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Follow Basic Principles

We review an investor's portfolio & show him how following basic principles can help him achieve his goals

I am a 35 year old salaried professional with two dependents (wife and a 4 year old son). Kindly analyse my portfolio and suggest me an ideal portfolio and the amount of investment that I should be making to achieve the following set of goals.
- Clifford

My financial goals
Son's higher education
Meet monthly expenses as per current spending after retirement
Buy a flat by early 2010 worth Rs 50 lakh by taking a loan of Rs 35 lakh. Intend to move into this flat and expect rent income of Rs 10,000 from current flat.

A look at your current investment portfolio makes it evident that it is high on real estate exposure. Apart from that, your portfolio comprises of fixed deposits, cash, foreign stocks, six ULIPs and three mutual funds.

Your fixed deposits are essential for maintaining adequate debt exposure, but your three mutual funds are a cause of concern because all of them are sector or theme oriented and hence, cannot be considered as core investment choices for your goals and objectives. However, thankfully, you have only miniscule investments in these funds.

Another cause of concern is the accumulation of six ULIPs, which eat away an annual premium of Rs 1.04 lakh and provide a cover of Rs 5.5 lakh (three schemes whose cover details you have provided). Sadly, you have mistaken ULIPs as the route to achieve your goals, which is not the way ahead.

You need to start afresh to build an appropriate portfolio. On the basis of the details provided by you, it is clear that you can invest a maximum of Rs. 50,000 per month. For your reference, we have provided a model portfolio with funds and SIP amounts. But before going ahead to model portfolios, here are some pointers that are a must before creating any portfolio.

What you need to do
1. Get rid of ULIPs
It is advisable to stop the premiums you are paying for the ULIP plans as they are an expensive mode of investment. One should never mix investment with insurance as both have separate requirements in life. Instead, you can take term insurance plans which have lower premium charges and provide higher life insurance cover. Invest in mutual fund schemes for your future goal achievement.

2. Build an appropriate portfolio
Looking at your current mutual fund portfolio, it is apparent that you have invested in mutual fund schemes without any prior understanding and without considering your goals and objectives. As of now, you have three mutual fund schemes: Tata Infrastructure, DSPBR T.I.G.E.R and Reliance Diversified Power Sector Fund, all of which are sector oriented funds. Due to this, your portfolio is heavy on the energy sector with 33.16 per cent exposure to it. For long-term purpose, one should have maximum exposure to plain vanilla diversified equity funds and a minimal exposure to sector or theme based funds.

3. Make separate portfolios for separate goals
Two of your above mentioned goals are long-term oriented with different time spans. It is advisable to maintain separate portfolios for each of the goals so that you can track them separately.

4. Invest systematically
It is very important for you to start your investments by adopting a systematic investment approach. This is an appropriate choice for long-term investors as it not only provides the benefit of rupee cost averaging but also ensures a disciplined investment approach.

5. Add debt
It is important to have some exposure to debt so as to curtail the downfall of equities during falling markets. Though you have considerable exposure to fixed deposit schemes and cash at bank, you can also add a debt fund to your portfolio on the basis of your risk appetite.

6. Rebalance your portfolio once every year
After choosing appropriate funds, allocating SIP amount to it and paying the money on time, your work doesn't end here. It is very important for you to continuously monitor the portfolio and rebalance it according to the predetermined asset allocation at least once every year.

All you need to do is follow these basic principles and opt for the right investment approach to easily achieve your goals.


Goal 1
Son's Education  
Time 14 years
Estimated Amount Rs 20 lakhs
(Our assumption, as you didn't mention anything) 
SIP Amount Rs 6,000 per month
Future Value Rs 21.2 Lakhs*
Funds SIP Amt (Rs)  
DSPBR Top 100 Equity 3,000
Kotak 30 3,000

Brief
For your son's higher education, if you invest Rs 6,000 per month for the next 14 years, you would be able to accumulate Rs 21.2 lakhs within the stipulated time span.


Goal 2
Retirement Corpus  
Time 20 years
Estimated Amount Rs 1.15 crore
SIP Amount Rs 16,000 per month
Future Value Rs 1.15 crore*
Funds SIP Amt (Rs)  
HDFC Top 200 4,000
Birla Sunlife Frontline Equity 4,000
Franklin India Prima Plus 4,000
ICICI Prudential Infrastructure 2,000
Kotak Flexi debt 2,000

Brief
As you have already mentioned that you want to maintain a similar expenditure amount as it is today, i.e. Rs 32,000 per month, if we consider a minimum life expectancy of 30 more years after you retire at the age of 55, you need to accumulate at least Rs 1.15 crore to attain the same level. Thus if you invest Rs 16,000 per month for the next 20 years via SIP, you can achieve this goal.


Goal 3
Buying a Flat  
Time Within one year
Estimated Amount Rs 50 lakhs

Brief
If you take a loan of Rs 35 lakh to finance this purchase, then your EMI would roughly be Rs 38,000 (assuming interest rate of 9.5 per cent and repayment period of 20 years). Combining your future rental income of Rs 10,000 with the surplus of Rs 28,000 left over after meeting your monthly expenses and investment needs you will have enough cash to cover your EMI.

Consider taking a home loan insurance which would cover your EMI payments in case anything unfortunate happens to you.

(*Calculated on the basis that the amount is invested consistently with an assumed rate of return of 10 per cent per annum)