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Mission Retirement Corpus

We review Bhadresh Gandhi's portfolio & tell him if he's on the right track towards creating his retirement corpus

I am a 59-years old practising lawyer and plan to retire at the age of 65. My current portfolio consists of the following investments:
- Investment in shares and mutual funds: Rs 35 lakhs
- Investment in PPF: Rs 10 lakhs
- Fixed Deposits: Rs 11 lakhs
- Office worth Rs 25 lakhs
I am really worried about my equity & mutual fund investments as their current worth have almost halved. Yet I don't intend to withdraw my investments till my retirement. Additionally, I will invest Rs 5 lakhs every year till retirement. I also plan to dispose the office after retirement. Please guide me about where I should invest so as to accumulate Rs 1.25 crore by the time of retirement.

-Bhadresh Gandhi

One of the first, and most important, steps towards achieving an investment goal is dreaming realistically. Ideally, investors should be reasonable in their expectations from their investments and the good thing is that it seems like you are one of that kind.

Your investment goal is reasonable and it looks like you are on the right path towards achieving it. We'll tell you why, but first we would like to tell you to not worry over your equity investments. The present worth of your investments is down by almost 50 per cent because you started investing when the equity market was on an upward trend. We all know that the circumstances have changes drastically over the previous year. Hence, right now you need to be patient. Keep faith in the equity market and as you have mentioned, don't stop investing. The current market state might not be too appealing, but this is the ideal time to invest for the long-term.

Now let's see why we think your goal - of accumulating Rs 1.25 crore - is a realistic one. Your current investments of Rs 17.53 lakhs can grow to Rs 34.17 lakhs by the time of your retirement, assuming a 10 per cent annual return. Your additional investment of Rs 5 lakhs every year for the next seven years, breaking the amount to an SIP of Rs 40,000 monthly, can grow to Rs 47.9 lakhs, assuming the same rate of return. So the total corpus you can accumulate from your equity and fund investments would be Rs 82.07 lakhs. Add to this the income from the property that you wish to dispose and the balance in fixed deposits and PPF, a corpus of Rs 1.25 crore seems to be quite realistic.

The good thing about your overall portfolio is that knowingly or unknowingly, you have attained an appropriate equity-debt allocation, in the ratio of 45:55. The allocation is ideal because when you are so close to retirement, you shouldn't be entirely dependent on equity as an asset class to accumulate wealth. Debt provides the cushioning that a portfolio needs to weather the unpredictable equity storms.

Furthermore, another good thing is that your portfolio is high on quality. But while you have chosen good funds and shares, the problem is that you have chosen too many of them. Your portfolio carries too many funds and stocks, which can cause hurdles towards your goal. Hence, you need to restructure your equity portfolio.

Current Equity Portfolio
Top Funds  % Allocation
Reliance Growth 6.8
HDFC Top 200  4.94
Magnum Contra  4.86
Sundaram BNP P S.M.I.L.E.  4.21
Fidelity Equity 4.14
Franklin India Prima Plus 3.27
Kotak 30 3.21
HDFC Equity 3.16
Fidelity Tax Advantage 2.08
DSPBR T.I.G.E.R. 2.04

Let's take a look at the problems in your portfolio and work out how you can solve them...

Problem Areas
1) Diversification
Your portfolio has 23 funds and 19 stocks, which add up to a total of a mammoth 297 stocks. A clear case of over-diversification.

2) Cap allocation
40 per cent exposure in mid- & small-caps makes the portfolio volatile and risky.

3) Irregular investments
Your investment approach lacks discipline as most of your investments are in lump-sums and at irregular intervals.

4) Sector exposure
Your portfolio is heavy on the energy sector with 30.61 per cent exposure to it. Too much exposure to one sector makes the portfolio's performance overly dependent on it.

Plausible Solutions
1) Choose fewer funds with proven track records
A portfolio with fewer funds will not only achieve appropriate diversification, but will also help you track their performance efficiently.

2) Core holdings should be in large-cap funds
High exposure to large-cap funds will reduce volatility and make the portfolio concentrated.

3) Invest systematically
Systematic investments will bring discipline to your investment approach.

4) Stay away from direct equity investments
Investing directly in the stock market requires an in-depth knowledge and understanding of the equity market. It also calls for devotion of time. Hence, it's better to stay away from direct equity investments, when you are already investing in equity funds.

5) Rebalance your portfolio once a year
Since you already have an appropriate equity-debt allocation, you should check and rebalance your portfolio once a year to maintain that allocation.
Keeping in mind the above mentioned points, here is a model portfolio that we have devised to push you towards your goal.

All the best!

Suggested Portfolio
Funds  % Allocation  SIP in Rs
Franklin India Prima Plus 18.58 7,500
Kotak 30 18.94 7,500
Magnum Contra 19.04 7,500
Magnum Taxgain 18.86 7,500
Sundaram BNP Paribas Select Focus 18.52 7,500
Tata Infrastructure 6.06 2,500