I am 29 and married. I started investing in Reliance Life AIP Plan A in 2008 and added mutual funds and stocks to my investments only a month ago. My monthly investment is currently Rs13,000. which is 50 per cent of my take home salary. I want to know if my decisions will achieve my financial goals and grow my wealth.
— Nana Khot
We all have dreams and we all want to reach some goals in our life. Financial goals form some of those dreams that can be achieved with a little planning and discipline. These goals are different for everyone and it is important you set some attainable goals. By listing the financial goals as short-, medium- and long-term goals and investing for each of them goals you can hope to achieve your desired needs. Few factors are important when working towards financial goals; your income, marital status and financial dependents.
Determining goals
You have stated two objectives; a house a year from now and to have assets worth Rs1 crore in 10 years. This is a good start. However, you need to plan better and be realistic with your plans. With your income, savings and investments, you are unlikely to achieve your goal for an apartment next year on your own. No doubt you can opt for a loan and buy the house that you desire, but take into account the cost of servicing your loan and its impact on your current savings towards investments, which in turn will impact your 10-year asset creation plan. You should consider postponing a house purchase by a few years even if it means paying more for it.
Start by planning for a contingency plan, by setting aside 2-3 months of household expenses into a liquid fund. You are looking forward to the birth of a child; it will be wise to set aside savings to manage the additional costs that accompany a new born and lasts for the long-term. It will be also an opportune moment if you plan towards finances for your child’s schooling and education later. You should also have clear goals towards your own retirement than a loose goal towards creating a Rs1 crore corpus in 10 years. Your retirement is easily another 30 years to go and you have the time on hand to look for Rs1 crore when you retire.
Insurance
At the base of a successful financial plan rests insurance. You have two life insurance plans that are unit linked insurance plans (ULIPs) and are being treated as investment by you. Insurance is risk mitigation and protection before anything else. You should immediately look at buying a pure term insurance plan for yourself worth 5-7 times your annual salary to create a buffer for any eventualities. You should also consider doing away with the ULIP that you purchased just a month ago, if it is still within the free look period. ULIPs are a combination of life insurance and investments and do not do adequate justice to either. Have a floater health cover which should be at least Rs2 lakh and go up with time.
Investments
At 29, you are not too late to correct your financial mistakes. For instance, your investments indicate no clarity or purpose and have been done in a hurry to invest for the sake of investments. For investments to yield results you need to invest in products that will work towards your financial goals.
Stock investing may help you achieve higher returns in the long term but you should not buy stocks as a beginner without sound understanding. It could backfire with a vengeance. For a beginner, the right mix of mutual funds across different categories is the best option and the key to success because you can select mutual funds that meet your risk profile. Moreover, investing through the systematic investment plan (SIP) in the selected funds will enforce discipline and regular investments which are most desired. You have started on the right note by investing in SIPs.
Your investment portfolio is 97 per cent into equity and has a large-cap blend characteristic with investments across 185 stocks. The bulk of diversification is through mutual fund investments with the top five sectors accounting for 75 per cent of assets. This is spreading yourself thin and is to do with your stock investments which need refining. Likewise the top 5 stocks account for 55 per cent, again due to the stocks you hold. Your portfolio is on the risky side because of a 65 per cent bias towards mid and small caps. You should be aware of the risks associated with such a skew.
Fund selection
You have selected good funds but your portfolio lacks diversification. There is a tilt towards risky fund categories such as mid- and small-cap funds and multi-cap funds. What you need is diversification which can be achieved through a portfolio that is based on a core and satellite approach. This approach will provide the necessary stability and growth for long-term wealth creation. Ideally, you should look at investing 70-80 per cent in core funds and the remaining in satellite funds.
You can have 2-3 funds as core holdings (Equity: Large Cap and Equity: Large & Mid Cap), with a satellite component (sector and multi-cap funds). This way, the investments have the ability to absorb shocks as well as the potential to earn higher returns over various market cycles.
If you can reverse your current allocation, it would do you good to add funds such as Franklin India Bluechip (Equity: Large Cap) and HDFC Top 200 or Fidelity India Growth (Equity: Large & Mid Cap) into your portfolio.
Stock selection
Your stock selection is confusing as none of the stocks are components of the Sensex or Nifty. Your pick of stocks is faring well; you should continue to do so if you have the ability and knack of stock picking with the stable returns to come from your core mutual fund holdings. However, you need to be regular with stock investing and not invest on a single day for the sake of convenience or because you felt the need to deploy funds. Investing in stocks may help you to reach higher returns but the risk of losing money is also higher.
Once you know the ropes of investing and you can afford to invest more money, you can further spread your investments in mutual funds, stocks and other asset classes. The key to succeed is to diversify your investments in accordance with your risk profile. Aligning your tax planning with financial planning is also important at this stage and you should consider investments in tax planning funds to get the benefit of tax deductions as well as long-term wealth creation.
Building an investment portfolio from scratch or optimizing an existing one can be quite a challenge, especially if you have no experience in this field. Practice is the key to becoming an expert in financial planning and will help to realize most of your goals. Regular review is a must for a plan to succeed. Do not invest and forget about your investments; review your holdings at least once a year to track its progress towards your financial goals and make necessary changes in your fund and stock holdings to reach your desired financial goals. Also, have the flexibility to advance or postpone your financial goals based on the merit of each.
This article was originally published on April 13, 2011.
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