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Adjusting Allocations

While returns on investments are a must, the most important factor playing on an investor’s mind is safety of his money

Safety of investments is paramount for me and I have tailored my financial destinations accordingly. My primary investments are in fixed income instruments like Public Provident Fund (PPF) (Rs 2.84 lakh), Post Office MIS (Rs 1.64 lakh), bank fixed deposits (FDs) (Rs 3 lakh) and insurance policies (total premium paid Rs 6.90 lakh till date). The risk factor is present in my equity exposure, having bought stocks that are currently valued at about Rs 55,000. I started buying into mutual funds (MFs) 2 years ago and have invested a total of Rs 50,000 in them so far, but the value has fallen to about Rs 45,000 now. However, there are no ongoing SIP payments being made.

Profile
Name: Gopal Pujara
Age: 29 years
Annual Income: Rs 4.5 lakh
Monthly Expenses: Rs 20,000
(including home loan EMI of Rs 8,700; principal outstanding: Rs 5.4 lakh)
Annual Life Insurance Premium:
Rs 79,197 (Rs 49,000 towards 4 ULIPs)
Total Sum Assured: Rs 20 lakh
Dependents: Wife and Son (2-yr old)
Total Investment Surplus: Rs 10,900 p.m. (Rs 5,000 p.m. goes towards PPF)

Goals/Time
Son’s education: Rs 25 lakh/16 years
Retirement: Rs 2 crore/19 years

GOING FOR GOALS

You have set ambitious objectives for yourself. To achieve them the way that you have planned, will require an investment of Rs 20,000 per month now, and keep increasing this by 5 per cent per annum. Given that you are constrained by the investable surplus, we have tried to rationalize your goals and have come up with some alternatives:

TILT TOWARDS EQUITY

You have indulged in investments across a spectrum of options, but in an attempt to invest in safe instruments, your portfolio has leaned too far in favour of debt — it has more than 80 per cent allocation in your portfolio. That is not the ideal way, asset allocation must be systematically worked out.

We have prepared the following ‘to do’ list for you:

    * Raise exposure to equity. Fixed income investments such as FDs and PPF will generate safe returns of about 7 to 10 per cent per annum, but equities can generate even better gains in the long run say, around 5 years;

    * Reduce investments in FDs and Post Office MIS. Shift proceeds towards MF equity schemes;

    * Allocate funds to equity based on your age. The longer the time available before the goals are to be reached, the higher can be the equity allocation. Give a minimum of 70 per cent allocation to equities in your total portfolio. As you approach your retirement, gradually reduce equity allocation to 20 per cent;

    * Limit investments in PPF to Rs 1,000 per month;

    * Maintain an emergency fund of about Rs 50,000 in a savings bank account.

We have analysed your investments in both MFs and stocks and have  made some suggestions that can help you achieve your goals. It will require a greater amount of involvement on your part, of course.

 

INVESTING IN STOCKS

You have invested directly in stocks. If you have the inclination, the time and the understanding to research companies, then definitely build your own portfolio, otherwise leave the job to MFs. Remember the basic principles of investing. In the long run, a well diversified portfolio is better than a concentrated bet as this will safeguard your portfolio from extreme negative changes if some stock or sector does badly.

Allocation to some stocks too has become heavily skewed. A 30 per cent allocation to State Bank of Mysore is coming in the way of diversification. A 50 per cent drop in this stock will mean a drop of more than 15 per cent in your portfolio’s valuation. Such high allocations to a single stock should be avoided unless you have a privileged understanding of the respective sector or the company itself.

Also, avoid acting on tips received from brokers and friends/family. Invest in companies that you yourself believe in, and hold on to them.

 

REBUILDING MF PORTFOLIO

Investments were made irregularly and as lump-sum payments.

Opt for SIPs whereby regular investments will be made at all market levels. This will keep your investments safe from extreme volatility.

Investments were made during new fund offers (NFOs).

This is unwise as the pedigree of NFOs is not known. Look for funds that have a proven track record over the years.

Your MF portfolio should be supplementing your stocks portfolio, i.e., if you decide to invest further in them. Currently, none of the funds that you hold fits our recommendations.

Start by investing in up to three diversified large-cap equity funds. Include one debt fund (up to 20 per cent of the portfolio) to provide cushioning against extreme market movements and to help in regular rebalancing. You may consider investing up to 20 per cent in one aggressive equity fund as well.

You can claim tax benefits from MF investments too. You are repaying a home loan whose principal component forms a sizable part of this repayment and is exempt under Section 80C of Income Tax Act. Utilize the unclaimed tax benefit by investing in 2 tax-planning funds.

We take the opportunity to recommend certain MF schemes to build your portfolio.

 

RATIONALISE INSURANCE

    * Your present life cover of Rs 20 lakh leaves you under-insured. An adequate cover will help your family meet their regular expenses and future goals in case of a tragedy. Here’s what needs to be done:

    * A sum assured of about Rs 50 lakh will cover your outstanding home loan, future goals and family’s regular expenses;

    * Need for a life cover, and costs thereof, will reduce as your investments accumulate;

    * Use term plans as they’re purest/cheapest types of life insurance*;

    * Discontinue ULIPs once surrender charges become zero or negligible. ULIPs offer tax-saving benefits, but are  suitable    neither as investment nor insurance vehicles as they are complex instruments and involve high charges;

    * Redirect the premium going towards ULIPs to equity funds.

    * *According to the website of a public sector life insurer, the cost of a life cover of Rs 30 lakh for a 29 year old male for 10 years works out to Rs 5,890, while a cover of Rs 15 lakh for 10 years for a 39 year old male is Rs 4,870.