Higher debt for the elderly

I am a 59-year old practising lawyer and plan to retire at the age of 65. My current portfolio consists of the following investments: 
In shares and mutual funds: Rs 35 lakh 
In PPF: Rs 10 lakh Fixed Deposits: Rs 11 lakh 
Office worth Rs 25 lakh
I am really worried about my equity and mutual fund investments as their current worth have almost halved. Yet, I don't intend to withdraw my investments till my retirement. Additionally, I intend to invest Rs 5 lakh every year till retirement. I also plan to dispose the office after retirement. I want to accumulate Rs 1.25 crore by then. How do I go about it?

One of the first, and most important, steps towards achieving an investment goal is dreaming realistically. The good thing is that it seems like you belong to that ilk.

Your investment goal is reasonable. It looks like you are on the right path towards achieving it. But first, we would like to tell you to not worry over your equity investments. The present worth of your investments is down by almost 50 per cent because you started investing when the equity market was on an upward trend.

Given that the circumstances have changes drastically over the previous year. Right now, you need to be patient. Keep faith in the equity market and as you have mentioned, don't stop investing. The current market state might not be too appealing, but this is the ideal time to invest for the long-term.

Now let's see why we think your goal - of accumulating Rs 1.25 crore - is a realistic one. Your current investments of Rs 17.53 lakh can grow to Rs 34.17 lakh by the time of your retirement, assuming a 10 per cent annual return. Your additional investment of Rs 5 lakh every year for the next seven years, breaking the amount to an SIP of Rs 40,000 monthly, can grow to Rs 47.9 lakh, assuming the same rate of return. So the total corpus you can accumulate from your equity and fund investments would be Rs 82.07 lakh. Add to this, the income from the property that you wish to dispose and the balance in fixed deposits and PPF, a corpus of Rs 1.25 crore seems to be quite realistic.

The good thing about your overall portfolio is that knowingly or unknowingly, you have attained an appropriate equity-debt allocation, in the ratio of 45:55. The allocation is ideal because when you are so close to retirement, you shouldn't be entirely dependent on equity as an asset class to accumulate wealth. Debt provides the cushioning that a portfolio needs to weather the unpredictable equity storms.

Furthermore, another good thing is that your portfolio is high on quality. But while you have chosen good funds and shares, the problem is that you have chosen too many of them. Your portfolio carries too many funds and stocks, which can cause hurdles towards your goal. Hence, you need to restructure your equity portfolio.

Let's look at the problems in your portfolio and work out how you can solve them...

Problem Areas
Diversification
Your portfolio has 23 funds and 19 stocks, which add up to a total of a mammoth 297 stocks. A clear case of over-diversification.

Cap allocation
There is a 40 per cent exposure in mid- and small-caps makes the portfolio volatile and risky.

Irregular investments
Your investment approach lacks discipline as most of your investments are in lump-sums and at irregular intervals.

Sector exposure
Your portfolio is heavy on the energy sector with 30.61 per cent exposure to it. Too much exposure to one sector makes the portfolio's performance overly dependent on it.

Plausible Solutions
Choose fewer funds with proven track records
A portfolio with fewer funds will not only achieve appropriate diversification, but will also help you track their performance efficiently.

Core holdings should be in large-cap funds
High exposure to large-cap funds will reduce volatility and make the portfolio concentrated.

Invest systematically
Systematic investments will bring discipline to your investment approach.

Stay away from direct equity investments
Investing directly in the stock market requires an in-depth knowledge and understanding of the equity market. It also calls for devotion of time. Hence, it's better to stay away from direct equity investments, when you are already investing in equity funds.

Rebalance your portfolio once a year
Since you already have an appropriate equity-debt allocation, you should check and rebalance your portfolio once a year to maintain that allocation.

Keeping in mind the above mentioned points, here is a model portfolio that we have devised to push you towards your goal.

All the best!