Buying a house: Plan for additional costs

If you are planning to buy a house then you must keep yourself ready to open the Pandora box called ‘Cost of house’. Very likely everyone, the seller, the real estate agent or the builder, will tell you about the basic cost of the house only. But once you make up your mind or sign up for the deal, the nonstop demand for the additional costs can leave you frustrated. Therefore in order to avoid any rude shock of bearing these extra costs in future, it is better that you budget for them while planning for your house purchase.

Most of the additional cost are either percentage of the basic price or are calculated on per square foot area. Hence higher the area or the basic price, higher will be your additional costs. The various additional costs can increase your total outflow on the house purchase by 25% to 30%.

Your initial house cost = BSP (basic price per square foot) * Super area in square foot

The various other costs keep on adding to it as purchase process continues. Here is the list of such costs:

At the time of purchase of house property:

A. Down payment:

It is upfront payment to the builder while buying under construction or ready to move in property directly from the builder. It could be anywhere around 10-20% of the BSP.

B. Token money:

It is upfront payment when you are buying resale property. Ideally, It seals the deal stating the agreed upon purchase price and terms and conditions of the sale.

C. Loan

If you are applying for loan from banks then apart from EMIs (equated monthly installments) you will be required to pay the following charges.

1. Loan processing fee

Banks charge processing fees for every home loan application. It is a non refundable and used by banks to complete various formalities during the loan process which includes documentation, service charges etc. It may vary from bank to bank and is generally between 0.25% to 0.5% of the loan amount.

2. Other charges

It includes advocate’s charges for property search and the title investigation report, valuer’s fee for valuation report, stamp duty for loan agreement. The charges are generally on the actual basis.

2. Loan insurance charges and premium

Home loan is a financial burden. It is recommended that the loanee and co-loanee should get themselves insured against this liability. They can either take insurance directly from insurance company or can take home loan insurance along with the loan from the banks. Premium depends upon age of applicant, amount of insurance and additional benefits.

3. Prepayment or foreclosure charges

Pre-payment penalty on the floating rate loans has been abolished. Banks may charge only processing fee. Whereas on fixed rate loans it can vary from Nil to 2% of the outstanding loan amount, depending upon the lender.

D. Title and Valuation check

Once you have narrowed down the property, it is necessary to carry out a thorough search to verify all claims regarding the property. It includes encumbrance certificate, title deed, No objection certificates from various government authorities, other ownership documents, approved layout and building plans, background check of the builder or the society. There have incidents of same property being sold to different people. Hence it is always advisable to take professional legal help to verify and validate the documents.

The charges may differ depending upon the type of consulting service, type of property, city etc. It can be anywhere between Rs. 1000/- to Rs. 30,000/- and may be more in some cases.

E. Additional charges on infrastructure of the house

1. EDC: External development charges

Builder will add this cost to your basic price while calculating the total purchase price. It includes charges for creation of utilities, costs incurred in developing water and electricity supply, sewerage, roads, street lighting, community halls, etc. It is calculated on per square foot area. This may vary from Rs. 25/- to Rs. 150/- per square foot.

2. IDC: Internal development charges

Like EDC, IDC will also be part of your total purchase price and will be demanded at the time of payment. It includes charges for facilities inside the housing complex/ society like garden, internal roads, lifts, fire fighting equipments. It is calculated on per square foot area.

3. IFMS: Interest Free Maintenance security and CD (Contingency deposit)

Builders ask for this deposit to cover maintenance costs for initial years before RWA (Residents Welfare Association) is formed or take over the maintenance work upon itself.

Contingency deposit is demanded by the builder to cover any future price escalations like labour costs.

Both are refundable charges. It can vary between Rs.20/- to Rs. 100/-.

4. Car parking

If you want reserved car parking area allotted to you, you may be required to borne this one time charge. Mostly one car parking is mandatory with the apartments even if you may not wish to buy it. It may vary as per various parking options like open parking, covered parking or basement parking. It may vary from Rs. 50,000/- to Rs. 4,00,000/-.

5. One time club charges

If the housing complex is providing a community hall or club, you may be required to bear the charges. It is a one time charge for the building and equipments of the club. It can be some fixed amount decided by the builder or society. It may vary from Rs. 20,000/- to Rs. 2,00,000/- .

6. PLC: Preferential location charges

It can vary as per your choice of location of house with in the housing complex/ society. Some commonly preferred locations are Garden facing, higher or lower floors, Corner flat etc. To give you an idea, it can be anywhere between Rs.10/- to Rs. 200/- per square feet.

7. Utility connection charges

These are one time charges for utility connection like Gas connection, water, electricity meter connection. It varies as per the builder or society.

8. Cost of fittings and customization

It is usually possible in under construction properties. Outer layout of the house cannot be changed but sometimes builder can customize interiors for you like flooring or changing colour of tiles.

At the time of Registration of house property:

1. Stamp duty and Registration charges

Registration means registration of the documents of ownership with the government office. Unless the process is complete, you do not possess the full ownership of the property. And stamp duty is the tax to the government.

Registration charges could be 1% to 2% of the total value of property. And Stamp duty can be anywhere between 3% to 10% of the market value/circle rate of the property. In India different states levied different stamp duties. Also it will be different if the owner is male, female, joint or senior citizen.

2. Legal Fees

You will be needed to take services of a lawyer for registering the property in the court. Lawyer’s can charge anywhere between 0.25% to 1.5% of the value of property. They may also charge nominal fees for various documentations at times.  

Recurring charges after buying the house property:

The recurring charges after the possession of house will include:

1. Maintenance charges, usually on per square foot area basis.

2. Electricity charges, including both regular power supply from authorities and Generator Running by the society. It will be on the actual usage basis. The cost of power supply generated using DG or Generator by the society can be much higher than the regular power supply.

3. Other charges will include water and gas supply on the actual usage basis, monthly Club charges and yearly property tax.

Buying under construction house property:

1. Service tax

If you are buying under construction property from the builder, you are liable to pay service tax on the purchase price. It may range anywhere between 3.09% to 3.71% of the purchase price.

2. VAT

Recently Supreme Court has levied VAT on the under construction properties. VAT is over and above the service tax. It is very likely that builders will pass on this cost to buyers. It may be any where between 1% to 5% of the purchase price. More is yet to be made clear in this regard, hence it is advisable to ask the builder upfront about the charges and get it in writing.

Buying resale house property:

1. Transfer charges 

Builders and societies charge transfer charges when the original buyer wants to sell it to the third party. Such charges are to be borne by the seller but in several cases the seller tries to pass it on to the buyer. The charges could be anywhere between Rs.50/- to Rs. 1000/- per square foot.

2. Voluntary contribution or premium on transfer charges

If you are planning to buy house from co-operative societies then it will be advisable to check the list of their bylaws. They may sometime expect some voluntary contribution towards the society funds which can come as a surprise after the purchase.

Buying through a real estate agent:

            1. Brokerage + VAT

If you are taking services of a real estate agent, then you must ask for the brokerage and other charges upfront. They may charge any where between 1% to 2% of the purchase price excluding VAT.

During possession of the house property:

            If you plan to shift to the house after the purchase, you must plan to incur further costs.

1. Pure Shifting charges

Shifting charges depend upon the distance, amount and weight of load to be transferred, location of flat like higher or lower floors. Charges for intercity and intra city transfer will be different. You can choose for options like packing, loading, unloading, unpacking and rearranging. It may vary between Rs. 3000/- to Rs. 50,000/-.

            2. Fitments

To make your house livable some more after shifting costs become necessary like cable TV, Phone, internet connections, Electrical equipment fittings, gas connection. Overall they may cost you additional few thousand rupees.

            3. Interiors

Cost of interiors will depend upon the condition of the house and your needs. Many builders provide basic plumbing, flooring and painting. But other additions like wood work, window dressing, accessories for kitchen and bathrooms are to be borne by the buyer. Also if you plan to buy new furniture and home accessories, then it is advisable to budget for them in advance. If you plan to hire a professional interior designer, you need to plan for their fees too. The whole cost of interiors can add few lakhs to your house purchase budget.

Note: All the charges are indicative; you are advised to check the actual charges before taking any decision.

Finally:  Buying a house or investing in Real estate can be a big financial commitment for the buyer. It not only affects immediate financial resources but can also impact future financial resources. It is always advisable to look into all financial commitments as well as study the personal, professional, health, financial as well as psychological situation before committing yourself to such a purchase. Comprehensive Financial Planning exercise can help you understand your situation thoroughly. House Purchase or Real Estate planning is an integral part of Comprehensive Financial Planning exercise.

You may also like to read the following articles on house purchase, home loan and real estate investing.

http://shilpijohri.blogspot.com/2012/04/road-to-buy-your-dream-house.html

http://shilpijohri.blogspot.com/2012/04/tame-your-home-loan-strategies-to.html

http://shilpijohri.blogspot.com/2012/08/what-is-your-real-reason-for-investing.html

Financial Plan prepared by me for Economic Times: Review Plan for Bansode Family!

We are living in a world which no longer offers any 'Guarantee'!

Everyone from Government to Corporate, is caught in the downward spiral of Economic Slowdown. And the worst affected are the smallest unit of economy… ‘Individuals and their personal finance’! In the following case the family has suffered with double whammy of salary cut along with increase in expenses due to inflation. How will they fight back…I have tried to get the answers through the review of their financial plan.

Also I am glad that they have implemented some of the recommendations given in the first financial plan.

http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/Salary-cut-has-put-most-of-Bansodes-financial-goals-in-jeopardy/articleshow/23205695.cms

A year may be a short period when it comes to financial planning, but for the Bansodes, it seems long enough given the changes their finances have undergone, all for the worse. When the Bansodes approached us nearly a year ago, we suggested changes which left them with a surplus of Rs 1,416 per month after investments for their goals. Today, not only has their monthly income fallen by Rs 5,000, but their expenses have gone up by Rs 4,840. More significantly, none of their goals, barring retirement, seem achievable now.

Given the double whammy of reduced income and increased expenses, the Bansodes will either have to find a new source of income to fund their goals, cut down on their financial outgo, or rein in their targets.

The original plan 

When the Bansodes contacted us, Ravindra was working in the aviation industry and lived in Mumbai with his wife Sharmila, 39, his father Pandurang, 75, mother Kamal, 70, and daughters Ananya, 13, and Maahi, 8. As the only earning member of the family, he brought in a monthly income of Rs 45,000.

After accounting for their expenses, which included a home loan EMI of Rs 13,543, a personal loan EMI of Rs 3,265 and an insurance premium of Rs 1,320 per month, they were left with a surplus of Rs 10,680 per month. This sufficed for most of their goals, but the Bansodes were advised to rearrange their insurance portfolio so that they would have had adequate protection.

They were helped by the fact that their portfolio was diversified in equity, debt and cash, and given their age and family size, they had an impressive savings rate of about 20 per cent of the salary.

Our suggestions 

To begin with, Shilpi Johri of Arthashastra Planning suggested that the Bansodes build a contingency fund since Ravindra was the only earning member. For this, they needed to save about Rs 1.2 lakh, which could be arranged by allocating the fixed deposit and cash to this goal, and directing the surplus amount after investing for other goals.

The couple was also asked to beef up theirlife insurance since they had two expensive policies, which provided inadequate cover. Johri advised them to increase the insurance coverage to at least Rs 1 crore. They were also asked to surrender their insurance plans and divert the premium of Rs 1,321 that they would save to fund the new cover.

The family's goals included saving Rs 8 lakh and Rs 10 lakh for the education of Ananya and Maahi after 9 and 14 years, respectively. For Ananya, they were asked to use their direct equity worth Rs 1.58 lakh, along with the equity fund portfolio of Rs 26,000, which would suffice for about half the goal. For the remaining corpus, they were asked to start an SIP of Rs 1,808 per month in equity funds. For their younger daughter's education, they were asked to surrender the child plan that they had bought, and along with the surrender value of Rs 35,000, they were asked to invest Rs 2,276 per month.




For their elder daughter's marriage, the couple wanted to build a corpus of Rs 15 lakh in 14 years. Their PPF balance gave them Rs 2.5 lakh. For the remaining amount, they were asked to save Rs 4,591 per month in equity funds. For the corpus of Rs 22 lakh for Maahi's marriage after 17 years, they were asked to wait, as their surplus did not allow further investment.

For retirement, the couple needed a corpus of Rs 1.1 crore in 20 years. The EPF balance would have sufficed for about 95 per cent of the corpus, while for the balance, they would have to invest Rs 421 in SIPs.

The new plan 

As mentioned earlier, the Bansodes' income has fallen and expenses have increased, which means that practically their entire surplus has been wiped out and their investments have fallen off track. The surplus has dropped from Rs 10,680 to Rs 1,000.

Besides, Ravindra did not follow the advice to reduce his equity portfolio to 6-7 stocks and continues to hold about 20. Given the market conditions, the portfolio has been slashed by about Rs 27,000 to Rs 1.31 lakh.
Bansode also failed to build the contingency fund as recommended, though he has decided to repay his home loan with the earmarked amount. This will help him save Rs 5,560 starting next month. Though this provides the Bansodes with some breathing space, there is little to cheer.

Their inability to start the requiredinvestments last year has resulted in the shooting up of the monthly investment for each goal. However, it seems the Bansodes don't understand the gravity of the situation, for they have scaled up the corpus for each goal. This makes it unlikely to achieve the targets since their current surplus will barely suffice for a couple of goals.

The Bansodes now want to save Rs 12 lakh and Rs 15 lakh for their children's education, instead of the original targets of Rs 8 lakh and Rs 10 lakh, respectively. The situation is the same for their other goals, which seem unlikely to be achieved at the current juncture.





Are they on the right track? 

Apart from buying insurance worth Rs 50 lakh, the Bansodes have not followed any of the recommendations. They did not cut down their stock portfolio and since almost all the scrips are in the red now, Johri thinks it makes more sense to hold them for some more time. However, they must not invest more in direct equity.

The Bansodes hold only Rs 50,000 as cash, and since Ravindra is the only earning member, they must build a contingency fund. From next month onwards, they will also save Rs 5,560 since Ravindra plans to repay the personal loan (he had increased the EMI from Rs 3,265 to Rs 5,560 last year). This amount, along with the current surplus of Rs 1,000 must be saved for at least a year to building the contingency fund equal to three months' expenses.

The only silver lining is that they need to invest only Rs 111 per month for the retirement corpus, which should be easy. Once they build the emergency fund, the family can take stock of the surplus and the time they have to invest for their goals.

"The Bansodes have been hit badly due to the rising expenses and, if possible, a family member should consider part-time work to supplement the income," says Johri.

(Financial plan by Shilpi Johri, CFP, Arthashastra Planning)

Realizing your dreams is not a dream!

Realizing your dreams is Not a dream!

We all have dreams. Dreams are our hopes of future! Dreams give us sense of purpose and keep us alive. They give us direction and keep us moving forward! Our dreams are very close to our hearts and we all wish if our dreams can come true!

Your dreams are the ‘Big goals’ which would mean ‘big changes’ in the way you think, the way you live and the way you work. But as any change would meet reluctance initially such big changes are daunting particularly if you are comfortable with your present. But isn’t it what you wished and aspired for…a change from your present? These changes are your journey towards realizing your dreams. And along this journey you may have already made few changes and must be making some of them even now and that’s exactly what you need to do…small changes that are aligned to the big changes you wish to make. Small changes are easier to make and higher the number of small goals or changes you have attained, greater will be your faith in the present reality and larger will be your hope to accomplish the big goal. But these changes, small or big, should be more than mere wishful thinking rather they should be well defined and thoroughly analyzed realistic action items

Besides doing all the changes you need to be realistic. Being realistic will help you have realistic expectations and set achievable goals. The reality checks may give you some realizations… some very interesting realizations at times! Like, May be you are closer to achieving your dreams than you actually thought! May be you have already achieved some of them and are now aspiring for new ones! May be you want to change the old ones as the times have changed including you! Whatever may be your realizations, you are close to realizing your dreams when you can define them, explain them and enjoy them.

Also, you may face several challenges during this journey and some of them can be very discouraging. But instead of giving up and abandoning your dreams, be hopeful and be persistent! Your dreams are your promises to yourself. They are the promises to keep faith in your abilities and work hard to accomplish and achieve all you want. You are very close to realizing your dreams by being realistically hopeful.

Therefore to realize your dreams you need all you need to do are…small, realistic and promising changes!

Let us examine some dreams to appreciate how starting small, being realistic and being hopeful can get you closer to realizing your dreams. Following are the three dreams which some one can have as a professional, as a parent or as an investor.

Dream: ‘I wish I could have my own company’!  

Hope: As a professional you may wish to turn into an entrepreneur and become an overnight success. Be hopeful and envisage your success story in business magazines and think of your company’s name and logo to start with. Nevertheless from finalizing a marketable idea to collecting funds and getting enviable number of customers is a long way to go.

Reality check: You have a realistic idea when you are sure of its being commercially viable. Also your idea would need funding and Investors would look for return on their investment. Along with a saleable idea and projections of growth they would look for people who are qualified as well as passionate about their idea. Besides having impact on your professional life this decision will also have impact on your personal and financial life. Your own venture will mean a shift from regular income from job to irregular income. It may also mean some waiting period before you start realizing any profits. It is advisable to get into something entirely new only when you have taken care of your financial liabilities like loans and personal responsibilities like child’s birth and education. You are realistically hopeful when you have got back up plan ready i.e. in case your venture does not take off, would you like to and be able to go back your previous job? Or are there other options available? Is there any alternative source of income in case your payback period delays?

Small steps at a time:  Big goals involve big time frame. Therefore once you have decided as to ‘When’ you want to start your venture you can start working backwards. The first step can be validation of your idea by conducting a market research. If the research results in about 20% positive sentiments then you may need to revise the idea. However if there are 70% positive sentiments then your idea is generally acceptable. Small steps like widening your network among the fellow professionals or joining online & offline forums both as a manufacturer and consumer will give you wider and deeper perspectives about the industry. Social media is gaining momentum day by day.  By establishing your identity on social media you can get potential investors interested in your activities. Also it will prepare grounds for future marketing initiatives. At the same time you should keep fortifying your finances by paying off your loans fully or partially, preparing the medical and nonmedical emergency funds and adjusting the expenses as per forthcoming monetary situation. Higher will be the level of preparation and planning, greater will be your confidence in achieving your dream.

Dream: ‘I want to give world class education to my child’! 

Hope: As a parent you may wish to send your child to the best college in the world. Be hopeful, your child can for sure become a Harvard graduate and start next Google and Facebook. However as you already know that possibilities and perspectives are not created in one day and it will need focused efforts to boost your child’s confidence and prepare him/her to take on world class challenges.

Reality check: You are realistic if you are aware of the fact that out of several thousands of applicants around the world less than 5% get selected in Harvard each year. The Ivy League colleges are very selective about the intellectual as well as emotional ability of students. Even fee, which is upwards of $150K (over 1 crore rupees) is high enough to discourage many from being able to afford it. It will be judicious to keep your child and yourself emotionally ready for the alternatives. Prepare your child to choose next best choice of college in case they don’t get into their dream college.  And you can consider taking education loan in case you could gather the required amount.

Small steps at a time:  Your child’s elementary and secondary education is the foundation step for college admission. You have taken a small step once you select a school that focuses on overall development of children and also provide them international and intercultural exposure. Along with grooming in school, grooming at home will play an important role. You can take various steps to increase your child’s intellectual and emotional intelligence at home. Activities like doing puzzles and brain teasers, playing games like chess, reading then explaining and debating on various topics will help in increasing their IQ. Internet surfing (under parental guidance) can also be useful. It will help your child connect globally and help them understand other’s perspective. And they will develop their own perspectives when put to various ‘what if’ situations. By spending time with your child and sharing anecdotes, you will help them understand the real world and there by prepare them to handle real situations.  Similarly activities like playing with other kids, participating in group discussions, meeting people of all age groups will increase their social and self awareness. Hobby like drawing, story writing or playing musical instrument will help them de-stress and channelize their emotions productively. In order to prepare finances you can start saving and investing small amounts regularly and as early as possible. If you are able to gather large sums, you should consider keeping it safe by investing in debt instruments. Since, you are the one providing for your child you must take adequate life insurance for yourself and not for your child. Such steps will gradually shape up a bright future for your child.

Dream: ‘I want to get high returns on my investments’! 

Hope:  As an investor you may wish to earn high returns with minimal risk. Be hopeful and imagine yourself taking all dream vacations and buying all dream cars! But as you know investments take time and need proper strategies to grow and give good returns.

Reality check: You have realistic expectations from your investments when you remind yourself that high gains come with high risk and high risk may even mean losing all your money. Very few investments can give guaranteed returns and the actual returns should be calculated after accounting for inflation and taxes. Besides aiming for good returns, your investments should be a result of careful deliberation of your financial landscape. Equally important are your emotional and intellectual outlook which will define your reactions to result of your investments.

Small steps at a time: In the series of action items your first step should be defining the investment objectives like preparing down payment for buying your dream thing i.e. a car or a house. Prioritizing your requirements will be the next step. This will decide the time horizon of your investments as well as the amount required. It will help you determine expected returns on your investments. On the basis of which you can prepare your investment strategy and finally choose the product. At same time you should explore ability then your willingness to absorb the outcome of your investments. For example,  if you have conservative growth expectations in your profession then maybe you should reconsider having aggressive expectations from market linked investments. Similarly if you have small amount that you cannot afford to lose and want to use as per your convenience then you should consider investing in safe instruments like fixed deposits without worrying about returns being taxable. The best investment strategy is the one which can make the right amount available at the right time. And the best product is the product which you can understand and use as an individual investor and not as a financial wizard.

Dream Big but start small and start today!

All these examples and their analysis assure that taking well defined and thoroughly analyzed small steps will get you closer to your dreams and help you realizing your dreams!

In personal finance: ‘Comprehensive Financial Planning’ is the series of…‘small (sometimes big), realistic and promising changes’ which get you closer to your dreams and help you realize them. It comprises all the steps taken with respect to your financial landscape in the above situations.

During the exercise your dreams and aspiration are translated into meaningful goals with defined time horizons. You current financial landscape which comprises of your personal, professional, physical and financial situations is thoroughly analyzed to understand ‘where and how’ you are at present. It tells you the realistic distance of your present from your dreams of future. The exercise gives you specific action items aligned with your goals. Further, the continuous monitoring of the plan keeps you aware about the adjustments required in your actions or your aspirations.

Be a Dreamer…Be Realistic…Be Hopeful!

My comments on 'How to build a good Mutual Fund portfolio?'- Story in Business Today magazine

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Tips to build a good mutual fund portfolio

Dipak Mondal Edition:March 2013

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Investing requires discipline, even if you regularly put money in mutual funds. Since mutual funds are run by professionals, these are considered good for those who do not have the time and knowledge to invest in shares and bonds. However, building a good mutual fund portfolio requires planning. Though the ideal portfolio depends upon the person's risk-taking ability and age, investors must keep some broad points in mind while deciding which funds they should invest in. A mutual fund portfolio should ideally be divided into two parts - core, for stability and predictability; and satellite, for investments that have a lot of potential but are risky. This not only reduces volatility but also lowers the tax burden. "The premise of the core and satellite portfolio strategy is to minimise transaction costs and tax liability (short- and long-term capital gains) and manage volatility while looking for opportunities to outperform the market," says Shilpi Johri, Certified Financial Planner, and Head, Arthashastra Consulting. IN THE CORE The core, as the name suggests, is at the backbone and must comprise 70-90 per cent of the portfolio. Its aim is giving stability and decent returns. Globally, index funds or passively-managed funds are the first choice for the core. An index fund replicates a benchmark index both in portfolio composition and returns. The fund manager does not have any say in stock selection, which eliminates the risk of wrong judgement. The fund management costs, too, are low. Because they invest in multiple stocks, index funds are well-diversified. In India, actively-managed funds have consistently beaten benchmarks over the years and are likely to continue to do so in the coming years. Therefore, activelymanaged large-cap funds can be a part of the core. These funds invest in large companies and are usually less volatile than mid- and smallcap funds. The portfolio core, if it comprises such funds, will not show any sharp drop or jump in value. "Considering that in India actively-managed funds have outperformed passive funds, which is contrary to global trends, the core should ideally be built around a combination of index and large-cap funds that have a good track record and stable fund management teams," says Vishal Dhawan, founder and chief financial planner, Plan Ahead Wealth Advisors. Equity-oriented hybrid funds can also be a part of the core. These funds have over 65 per cent exposure to equities and 15-35 per cent to bonds. Since the allocation to equities is higher, the returns are in line with those from equity funds. Plus, exposure to debt gives downside protection. Gold ETFs and gold fund-offunds can also be a part of the core. But they should be limited to 5-10 per cent of the overall portfolio. A part of the core portfolio can be used to meet short-term goals if you add debt funds, which offer downside protection. "Ideally, the core portfolio should have a combination of accrual-based funds which follow the hold-to-maturity strategy. These could range from FMPs (fixed maturity plans) of different maturities to short- and medium-term funds with hold-to-maturity strategy," says Vishal Dhawan. SATELLITE PORTFOLIO The core gives stability while the satellite part of the portfolio is for earning above-market returns. The latter's objective is to generate high returns through aggressive products such as mid- and small-cap funds, sector funds, thematic funds and international funds. Duration-based debt funds, which take active interest-rate bets, can also be a part of the satellite portfolio. These do not follow the hold-to-maturity strategy and instead try to profit from capital appreciation. Such funds invest in gilt funds, income funds and floating rate funds. "Never use money from the core part to rebalance the satellite part. If the satellite part is not doing well, play to your strengths and stick to the core portfolio," says Shilpi Johri of Arthashastra Consulting. REBALANCING PORTFOLIO Periodic rebalancing (between equity and debt) of the portfolio is as important as creating a good portfolio. This helps investors keep up with the changing market conditions. We discuss different approaches for doing so. Fixed ratio approach: In this, you keep exposure to equity and debt at a certain ratio based on your age and risk-taking ability. If this changes significantly due to conditions in equity and debt markets, you shuffle the investments to the pre-determined ratio. As an example, imagine a portfolio of Rs 10 lakh with 70:30 equitydebt ratio, that is, the equity portfolio is valued at Rs 7 lakh and the debt at Rs 3 lakh. After a year, suppose the equity portfolio rises by 12 per cent to Rs 7.84 lakh while the value of debt goes up by 7 per cent to Rs 3.21 lakh. Clearly, the ideal ratio (70:30) has been altered. It can be balanced by selling stocks worth Rs 10,500 and investing the money in debt. The rebalancing can be done periodically, say, once a year or on reaching a trigger, say, a 10 per cent change in favour of one asset class. "I prefer the fixed-ratio approach as it is easy to explain it to the client. However, rebalancing should not be done too frequently," says Jayant Pai, head, marketing, Parag Parikh Financial Advisory Services (PPFAS) Mutual Fund. Variable ratio approach: Under this, if the value of the stock portfolio changes significantly, the equitydebt ratio shifts to a new predetermined ratio. If the equity-debt ratio was 1:1 at the beginning, and the equity portfolio rises by more than 10 per cent, you can sell a part of your equity holdings and invest it in debt to bring the ratio to, say, 4:6. Suppose your portfolio of Rs 20 lakh is perfectly balanced between equity and debt. Now, after some time, the equity portfolio rises to Rs 11 lakh and the debt portfolio to Rs 10.6 lakh. If you now want to bring the equity-debt ratio to 4:6, you can sell stocks worth Rs 2.36 lakh and invest the proceeds in debt. As seen in the above examples, this approach requires much greater understanding of future equity market movements for arriving at the new ratio. If you cannot predict the market movement, stick to the fixed ratio approach. Constant rupee value approach: Under this, you keep the value of the stock portfolio constant, investing any appreciation in value in debt, or vice versa. For example, if your equity portfolio is valued at Rs 10 lakh and it rises 10 per cent to Rs 11 lakh, you sell shares worth Rs 1 lakh and invest the money in debt. Similarly, if the portfolio value falls to Rs 9 lakh, you sell Rs 1 lakh worth of debt and invest in equities to keep the value of the stock portfolio at Rs 10 lakh. Though the above discussed approaches bring objectivity to portfolio rebalancing decisions, experts advise a slightly more flexible approach.