I am 27 years old, working in a KPO. Currently, I am the only earning member in my family. My aim is to create a retirement corpus that will give me a monthly income of Rs 25,000.
I have attached my current investment details. I have deliberately not balanced or diversified my portfolio yet. I felt the need to first get it reviewed and obtain some guidance on that front. That would help me choose my future investments properly.
Please suggest me some funds that I should choose to fulfill my goals. Would also appreciate some guidance concerning my investment strategies.
- Sandeep Das
Your approach of investing 30 per cent of your income in various short- and long-term assets, and keeping 10 per cent in cash for emergencies, reflects a sensible and disciplined approach towards investing.
Now, looking at it from the long-term point of view, there are two essential principles you must follow. You must be amply diversified and must decide on the appropriate asset allocation. This must be done keeping in mind your risk taking capacity as well as future goals.
Your existing portfolio is spread across two asset classes - equity and debt. Your equity exposure is done via mutual funds as well as investments in Unit Linked Insurance Plans (ULIPs). Your debt allocation refers to your fixed return investments. Let's look at each.
Debt
Even though you are young and it is the best time to get into equity, it is always important to have some amount of exposure to this asset class too.
Currently, your investment in debt is in Kisan Vikas Patra (KVP), National Savings Certificate (NSC), Post Office Monthly Income Scheme and Public Provident Fund (PPF). All these are very safe since they are backed by the government.
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Due to their fixed return and safety, they will provide the stability to your portfolio. In addition, your investments in PPF and NSC fall under Section 80C of the Income Tax Act enabling you to avail of the tax benefit. But when investing in such instruments, please keep in mind the tenure and try and ensure that you will not need this money for the entire time frame. For example, the NSC has a lock-in period of 6 years, while it is 15 years for PPF.
ULIPs
We are not against insurance. And since you are the only earning member in your family, it is mandatory in your case. But we do not advocate mixing insurance with investments.
ULIPs are regarded as convenient because they combine both, the insurance requirements as well provide for a simultaneous investment. But when you have already invested in various other avenues, your investment needs have been met. So to provide for a cover, all you need to do is opt for a term insurance plan. This is the most basic and simple, not to mention cheapest, form of life insurance.
Currently, you have 4 ULIPs in your portfolio and this is eating away a lot of money in the form of expenses. We did a simple comparison between a ULIP (LIC Market Plus) and a mutual fund scheme on the basis of chargeable expenses. We allocated Rs 20,000 annually for 20 years in both the instruments.
In the case of the ULIP, the deductible charges amounted to Rs 6,356, including the premium allocation, policy administration, fund management charges and addition to fund costs.
In the case of the mutual fund, deductible charges only include the recurring expense charge. We are assuming the investor buys his units directly from the fund house and sells them after the period which requires an exit load to be paid.
After deducting the chargeable expenses, we found that in case of the ULIP, the investable amount stands at Rs 13,644 and in the mutual fund, Rs 19,600. Looking at this as the annual investment for the next 20 years, the corpus in hand will eventually stand at Rs 11.41 lakh (ULIP) and Rs 13.80 lakh (mutual fund). This difference of almost 20 per cent is directly the result of the expense charges. In the case of ULIPs, the commission paid to agents, which goes as high as 50-70 per cent of the premium in the first year, was not taken into account.
Mutual Funds
Your current portfolio is high on quality in spite of tax saving funds accounting for 57 per cent of the total investment. Actually, there is no harm in making these funds your core holdings since they are essentially just diversified equity funds with the additional facility of tax exemption. The only restriction is that of liquidity as you cannot withdraw the money from these schemes during its lock-in period of three years.
In your mutual fund portfolio, you have eight schemes. You can make DSPBR Top 100 Equity and Magnum Tax Gain your core holdings. Both these funds are large cap, 5-star schemes with a strong track record.
From the remaining two - HDFC Tax Saver and Sundaram BNP Paribas Tax Saver - stay invested in any one of them. But do remember to sell only after you have completed the lock-in period. HDFC Tax Saver is a mid-cap oriented fund while the other is multi-cap.
It would be wise to stay away from theme-based funds like DSPBR World Gold Fund and Reliance Diversified Power Sector Fund. You can take a minimum exposure to Kotak Opportunities Fund. For the debt allocation, do consider a debt fund like Kotak Flexi Debt, and not just fixed-return instruments.
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In a nutshell, just select few funds with a good track record from your existing portfolio and invest systematically in them.
Getting There
Our entire analysis is based on your need to create a corpus that will offer you Rs 25,000 per month once you retire. Let's make a few assumptions:
- You retire at the age of 57.
- Since you are 27 years of age, that will leave you with 30 years to invest.
- You live for 43 years after you retire.
To survive on a monthly income of Rs 25,000/month for 43 years, you will require a corpus of Rs 1.30 crore when you retire.
To generate Rs 25,000 per month, you need to systematically invest Rs 9,000 every month for next 30 years. This will allow you to sit on a corpus of Rs 2 crore, if we assume a compounded annual return of 10 per cent - quite moderate if the asset in question is equity.
And of course, keep rebalancing the equity debt allocation once every year to maintain the asset allocation proportion intact. Because if you tilt too much to debt you may not be able to save enough for your kitty.
This article was originally published on February 04, 2009.
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