I am a 65-year old retired Engineer and live with my wife (58) in an apartment in Kolkata, West Bengal. Both my children are married and well settled.
My wife and I have a Mediclaim Policy of base value Rs 1 lakh each (now approximately Rs 1.5 lakh).
We would like to be financially independent all our lives.
Kindly advise me as to any change required in my financial plan, particularly with regard to regular investment in mutual funds.
— C D Bhattacharya
Fixed Income: Rs 20 lakh
Shares: Rs 5 lakh
Mutual Funds: Rs 10 lakh (in some 50 schemes)
Total Assets: Rs 35 lakh at current value
You have made one glaring error and that is to assume that the more schemes you have, the more diversified you are. Yes, you must diversify, but do so smartly. Which means that with around six schemes from different fund houses, you can well achieve your target. Going with 50 only adds to the unnecessary clutter in your portfolio.
Moreover, you have numerous schemes from single fund houses, for instance: 6 schemes from Reliance Mutual Fund, 4 from Sundaram BNP Paribas Mutual Fund, 3 from Taurus Mutual Fund, 3 from Birla Sun Life Mutual Fund and 3 from 3 ICICI Prudential Mutual Fund.
You also have a number of tax saving schemes (5), thematic schemes and sector focused schemes.
Going by the fact that you have invested in shares and all your mutual funds are equity oriented schemes, you have a massive equity exposure. Our suggestion is that you offload most of your holdings. Let's look at your shares. Have you researched the companies you have invested in? Do you feel strongly enough to hold on to them? If not, then sell them.
As to your funds, which ones must you sell? Get rid of the underperformers like JP Morgan Equity and JM Basic. You do not need that many equity linked saving schemes (ELSS), which are the tax-saving funds. Do check out your tax incidence now that you are retired and are also a senior citizen. If you have completed the 3-year lock-in period, then sell them. Sector funds and thematic schemes also need not find a place in your portfolio.
You have not provided us with many details on your fixed-income portfolio. We are making the assumption that you have not invested in any fixed-income schemes of mutual funds. We are also further assuming that your investments are in bank fixed deposits or post office schemes. Our suggestion is that on maturity of these instruments, move into debt funds.
Other aspects of financial planning
You have not spoken of any liabilities so we take it for granted that you have none. However, you have mentioned a medical cover, though we do feel that the amount you are insured for is quite inadequate given you and your wife's age. Please do look at options to increase your medical insurance cover.
Where must you invest?
Create a portfolio of a few balanced funds that will corner 45 per cent of your total portfolio. Since such funds keep 65 per cent of their assets in equity, you will simultaneously get an exposure to the stock market and debt. Also, such funds will not be as risky or volatile as pure equity funds. Three good options that you can consider are FT India Balanced, DSPBR Balanced and HDFC Prudence.
As for the debt schemes, Fortis Flexi Debt and JM Money Manager can be considered.
After you sell your existing funds, you can invest the proceeds in the above schemes. But we advice investors to avoid lump-sum investments. What you can do is sell them and put all the money in a liquid fund, say JM Money Manager Super. Then, every month via a systematic investment plan (SIP) channelize the money into the funds you have selected for further investment.
How to get a regular income
This is a grey area. We are not aware as to the exact amount of your monthly expenses and whether or not you avail of a pension. Or whether or not your current debt investments give you a regular return by way of interest payments.
Should you need a regular income, we suggest that you make an estimate of how much money you need for the year then opt for a systematic withdrawal play (SWP) from the balanced funds. For example, in How your investments will pan out, we have taken Rs 15,000/month as expenses and deducted a year’s expenses in advance from the corpus.
How to Rebalance
Arriving at a pre-determined allocation to balanced and debt funds is just the first part of managing your portfolio. You have to religiously rebalance your investments every year. That would translate into you selling off some of your holdings in either balanced funds to invest more into debt funds or vice versa. The ones that have done better in terms of performance are the ones that have to be lowered in allocation, cause the overall value of that asset rises. It may sadden you to do so, but it would bring in a fair amount of discipline in the way you maintain your portfolio. Creating a portfolio is not as tough as maintaining it is. Not only will you be going against the crowd at times but also against your own emotions.
How your investments will pan out
Taking the average returns given by the categories of balanced funds and ultra short-term debt funds, we have calculated the annual value of the portfolio and have rebalanced accordingly.
Balanced Funds: Rs 15.75 lakh
Debt Funds: Rs 19.25 lakh
Inflation: 6.5% per annum
Expenses: Rs 15,000/month
Expenses will be inflated every year with the assumption of annual inflation at 6.5%.
• Reduce your equity portfolio dramatically
• As your fixed income investments mature, encash them
• Stick to around 5 funds
• Avoid pure equity funds & go for balanced funds
• Have an exposure to debt funds too
• Stick to a 30:70 debt-equity ratio
• The entire portfolio can have 45% in balanced funds and 55% in debt funds
• Every year, look at the value of your portfolio and rebalance it to ensure that the debt-equity ratio is maintained. This would require you to sell some units of certain schemes and buy units of other schemes.
• The older you get, gradually increase your debt exposure