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Carried Away

Investors must beware about going overboard with their investments

I am 30 years old, single and work as a flight purser in an international airline. My monthly salary averages Rs 1.2 - 1.4 lakh a month.

My first investment was made in 2006, primarily for tax saving purposes. Thereafter, I discontinued investing as I was saving for my education. It was in early 2008 that I started investing again, only to burn my fingers. This investment was made in a lump sum and is now down by about 26 per cent. Though the funds I had invested in were chosen on basis of past performance, luck was not on my side. Now I've decided to invest via an SIP.

I was also tempted to invest in the IPOs of Reliance Petroleum and Reliance Power. Apart from that, I have never invested in stocks, due to lack of knowledge and time.
— Sandeep Khurana

Procuring a Home
I plan to buy a house in the near future. The cost is around Rs 60 lakh for which I have already saved about Rs 22 lakh, which is lying in my bank account. I will take a home loan for the balance.

I also plan to invest in an additional house that I will jointly own with my father. This is a part of my retirement planning strategy and it will also ensure a fixed rental income. My other financial goals fall due after 7 - 8 years.

I would like to take a term life insurance plan, but am unsure of the amount of cover that I need. However, I do not think I should take a cover against my home loan as this will automatically be covered by the term plan I would like to take.

My health insurance is currently taken care of by my employer. Though, where my parents are concerned, I have taken health insurance policies of Rs 1.5 lakh for each one of them.

Medical Insurance
It is wise to also have your own medical insurance. What if you resign? You will be uninsured. Or, even if you are between jobs, for that short period of time you will have no cover. What if years down the road you decide to start off on your own or be employed as a consultant? In such a situation there will not be any employee benefit of medical insurance. So get your own personal medical insurance cover when you are young and healthy. Should you wait, all pre-existing illnesses will not be covered and you could lose out. Moreover, for every claim-free year that you have, some insurance companies decrease the premium or increase the cover. So there are benefits of taking a policy in your very own name.

Life Insurance
A life insurance policy is solely required to provide for your dependents in the eventuality of your not being around to support them. So you need to calculate how much money your dependents need every year, account for inflation too and then estimate the number of years they will need to be supported. Accordingly, you will arrive at a figure. Insure yourself for an amount which when invested at a particular rate of interest (take a bank deposit rate) will give them the return they need to live on. Based on an assumption that expenses are 40-50 per cent of your income, a cover with a tenure of 15 years, you should get covered for Rs 1 crore. 

Home Loan Insurance
A number of home loan companies offer an insurance benefit along with it. It would be more convenient to take it from the home loan company itself. Because it would help in the paperwork and the entire loan will be settled instantly should you pass away. If they do not provide an insurance policy, then opt for another term insurance policy. You can opt for a decreasing term plan where the sum assured, and hence the cost, keeps falling as the outstanding loan gets reduced.

The fact that you invested in January 2008 shows that you got carried away with the market sentiment. You also picked up the top performing funds at that time. In the future, stick to investing regularly and consistently in funds with a proven historic record. Investing through a systematic investment plan (SIP) prevents investment losses since the investment averages out during market highs and lows. You end up buying more units when cheap, and less when expensive.

Had you invested in HDFC Top 200 via an SIP starting January 2008, a monthly investment of Rs 1,000 till September 2009 would have accumulated to more than Rs 27,000 against a total investment of Rs 21,000 (Rs 1,000 x 21). In contrast, your investments are still down 26 per cent!

Thematic Funds
Current Position: Currently, thematic funds account for 60 per cent of your portfolio. Though you are young with few liabilities, it is not wise to be so concentrated on specific sectors. Restrict the exposure to such funds to 20 per cent of your equity portfolio.

Suggested Action: Sell JM Basic and JM Financial Services Sector. You now are left with an exposure to a banking sector fund, a power sector fund and two funds with a focus on infrastructure. Decide on which sectors you want to stay invested in and accordingly sell the funds. As you increase your investment to core funds, these exposures will automatically get lowered.

Tax Saving Funds
Current Position: Currently, you own Magnum Taxgain and Fidelity Tax Advantage.
Suggested Action: Both are good funds. Stick with them and utilize them to exhaust the exemption limit under Section 80C of Income Tax Act. However, you will also be getting a Provident Fund benefit which will qualify under Section 80C.

Debt Fund
Current Position: NIL
Suggested Action: You must have some amount of debt exposure to provide stability to your overall portfolio as well as help in rebalancing. Where the latter is concerned, you should arrive at an asset allocation figure. So should you decide to invest around 80 per cent of your assets in equity, allocate the balance 20 per cent to debt. And rebalance your portfolio once a year to maintain that ratio.

If you do not want a pure debt fund, consider a balanced fund Canara Robeco Balanced, DSPBR Balanced and Magnum Balanced.

Core Funds
Suggested Action: Both the tax saving funds can double up as core funds so continue investing in them. However, Reliance Regular Savings Equity is also a good fund so you can consider increasing your investment in it.