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Passive Investing Woes

Long-term wealth creation calls for regular and disciplined investing and not a one-time invest and forget behaviour

I am 45 and have two children aged 7 and 11. I earn Rs 2 lakh and my wife earns Rs 1 lakh a month. We live in our own house which has no outstanding loans on it. We are thinking of a second home in 2012, which could be used in retirement or could provide rental income then. My investments are mostly in stocks because I feel in the long run these perform better than funds. I am looking at these investments as my retirement income. My children may need money when in college, which my wife is investing for through two SIPs of Rs 10,000 each.

Both our employers provide for health insurance, we have no other dependents or liabilities. I would like an honest view on my portfolio and possible investment, suggestion in other stocks with good fundamentals that can give good return in long term.
-Sadique Khan

Investing is all about discipline. Your portfolio comprises of good stocks and funds, but there is lack of discipline in the way you are investing. While your fund investments are regular and systematic through SIPs, your investments in stocks seem to be random and irregular. The net result; the annualised portfolio return is about 8 per cent compared to the 23 per cent returns from the two funds that you have. There is lesson for you; you need to be regular at investing if you are to achieve long-term wealth creation. You cannot have invest and forget approach if you are looking for long-term wealth creation. You need to track, monitor and evaluate your investments and align them to achieve your financial goals.

First Principles
Your financial plan and future rests on protection. The base of your financial plan should have adequate insurance cover to enable your family and dependents maintain the same lifestyle in eventualities. Though you do not have any liabilities; you should consider insuring your life adequately to meet future financial obligations that your family will face. Even though you have health cover from your employer, you should consider a family floater policy for all four of you. And finally, do insure your house; it is an asset that you cannot afford to be damaged or lose any of its contents.

Ground Rules
Investments in mutual funds and stocks are dynamic. Their value changes in real time and what is a good stock or a fund to invest in today, need not necessarily be good two years later. Understand the advantage when investing in equity mutual funds; they offer diversification that stock investing does not. Another way to understand this is the risk that a single stock has compared to a fund which comprises of a portfolio of stocks, thereby spreading the risk. When investing for the long-term, over 10-15 years with funds and stocks approach with fixed allocations. Have a 60-70 per cent allocation to mutual funds that comprise of a large-, mid and small-cap funds. This should form the core and growth portion of your portfolio. Next, allocate 20-30 per cent into stocks. Base your stock selection on some principles; have investments in bluechip stocks that are not too volatile. Look for stocks that do not overtly ride on a sector or a theme and add to your portfolio’s stability.

Finally, have 10-20 per cent fun allocation. This allocation, will work only if you are an active investor. The case for this allocation is for you to make good returns, while being aware of the possibility of losses. Though, risky; this allocation will give the necessary boost to your portfolio returns. Make sure that you not only invest regularly within this allocation, you should also set price targets, stop loss calls and track the performance of this allocation. Collectively, this approach should help you make overall gains with your investments.

Dexterity Advantage
Have a portfolio that is manageable. Have five to seven well-chosen equity funds, any more will rarely give better returns. Likewise have only as many stocks that you can keep track of and manage. The choice of funds and stocks should be governed by your financial goals. For instance a long-term goal for retirement should be growth oriented building on capital. Likewise, a medium-term investment for a holiday, should come from investments in your fun allocation. This way you do not dip into the long-term pool, yet have enough for your short- and medium-term goals.

To succeed in achieving your financial goals, make sure you are regular with investment and monitor its performance. From the details you have shared, there is investible surplus which is not being deployed. You should invest as much as you can to make of the opportunity that investments offer Adopt the mantra to save well, invest wisely and borrow smartly to achieve all your financial goals.

Funds/Stocks  Units/Shares  Total Cost Basis (Rs)  Market Value (Rs)  Unrealised Gains (Rs)  Portfolio Weight (%)
DSPBR Top 100 Eqt Reg-G 3361.64 240,000.00 347,990.37 107,990.37 23.44
Franklin India Prima Plus-G 1445.96 240,000.01 324,753.93 84,753.93 21.88
Fund Portfolio Total     480,000.01  672,744.31  192,744.30  
STOCKS          
Bharti Airtel 250.00 82,500.00 84,825.00 2,325.00 5.71
Cairn India 250.00 82,500.00 82,625.00 125 5.57
Deepak Fertilisers & Petro. 200.00 32,000.00 32,260.00 260 2.17
HDFC 70.00 48,650.00 48,002.50 -647.5 3.23
IFCI 1500.00 72,000.00 88,350.00 16,350.00 5.95
Ispat Inds. 300.00 6,900.00 6,375.00 -525 0.43
Larsen & Toubro 35.00 64,960.00 69,847.75 4,887.75 4.71
Orchid Chemicals 150.00 45,150.00 40,012.50 -5,137.50 2.7
Rashtriya Chem & Fert. 200.00 25,000.00 18,850.00 -6,150.00 1.27
Reliance Communications 300.00 67,500.00 38,730.00 -28,770.00 2.61
Reliance Industries 50.00 53,950.00 52,595.00 -1,355.00 3.54
Reliance Power 200.00 37,000.00 30,820.00 -6,180.00 2.08
Spicejet 2000.00 112,000.00 150,000.00 38,000.00 10.1
Sterlite Industries 400.00 66,800.00 68,420.00 1,620.00 4.61
Stock Portfolio Total     796,910.00  811712.75  14802.75  
TOTAL PORTFOLIO    1,276,910.01  1,484,457.06  207,547.05  

Case Analysis
- Invest regularly, the opportunity loss of being inconsistent is visible with your stock investments

- Your mutual fund investments demonstrate the advantage of regular and systematic investments

- Approach investing with a 60-70 per cent exposure to mutual funds for growth with a mix of market-cap allocation across funds that have a proven history and track record

- Allocate 20-30 per cent of your investments to stocks in bluechips that should be acquired over time.

- Allocate the balance 10-20 per cent into a fun allocation. This allocation will work only if you are regularly tracking your investments. This will also need you to invest with price targets to exit and stop losses to check on losses. The idea is to book profits from this allocation and it will also give the necessary boost to your overall portfolio returns

- Mutual funds offer natural diversification which stock investing cannot; evaluate your fund holdings frequently to understand the kind of diversification you get