I am 41 years old and have two daughters aged 8 and 4. I would like to save for their education and marriage. I started some SIPs towards this goal and also invest in compulsory PF and VPF (optional) every month. I am planning to discontinue the VPF and start another SIP for a period of around 10 to 12 years. Should I take a ULIP or invest in mutual funds? Also, should I opt for the dividend or growth option?
-Narendra Kumar
Looking at your age, the first observation is that you have started your financial planning rather late. Nevertheless, better late than never. On the bright side, you do have goals in place and time on your side considering the age of your daughters. Let's see how we can make your portfolio look stronger and better.
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Asset Allocation
Your current portfolio consists of 90.5 per cent equity and just 1 per cent debt (8.5 per cent being in cash equivalent instruments). It would be ideal if you include a debt fund like Kotak Flexi Debt in your portfolio. This would help you to maintain a balanced equity debt portfolio allocation.
Every year you should review and re-balance your portfolio and move funds from this debt fund to equity funds or vice versa, if required.
Fund Strategy
We noticed that you follow no clear strategy while investing in funds. Funds like AIG India Equity, Fidelity International Opportunities, Reliance Equity Advantage and SBI Infrastructure are all new fund offer (NFO) purchases. Our stance is that investors should steer clear of NFOs. They are new funds with no track record. A better strategy would be to stick to old funds which have already proven their worth. You can refer to the star ratings and performance track record of funds on this website.
Discontinue your SIP installments in the new funds and shift to better performing funds with a good performance history.
Also, try not to over diversify your portfolio as it does not help you achieve anything. Choose fewer funds for SIP and just be a disciplined and a consistent investor to realise your goals. Choose the growth or the dividend reinvestment option in all your fund investments as your goals are long term.
Fund Selection
Your fund selection seems decent. You have some good funds and some bad ones too which could have been easily been avoided. You should invest in some five- or four-star rated diversified equity funds which can form the core holdings of your portfolio. We chose Reliance Vision and HDFC Equity to serve this function.
A major flaw in your portfolio that needs correction is the over exposure to one single fund - SBI Magnum Tax Gain. Since it accounts for nearly 43.8 per cent of your investments, your portfolio's performance becomes largely dependent on it.
Limit your exposure to this and spread your investments well.
Life Insurance
With three dependents, you are grossly uninsured. You need to be insured for such an amount that the conservative annual return on it will provide for the monthly expense without depletion of capital. To calculate, start with your annual financial contribution to the family. Now do a simple reverse calculation (assume a conservative return of 8 per cent on bank fixed deposits) to estimate how much money your family would need to maintain the same lifestyle in your absence.
Let us take an example. Let's say an individual contributes Rs 15,000 per month towards family expenses (Rs 1.8 lakh annually). Now 8 per cent of 22.5 lakh is Rs 1.8 lakh. So the person would require a life cover of Rs 22.5 lakh to enable his family to get Rs 15,000 per month in case of an eventuality. The three insurance policies that you have taken are all traditional plans, which are not high yielding products. What is worse is that for a high annual premium of Rs 15,000 you are covered for a meager Rs 3 lakh. You should seriously look at revising your cover and discontinuing your current policies. For life insurance just buy a simple term plan from any insurer which would be quite cheap when compared to other traditional plans. Try and stay away from unit linked insurance plans (ULIPs) as they are complex products with high charges.
Tax Saving
Contribute with the compulsory contribution to your provident fund (PF) and discontinue your Voluntary Provident Fund (VPF). To save taxes, increase your investments in Equity Linked Saving Schemes (ELSS). The numbers here speak for themselves as the ELSS funds have outperformed every other tax saving tool in the past years. The average return of the tax-planning or ELSS category has been 51 per cent in the last five years (as on December 7, 2007). Invest in some good tax saver funds like SBI Magnum Tax Gain or Birla Sun Life Tax Relief 96 through SIP mode.
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Discipline is the key in your case. Just try and stick to quality fund picks and continue investing regularly. Good Luck!
This article was originally published on January 17, 2008.
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