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Excess investment in tax saving instrument is not beneficial

I am a 39 year old defence officer with two dependents (wife and a 8-year old daughter). I have two insurance policies with a total sum assured of Rs 9.5 lakh and total premium being paid towards them is Rs 34,300 per annum. I have started investing and saving late in life. Kindly analyse my investments and suggest an ideal portfolio and the amount of investment that I should be making to achieve the following set of goals.
-Mohan Puri

You have been very dedicated in building your investments even though you started quite late. Your zeal, though has led to a situation where your money has not been invested in an ideal manner leading to a lop-sided holding pattern.


Existing Portfolio
Mutual Funds  Allocation (%)
Magnum Taxgain 28.53
Sundaram BNP Paribas Taxsaver 15.42
ICICI Pru Index Fund Retail 14.90
Magnum Contra 9.20
DWS Investment Opportunity 9.00
Sundaram BNP Paribas Select Focus 6.12
HDFC Taxsaver 5.42
Reliance Regular Savings Equity 4.48
HDFC Taxsaver 4.29
JM Basic 2.04
Sundaram BNP Paribas Select Midcap  0.60
Total  100.00

High allocation to tax-saving instruments
Contribution of Rs 2.14 lakh to tax-saving instruments is more than the exemption limit of Rs 1 lakh. Further, a high investment in public provident fund (PPF) is making your portfolio biased towards debt. So, while you will be investing in an excellent debt avenue, you might be missing out on some extra returns and at the same time getting locked in for 15 years. This also makes a major part of the portfolio illiquid for the near term.

Inadequate Life Insurance cover
Adequate life insurance is necessary to deal with uncertainties of life. A life insurance policy takes care of your family's financial needs in case of a person's untimely demise. Ideally, your sum assured should be around 10 times of your family's annual expenditure.

You should consider increasing your insurance cover by supplementing your present policies with term insurance plans, which are the purest and the cheapest from of life insurance.

Low equity allocation
You should work upon an asset allocation pattern and keep rebalancing your portfolio regularly. At 39, age is on your side, and ideally 50-60 per cent of your portfolio should be in equities. While you reach your goals, gradually decrease equity allocation in your portfolio for debt, so as to keep the risk of sudden market movements at bay. All the cash required within next 5 years should be kept in safer avenues like bank FD, or debt funds.

Portfolio Consolidation
You have most of your investments in 4 or 5 star rated funds, which is a strong positive. These funds have been consistent leaders in their categories. However, you should limit the number of funds in your portfolio and stay away from funds with poor past performance. A small allocation to a fund should be avoided as this only increases the count of funds in the portfolio without any significant effect on the performance of the portfolio. Investing in new funds offers (NFOs) should have been avoided. Opting to invest in ICICI Prudential Target Returns Fund, as one really has no inkling about the pedigree of fund should have been avoided.

Reaching Your Goals
For your financial goals, the amount that is required to be invested each month might be far too much given your current salary levels. We have assumed that your daughter gets married at 23 when she completes 5 years of higher education after school, which will also be the time when you retire. Taking the inflation rate of 6 per cent per annum, an expenditure of Rs 20,000 today will be worth Rs 48,000 by that time. A monthly investment of Rs 41,500 will be required along with your current investments in mutual fund, bank FD and PPF to meet expenses for your daughter's marriage, gift and your post-retirement income. This will accumulate a corpus of Rs 1.37 crore for your retirement which if invested at 7 per cent, will provide you with a post-retirement income of Rs 48,000 per month for another 26 years.

However, if you may consider postponing your retirement up to 60 years, then the monthly contribution towards these two goals needs to be Rs 25,200 per month giving you a similar monthly income for 20 years. For your current investments of Rs 15,000 p.m., we suggest you limit your investments in PPF to Rs 5,500 p.m. and invest the rest in equity funds.

This amount if invested regularly, coupled with your present investments will give you an accumulation of Rs 60 lakh at the end of 15 years from now. We advise you to keep moving towards your goal even with the current investment and keep increasing your investments at later stages whenever you can.


Suggested Portfolio
Monthly Investment   Amount (Rs)
PPF 5,500
Magnum Contra 5,000
Reliance Regular Savings Equity 2,500
Sundaram BNP Paribas Select Focus 2,000
Total  15,000