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Big Plans & Early Retirement

We review Satish Venugopal's portfolio & tell him how the right diversification can help him achieve his goals

I started investing since 2006 and recently I invested in gilt funds. I read in one of your articles that gilt funds may not be right investment in the months to come. Should I stop investing further? Am I on the right track? Is there something I should do to better my investment portfolio to achieve my targets?
– Satish Venugopal

Profile 30 years old
Two dependants; wife & 7-year old daughter
Based in Dubai, UAE

Goals
To retire by the age of 45
To attain Rs 50 lakh in liquid cash by retirement (15 years)
To save Rs 10 lakh for daughter’s marriage (11 years)
To save Rs 7-8 lakh for daughter’s higher education (8 years)

Rebalance your portfolio
It’s interesting to see that you have diversified your investments across asset classes. Unfortunately, you only have 1 per cent invested in equity. You need to up this exposure since it is the asset class that delivers the maximum returns in the long run. The high debt tilt will offer a stable portfolio but with a heavy compromise on returns.

Also, a lot of your assets are in real estate and gold. Besides a higher exposure to equity, you need to have a specified amount in a relatively liquid asset for emergencies, like a liquid fund or bank fixed deposit.

You do not require a Unit Linked Insurance Plan (ULIP) as your equity needs will be catered to by mutual fund investments and your insurance requirements are taken care of by your insurance policies. One should stay away from ULIPs as they are costly avenues and carry hidden charges as well. You should stop the premium in the ULIP as soon as the lock-in period expires and invest that amount in mutual funds.

Increase allocation to funds
When we look at your annual contribution towards various assets, the allocation towards mutual funds accounts for 44 per cent (equity: 17%, debt: 27%). On the other hand, 23 per cent goes towards gold and 27 per cent towards the ULIP. Right now you should focus on wealth accumulation, not wealth protection. So do increase your investments to equity mutual funds. Which brings us to the issue of gilt funds.

The portfolio of a gilt fund consists of debt instruments issued by the Government of India. The market value of these instruments depends on the interest rate movement in economy. As the interest rates go down, the price of the instrument rises, taking up the NAV of the fund. That’s what happened in 2008, when the successive rate cuts resulted in the gilt fund category (medium and long term) delivering a great performance.

But now the performance of gilt funds have started to decline and the category delivered a return of -6.28 per cent in the month of January 2009. A better option would be income funds as they have the leeway of investing in both government securities and corporate debt.

Be smart with your retirement corpus
You stated that you would like your entire retirement corpus to be in cash. Why? You want to retire at the age of 45 years and with a life expectancy of 80 years, you will have around 35 years post retirement. Your only source of income would be your retirement portfolio. A part of your portfolio can be invested to generate some return while the rest can be invested for growth. Ideally, you should always keep money that you need for meeting your expenses for the next three months in liquid form.

Quick Action Points
Since you have a different time frame for each goal, maintain different portfolios for each
Ensure that you have more exposure to equity than debt
Rebalance your portfolios once a year to ensure that your equity allocation is on track
Increase your monthly savings
Invest systematically
Increase exposure to equity mutual funds
Reduce you equity exposure as you approach retirement

Goal 1: Retirement
Desired Corpus : Rs 50 lakh
Time : 15 years
Monthly Investment : 12,500
Approx. Future Value : Rs 50.02 lakh
Suggested Funds SIP Amt (Rs)
Birla Sun Life Frontline Equity 5,500
Magnum Contra 5,500
ICICI Pru Flexible Income: 1,500

Goal 2: Daughter’s Marriage
Desired Corpus : Rs 10 lakh
Time : 11 years
Monthly Investment : 4,500
Approx. Future Value : Rs 12.16 lakh
Suggested Funds SIP Amt (Rs)
Kotak 30: 4,500
Goal 3: Daughter’s Education
Desired Corpus : Rs 8 lakh
Time : 8 years
Monthly Investment : 5,500
Approx. Future Value : Rs 7.95 lakh
Suggested Funds SIP Amt (Rs)
DSPBR Top 100: 4,000
Kotak Flexi Debt: 1,500

The above calculations are based on an annual return of 10 per cent, per annum. It is clear that you need to invest a total of Rs 22,500 every month to successfully achieve all the goals.