I am 40 years old. My monthly net income is Rs 1.5 lakh and I have a monthly fixed outgo of Rs 70,000 for the next three years on account of loan repayment. I opened a Public Provident Fund (PPF) account this year and plan to invest Rs 70,000 annually for the next 15 years. My family is covered under medical insurance by my company and I have also taken an additional medical insurance of Rs 2 lakh each for both myself and my husband. I don't have a term plan but have two traditional insurance policies. Currently I have systematic investment plans (SIPs) running of Rs 10,000 each in the following schemes: DSPBR Equity, DSPBR TIGER Reg, and DSPBR Top 100 Eqt Reg. I have also invested in shares that are worth around Rs 3,86,000. I have also invested around Rs 10 lakh in HDFC HI Short term. As I wanted to invest in equity funds, I have started moving money from this fund (using Systematic Transfer Plan) to nine other funds that I already have in my portfolio.
Below are my mutual funds holdings:
My goal is to create a corpus of Rs 5 crore for my retirement and Rs 50 lakh for my daughter's education, both of which are 15 years away. Kindly revamp my portfolio.
- Madhavi
Goals
The current value of your investments in mutual funds and shares stands close to Rs 40 lakh. This along with your monthly investment of Rs 30,000 will help you accumulate around Rs 3.7 crore in 15 years. Your planned PPF investment will add to your retirement corpus but will not be sufficient to meet your planned goals.
To be able to accumulate the required corpus (Rs 5.5 crore), you will have to increase your present monthly investment of Rs 30,000 to Rs 54,000.
Since you feel that increasing the investment amount will be difficult unless you get a salary hike in the years to come, you must look for other solutions. Once your home loan is repaid after three years, you may redirect that money towards SIPs. Other alternatives could be that you either reduce the amount that you wish to collect (to meet your two goals), or if possible, postpone your retirement by three to four years.
The assumptions we have made while doing the above calculations are as follows:
- Based on conservative estimates, your equity investments are likely to earn a return of 10 per cent annually.
- You will continue to invest until you retire while increasing your investment amount annually by 10 per cent.
- You will not withdraw any amount from the invested corpus prior to your retirement.
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Observations
Your equity investment comprises mutual funds and shares and they account for the majority of your investments. Since we have no information regarding your debt holdings, we assume that you just have PPF as your debt investment. PPF is quite an illiquid investment. If you need the money in an emergency, you would be in trouble (withdrawals are not permitted during the first five years of investment). As for your mutual fund investments, 69.30 per cent is in equity and the rest in debt. Large cap holdings constitute 54.50 per cent of your portfolio. We would like to warn you against your exposure to mid-cap stocks. Currently these comprise 40 per cent of your fund investments. Limit it to 30 per cent.
You have far too many funds - 23 - in your portfolio. Having too many funds is not the smart way to diversify. Instead, it leads to over-diversification. It not only reduces the probability of superior performance but also makes the portfolio difficult to manage.
In addition, you hold seven shares that constitute 10 per cent of your equity investments. While all these are of quality companies, we hope that you have the required knowledge, expertise and time to research the companies yourself and do a good job of managing your direct equity holdings.
You have invested lump sum in eight funds during their new fund offers (NFOs). By doing so, you have committed two mistakes at one go. One, you have chosen funds that have no history to go by when there were so many proven performers in the market. And two, you deprived your portfolio of the benefits arising from systematic investment.
Portfolio revamp
Many of the funds that you currently hold do not deserve a place in your portfolio. We have picked eight quality funds. Invest only in these. These eight funds may be segregated into Core and Supporting funds. Generally core funds are less volatile and are consistent performers over the years. Continue to hold these eight funds and start selling off the rest. Ensure that you avoid paying Short Term Capital Gains Tax (STCG) by selling only those funds that you have held for more than a year.
HSBC Small Cap is the only closed-end fund in your portfolio. Exit it once the lock-in period ends in March 2011.
Invest the proceeds in the suggested funds in such a manner that the core funds constitute 70-80 per cent of your portfolio. Limit the weight of supporting funds to 30 per cent of the portfolio. This will ensure that your portfolio remains low on volatility. Invest in a sectoral fund only if you understand the nature of the sector or theme well.
We have retained HDFC Prudence, which is a Balanced Fund (equity-oriented). This fund will take care of the debt exposure that your portfolio requires. However, this fund will not help you rebalance the portfolio as a pure debt fund would. In the later years, as you reach closer to retirement, start channelising your money from equity funds to pure debt funds as at that point of time safety of capital should become your prime concern.
We also suggest that you transfer money from HDFC HI Short-term to the funds suggested.
Regarding SIP
Instead of investing Rs 10,000 each in three funds of DSPBR AMC, choose four funds from those suggested by us. Spread Rs 30,000 equally among any three core funds (preferably one from each sub-head) and one supporting fund (preferably Reliance Growth). Diversify your portfolio across fund houses so that your portfolio returns do not get affected in case a particular fund manager or fund house does not perform well.
Insurance
In our opinion, traditional insurance policies are not the best way to get yourself insured. See if you can exit these policies. Instead buy a term plan. It is inexpensive and will provide adequate cover for a reasonable premium amount. Though you are not the sole earning member, you do have dependants and hence need insurance. A term plan does not pay any returns, but it ensures adequate compensation to the family in case of an eventuality to the insured.
This article was originally published on September 16, 2010.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
