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Achieving Goals Systematically

We analyze Suresh Babu’s portfolio & tell him how he can achieve all his goals through systematic planning

I have been investing in stocks and funds since January 2005. Initially, it was for the tax saving purpose and later for building a portfolio to achieve my future goals - retirement, children's education and their marriage. Please review my portfolio keeping these perspective. Which funds should I retain and remain invested in? As far as my direct stock investments are concerned, I didn't have much of an idea while investing; I followed some websites instructions and some other sources. In future I will make sure to not invest directly in the stock market. -Suresh Babu

It's good that you have well-defined long-term goals and time is in your favour to prepare for their fulfilments. The not-so-good news (we wouldn't really call it bad news) is that your approach has been haphazard. A portfolio of 16 mutual funds and 15 stocks built over a period of three years is not ideal. You have tried to make it over-diversified, which won't really do your portfolio any major harm, but it won't help you in building a decent corpus either.

Investing in too many stocks or funds should be avoided as each loses the significance in the overall portfolio. In your case, the total number of stocks (direct and funds combined) amount to around 300. Of them, only 21 have an allocation of more than one per cent in your portfolio. This means that if a stock sees a surge in its price, the effect won't be clearly seen in your portfolio.

Investor's Portfolio
Mutual Funds  % Allocation
Investing via SIP  
Fidelity Tax Advantage 11.96
DSPBR Equity 11.06
Fidelity Equity 8.35
DSPBR T.I.G.E.R.  7.08
Reliance Vision 0.72
Franklin India Prima Plus 2.79
SIPs Discontinued  
DSPBR Small and Mid Cap  2.58
Fortis Tax Advantage Plan 3.46
Franklin India Flexi Cap 2.12
HDFC Equity 6.72
Magnum Contra 4.63
Magnum Global 1.01
Magnum Taxgain 6.59
Reliance Banking Retail 1.89
Reliance Diversified Power Sect. 1.56
Reliance Growth 1.36
Reliance Vision 2.68
Sundaram BNP Select Midcap  2.93
Stocks  % Allocation
BHEL 4.70
ICICI Bank 4.01
Reliance Petroleum 3.08
Reliance Industries 2.29
Reliance Communications 1.80
Others (Less than 1 per cent) 4.64
Debt Investment  Maturity Amt (Rs)
National Savings Certificate 40000
Company PF 70000
Insurance  Premium/Yr (Rs)
Health Insurance (Parents) 7500
ULIPS  Premium/Yr (Rs)
LIC Jeevan Anand 100000
ICICI Prudential ULIP 30000
Loan  Amount (Rs)
From Relatives 69000

That said you can still work on developing a quality portfolio, which will help in fulfilling your specific goals.

The first step is to decide on your asset allocation. Your portfolio is devoid of debt, which is integral in volatile times. Furthermore, you should reduce the unnecessary overexposure to stocks and funds and opt out of ULIPs.

Based on your specific goals, we allocated part of your monthly investable amount to each of your goals and figured out how you can achieve a minimum corpus by adopting a systematic and disciplined investment approach. Please note that for this calculation, compounding interest is used and the rate of return is assumed at 10 per cent per annum.

Goal 1
Children's Education
A decent corpus is required for your children's higher education. Since you got married recently, the minimum time period after which you will need the corpus is 20 years. Now, if you invest Rs 2,000 per month through the systematic route (SIP) for the next 20 years, you can accumulate Rs 16.19 lakh for this goal.

Goal 2
Children's Marriage
Here also, if you allocate Rs 2,000 per month, but with increased time horizon of 27 years, your corpus would increase to Rs 33.97 lakhs.

Goal 3
Retirement Corpus
At the age of 28 years, you have 32 more years to generate a corpus for your retirement. Now if you invest Rs 5,000 per month for the next 32 years, you could generate Rs 1.15 crores for your retirement and assuming more 40 years of life span after your retirement, you can draw Rs 24,000 per month till your survival to meet your livelihood expenses and lead a comfortable life after retirement.

Goal 4
Buy a House
To buy a house, you need to take a home loan. Before that, consider this:
If you take a loan of up to Rs 20,00,000, at the present home loan rate of 9.5 per cent charged annually and payment period of 30 years, the Equated Monthly Instalment (EMI) would be as high as approximately Rs 16,817. To reduce the burden of bulky monthly instalments, make hefty down payments. So, if you pay some cash, say Rs 5,00,000 and the loan amount reduces to Rs 15 lakhs, your EMI will come down to Rs 12,612. Lesser the loan amount, less is the EMI burden. As you have just started your family life; in time your responsibilities will increase. Thus one wrong decision can lead to compromise in the achievement of various goals. So be judicious while going for a home loan.

Other Contingencies
From your monthly savings of Rs 12,000 - Rs 9,000 has been used for different purposes; now keep the remaining Rs 3,000 for other uncertainties or contingencies in life. You can use it for the payment credit you have taken from your relative. Or you can invest this systematically for the next six years to accumulate some corpus which you can use for the down payment of your house (if you can postpone your plan of buying the house now). Always remember to clear your debt as soon as possible.

To give you a further idea of what we think you should be investing in, we have devised a portfolio for you. As you can see, the 'suggested portfolio' is made up of seven funds and has an increased debt allocation of approximately 12 per cent. The portfolio is high on large-caps, so as to ensure higher stability. We suggest you rebalance the portfolio every year and make changes as per your requirements and the performances of the funds.

A systematic approach, with quality funds, will help you achieve your goals easily.

Suggested Portfolio
Funds  Amount (Rs)
DSPBR Equity 2000
Franklin India Prima Plus 2000
Kotak 30 2000
Kotak Opportunities 2000
Magnum Taxgain 2000
Kotak Flexi Debt Fund 1000
Sundaram BNP Select Mid Cap  1000

Action Plan
Let's focus on the changes or alterations you need in your current portfolio.
Cut down the number of funds in your portfolio
Don't invest directly in the stock market
Increase debt allocation
Keep investing systematically
Maintain a quality portfolio with few selective funds with good track record
Move out of ULIPs as they wither away your savings
Take simple term-plans; pay lower premium and get higher sum assured
Pay back your loan