Changing Tactics

I am 32 and live with my wife & 1 year son in our own house. I earn ₹50,000 per month and have savings in EPF, PPF, Savings Account and Recurring deposits. I have also invested into direct equities . I am holding BHEL, Jindal Steel, Jubilant, Navneet Publications, Dish TV and NTPC. Our household expense is ₹34000 per month. Five years ago I started SIP in 2 mutual funds of UTI, which I stopped & withdrew for purchasing home. On liabilities side, I have an outstanding home loan. My short term goal is to buy a new car after 4 years and long term goals are a better post retirement life and kid's higher education. Kindly suggest a portfolio and investment plan to achieve my goals on time.
- Mahesh Bhong

Overview
You have made a start which could have been better if you had remained focused. The term insurance plans and health insurance that you have, are the right products for the anticipated needs for which they have been taken. However, not all is lost, a few changes to your approach and your finance should be on track.

First, the money that you have at the moment is insufficient to meet your stated goals. However, with a little help and discipline, you should be able to achieve the same. For instance, you need to invest in products that are inflation beating, which means you need to be more aggressive and earmark a higher allocation to equity investments.

Your savings account balance is sufficient to take care of any emergency financial needs. Ideally you need to maintain an emergency balance to take care of 3-6 months of your household expenses, including commitments like the home loan EMIs.

Things will get better once you retire your home loan, in fact it will leave you with ₹14,000 a month surplus. But this will not be enough to achieve your financial goals and you will need to invest more as and when possible through increments that you receive with your job or any other such source. Divert such surplus into equities and you are better placed to achieve your financial goals.

Your current investments are into good quality large and mid-cap stocks which are good to hold for long term. But, this comes with the added strain of monitoring, something that is limited when it comes to investing in mutual funds. Likewise, instead of restricting your investments to four stocks, your mutual fund investments will be diversified, which not only reduces investment risks, it also gives you the scope to earn better returns.

Do's

• Invest in equities instead of debt instruments that account for 95 per cent of your savings. This move will help you earn better returns in the long run, which are inflation beating.
• Start investing in mutual funds regularly though SIPs instead of irregularly investing directly in stocks.
• Your son's higher education and your retirement are a long way to go; you can easily achieve these two goals by investing in highly rated and consistent Large & Mid Cap as well as Mid & Small Cap funds through the SIP route.
• Continue contributing to PPF and EPF towards your retirement savings.

Don'ts

• Do not buy your car as planned and instead push the purchase by a few years otherwise it will hamper your other goals.
• Do not add insurance plans in the garb of pension plans. These accumulation products are costly, poor with returns and opaque with their working.
• Do not depend only on debt to take care of your goals. This way you are losing on higher returns that your funds can actually generate.

This article was originally published on October 16, 2014.