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| Make up for lost time |
| BS Research / Mumbai Aug 01, 2010, 01:09 IST |
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I am 42, with three dependants - wife and two children. I invest Rs 1 lakh a year for tax saving (Ulip + other insurance + PPF). I have invested in mutual funds (as mentioned) in lumpsum. I want to invest Rs 20,000 a month in mutual funds to achieve my goals. Please review my portfolio and suggest changes with suitable funds.
GOALS
Daughter's Education Rs 8 lakh 2012-2016
Daughter's Marriage Rs 25 lakh 2015
Son's Education Rs 12 lakh 2016-2020
Buying a Home Rs 75 lakh 2020
Retirement Rs 1 crore 2025
An overall look at your investments suggests around 50 per cent in debt and 50 per cent in equity. While debt provides with secure returns, the instruments you have chosen are illiquid and not tax efficient.
Mutual funds form 98 per cent your equity portfolio and the rest (2 per cent) is in shares. Since you have been investing in mutual funds irregularly only over the past few years, time is not on your side.
You are willing to invest Rs 20,000 a month to achieve your goals, but this is insufficient. Even if we look at your current investments, it won’t add up.
Age is definitely on your side and you are the sole breadwinner with three dependants, you would have to do some serious re-thinking.
It would be great if you could increase your planned monthly investment of Rs 20,000. Unfortunately, that is not possible. Your current monthly outgoing are Rs 50,000 (EMI + Rent + Expenses), leaving you with Rs 25,000. And you do have other commitments like Public Provident Fund (PPF) and insurance premiums. Our suggestion is that you enhance the equity allocation to 80 per cent for the much needed higher return.
Take a fresh look at some of your goals. You plan to buy the home in 10 years. By then, you would have completed the equated monthly instalments (EMIs) on the land loans. Do you plan to sell any of the land then to buy the home? Also, can you retire a few years later?
A fresh look at insurance
You bought a unit-linked insurance plan (Ulip) for tax saving. But, they are high-cost instruments, where a significant portion of your initial premium is deducted as charges. Due to such upfront costs, the policyholder needs to stay with the policy for a very long term, since you recover the costs only after the first few years. Take a look at the policy document for the surrender charges (fee levied for exiting before maturity). Talk to the agent and ask him what would happen if you stopped paying fresh premiums but don't surrender. Some times, if you discontinue your premiums after a minimum of three years, your policy can continue if the value of your investment is big enough to cover other fees which need to be incurred.
Instead, opt for a term insurance policy. It is a pure life insurance policy which is much cheaper than other insurance products and will provide financial support to your dependants, should something happen to you.
Consolidate your portfolio
# We have selected seven funds for you. You may sell the remaining ones. Gradually deploy the proceeds in the existing portfolio, ensuring that the core funds constitute up to 80 per cent of the overall portfolio.
# Invest your planned monthly systematic investment plan (SIP) in four funds from those suggested. Deploy up to 70 per cent in the core funds.
# Do not choose a tax saving fund if contributions towards PPF, insurance exhaust the exemption limit under Section 80C. Choose funds across fund houses.
# Your portfolio lacks a debt fund. You could invest around 10 per cent in a good debt fund like Fortis Flexi Debt. It will give stability to the portfolio and help you rejig it.
# Near to the goal, sell your equity units and shift them to debt fund.
# Keep track of the performance of these schemes and monitor your portfolio from time-to-time.
Missing in your portfolio
# You have invested in way too many funds (18). Everyone wants to diversify, but you can achieve an excellent amount of diversification with less than half the number of funds. Ironically, of your entire fund portfolio, 51.72 per cent is allocated to six Reliance schemes. This beats the purpose of diversification. Diversification is not just numbers, but should be across fund houses, investment styles and market caps.
# Your investments are in lump sum and not via a SIP. This shows your irregularity with investments. This does not give the benefit of riding market highs and lows when you invest at one go.
# Investing in new fund offerings (NFOs) is not recommended for they lack any track record. You have invested in three NFOs and six new funds. Why did you choose funds which have no history, especially when there are so many proven schemes in the market?
# You invested in a close-ended fund, SBI Infrastructure Fund Series-1. It should be avoided,since it is not as liquid as other schemes in the same category. Fortunately for you, this fund just turned open-ended on July 5. This will give you the exit route.
# Your exposure to large-cap stocks is 48.17 per cent of the portfolio; increase it to 70 per cent.
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