Method of Allocation towards Debt once goal is reached

POSTED BY Ram Mohan ON May 4, 2012 5:52 pm COMMENTS (2)

Hi Experts:

Let’s assume a hypothetical scenario. I’m saving 5500 p.m for my daughters education (19 years away) with a goal of accumulating corpus of 50L. Assume that 50 L is enough and I can only put in 5500 p.m and cannot increase it.

Now, let’s assume that after 14 years, my target is reached (5 years ahead) due to good market conditions. It’s very possible — for all the doubters, go to http://www.moneycontrol.com/mutual-funds/nav/hdfc-equity-fund/sip-calculator-MZU001.html and you’ll see that you would have gotten a CAGR of around 25% from 1999 to 2012.

Anyways, coming back to the question, once target is reached, what to do? Move entire amount to debt fund? Or do a STP to debt fund? In both cases, if the current tax situation prevails LTCG is imposed. Both methods have plus and minus.

Plus in moving entire corpus to debt fund is that you’re off course protecting the target. Minus is that you’re possibly missing out on further gains.

Can experts shed some light on this?

Thanks,

Ram

2 replies on this article “Method of Allocation towards Debt once goal is reached”

  1. Dear Ram, switch as amount that ‘ll be sufficient to reach the target value based upon the debt fund return. it may be 60%, 70% or 80%. Rest you may keep in Eq. itself & at the same time, keep investing those 500 in the Eq. The excess amount received from Eq. at the end of desired term (19Y in this example) can be used for any other goal say retirement funding, d’ter marriage……

    Thanks

    Ashal

  2. Spot on. True. As you approach a goal you move the goal amount to Debt to safeguard them. If you have 5 years, as taken in this example, then perhaps moving about 70-75% of the needed goal’s corpus to Debt in bulk makes sense leaving the remaining corpus to grow for 5 more years. (IF you invested Rs. 75 in Debt for 5 years and assuming a 6% post tax return this corpus alone would become Rs. 100 – for the goal)

    However if you are close to the goal (say 2 years) then it helps to protect the corpus needed for the goal and leave the rest to grow. At the end it does not matter whether you beat the market – but whether you fulfilled your financial goals!

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