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A Good Start

Capitalise on your start by investing systematically to achieve your long-term goals…

We are both 31 years old with a 30-month old daughter. Our combined take home salary is Rs 60,000. Since our monthly expenses are a maximum Rs 30,000, we plan to invest Rs 20,000 every month systematically into various mutual funds. We own an apartment (which we live in) and a car and currently have no outstanding loans whatsoever. We have provided you with details on all our investments. Please share with us your views. Do you think we can achieve our financial goals? Should we exit the pension plan we have?
- Neelima and Vishnu

Neelima and Vishnu display great maturity with their money. How many young couples commit one-third of their combined take home pay towards investments? In the long run, this will only keep increasing with salary increments. What's even commendable is the fact that they already own a home with no liabilities at all. Here we take a look at their portfolio and savings plan and come up suggestions for them to fine tune their investment strategy.

Neelima and Vishnu have clearly listed their financial goals, detailing the sum they will need for each of the goals and the year in which each goal will materialise. Having such detail helps immensely when working on an investment strategy. If their investments earn around 15 per cent annually, they will be able to achieve their goals with ease.
However, a look at the table will reveal that we did not take into account two of their goals. Those goals will be attained by taking loans. If they utilise their existing investments which are being channelised towards the other goals, that could be a problem.
We would like to discuss those two goals separately. They need to understand that the value of a built house appreciates less compared to an apartment, if they are looking at gains in real estate. Moreover, maintaining an independent house over an apartment is expensive. We suggest they either reconsider their goal of buying land to build a house or push the plan by a few years till one or both of them have substanial increases in their income.
Their plan to save for retirement is very important and with many years to go for this goal, they can comfortably save towards achieving this goal. Likewise, their goal to save for their child's future education and marriage are both necessary and can be achieved with their existing cash flows.

Since both are earning and have a child, insurance is a must. So it's good to note that both have a mix of insurance plans. While they do have one term policy, we notice that the other plans combine insurance and investment, something we never recommend. Being combination products, these take the middle path and do not do justice to either insurance or investments. They can reconsider the endowment plans as well as the unit linked insurance plan (ULIP) if the cost to exit is not too high and they do not incur any losses in doing so.
With many more active working years to go, they must evaluate their life insurance needs again. Once they arrive at a figure, take can take an appropriate term insurance policy. If they take loans to buy land and build a home, they must consider taking an insurance policy on those liabilities too.
Since both are employed, the organisations they work for provide them with health insurance. However, they must consider taking out a separate cover for the entire family. Should one of them resign, for that period of time their health cover would drop significantly. Or, if one of them loses his/her job, it could be a problem.

Fund portfolio
The mutual fund portfolio comprises 10 funds across different categories with a 93 per cent equity exposure in 272 stocks. The top three stocks (ICICI Bank, State Bank of India, Reliance Industries) account for 12 per cent of the portfolio. The top three sectors (Energy, Financials, Engineering) account for 44 per cent. Despite the diversification, it lacks focus. Some of the funds selected are questionable and the investment in thematic funds is unwarranted.
The essential necessity when building a portfolio is fund selection, not so much the actual number of schemes. In fact, having too many funds could reduce the chance of superior performance, in addition to the hassle of maintaining a huge portfolio.
At Value Research we believe that all investors must adopt a core and satellite approach to investing in funds. This approach will provide the necessary stability and growth for long-term wealth creation. Ideally, they should look at investing 70-80 per cent in core funds and the remaining in satellite funds. Going by this factor alone, they have many funds that satisfy the satellite component while the core lacks strength.
If the tax planning funds have completed their mandated three-year lock-in period, they must consider exiting them. Likewise, they need to exit the infrastructure and thematic funds such as Reliance Natural Resources. We suggest they modify their holdings by adding two new funds and exiting six of the existing ones.
They also need to invest regularly through a systematic investment plans (SIP) in the selected funds. Once they redeem the units from the six funds, they can invest it in a liquid fund and initiate a systematic transfer plan (STP) into the new suggested portfolio.
They should track their portfolio at least once a year and move towards debt as their goal approaches.

Existing Portfolio
Schemes  Category  Rating  3-yrs ret(%)   5-yrs ret (%)
DSPBR Micro Cap Reg Equity: Mid & Small Cap **** 15.5 NA
HDFC Prudence Hybrid: Equity Oriented ***** 19.81 21.44
HDFC Top 200 Equity: Large & Mid Cap ***** 16.54 22.19
Magnum COMMA Equity: Others Not Rated 5.44 17.12
Magnum Taxgain Equity: Tax Planning *** 6.17 15.47
Reliance Infrastructure Ret Equity: Infrastructure Not Rated NA NA
Reliance Natural Resources Retail Equity: Others Not Rated 2.19 NA
Reliance Regular Savings Equity Equity: Multi Cap **** 12.52 24.63
Reliance Tax Saver Equity: Tax Planning **** 14.25 16.56
SBI Infrastructure Fund Series 1 Equity: Infrastructure * -3.74 NA
Returns as on June 08, 2011 Ratings as on May 31, 2011
Suggested Portfolio
Schemes  Category  Rating  Monthly SIP (Rs)   5-yr ret (%)
DSPBR Micro Cap Reg Equity: Mid & Small Cap **** 3,000 NA
Fidelity Equity Equity: Large & Mid Cap **** 4,000 20.54
Franklin India Bluechip Equity: Large Cap **** 4,000 18.98
HDFC Prudence Hybrid: Equity Oriented ***** 2,000 21.44
HDFC Top 200 Equity: Large & Mid Cap ***** 4,000 22.19
Reliance Regular Savings Equity Equity: Multi Cap **** 3,000 24.63
Returns as on June 08, 2011 Ratings as on May 31, 2011    
Current Investments (Rs)  
PPF (7 years complete) 3,00,000
Mutual funds 2,30,000
Bank balance 1,50,000
Stocks 1,35,000

The amount in a savings account is way too much. We like the thinking behind it of this amount being an emergency fund which amounts to five months expenses. However, the money can be deployed in a liquid fund. They would get a better realisation on their savings and it is more tax efficient and liquid too.
We suggest they no longer invest directly in stocks since they are committed to regularly investing in equity mutual funds.
They can continue with their PPF to avail of tax benefits under Section 80C.
We have not suggested any equity linked savings schemes (ELSS) in their mutual fund portfolio because we are assuming they would achieve their tax savings with the contributions to the Employees Provident Fund (EPF), the Public Provident Fund (PPF) and premiums towards their insurance schemes.