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Few Good Funds are enough

Eliminate the laggards and have a diversified portfolio to achieve your goal

I am a 26-year-old employee of the media industry with a monthly income of Rs 45,000. After meeting my monthly expenses and making the required payments towards my loans and provident fund etc, I can spare Rs 8,000 per month for investment purposes. I plan to invest Rs 60,000 this financial year for tax saving purposes. The medical cover offered by my employer is for a sum assured of Rs 1 lakh.

Kartik

Current Contributions  Amount (Rs)
Provident Fund 2,500 p.m.
Public Provident Fund 5,000 p.a.
Life Insurance Prem. (endowment policy) 20,000 p.a.
Medical Insurance (through employer) 15,000 p.a.
Education Loan repayment (till 2014) 12,500 p.m.

Current Fund Portfolio
Fund  Allocation (%)
Magnum Contra 20.29
HDFC Equity 12.16
Franklin India Prima 11.32
ICICI Pru Eq & Der Wealth Optimiser Ret 10.54
Magnum COMMA 10.35
Magnum Global 9.39
Magnum Midcap 9.18
SBI Infrastructure Fund Series 1 9.15
ICICI Pru Dynamic 7.62

Current Investments   Amount (Rs Lakhs)
Fixed Deposits 1.00
Savings Bank A/c 1.00
PPF 0.40
Mutual Funds 2.15

Goals
House in Pune (5 years)
Rs 10 lakh for downpayment. The total cost of the home is Rs 40 lakh for which I will take a loan.

Retirement (31 years)
Rs 2.34 crore. Rs 15,000/month at today's prices will be equivalent to Rs 1.05 lakh/month in 31 years, at an inflation rate of 6.50%.

Tax Savings
Going by the information provided by you, your total contribution that can be counted towards Section 80C amounts to Rs 55,000 (EPF, PPF and LIC Premium) for the current financial year. To exhaust the exemption limit of Rs 1 lakh, you are additionally required to invest Rs 45,000. Choose an equity linked savings scheme (ELSS) such as Sundaram BNP Paribas Taxsaver or Fidelity Tax Advantage.

Your tax saving exercise should ideally be spread over the whole year. However, due to time restrictions, you may either invest at one go or spread it in two installments. Next financial year, start a systematic investment plan (SIP) from April 2010 itself.

Medical Insurance

The health cover that you have is dependent upon your being with the present employer. Should you switch jobs or move out to start on your own, you will be uninsured. Moreover, it would be wise to up your insured limit from the current Rs 1 lakh. Consider an additional policy of your own.

Buying a House

If you plan to take a loan of Rs 30 lakh for 20 years, your equated monthly installment (EMI) should amount to Rs 23,000. This calculation has been arrived at according to the figures provided by a nationalized bank which is currently offering a rate of 8.5 per cent per annum.

Once you pay back your educational loan, you may redirect Rs 12,500 towards home loan repayment. Can you increase your savings which can redirected towards this purpose? On the other hand, you could delay your plans temporarily until you are able to afford the EMI payment.

Retirement Planning

You certainly need to plan for your retirement, but investing in pension plans offered by insurance companies involves a high cost and is not as transparent as mutual funds. Investing in mutual funds can help you fulfill the same need in a better way. So, if you invest Rs 8,000 every month for the next 31 years in the suggested mutual funds and increase this contribution at around 5 per cent every year, you would be able to arrive at the required retirement corpus of Rs 2.34 crore*. This strategy will even help you withdraw Rs 10 lakh required for your down payment at the end of five years. 

*At an assumed 10% compounded annual rate of return.

Rebuilding Your Portfolio

• Your current portfolio has 9 funds, which are way too many. Majority of them are inconsistent performers. You need to eliminate the laggards.

• Your investment in debt (PPF, savings account and fixed deposits) account for close to 48 per cent of your total investment (after investing Rs 45,000 in an ELSS fund).  For this calculation, we have excluded your investments in PF and value of life insurance policy, which also add to your debt exposure. In our view, this allocation to debt is too high. Since your goals are far off, you can commit a large portion of your total investments to equities to help in wealth creation. We suggest an allocation of 80 per cent to equity. Once your fixed deposits mature, transfer the amount to equities. 

• Worth mentioning is that your investment in PPF provides a safe tax deduction but its lock-in period makes it highly illiquid.

• Around 38 per cent of your current fund portfolio takes an exposure to aggressive and sector/thematic funds. Do not let such funds command more than 20-30 per cent, in total. Since they are more volatile and their performance is also dependent on the fortunes of a particular sector or theme, the risk in such investments is higher. Your core holdings should preferably comprise of large cap diversified equity funds.

• Out of 9 funds, 5 belong to same fund house- SBI Mutual Fund. You must diversify between funds of various fund houses too. Any unfavorable decision in one asset management company (AMC) may adversely affect a large part of your portfolio.

• You opted for dividend payout. Instead, go for the dividend reinvestment option, which automatically reinvests the income that you earn to accumulate wealth over a long term investment horizon.

• Rebalance your portfolio from time to time. As you approach your goals, gradually sell off your equity holdings and channelize money in debt instruments, as then safety of capital would be a prime concern.  

• To meet future contingencies, you can rely upon money in your savings bank account or you could even park part of it in liquid funds.

Suggested Portfolio
Maintain a portfolio of 5 funds. Choose any 3 as core funds (including an ELSS fund). For support, add an aggressive fund and balance your portfolio by including a debt fund.
Core Funds: HDFC Equity, Magnum Contra, ICICI Prudential Dynamic
Aggressive Funds: Birla Sun Life Mid Cap, Sundaram BNP Paribas Select Focus
Liquid Funds: Sahara Liquid Variable Pricing, UTI Money Market Mutual Fund
Tax Saving Funds: Sundaram BNP Paribas Taxsaver, Fidelity Tax Advantage