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Starting Young

Piyush Bhurangi is looking to freeze a long-term investment plan to suit a larger family

Piyush Bhurangi, 26, working as a Software Engineer in Noida, U.P. is getting married in November and is looking to freeze a long-term investment plan to suit a larger family. He has invested Rs 1,000 each in mutual funds via the systematic investment plans (SIPs). Currently, on a take-home salary of Rs 25,000 per month, his expenses add up to about Rs 10,000, apart from investments. He has a term insurance plan of Rs 25 lakh with additional death benefits (ADB) taken in September, 2009. All his investments are tilted towards equities. While that wasn’t really a very big problem as he is young, yet diversification is crucially necessary as he is the only bread-earning member of his family right now.

Thinking about investments and goals early in life is an excellent obsession and implementing that plan as soon-as-possible makes it an even better achievement — the longer time frame makes it easier to achieve goals. You have shown excellent intent on both.

Having said that, you have let your imagination run riot in one area, but failed to address a long-term problem. You have planned for intermittent goals, but not for retirement. Since you won’t be able to work throughout your life, you must plan for a life after superannuation.

The Open Road

With current investments totaling Rs 5,000 monthly, you will not be able to meet your goals. Inferring an annualized return of 10 per cent on investments, you will need to invest Rs 9,490 more that is, Rs 14,490 per month to achieve your current goals over the respective years.

These monthly investments, growing at the rate of 10 per cent per annum will let you achieve your goals. 

Prioritising Goals

This is a crucial aspect of your investment plan. Goals, including going for a holiday or buying a car, are negotiable ones. Since your investment requirements will depend on the timing of withdrawals, you may shift the flexible goals to a later date, perhaps even to the extent of a few years, depending on priorities. This will have a positive effect on your investments as the later you withdraw these amounts, the lesser you will have to invest, thereby reducing your workload tremendously. While goals like buying a house and child’s education are non-negotiable therefore, these should be on the high priority list.

Since it might be difficult for you to raise your investment to the desired level, you can progressively increase your investment levels.

Fixing Fund Mix

Certain problems need to be addressed by you in your existing mutual fund portfolio. It’s good that you have limited the number of funds in your portfolio to seven, except that you stopped SIPs in two, and also all of them are 4- or 5-star rated funds, except for Reliance Tax Saver, which is rated 3-star, but the concern is about the mix of funds.

The current fund selection makes your portfolio quite aggressive. Out of seven funds, five are aggressive or thematic funds, apart from Birla Sun Life Frontline Equity and Reliance Tax Saver. Although you have stopped investments in Sundaram BNP Paribas Select Focus and Tata Infrastructure, but still 60 per cent (Rs 3,000) of your current monthly investment of Rs 5,000 goes into aggressive and thematic funds. For any long-term term investor like you it is always advisable to have well-diversified large-cap funds as core holdings in your portfolio.

Although one can have exposure to aggressive funds or thematic funds for alpha generation, but the allocation to such funds should be limited to 10-to-15 per cent of the portfolio.

In addition, out of the five funds that you are investing in currently, three are from Reliance Mutual Fund and 60 per cent of your current monthly installment goes to the funds of this fund house. It is not advisable to have high allocations in funds of a single fund family because the possibility of a single fund house’s research teams may come to a uniform investment decisions. There may be too many similarities for comfort.

Here is a tailor-made allocation for you:

Asset Allocation Problem

The debt component is entirely missing in your portfolio. Equities do give higher returns, but debt provides a cushion when the tides turn. Having adequate debt allocation lowers portfolio volatility.

The general principle is to have an allocation to equity and debt in the ratio of 80-20. Depending on your risk appetite, you can decide on your allocation to these respective asset classes. You can get debt exposure by including a good debt fund in your portfolio.

The debt fund can also be used to rebalance your portfolio regularly - securing gains when markets rally and investing more when the equities are cheap to ensure safety alongside gains.

As you approach your goals, gradually shift the money allocated for them to debt to prevent any last minute market crashes from wiping out a goodly portion of the sum.

Adequate Insurance

It’s good that you have taken a term plan as it is a better insurance option than an unit-linked insurance plan (ULIP). Your insurance cover is sufficient to meet the current needs of the family in case any unfortunate events come to pass after marriage. However, it will be advisable to have medical insurance too as it will be helpful in meeting any sudden expenses arising from ilnesses.

Contingency Fund

You have not mentioned any allocation to an emergency fund. That would leave you short of being adequately prepared for disaster management. Although there is no ideal ratio, but in case of any urgency one should be able to meet his or her expense for four-to-five months. You can keep these funds in saving banks account. You also have an option to keep them in liquid funds, but remember that will not be as liquid as a savings bank account as you get money only after one working day.