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Better Late Than Never

We review Pradeep's portfolio & tell him the importance of investing in large-cap diversified schemes

I am 50-year old defence officer with two dependents. My monthly take home pay is Rs 58,000. Post-retirement, after four years, I am likely to receive about Rs 30 lakh as a lump-sum and a monthly pension of Rs 25,000.
Kindly examine the financial health of my portfolio, review my mutual fund selection and suggest the necessary changes/additional investments.
- Pradeep

50 years
Two (wife & son)
Rs 58,000 p.m.

My financial goals:
Rs 20 lakh towards my son's education (MBA/MS) after three years and a post-retirement kitty for me and my wife.

Your investments are spread across five broad categories - Provident fund, fixed deposits, gold, mutual funds and real estate.

Existing Portfolio
Funds  % Allocation
HDFC Prudence 17.85
Reliance Diversified Power 17.02
Reliance Vision 16.73
HDFC Equity 16.57
DSPBR T.I.G.E.R. 16.33
Tata Infrastructure 15.48

Your mutual fund portfolio sports six funds including two based on the infrastructure theme, one sector fund and a balanced fund. When one looks at your entire portfolio in totality, your equity allocation is not that high, but a large component of it (45 per cent) is in mid- and small cap stocks.

We are not happy with your selection of funds as we feel the sector and thematic tilt is high. We also feel you need to increase your large-cap exposure.

Here we present three steps as to how you can get your portfolio on track as well as achieve your goals.

Prudent fund selection
You have allocated Rs 31,000 every month for your SIP. Investing systematically is a smart move. We have created a model portfolio for you based on the logic that you need to decrease your mid- and small-cap exposure. With that is mind, we narrowed down on large-cap oriented, equity diversified schemes. We also kept in mind that the thematic and sector exposure needs to be toned down. That is why we have not included DSPBR T.I.G.E.R and Reliance Diversified Power Sector in the suggested portfolio. You can, however, keep a minimal exposure to Tata Infrastructure.

Planning for son's education
The requirement of Rs 20 lakh for your son's education seems difficult in a short span of three years. The reason being that since your goal is not too far away; it makes equity way too risky. And if you keep the money in debt instruments, they won't deliver a return you need to accumulate that amount.

The other alternative is to take a loan. Either you take a loan against the property you own. Having said that, we ourselves would advise against it since it makes no sense to take on a liability when you are so close to retirement. Alternatively, your son could opt for an education loan from a bank. He can then repay the loan once he starts working.

Another option would be if he postpones his higher education plan by just a year. The reason being your lump-sum entitlement of Rs 30 lakh would come in handy. However, that would eat into your retirement kitty.

Planning for retirement
You seem to be on a pretty sure footing when it comes to retirement. You will get a huge amount on retirement (Rs 30 lakh) along with your provident fund. When you finally retire, you can decide whether you want to invest it in a monthly income plan (MIP) of a mutual fund or a fixed deposit. Though, in addition, you will be getting a monthly pension. And, we have not even taken into account your mutual fund investments. You have nothing to worry about.

Suggested Portfolio
Funds  SIP Amt (Rs)
HDFC Equity 7,500
DSPBR Top 100 7,500
Kotak 30 5,000
Birla Sun Life FrontLine Equity 6,000
Tata Infrastructure 5,000