 7%, assumptions)
The portfolio holds 80% equity for twelve years, then steps down to 60%, 40% and 20% equity in years 13, 14 and 15, so that the Rs 91.1 lakh due at the end of year 15 is mostly in debt by the time the fees are paid.
Step 3What does the glide path cost, and what does it buy?

The final three years now earn about 10%, 9% and 8% instead of 11%, and they are the years with the largest balances. Rerunning the plan, the SIP rises to about Rs 15,400 a month, roughly Rs 1,140 more. That extra is an insurance premium against a crash arriving just before the fees. By the start of year 14 the corpus is about Rs 74 lakh. A 30% equity fall that year would cut about Rs 17.7 lakh from an 80% equity portfolio, but about Rs 8.9 lakh from a 40% one, and there is no time left to recover.

How the goal is filled, Rs lakhRs 6 lakh saved, grown27.2SIP money paid in+27.7Growth on the SIPs+36.1Goal at year 1591.1SIP needed: about Rs 15,400 a month for 180 months
On the glide path the Rs 6 lakh already saved grows to about Rs 27.2 lakh, SIPs of about Rs 15,400 a month add Rs 27.7 lakh of her own money, and growth on those instalments supplies the remaining Rs 36.1 lakh of the Rs 91.1 lakh goal.

Two practical notes finish the plan. If the SIP is hard to afford today, a yearly step-up of 8 to 10% in line with her salary starts lower and reaches the same goal. And the 12% and 7% returns are assumptions, not promises: review the plan every year, and if returns run behind, raise the SIP early rather than add risk late.

Where candidates lose it

The usual loss is planning for Rs 25 lakh, today's price, and producing an SIP a third the size it needs to be. The interviewer gave you the inflation rate precisely to see whether you use it.

The second miss is holding 80% equity until the last month because the long-run return is higher. The long run is exactly what a goal three years away no longer has.

What the interviewer asks next

  • Her salary rises 10% a year. What starting SIP with a 10% yearly step-up reaches the same goal?
  • Equity returns 9% instead of 12% for the first five years. What do you change, and when?
  • Would you glide over three years or five for a goal like this, and what decides it?
  • She receives a Rs 5 lakh bonus in year 6. How much does it cut the SIP?

Company names and figures are illustrative.