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A Bit Late

You will have to increase your savings to match your goals

I have been investing in mutual funds since December 2007, when the market was at 20K levels. All my investment decisions are directed by the information I get on your website and the fund ratings.
When I started off, my goal was tax saving. But now I understand that it is as important to focus on wealth creation too.
I have a total life cover of Rs 16.6 lakh for which I pay an annual premium of Rs 67,000. Of this, a life cover of Rs 1.6 lakh comes by way of ULIPs, against a premium of Rs 32,000 per annum.
Please review my portfolio and suggest suitable changes for the following goals. Also tell me if they are achievable. I also want to invest an additional Rs 2,000 every month in a good debt fund for a period of more than five years. Can you make some suggestions?


The first thing we have done is look at your goals and how much you would need to save to achieve them. We have assumed an annual rate of return of 10 per cent on your investments.

Construction of house
How much you need: Rs 25 lakh
Time frame: 7 years
Monthly saving: To get Rs 25 lakh in 7 years, you would need to save Rs 20,850 per month.

Child’s Education
How much you need: Rs 20 lakh
Time frame: 20 years
Monthly saving: To get Rs 20 lakh in 20 years, you would need to save Rs 2,760 per month.

How much you need: 20,000/month as income at today’s prices
Time frame: 22 years

Monthly saving: If you want to retire in 22 years, then Rs 20,000/month, would be valued at Rs 47,400/month, assuming an annual inflation rate of 4 per cent. That means, you need to have a corpus of Rs 91.2 lakh in 22 years to be able to give you a required income of Rs 47,400/month.

To get that corpus of Rs 91.2 lakh, you would have to save Rs 10,150 per month. But do note, we have not taken into account the payments you may get from your insurance policies once they mature.

Now let us look at your overall portfolio

Mutual Fund Holdings
Fund  Allocation (%)
Magnum Taxgain 34.72
HDFC Taxsaver 19.99
Sundaram BNP P Taxsaver 16.89
HDFC LT Advantage 14.89
HDFC Top 200 10.26
Magnum Contra 3.24
Total  100.00

Sensible contributions to tax-saving funds
Your contribution to tax-saving inst-ruments is more than required. Un-der Section 80C of the Income Tax Act, the exemption limit is Rs 1 lakh. So after you pay your life insurance premiums, also take into account your contribution to the Public Provident Fund (PPF) and Employees Provident Fund (EPF). If there is any balance till the Rs 1 lakh limit is reached, then you can fill in the gap with an investment in a good tax-planning mutual fund. Don’t go overboard.

Adequate life insurance cover
You have not mentioned how many dependents you have. But you have stated that your monthly ex-penses amount to Rs 20,000. Ideally, you should have a life cover of around 10 times of your annual expenses so that your family can be well taken care of in any eventuality.

Currently, your total sum assured is Rs 16.60 lakh. Looking at your expenses, your life cover must be around Rs 25 lakh. Hence, you should consider increasing your life cover by Rs 10 lakh. For this, we recommend term insurance plans which are the purest and the cheapest form of life insurance.

Selection of funds
A good thing about your portfolio is the quality of funds selected. Other than HDFC LT Advantage, all other funds are either 4- or 5-star rated. Hence, there isn’t much tinkering you should do with your portfolio. With six funds, your portfolio is quite compact and can be easily managed.

At later point you might consider adding a debt fund to your portfolio.

Consistency is important
You started investing in December 2007 when the stock market was at its all-time high. From those levels, it has fallen by more than 60 per cent till March 2009. You have made a total investment of Rs 64,000 this far but the value of portfolio is down to Rs 56,000.

We suggest that you follow a systematic investment route and do not invest at one go. This way you invest at market highs and lows.

Rebalancing is important
Since you have a number of years to attain your goals, it would be wise to invest in equity to help in wealth creation. As you approach your goals, you can select a good debt fund and slowly channelize money towards it. So that when you reach the end of your time frame, your money would be safer because at that time, it is not wealth creation that is important but capital preservation.

The proposition
As you can see, the amount of money you are saving every month is not sufficient to meet your goals. Here are some solutions:

Lower the amount you would need for the construction of your home to say just Rs 10 lakh. You can consider taking a loan to finance the balance amount when you plan to start construction.

Lower the amount you will need to save for your child’s education to Rs 15 lakh. Here too, you can consider taking an education loan when the need arises.

We do not think you should compromise on your retirement kitty. But if you could add a few more years to that deadline, it would certainly help. If instead of 22 years, you push it to 25, then you would need a corpus of Rs 1.03 crore to enable you to earn a monthly income of Rs 53,300 once you retire. Moreover, if your retirement goal is postponed to 25 years, then the monthly payment towards this goal will come down from Rs 10,150 to Rs 8,300.

You currently invest Rs 9,500 every month towards your goals. This amount is very insufficient. Increase your monthly savings to Rs 23,450 and do so consistently till the time you retire — which means for the next 22 years. Now this may be difficult, so here’s a suggestion. Your annual premium towards ULIPs is Rs 32,000. You should discontinue your ULIPs after they complete five years after all they are a costly way to get insured. Redirect this money towards saving for your goals. As for insurance, stick to term insurance plans.