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Working on Consistency

Working on Consistency

I am 31 years old. I live with my wife and a 17-month old son. I am the sole breadwinner with a take-home monthly salary of Rs 70,000. My monthly expenses are around Rs 25,000. After meeting my other liabilities, I invest Rs 34,000 per month in mutual funds via systematic investment plans (SIPs).
Currently, I have 3 insurance policies which provide a total life cover of Rs 22 lakh. The premium I pay towards them exhausts my exemption limit of Rs 1 lakh under Section 80C. I intend to buy a term insurance policy worth Rs 1.5 crore, a child plan to cover my child's education and a pension plan.
Please help me revamp my portfolio so that I am able to achieve my goals.

-Raghvendra Sharma

Current Investments
FDs - Rs 1.65 lakh
NSC - Rs 20,000
MFs - Rs 8.53 lakh

We are impressed by your consistent investment philosophy and how well you have articulated your goals. However, we are not totally clear about your entire portfolio. You have mentioned three insurance policies but have not provided adequate details on whether they are Ulips, money back policies or term insurance policies. While you have mentioned National Saving Certificate (NSC) and fixed deposits (FDs), you have not mentioned the details of the Employees Provident Fund (EPF) or Public Provident Fund (PPF).

In our view, your current investments (Rs 10.4 lakh) and the monthly commitment to ongoing investments (Rs 34,000) will definitely help you achieve your goals. However, we are making that statement based on three assumptions:

1) Your investment allocation will increase by 10 per cent every year till the time you retire.
2) All your investments earn a return of 10 per cent per annum.
3) Inflation @ 6.5 per cent per annum has been taken into account.

Buying a house
When you take a home loan, you will be required to put up around 15 per cent of the total cost as a margin payment. Your current ongoing investments and the total value of your present investments (Rs 10.4 lakh) will be worth around Rs 20 lakh in two years. This should help you take care of that amount.

Retirement
After meeting your other goals, you will be able to accumulate a corpus of Rs 3.4 crore by the age of 60, which will take care of your monthly requirement of Rs 1.65 lakh post-retirement. Any amount that you receive from your insurance policies or provident fund will be additional income for you.

Term Insurance
A life cover of Rs 1.5 crore, along with your present insurance policies, should be sufficient to meet all your liabilities and monthly expenses of your dependants in the case of your demise.

Child Plan/ Pension Plan
Are you referring to insurance products? You already have three policies and are taking out one more. To build up a corpus, stick to investments by way of mutual funds; it is cost efficient, transparent and gives a higher return than any other avenue.

Contingency planning
Have you planned for any emergency? Some money in a savings bank account or a flexi deposit in your bank would help.

Trimming the mutual fund portfolio
Your fund portfolio has an exposure of around 75 per cent to equities; increase it to 90 per cent. Your goals are far off and a higher equity exposure will help in wealth accumulation.
Your current portfolio holds 24 funds which add up to a total of more than 350 stocks. This is a clear case of over-diversification. Moreover, it becomes difficult to manage so many funds. A fall-out of such diversification is that each of them has a negligible share in your portfolio. So even if they display great performance, it will not have a significant impact on your overall portfolio.
Our advice: Continue with an SIP but stick to around 7 funds.

Core Holdings (70%)
From your existing funds, stick to 4 or 5 as your core holdings.
Continue with your SIP in these funds.
Take your pick from these but ensure that your selection is across fund houses: DSPBR Top 100 Equity, DSPBR Equity, Franklin India Prima Plus, Templeton India Equity Income, HDFC Top 200, UTI Opportunities, Magnum Contra, Reliance Regular Savings Equity and Tata Equity PE.

Debt Exposure (10%)
Select one, either Fortis Flexi Debt or Canara Robeco Income.

Supporting Funds (20%)
When you invested in DSPBR World Gold Fund, were you aware that this fund carries a lot of risk since it invests in stocks of gold mining companies across the globe? If you want an exposure to gold, then you could try a Gold Exchange Traded Fund (Gold ETF).
You also invested in UTI Infrastructure Advantage and ICICI Prudential Infrastructure. If you want an exposure to this theme, stick with ICICI Prudential Infrastructure.

Offloading The Rest
Once you decide on your core holdings and the thematic offerings you wish to hold, start the process of offloading the rest.
Begin by terminating all your other SIPs.
To avoid short-term capital gains, start by selling those funds which you have held for more than a year. Since you have been investing via SIP, the investments have been ongoing and continuous so it would take a while. If possible, try and avoid paying any exit load.
From your 4 close ended funds: UTI Infrastructure Advantage- Series 1, HDFC Mid-Cap Opportunities, UTI Wealth Builder and Franklin Templeton Capital Safety, the latter is the only one that does not allow premature redemptions. You, therefore, have no choice but to hold on to it till maturity.