Postpone your retirement
I am 37 years old and I work in the IT Industry. I have two dependants - my wife and an eight-year-old daughter. My monthly take-home salary is Rs 98,000. My monthly household expense is Rs 20,000. I have taken a home loan for which I pay an EMI of Rs 35,000 per month. Eight more years remain before the loan will be fully repaid. I have a surplus of Rs 40,000 per month which I would like to invest in mutual funds.
I had invested in mutual funds in 2007, continued till 2008, and then stopped investing. I also redeemed some of my mutual fund investments in mid 2009. Now I own only eight funds as mentioned below. I have shares worth Rs 40,000 and employee provident fund (EPF) of Rs 2 lakh. I have a term plan provided by my employer whose sum assured is Rs 25 lakh. I have a medical policy of Rs 9.5 lakh that covers my family too. I also have an endowment policy for which the sum assured is Rs 5 lakh. This policy will mature in 2027.
I plan to retire 10 years from now. I want to accumulate at least Rs 2 crore for retirement. I also want to accumulate money for my daughter's education and wedding which will be due in 10 and 15 years respectively.
Please suggest modifications to my portfolio and also suggest funds for my monthly investments so that I am able to reach my goals.
- Rajkumar
You are among those investors who try to time the market. You started investing in mutual funds in 2007, continued in 2008, and when the market saw a downturn, you stopped investing and waited for the market to bounce back. Thereafter, when the market rally started, you sold off a few schemes in 2009 just to recover your losses. You did this even though you did not need the money, nor were all the funds that you sold off unworthy of staying in your portfolio.
In the whole process, you have committed several mistakes. These are as follows:
- You tried to time the market. Timing the market is a futile exercise. Markets are unpredictable and have their own highs and lows. Had you been investing consistently every month, you would have accumulated a sizeable corpus by now.
- Further, you have not inculcated the habit of investing regularly, which is another fundamental principle of investing. The right way to accumulate wealth through equities is to invest regularly through the most recommended route, i.e., via Systematic Investment Plan (SIP). By taking advantage of rupee cost averaging (by investing in funds even during lean periods when prices are low), you lower your cost of acquisition of units, which in turn enhances your returns.
- You currently have eight funds. This is too large for a portfolio worth Rs 70,000. No additional diversification is provided by a large number of funds. Rather, you make your task of investing more tedious and unmanageable by adding a lot of paper work.
- The only debt exposure you have is via EPF. This accounts for 65 per cent of your entire investment. This is too high a level of debt exposure at this stage when you need to accumulate wealth, which is better done through equity investments. In the long run, equity funds will deliver higher returns than debt funds.
Goals
Retirement kitty. At present you are 37 and want to retire at 47. This leaves you with just 10 years to invest. To accumulate a retirement corpus of Rs 2 crore when you retire, you need to invest Rs 55,000 per month now and keep increasing this amount by 10 per cent every year. For our calculation we have taken into consideration your accumulated investments in mutual funds and shares and we have assumed that your equity investments will earn a return of 10 per cent annually. However, this monthly investment will only let you meet your retirement need.
Other goals. While you have mentioned the time frame for your other goals such as daughter's education and marriage, you haven't quantified them. Unless you are clear about how much you want to accumulate for each goal, it will be impossible to decide how much you need to invest in order to meet those goals well in time.
Since you haven't quantified your goals, we cannot comment on how much you need to invest to be able to achieve them.
Nonetheless, we feel that it is going to be really difficult for you to accumulate the additional amount required for the two above-mentioned goals when you already have to scale up your planned monthly investment by Rs 15,000 to meet your retirement goal. Moreover, you have planned your daughter's marriage after your retirement, when you will not have a regular income flowing into the family.
We suggest that you should try to rationalise your goals. It will be virtually impossible for you to begin saving for your daughter's wedding daughter until you have fully repaid your home loan. One option before you is to consider increasing your retirement age. Below is a table that will tell you how much you will be able to accumulate given different retirement ages. We have assumed that your investment of Rs 40,000 per month in mutual funds (which you will increase by 10 per cent every year) along with your accumulated investments worth Rs 1.1 lakh will earn a return of 10 per cent annually.
Portfolio restructuring
Your present funds give you a good exposure to equity stocks - approximately 95 per cent. However, there is an insignificant debt exposure in your portfolio (0.54 per cent).
Your large-cap exposure is 40.65 per cent, which is too low. Increase it to at least 70 per cent. Mid-cap exposure is 55.5 per cent which is too high. That needs to be brought down to 30 per cent.
Maintain a small portfolio of just the five funds that we have suggested. Three quality funds have been retained from your existing portfolio. Exit the remaining ones and invest the sales proceeds among the suggested funds. Your core funds should comprise at least 70 per cent of your mutual funds investments. Keep 10 per cent in a debt fund and limit your exposure to supporting funds to the extent of 20 per cent.
Since there is no pure debt fund present in your portfolio, we have suggested one. This will provide stability to your portfolio, especially during a downturn. It will also help in rebalancing the portfolio.
Insurance
It is good that your medical insurance covers you and your dependants. Further, you don't have your own term insurance but you have a Rs 25 lakh cover provided by your employer. We have two concerns here: firstly, the sum assured is insufficient and may not be able to fulfil all your family's goals. And secondly, what if you quit your current job and move to another? Therefore, we suggest that you buy a term cover that is adequate and is paid for by you. Consult a planner to find out how much cover you need.
Points to remember
- Invest consistently each month via SIP without trying to time the market
- Always choose well-rated funds
- When you get closer to your goals, gradually shift money from equities to debt to avoid losses
- Rebalance your mutual-fund portfolio at least once a year
- Buy a term insurance of your own for a cover that will sufficiently meet your future goals and let your family live comfortably
- Invest in stocks only if you have the inclination, time and understanding to research companies by yourself. If not, then leave the job to mutual fund managers
This article was originally published on October 14, 2010.
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