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Young Achiever

A systematic investment strategy is crucial at the start of your investing journey

I am 30 years old and want to plan systematically to reach goals on schedule. I am married and the father of a 4-month old son.

My mutual fund investments consist of two tax-planning funds (via SIPs), but investments in two other schemes were lump-sum payments in January, 2008. My ongoing investments are monthly systematic investment plans (SIPs) of Rs 1,500 in two tax-planning funds, Rs 1,235 to Employees Provident Fund (EPF), which is my monthly contribution and Rs 5,000 per annum in Public Provident Fund (PPF).

For insurance, I have a money-back policy and one endowment policy from LIC, which give me a total life cover of Rs 5.75 lakh.

After a deduction of Rs 3,000 against repayment of my education loan, payment of Rs 33,000 per annum against the life insurance policies and EPF, I am left with a spare about Rs 8,000 per month.

I have also planned to take up life insurance policies for my wife and son, a family medical insurance with a cover of about Rs 8-10 lakh and a pension plan — unit-linked insurance plan (ULIP) — to secure my retirement.

I am open to risks as I’m currently in the beginning of my career. How should I invest to achieve my goals?

-Sandeep S. Slathia

Salary: Rs 25,000 per month
Expenses: Rs 13,000 per month


A house in Jammu   
Rs 20 lakh, 10 years hence
Son’s education   
Rs 10 lakh, 16 years hence
Son’s marriage
Rs 5 lakh, 25 years hence
Rs 25,000 per month, 30 years hence
(Cost estimations are at today’s prices)

Current Portfolio

Of the total investments of Rs 2.09 lakh, Rs 1.15 lakh are in debt (PPF, EPF and bank deposits). This amounts to 55 per cent allocation to debt. We find two problems here - the allocation to debt is too high and there is a complete omission of a debt fund.

So, let us explain first, the importance of having debt, and that too through debt funds.

Debt Allocation

Equities can see extreme increases and decreases in their values due to market movements, but debt is relatively stable. Debt provides a cushion and stability to your portfolio by reducing the impact of market volatility. Since it is important to keep the debt allocation maintained at a specific level, rebalancing can be more convenient through debt funds.

However, we do believe that you should limit debt allocation to 20-30 per cent as none of your goals are near. This will enable the equities to generate meaningful returns in your portfolio. You should decide an ideal allocation for yourself based on your risk appetite.

Equity Funds

Your portfolio consists of two tax-planning funds which can double up as diversified equity funds to form the core of your equity portfolio.

You had invested a lump-sum in the two funds when the markets were at their peak and the funds were just launched. Going with the market momentum is not the right way to go about investing for achieving long-term goals and should be avoided.
Importantly, you should invest in thematic funds only if you understand the peculiar nature of the sectors where the fund invests and are in a privileged position to benefit from it.

Life Insurance

Insurance has a lot of relevance for you as the breadwinner of the family. As such, in case of an unforeseen eventuality, your family will not be left at the mercy of others. The proceeds from life insurance will take care of them financially, by restoring the lost income and aid them in fulfilling their financial goals.

But, insurance can only restore a financial loss. If there is no one getting financially disrupted from someone’s absence, then that person should not buy insurance. Insurance should be seen as a cost, and not as an investment. We suggest that you avoid taking life cover for your wife (if not working) and son. However, do increase your own life cover.

Achieving Goals

You have mentioned the desire to receive a retirement income of Rs 25,000 at today’s price levels, or Rs 1.65 lakh when you superannuate (the growth counters an assumed inflation rate of 6-7 per cent), you need to accumulate a corpus of Rs 2.93 crore.

Invest the spare Rs 8,000 per month and keep increasing this contribution by 11-12 per cent per annum. Assuming a return of 10 per cent on your investments, this investment along with your present investments will enable you to accumulate the required corpus for your goals after meeting the other intermittent goals.

The current premiums going towards the two life insurance policies (endowment and money back) can be treated as debt investments, proceeds from which will be reinvested towards your goals. We have not considered the present accumulation under EPF and ongoing contributions towards it in our calculations. This accumulation will further increase your retirement income.

ULIPs for Retirement

Investing for retirement can be done with mutual funds in the same way as through ULIPs. However, the high cost factor in ULIPs goes against them. As a significant portion of your initial premium is deducted as various charges, opt for mutual funds instead, which are more cost efficient. In addition to this, mutual funds offer greater transparencies and choices as compared to ULIPs.

Risk Taking

This aspect should be better understood in terms of the downside possibilities. It is not uncommon to see a fund’s net asset value (NAV) fall by 50-70 per cent. A fall of 50 per cent means that it will have to rise 100 per cent to undo the loss. On the other hand, a fund that falls 25 per cent will need to rise just 33 per cent to get back to the same level. Aggressive funds do rise fast in a rising markets, but they show up at the bottom of the charts when the markets are on a decline. A limited exposure to aggressive funds can boost the overall returns.

Follow basic principles when investing
•    Choose proven funds with good track record;
•    Invest regularly via SIPs;
•    Keep a limited number of funds in your portfolio. 3-5 diversified funds will provide all the diversification you need;
•    Regularly rebalance the debt/ equity allocations;
•    Tracking funds is important. If a fund fails to perform for a considerable period of time, replace it with better performing options;
•    Don’t let aggressive funds form a significant part of your portfolio. Limit their allocation to 15-20 per cent of your portfolio.

Action Points
•    To attain the required equity/debt allocation, start investing in equities. When the allocation is reached, invest thereafter according to the planned allocation;
•    Include debt fund(s) in your portfolio alongside the investments in PPF, EPF and bank deposits;
•    Cautiously use aggressive funds in your portfolio. You may consider replacing existing thematic funds with other proven aggressive funds such as DWS Opportunities, Reliance Growth and Sundaram BNP Paribas Mid Cap;
•    Tax-planning funds can also be used as the core funds in your portfolio. Fully utilize the income tax exemption limit under Section 80C, and then invest in diversified equity funds;
•    Given your present investments, goals and expenses, you need an insurance cover of about Rs 70 lakh. Increase it through term plans, the cheapest and purest form of life insurance;
•    Take family medical insurance policy to cover risks of any medical emergency. This will prevent any major unplanned financial outgo and help steadily build the corpus for attaining goals.