I am 47 years old and my wife is 40. We are both self employed with a monthly income of Rs 1 lakh. We have a loan of Rs 20 lakh towards construction of our house. Our son is 12 and daughter is 8 years old. We have SIP investments in mutual funds and few funds that I bought in lump sum.
What changes should I implement to achieve my financial goals?
— Prashanth Prabhu

There is only one way to describe your portfolio– it’s a mess. In appears that in a hurry to make up for lost time, you have selected funds in an ad-hoc fashion with no clarity. This is a mistake many investors make. They assume that if they have many funds in their portfolio it is safer and much more diversified. Not at all! Having 18 funds does not amount to diversification. In fact, there is way too much clutter. Let’s tell you why. There are way too many mid- and small-cap funds and too many sector/ thematic funds in your portfolio. Such funds should corner a minority allocation in your portfolio. To make matters worse, you actually have two funds that invest in the same sector. What is the need for that? Also, there is an overlap of fund categories because there are too many options from the same fund houses. For instance, you have six funds from Reliance Mutual Fund, four from ICICI Prudential Mutual Fund and three from SBI Mutual Fund. This is certainly not smart diversification.

With such tilt on mid- and small-cap funds and sector and thematic funds, your portfolio is not very stable. We suggest you start rectifying the situation right away. There are 18 funds in your portfolio of which 15 are active monthly SIPs that add up to Rs 57,000. Take a look at our suggestions which we have mentioned in Fund portfolio. Over time, you need to consolidate your holdings to six or seven funds, at the most. That means you have to start selling some of your holdings. When you complete one year of holding of your sector and thematic funds, we suggest you offload them. If you sell before you complete a holding period of 12 months, you will end up paying short-term capital gains tax. Sell after a year to avoid any capital gains tax.

Looking at your goals, you will need Rs 65,184 or Rs 81,522 per month in terms of investments to achieve all the financial goals that you have stated. It’s not possible given the fact that you are servicing a home loan and also incur household expenses. Considering you plan to retire at 60, which is just 13 years away, you do not have the comfort of achieving all your financial goals with ease.

Our suggestion is that you take a fresh look at your goals. Can you postpone your retirement? Can you lower the amount for certain goals, such as your daughter’s wedding? Alternatively, you have huge amounts to save for your children’s education. If it is higher education, then they can look at taking an education loan at that time. Do keep a strong focus on your retirement goal as you cannot compromise on that.

Action list
* With two children in school and a home loan, it is wise that you and your spouse take out a term insurance policy on each of your names
* Do ensure that you and your entire family are also covered by medical insurance
* It will be a good idea to create an emergency fund that takes into account a few months’ household expenses in the case of an emergency
* Since you obviously will not have an Employees Provident Fund (EPF) being self employed, consider opening a Public Provident Fund (PPF) account in your name and your wife’s name
* Right now, your focus should be on de-cluttering your portfolio and clearing out your home loan so that you have no liabilities
* All investments into mutual funds in the future must only be done systematically and not in an ad-hoc or lumpsum fashion
* Currently, your SIPs add up to Rs 57,000/month and it looks will not be sufficient to help you reach your goals
* Keep track of your portfolio to replace a fund that is consistently underperforming with another
* We would also recommend that you do not retire at 60 but maybe extend that a bit so that your goal is a little easier to achieve
* Try to rescale the goal of Rs 50 lakh for your daughter’s wedding