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Playing Catch Up on Lost Ground

You still have a little over 10 years to catch up with the lost opportunity. Make the most of the time in hand...

I am 45 years old and a Central Government employee. I have completed 26 years in service. I had invested Rs 39,000 in Reliance Equity Opportunities Fund in December 2011 and started an SIP in it from March 2012 for Rs 1,000 for two years. I also have SIPs for Rs 2,000 in Reliance Gold Saving Fund from December 2011 and Rs 1,500 in HDFC Top 200 from June 2011 and have also invested Rs 20,000 in Reliance Money Manager. I have a demat account with Rs 35,000 in RIL and contribute Rs 5,000 every month to the Air Force PPF. Also, there is an emergency fund in my savings account for Rs 1.25 lakh and Rs 2 lakh in fixed deposit. I am paying Rs 1,730 as premium for the Air Force Group Insurance Scheme for Rs 25 lakh life insurance. My wife has a Kotak endowment insurance for Rs 4.5 lakh for which we pay Rs 30,000 annual premium, starting July 2011. This policy includes two riders to cover accident and disability. I have two sons and my parents as my dependents. Please suggest changes to improve my savings and investments. — B K Singh

Your interest in making your finances work for you will go a long way, even though you are left with less time to make the most with your investments. What goes in your favour is the fact that you are employed with the Central Government which will ensure that your future medical costs are taken care of along with your dependents. You have been employed for long to benefit from the defined pension scheme offered by the Government to its employees. That you are able to save and invest while managing two generations of dependents – parents and children – speaks a lot about your savings habit.

You have only one liability, which is servicing a car loan against your PF. We suggest you reduce the Rs 2 lakh fixed deposit and repay as much towards this loan. Likewise, it will be wise to terminate the Kotak life insurance policy you have taken for your wife, even if it means losing the entire premium that you have paid so far because:
* This is an endowment policy which offers little insurance cover and is savings oriented
* You should instead consider taking a pure risk term insurance plan from Kotak for Rs 25 lakh for which the annual premium for a 40-year old works to Rs 4,803
* Use the surplus Rs 25,197 that you annually save to make additional monthly contributions to pay your car loan

Your current investments in mutual funds do not seem to be well thought out and hence lack focus. For instance, Reliance Equity Opportunities is a mid- and small-cap fund, which is a good performing fund. But such funds are risky and not the best of funds to start building a portfolio. Likewise, investing in a gold fund does not make much sense, unless you foresee a future need for gold. Reliance Money Manager is an ultra-short-term fund, which is usually a parking spot for investments and HDFC Top 200 is a good fund, which will do well for the long-term.
* We feel you can increase your current monthly SIPs from Rs 8,500 (Rs 4,500 – monthly SIP and Rs 4,000 – Investible Surplus) to Rs 10,000 without any stretch
* Considering you are a first time investor in mutual funds, we are recommending a less-aggressive portfolio, which is low on risk, without compromising on equity exposure
* The portfolio of 4 funds is made of three balanced funds with equal weights making for 60 per cent of the portfolio with the asset allocation fund making up for the remaining 40 per cent
* Balanced funds limit their equity exposure to little over an average 65 per cent and maintain their equity-debt allocation, which helps reduce volatility in performance and provides for steady returns
* In the past three years, this portfolio has posted 10.5 per cent annualised returns, which is more than twice of what the 4.2 per cent managed by the Sensex

Future goals
Your elder son is in college and the younger one is on the verge of finishing school; which means you will need to support them for a few more years. You also have your parents with you, which makes it necessary for you to plan your finances taking into account their needs. It will help if you consider extending your career and take up employment after your retirement from the Air Force to supplement your pension. Your monthly investment of Rs 10,000 will make Rs 20.43 lakh in ten years if it earns an annualised 10 per cent or Rs 23.01 lakh if it earns an annualised 12 per cent. Though you have at least another 12 years to retirement, you should plan for a house when you retire if you don't have one already.