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Shun ULIPs & Trim Funds

We review Adit Gupta's portfolio & tell him how ULIPs can innocuously hamper a portfolio's returns

I am 35 years old and have been an active investor since December 2006. I am married and have a nine-year-old daughter and a six-year-old son. I want to create wealth for myself and my family and cater to their requirements, especially my children's higher education and marriages. At present, my wife and I save about Rs 35,000 a month after expenditures. Besides the investments mentioned alongside, we have also invested through Fixed Deposits and traditional insurance plans. Kindly review my portfolio?
-Adit Gupta, Jammu



Existing Portfolio
Funds  Allocation (%)
Reliance Long Term Equity-G 18.06
Kotak 30-G 13.18
Reliance Div. Power Sec. Ret-G 7.56
HDFC Top 200-G 7.23
Principal Pnb LT Equity 3 Y I-G 6.43
Reliance Growth-G 6.37
Fidelity Special Situations-G 5.07
Fidelity Equity-G 4.98
DSPBR Top 100 Equity Reg-G 4.31
Reliance Vision-G 4.16
JM Basic-G 3.98
Sundaram Energy Opp.-G 3.6
HSBC Equity-G 3.53
Tata Infrastructure-G 3.26
DSPBR T.I.G.E.R. Reg-G 3.18
JM Financial Services Sector-G 2.78
Kotak Opportunities-G 2.32
Total  100

Well, there are some good things about your portfolio and some bad ones. But that's no reason for you to worry because in your case, the good things outweigh the bad ones.

The first good thing is that out of the Rs 35,000 you invest every month, Rs 16,000 is invested in mutual funds via Systematic Investment Plans (SIP). Furthermore, you have also invested in fixed deposit schemes and traditional plans. Two points for these moves. But one point down because you have invested in ULIPs as well. If you are a regular reader of any Value Research publication, you would be well aware that we have asked investors to shun ULIPs time and again. Moreover, in your case, you don't need ULIPs because your investment needs are being take care by mutual funds and your insurance cover is taken care of by the term insurance plans.

What ULIPs Have Done To Your Investment
Now, before we move to what you should ideally do, let's get a deeper understanding of how investment in ULIPs eats away your money. The premium you pay has three components. One is the expenses, which include the commission earned by the agents as well as other expenses and distribution costs. The second is the mortality premium and only the balance that is left is invested.

In this case, you paid Rs 50,000 as premium for two policies of Max New York Life Insurance in the first year, out of which total chargeable expenses was of Rs 24,032. And for the two policies of Birla Sun Life you paid Rs 4,00,000 as premium out of which Rs 73,812 was deducted as expenses. Thus, of the total investment of Rs 4,50,000 made by you, Rs 97,845 went towards meeting expenses declared by your ULIPs as part of the charges. Translating this to percentile it is 21.74 per cent of your investment.

Besides this there can be hidden charges since commission of the agents varies amongst the distributors and agents and goes as high as 50 per cent of the premium you pay in the first year. Then for the second component there will be further deduction that is mortality premium. Thus, the third component, which is invested in the equity markets stands to be around 50 per cent or even less. In this way, a considerable part of your premium goes away in the pocket of the insurance companies.

Suggestions - Instead of ULIPs You should consider investing in...
A better alternative for you would be to opt for the mutual fund schemes from the fund houses like Birla Sun Life and Reliance Mutual Fund which provide insurance cover on investments routed through SIPs. Birla Sun Life Mutual Fund gives a life insurance cover of up to 100 times (maximum Rs 20 lakhs) of the SIP amount you invest for three years or more; Reliance Mutual Fund pays the remaining SIP installments in an unfortunate death of the investor and the nominee can redeem this investment once the SIP tenure gets over.

Review of Your Mutual Fund Portfolio
Moving further to review your mutual fund portfolio, the Value Research Portfolio Manager suggests that 84 per cent of your asset is allocated to equities, 2.28 per cent in debt and rest in cash. Large-cap stocks account for 47.15 per cent of the portfolio, followed by 52.85 per cent allocation to mid- and small-caps. 60 per cent of your funds are of superior quality with five or four star ratings. However, your sector allocation break up shows a slightly higher exposure to the financial services sector (16.83 per cent), which is not a big issue. The cause of concern in your mutual fund portfolio is excess number of funds, which is leading to over-diversification. The breakup of stocks shows that the highest allocation is in Reliance Industries accounting for only 4.10 per cent and the stock count shows that your portfolio is spread across 280-odd stocks, whereas investment in 90 per cent of the stocks is below one per cent.

Suggestions - What You Should Do
You have six sector funds where 25 per cent of the investment is allocated. Exposure in sector funds should be limited to 5 to 10 per cent of the total investment. So we would advise you to come out of the sector funds like JM Basic, JM Financial Service Sector Fund, Sundaram BNP Paribas Energy Opportunities and Reliance Diversified Power Sector Fund. Furthermore, keep any one fund from Tata Infrastructure and DSPBR T.I.G.E.R as both the funds are focusing on the infrastructure sector.

The next move which you need to take is to increase the large-cap allocation. In your portfolio, as of now, there are six large cap funds accounting for 37.39 per cent of the total investment and four mid-cap funds accounting for 35 per cent of the total investment. Thus, the portfolio is risky and volatile due to its heavy tilt towards mid- and small-cap stocks. Ideally, two to three large-cap funds and one to two mid-cap funds can give adequate diversification to the portfolio. For large-cap funds, you can stay invested in any three funds out of Kotak 30, DSPBR Top 100 Equity, Fidelity Equity, HDFC Top 200 and HSBC Equity. You can also invest in Birla Sun Life Frontline Equity and avail the insurance cover benefit from the same. For mid-cap funds, you can stay invested in Reliance Growth and avail the insurance cover facility from it as well.

To increase the debt exposure in your portfolio, you can also invest 10-15 per cent in a debt fund like Kotak Flexi Debt Fund. It will balance your portfolio and will even out the fall in the volatile equity market. Also keep investing systematically and rebalance your portfolio once every six months.

All The Best!