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Funding Family's Future

Planning for the family in advance is always the best option

Sivakumar K. is a 33-year old IT professional with two dependents, a wife and a baby who is not yet a year old. We looked at his current investments and earnings and came up with a portfolio to meet his goals.

My Investments
Rs 1.4 lakh in 3 tax-saving funds via an SIP, all of which are terminated
Rs 40,000 in Reliance Infrastructure fund, at one go during the NFO period
3 unit linked insurance plans (ULIPs)
Rs 46,000 p.a. to the CPF
A few investments in stocks of companies
Current Monthly Salary = Rs 80,000 p.m.

My Planned Portfolio
For a total investment of Rs 27,000/month  
Investment Avenue  Monthly Contribution (Rs)
Magnum Contra 4,000
Magnum Tax Gain 4,000
Sundaram BNP Paribas Tax Saver 3,000
Tata Infrastructure 3,000
Sundaram BNP Paribas Select Midcap 2,000
Reliance Growth 2,000
Reliance Diversified Power 2,000
UTI Gold ETF 2,000
Benchmark Gold ETF 2,000
Post Office MIS 2,000
Reliance MIP 1,000

My Goals
Build a corpus for my daughter’s education
Build a corpus for my daughter’s marriage
Save for retirement

My Concerns
I would like to discontinue my ULIPs. But if I do so, I will have a shortfall in my sum assured of Rs 28 lakh. I am not too inclined towards term plans as they do not pay anything after the expiry of the term.
When I retire, I would like to lead a lifestyle similar to the one I am leading now.
I also plan to buy some blue chip funds systematically over the next 25 years. Please suggest some.

Cost & Tenure of the Goals
Goal  Daughter's Education  Daughter's Marriage  Retirement
Years to achieve the goal 18 25 25
Expenses at current price levels (Rs Lakh) 20 15 0.59 / month
Cost on an assumption of 4% annual inflation over the time period (Rs Lakh) 40.52 40 1.56 / month
* Monthly Investment = Rs 21,500, Monthly Expenses = Rs 58,500
* Annual rise in savings towards investment = 5%
* Inflation rate = 4% p.a.

There are a number of aspects in your favour. One is that you have time on your side, you are very clear as to your goals and your earning capacity is high.

With an annual return of 10 per cent on equity, after paying for your daughter’s education 18 years from now, your total investments — which is your current investments of Rs 1.80 lakh plus the new investments of Rs 21,500 p.m.— will accumulate to a corpus of Rs 3.64 crore. This corpus will be sufficient to pay for your daughter’s marriage and provide you with a monthly income of Rs 1.56 lakh post retirement.

Your contribution of Rs 46,000 p.a. towards the provident fund (CPF) will also help increase your post -retirement income. Moreover, you will get money from your ULIPs as well as an increase in income every year.

Equity portfolio: Invest in any 3 out of these 4 diversified equity funds (Magnum Contra, Birla Sun Life Frontline Equity, HDFC Top 200, DSPBR Top 100 Equity), 1 aggressive fund (Kotak Opportunities, DWS Investment Oppor-tunities) and 1 tax planning fund (Magnum Taxgain, Sundaram BNP Paribas Tax Saver).

Debt allocation: Invest in Kotak Flexi Debt Fund. This will provide stability to your portfolio and it can be used for regular rebalancing. The dividend distribution tax (DDT) is 14.16 per cent (other than cash funds) and long term capital gains are taxed at 10 per cent without indexation or 20 per cent with indexation. Short term capital gains are taxed as per an individual’s tax slab.
Gold: Limit a small portion of your portfolio to gold and pick any 1 ETF.


The Do’s

- Get rid of your 3 ULIPs when the surrender charge turns negligible or zero.
- Select funds which have a track record and a performance history by which they can be analysed.
- Invest periodically via an SIP.
- If you do wish to buy stocks, we suggest that you limit your direct investment in the market to a small percentage of your total portfolio.
- With term insurance, you may get nothing back on maturity but it's also the cheapest form of life insurance. We looked at 2 plans from a private life insurance company. For a cover over 20 years of Rs 50 lakh, your annual premium would be Rs 15,663 (pure term plan) or Rs 48,090 (premium back term policy). Why not get yourself insured for the cheapest premium and invest the balance on your own?

The Don’ts

- Avoid ULIPs. They don't offer the best of both worlds — insurance and investment. They score poorly as investment vehicles and have high upfront charges.
- Avoid NFOs unless it is a fund which has no precedent of any sort and can add value to your portfolio. - Avoid lump-sum investments in the market.
- Avoid investing directly in shares unless you understand company balanced sheets and have the time and energy to research stocks. Also avoid speculative buying and selling.
- Avoid complicated life insurance schemes that offer money back on maturity. You will end up paying very high premiums. Insurance premium is a cost, don't try to convert it into an investment.

Why Your Planned Portfolio won't work

- You have planned 7 funds and 2 gold exchange traded funds (Gold ETFs). That is way too many and they do not add any significant diversification that you cannot get with fewer funds.
- With the 7 funds you suggested, you will own a total of 194 stocks with around 173 having an allocation of less than 1 per cent. This will fail to have a significant impact on the portfolio's performance.
- You have selected thematic funds in your portfolio which would make your portfolio more risky.
- Avoid the post office schemes since you will be taxed higher on the returns. If you do want safety, then consider the Public Provident Fund (PPF).
- You do not need 2 Gold ETFs, 1 will do. Since they invest in physical gold, there is no reason to prefer one over the other.