I am 36 years old and have two dependants. I have been investing in funds since 2004 and have opted for some ULIPs and traditional plans to meet my insurance requirements. Kindly review my overall portfolio and suggest changes that may be required. I wish to create a huge retirement corpus and also plan my child's education in the coming years.
< -Anubhav
Few positives, some common mistakes and some big ones - that is how we define your portfolio. Your mutual funds portfolio consists of 21 funds (mostly unrated) with a mid and small cap orientation. The number of funds is certainly more than required. The positive part is that the aggression in the funds is safeguarded by the significant amount of debt investments that you have in bank fixed deposits (FDs) and the post office monthly income scheme. Some major flaws that we noticed were on the insurance front. You have too much money in ULIPs and traditional insurance plans which are offering you a low cover for a high premium. You would need to work hard to get certain things in shape. Let's start by picking up each section of the portfolio separately.
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Mutual Funds
You have been investing in mutual funds since 2004, but you haven't been consistent. In fact in 2004 and 2005 you invested only twice a year. While investing in mutual funds, consistency is the key. That is the reason we recommend the systematic investment plan approach as investing manually at regular intervals can prove to be a time consuming and arduous task.
Your portfolio has 21 funds, 8 of which have a portfolio weight age of less than 3 per cent. Such small allocations would not help the portfolio in any way. You have also been a regular NFO investor (9 NFO purchases in the past 3 years). By buying into mid and small cap oriented funds like HDFC Mid Cap Opportunities and DSP ML Small and Mid Cap, you have increased the portfolio aggression. The mid and small stocks constitute 51 per cent of the portfolio. The debt component also seems less, but we are not worried about it as you have enough debt investments in bank FDs and post office schemes. Another thing that you need to keep a check on is the overexposure to HDFC mutual funds which account for 38 per cent of the portfolio. HDFC Equity alone accounts for 18 per cent of this. Once you increase the exposure to suggested funds slowly, this high allocation to HDFC would automatically reduce.
To fine tune the portfolio, you should reduce the number of funds. Try and be invested in the suggested funds. You can do away with funds like Fidelity Short Term Retail Income which form a very small part of your portfolio and have been average performers. You should increase the exposure to well rated funds like Reliance Vision, DSP ML Opportunities and HDFC Prudence. Remember to take the SIP route.
For an SIP of Rs 20,500 per month you have selected 6 funds. We suggest you to discontinue your SIP in Fidelity India Special Situation as its an unrated fund and has been average performer. An SIP in HDFC Tax Saver is not required as the home loan takes care of your savings under section 80C. For SIP select 4 funds from those suggested. We also recommend you to shift investments from your FDs to some debt funds (Kotak Flexi Debt, Birla Sun Life Income) and arbitrage funds (SBI Arbitrage Opportunities, JM Arbitrage). These funds would offer better yield in the long run.
Insurance
You really need to work hard on this aspect of the portfolio. Till now you have been treating insurance as an investment. We have been asserting for a long time (and many investors/insurance agents have been telling us to keep mum) that one should avoid investing in ULIPs. But we believe that numbers speak louder than words. So we decided to analyse the ULIP products that you have invested in - HDFC Unit Linked Pension and HDFC Unit Linked Young Star - both products of HDFC Standard Life Insurance. We always say ULIPs are expensive products with high initial charges. To be precise, in these policies your first and second year premium allocation charge stood at 17.5 and 20 per cent respectively. In two years you have paid Rs 8 lakh as premium and hence the allocation charges amount to a whooping Rs 1.5 lakh. That's not all - a monthly administration charge of Rs 20 (in each policy) and mortality charges (which depend on your chosen sum assured) are being deducted by cancellation of units every month. The compulsion to pay for a minimum of three years is another burden. The return generated by the equity funds of this policy is in the range of 25-30 per cent (two year annulised). Keep in mind that the amount invested in these funds was after deducting the high initial charge and are is subject to monthly deductions, you have just managed to recover the charges in two years. Hence capital growth is yet to start.
We believe we have proved that the ULIPs that you own are indeed expensive. Now let us get to designing a new insurance portfolio for you. As per our calculations (by taking into consideration your monthly contribution to the family expenses and your liabilities) you should be covered for around Rs 1.42 crore. These ULIPs insure you for Rs 10 lakh. Adding your traditional insurance plans (annual premium Rs 86,500 for a sum assured of Rs 31 lakh) and company provided insurance you are insured for a total of Rs 76 lakh. You are still short of what is required despite paying so much as premiums.
First, pay your third year ULIP premium (as it's a compulsion) and then try to surrender the policy (or wait for it to break even). Your other traditional insurance policies should also be discontinued. Once you get out of these policies, you can opt for a term plan from any life insurer to suit your needs. This will prove to be quite cheap when compared to other insurance policies/ULIPs you own currently. The remaining surplus can be directed to mutual funds/debt instruments in tghe right proportion.
Clearing Liabilities
We noticed that despite of healthy savings and earnings every year, you have quite a few EMIs to pay. Do you know that in the initial years almost 80 per cent of the home loan EMI constitutes interest? The problem is that interest that you bear on loans generally goes unnoticed. It is strongly advisable that you pay of a part of your home and car loans (if your bank permits) on a regular basis to reduce the interest and hence the principal gradually. At times, you can also utilise your annual bonus or profits booked from shares for this purpose.
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For achieving all your financial goals like creating a healthy corpus for retirement and child's education in the coming years, just be a regular investor. SIP is the technique that will help you achieve your long term goals with ease. Try and invest in equity diversified mutual funds (via SIP) and avoid timing the market. At the same time ensure that you stick to few quality fund picks. Review your portfolio every six months to check if it needs re balancing.
This article was originally published on March 27, 2008.
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