I am 63 and single with both my adult children being financially independent. I live in a self-owned apartment in Mumbai and have no other property. My income for living expenses is from interest earned on fixed deposits with banks. I have no income from salary, except dividends from shares and proceeds from redemption of mutual fund investments as and when I need it. I specifically want you to review and help me with my mutual fund portfolio.
— Rose Prabhu
To hold a mutual fund portfolio of 18 schemes is way too much. That too this is in addition to the stock portfolio. Since all these investments have been done in the past, either by way of lump sum or systematic investing, some of them can be safely exited. The aim of mutual fund investing is convenience and monitoring such a huge portfolio defeats the task.
If Prabhu was investing with the aim of being diversified, it has turned out to be quite meaningless. You can achieve optimal diversification with just six funds. Here there are plenty of schemes from the same category as well as same fund houses. Diversification is not just in terms of number of schemes but investing style too.
Currently, the mutual fund portfolio is very aggressive with a 90 per cent equity exposure which is large cap and growth oriented. The top three sectors; Finance, Energy and Telecom account for a 45 per cent allocation. The top five stocks are fairly conservative at just 18 per cent - ICICI Bank, Infosys, Airtel, Reliance Industries Ltd and State Bank of India.
We suggest she exits the poorly performing low rated equity linked savings schemes (ELSS) if she has completed the three-year mandatory lock-in required for tax-saving funds. We also feel she should exit mid- and small-cap funds. There should be more of a focus on large-cap funds in this portfolio.
If Prabhu follows these suggestions, she will be left with eight equity funds and two balanced funds (down from 18 funds). This money can be put in a liquid fund and transferred to the equity balanced funds she has periodically. Alternatively, she can even look at a few good 5-star rated monthly income plans (MIPs). Using this strategy over time, she can further prune her portfolio. She should review the performance of her investments regularly and make any changes to fund holdings in case of non performance.
Prabhu has 45 per cent of her savings and investments in equity through stocks and mutual funds and the rest in fixed return instruments such as PPF, NSC and bank deposits. While this is a high allocation to equity given her age, it is not too dangerous since she has no dependents and no liabilities. Furthermore, this will help in capital growth which can beat inflation and match the rising cost of living that she will incrementally face each passing year.
Since Prabhu has no dependents, there is no need for her to have a life insurance policy. What is mandatory though is a health insurance cover. On the other hand, maybe she could consider a householder’s insurance policy to protect her from the risk of burglary.
Investments & Outflows
Current Valuation of the Instruments
(Combined worth of portfolio of 18 schemes)
Rs 35 lakh
Public Provident Fund (PPF)
Rs 29 lakh
Rs 50 lakh
National Savings Certificate (NCS), to mature in 2012
Rs 6 lakh
Rs 40 lakh
Annual household expenses
Rs 7 lakh
Annual travel expenses
Rs 2 lakh
She is predominantly dependent on interest income from bank deposits and dividends from stocks and mutual funds. However, the bank deposits need to be worked optimally because interest income from deposits is treated as income and taxed accordingly. Income up to Rs 2.5 lakh is exempt from tax for senior citizens and anything above this would fall under the different tax slabs. She should look at limiting her income from bank deposits to this limit. Prabhu comes across as very balanced in managing her savings, investments and spending. She should consider drawing up a Will, if she has not done so far, to address legacy issues. Her ability to live within her means and smart handling of finances is a lesson for all that age is no bar when it comes to being smart with your money.