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Look for diversification in fund themes and not just in numbers

I am a 40 with my wife and 10-year old daughter as my only dependents. I have two insurance policies with a total sum assured of Rs 10 lakh for which I pay Rs 35,000 a year as premium. I have started investing in mutual funds since 2008 only. I am with the Army and do not find time to make regular investments. Kindly analyse my investments, I wish to create a savings of Rs 10 lakh for my daughter’s marriage and higher education in 10 years and also save Rs 50 lakh for my retirement. Please advice
Dinesh Mathur




Fund  Investment (Rs)  Category  Rating  3-year return (%)  5-year return (%)
Magnum Taxgain 35,000 Tax Planning *** -3.08 14.67
HDFC Taxsaver 20,000 Tax Planning ***** 5.41 16.5
Sundaram Taxsaver 17,000 Tax Planning *** -0.11 16.03
HDFC LT Advantage 15,000 Tax Planning **** 3.26 13.25
HDFC Top 200 10,000 Large & Mid Cap ***** 8.42 21.78
Magnum Contra 3,000 Multi Cap *** -1.33 17.65
Data as on January 12, 2011

You have got into investing a bit late in life but you are on the right track by investing in mutual funds and can hope to catch up on the lost time. In your hurry to catch up, your fund selection seems to have gone wrong. Having 87 per cent of your portfolio across four tax saving funds is not the best form of diversification. Moreover, you made one-time lump sum investments, which is not the best way to build a portfolio.

Investing in mutual funds through systematic investment plans (SIP) works well especially over the long-term, which is what you need to get into. And, if diversity is what you are looking at with six funds with four of them being tax saving funds; its not the best way to approach diversification.

We suggest you take a core and satellite investment philosophy, wherein you allocate 70:30 in core and satellite funds. The core funds will comprise of large cap and large- and mid-cap funds. And the satellite will have exposure in mid- and small-cap, sector and multi cap funds. This way, you will get the necessary boost on the combined portfolio returns in the initial years. As you approach the end of your investment horizon, you can move your investments into only large-cap funds.

Insurance check
A life insurance policy is necessarily to take care of your family’s financial needs in case of your death. As you are with the Army, you would be adequately covered by them. It may be a good idea to check on your existing life cover through them and then explore if you need more cover. From the details you have shared; it seems you have a ULIP (unit-linked insurance plan), which neither falls into a pure insurance product or pure investment product. We suggest you check its paid-up value and consider exiting it.

Ideally, you should have a term policy which is a pure risk cover to insure yourself. If your wife is working, you should consider a policy for her as well.

Again, being in the army, you must be covered along with your family for health benefits. Do evaluate your cover and make necessary additions if need be.

Financial Goals
Your goal to achieve a savings of Rs 10 lakh in ten years and Rs 50 lakh in twenty years is possible. An investment of Rs 4,000 a month earning annualised 12 per cent will build Rs 9.29 lakh over ten years, whereas the same investment earning 15 per cent will achieve a corpus of Rs 11.14 lakh. If you invest in large cap fund such as Franklin India Bluechip or IDFC Imperial Equity Plan A and large- and mid-cap funds such as Birla Sun Life Frontline Equity Plan A or HDFC Top 200 in which you are already invested; you should be able to reach the goal to save for your daughter’s education and marriage.

Likewise, if you invest Rs 5,000 a month for twenty years you can reach your retirement goal of Rs 50 lakh if the portfolio earns 12 per cent and Rs 75 lakh if the portfolio earns 15 per cent.

You can reach both your financial goals if you invest regularly and track your investments to alter fund selection if the selected fund is not faring well. Do not wait to get Rs 9,000 a month to start investing, if you do not have that much to invest each month. Start investing small sums through systematic investment plans, which you can supplement over time.

Select funds that are rated 5 or 4 stars as these are consistent leaders in their categories. Review their performance regularly to evaluate its progress towards your financial goals. As you approach your goals, gradually decrease the equity allocation in your portfolio to debt, so that you can be insulated against sudden market movements.

If you contribute more than the suggested sums; you can reach your goals faster or can consider increasing the desired sums for your financial goals. There are no short-cuts to wealth creation and you mention your inability to regularly track your investments. You cannot afford to stay away from tracking your investments. You should at least track your portfolio once a year, but more than that will only help you understand your fund selection and progress better. And, remember never to be a sporadic investor as being regular with investing is the key to long-term wealth creation. Also, do not have too many funds from the same asset management company. Have a portfolio that is well diversified and is built with a clear financial goal.