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Raise exposure to equities

I am a 42-year-old salaried person. I

I am a 42-year-old salaried person. I have two dependants - my wife and a six-year-old daughter. My monthly income is Rs 68,000.
I have also invested Rs 17,500 in four stocks of small-cap companies that are currently valued at Rs 16,900. I have Rs 55,000 in my savings bank account.
I deposit Rs 10,000 every month in a recurring deposit account. I have three Ulips for which I pay a total premium of Rs 1.04 lakh annually, and three endowment policies with total sum assured of Rs 1.5 lakh and annual premium of Rs 7,000 per annum. I have a term plan with a sum assured of Rs 15 lakh on which I pay an annual premium of Rs 8,500.
Kindly suggest a suitable portfolio that will help me achieve my goals.
-Purnendu Bagchi

  Daughter's education  Daughter's marriage  Retirement income (per annum)
Today's cost (Rs) 15,00,000 6,00,000 2,40,000
Years due 12 16 18
Estimated value* (Rs) 31,93,644 16,43,406 7,45,597

Current investments
Current investments   Amount (Rs)
Shares  16,900
Mutual funds investments  3,07,000
Fixed deposits (maturing in 2012) 54,000
Recurring deposit  1,15,000
PPF (maturing in 2011) 65,000
EPF  75,000

Monthly investment in MFs
Funds  Rs
Quantum Long Term Equity 2,000
Reliance Regular Savings Equity 2,000
Reliance MIP 1,000
Sundaram BNP Paribas S.M.I.L.E 1,000
Sundaram Select Focus 1,000
Total 7000

Mutual fund portfolio
Funds  Allocation (%)
Quantum Long Term Equity  26
ICICI Prudential Infrastructure  16
ICICI Prudential Discovery  15
Reliance Regular Savings Equity  11
HDFC Top 200 7
HDFC Prudence  7
Reliance MIP 6
Sundaram BNP Paribas S.M.I.L.E Reg  6
ICICI Pru Index Retail 4
Sundaram BNP Paribas Select Focus 2

Currently your debt exposure accounts for around 49 per cent of your entire investment (by way of fixed deposit, recurring deposit, employee provident fund and public provident fund). Since your goals are far off, keep up to 80 per cent in equities. As you approach your goals, gradually sell off your equity holdings and channelise the money into debt instruments, as then safety of capital will be a prime concern.

So to increase your equity exposure you can shift the money from your fixed deposit account and invest it in mutual funds. But do this when your FD matures in 2012. You may also close down your PPF account as you already have a similar purpose account, i.e., EPF. Once your PPF account matures, invest your PPF proceeds in mutual funds for better returns.

Mutual fund portfolio
Your portfolio is high on quality; we are quite impressed with all your 10 mutual fund schemes. Remember that too many funds do not give additional diversification. But more funds are difficult to monitor and you also have to undertake more paper work.

Hence, we suggest that you re-allocate your current ongoing investments. You may make Quantum Long Term Equity, Reliance Regular Savings Equity, HDFC Top 200 and HDFC Prudence your core holdings. These funds are large-cap, 5-star schemes with strong track records.

You have an insignificant exposure to Sundaram BNP Paribas Select Focus (a 3-star rated fund). Since it comprises only 2 per cent of your portfolio, we suggest that you exit your existing holdings in this fund and also stop your SIP.

Both ICICI Prudential Discovery and Sundaram BNP Paribas S.M.I.L.E Reg are essentially mid- and small-cap funds. Such funds are aggressive in nature and make your portfolio volatile. Stop your SIP in Sundaram BNP Paribas S.M.I.L.E. As for investments already made, you may hold on to any one of these two funds.

Further, you have one thematic fund - ICICI Prudential Infrastructure. Although it is a good 5-star rated fund, there is an additional risk associated with such a fund. The performance of such funds is dependent upon the fortune of their underlying theme, so stay invested only if you understand the theme and can bear the risk.

You have also invested a small amount in a good passively managed index fund - ICICI Prudential Index Retail - that tracks the S&P CNX Nifty Index. In order to trim your portfolio, exit it as you have only a small exposure to it (4 per cent).

Once you exit these funds, invest the proceeds in the core funds that we have suggested. It is essential to have a small component (up to 10 per cent) of your investments in debt funds that will help you in regular portfolio rebalancing. Currently you are systematically investing in a debt fund - Reliance MIP. It's a good 5-star rated fund; you may continue investing in it (the growth option).

Suggested Portfolio
Funds   SIP Amount (Rs)
Quantum Long Term Equity  2,000
Reliance Regular Savings Equity  2,000
HDFC Top 200 1,000
HDFC Prudence  1,000
Reliance MIP 1,000

You have three Ulips and three endowment policies. Ulips are a combination of insurance and investment. They involve high initial charges. From the returns perspective as well they are not the best of insurance products. Value Research has always recommended that investors should stay away from them. Discontinue Ulips once the surrender charges become zero or negligible. For your insurance needs we suggest a term plan. This is the cheapest form of insurance and it caters to insurance needs in a better way than Ulips. Although you have a term plan cover worth Rs 15 lakh, in our view that is insufficient, keeping in mind your future needs. Do take an additional cover of Rs 1 crore. This should be sufficient to provide for your future goals and the regular expenses of your dependants, should you meet with an unexpected calamity. You may redirect the premium going towards Ulips towards the term plan and invest the surplus amount in equity schemes.

You have mentioned that you hold shares of four small-cap companies and these are currently trading at a loss. The good part here is that the quantum of your investment is small. Such small-cap stocks are riskier than stocks of blue-chip companies. Our suggestion is that you monitor their performance and the moment you break even you exit them. Invest the money in blue-chip stocks provided you understand industry trends, can research companies, and keep can track of your investments on your own.

Contigency Funds
You must plan in advance for any contingency in future. Your saving bank balance is quite low. Keep around three-four months of your monthly expenses in your savings account to meet emergencies.