I am a 57-year old employee who will retire in three years. My savings are in bank fixed deposits and the company's Employee Provident Fund (EPF). In addition to my salary, I get a monthly pension of Rs 25,000 from my earlier job as a central government employee, from which I voluntarily retired in 2003.
I own a house in Delhi. My wife is a government employee. My children are settled and are on their own.
I have mentioned all my investments. I want to make the following changes in my portfolio.
* Switch from DSPBR T.I.G.E.R. to DSPBR Top 100 Equity and continue investing through SIP.
* Invest Rs 25,000 in IDFC Premier Equity and start an SIP of Rs 3,000 per month.
* Invest Rs 5,000 in HDFC Top 200 and continue a monthly SIP of Rs 3,000.
Goal
My investments in mutual funds should generate an income of approximately Rs 20,000 per month after my retirement. I will continue my SIPs till December 2012.
Kindly vet my proposal of investing in six diversified equity funds of different fund houses.
— Vikas Sharan
|
|||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Too many funds
It is wise to diversify your portfolio, but too many funds only add to unnecessary clutter. Five to six sensibly picked funds will give you all the diversification that you need. You yourself have realised the futility of investing in large number of funds which is why you want to prune it down to six.
Investments made in bulk
When investing in mutual funds, it is never wise to put in all your money at one go, unless you are absolutely positive that the market has bottomed out. But then no one can ever be sure of the market. Unfortunately, in your case, most of the investments were made when the market was near its peak. Investing systematically also helps in maintaining a savings discipline. Regular investments made at all market levels is stress free and provides you the benefits of rupee cost averaging.
High allocation to aggressive and thematic funds
Your portfolio is high on risk. Barring ICICI Prudential Dynamic and Religare Growth, all your investments are into thematic or aggressive funds. We are not saying avoid such funds altogether, but limit allocation to them to a small amount. Not more than 10-15 per cent of your equity portfolio should go towards thematic or sectoral funds. The larger portion of your portfolio should be in diversified-equity funds.
No debt component in the portfolio
You don't have any debt component in your portfolio. A debt component helps in reducing the volatility of the portfolio which will be very high in an all equity portfolios.
Investments in New Fund Offers (NFOs)
You have invested in four NFOs. Investments in NFOs should be avoided. Give the scheme and the fund manager time to prove themselves. Go for funds with credible track records. Also, funds with a very short history should be avoided.
Investments in closed-ended funds
You have invested in two close-ended funds. One should avoid that. An investment in such funds can only be done at the time of the NFO. Moreover, why do you want to unnecessarily block your investment?
Duplication of themes
You have invested in five funds which broadly invest in the infrastructure theme. If you want to take exposure to a particular theme, one fund should do it for you.
Can you achieve that?
Your current investments in mutual funds amount to around Rs 14.2 lakh. You plan to invest Rs 18,000 monthly over the next three years. Considering an annual return of 10 per cent, your total investment will grow to around Rs 27 lakh over these few years.
So, with your current investments it will not be possible for you to meet your required goal. You need to invest a sum of around Rs 50,000 per month to get the required income.
Since we are unaware about your expenses, current salary, and the amounts in fixed deposits and provident fund, we cannot comment further on the issue.
Meeting your goal
To achieve a monthly income of Rs 20,000/month on retirement, you will need to accumulate a substantial corpus. Do note that this figure is based on current prices, so if we take inflation into account the corpus amount needed would rise. Besides, you are going to retire in a few years, which means that you will not make any further investments.
What you want
Rs 20,000/month at current prices
From when
From 2013 onwards
What you need
A sum of Rs 40 lakh
By when
By the end of 2012
How much is inflation
6.5% per annum
Portfolio A
Construct a portfolio of four equity funds and one debt fund.
The Logic
Granted, you do have investments in fixed deposits and in your provident fund, but it will be easier to rebalance with a debt scheme. Moreover, with retirement not too far away, it would be wise to have a substantial debt allocation.
The constituents
1) Start an SIP with ICICI Prudential Dynamic which you already own
2) Switch to DSPBR Top 100
3) Add HDFC Top 200
4) Add a debt fund - Fortis Flexi Debt/ JM Money Manager Super
5) To add a bit of aggression, either go with Reliance Regular Savings Equity or Kotak Opportunities, both of which you have already invested in
Portfolio B
Construct a portfolio of around four balanced funds.
The Logic
Since such funds generally invest 65 per cent of their assets in equities and the rest in debt, it will provide you exposure to equity and debt simultaneously. Such funds are less risky or volatile than pure equity funds. Moreover, you will not have to worry about rebalancing. If you still feel the need to have a larger exposure to debt, you can add a debt fund.
The constituents
1) FT India Balanced
2) DSPBR Balanced
3) HDFC Prudence
4) Tata Balanced
Ways to rebuild your portfolio
There are two ways in which you can rebuild your portfolio. But start off only once you fix your equity: debt allocation, based on your risk appetite.
Once you decide on which portfolio to opt for, work on offloading your investments in thematic/sector or aggressive funds. As you sell the units, invest the proceeds in a liquid fund. Then, every month via a systematic investment plan (SIP) channelise the money into the funds you have selected for further investment. Thereafter you will have to rebalance your portfolio annually.
This artilcle appeared in the January 15-February 14 2010 edition of Mutual Fund Insight
This article was originally published on March 18, 2010.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
