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Better Late than Never

Your goals are achievable as long as you increase your savings to match your goals

I have been investing in mutual funds since December 2007. I started of with tax savings as my goal, but now I understand that it is as important to focus on wealth creation. I have a total life cover of Rs 16.6 lakh for which I pay an annual premium of Rs 67,000. Of this, a life cover of Rs 1.6 lakh comes by way of ULIPs, against a premium of Rs 32,000 per annum. Please review my portfolio and are my goals achievable?
—Jagadish Kapoor

Most investors get initiated into investing through tax planning funds. It is good that you made a start with this category of funds and realize that you need to diversify to achieve wealth creation. Diversification is the cornerstone of sound portfolio construction, however, being diversified does not make your portfolio risk-free.

Diversification is beneficial because a collection of investment assets carry lower risk than individual assets. Many asset classes are negatively correlated to each other, for instance it is common observation that when the stock markets fall, gold prices rise. We suggest you adopt a core and a satellite portfolio strategy. The core portfolio will comprise of funds that need low maintenance and a satellite portfolio that you need to active track. With this dual strategy you can take advantage of market opportunities without risking your complete portfolio at risk.

Core and Satellite Portfolio
The core portfolio should comprise of funds that are not prone to violent swings such as large-cap funds, index funds and large- and mid-cap funds. This enables the portfolio to cushion against market swings with its steady returns. The satellite portfolio should comprise of high alpha-generating funds such as mid- and small caps, sector funds and even thematic funds. The main advantage of this approach is that it is flexible and can be modified according to your risk appetite.

Goals
Assuming an annual rate of return of 10 per cent on your investments we have arrived at the savings that you need to make to achieve your goals

Construction of House
You need: Rs 25 lakh
Time: 7 years
Monthly saving required: Rs 20,850 per month.

Child’s Education
You need: Rs 20 lakh
Time: 20 years
Monthly saving required: Rs 2,760 per month.

Retirement
You need: Rs 20,000 a month income at today’s prices
Time: 22 years
Monthly saving required: In 22 years, Rs 20,000 with inflation will add up to Rs Rs 47,400. You will need a corpus of Rs 91.2 lakh. You will need to save Rs 10,150 a month from now to reach this goal. This does not include any other investments or savings.

Life Insurance
There is no mention to dependents. Insurance will depend on your financial dependents and the number of years they will remain so. You should ideally have a pure life insurance cover that matches your current financial liabilities and your dependents financial requirements. Your investment in a Ulip is not the most ideal choice. You should check with your insurer the paid up value of your policy and consider terminating it or continuing it for better realization for a few more years.

Health Insurance
It would be a good idea to consider a health insurance plan for yourself and your family. This should take care of any medical emergencies. Opt for a family floater cover to optimize the cost and cover.

Portfolio Analysis
Your portfolio is tilted to tax planning funds. Too many of these funds does not amount to diversification. In fact you are duplicating the efforts being invested in so many funds with similar investment objective. You selection of HDFC Top 200, a large- and mid-cap fund is good. You should reconsider holding on to Magnum Contra and Sundaram Taxsaver if the mandatory 3-year lock-in period is over in this ELSS.

Future Strategy
Being disciplined is important when it comes to investing. You should be regular in investing through systematic investment plans in funds. At your age, you should consider higher equity exposure. By investing regularly you can save as well as gain from the power of compounding that adds to your portfolio’s returns over time. As you have many years to attain your goals, it would be wise to invest in equity funds to help in wealth creation. As you approach your goals, you can move funds into a good debt fund to be safer as capital preservation is as important as wealth creation. Finally; track your investments at least once a year. A fund that is good today, need not be so a year later. It is imperative that you are aware of your portfolio’s progress to make necessary changes to achieve your financial goals.

Mutual Fund Holdings
Fund  Allocation (%)  Star Rating  3- year ret (%)
Magnum Taxgain 34.72 * * * -2.92
HDFC Taxsaver 19.99 * * * * * 5.65
Sundaram Taxsaver 16.89 * * * -0.35
HDFC LT Advantage 14.89 * * * * 3.63
HDFC Top 200 10.26 * * * * * 8.86
Magnum Contra 3.24 * * * -1.71
Returns as on January 5, 2011, Star Rating as on December 31, 2010