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Too full a platter

Amit has an over-diversified portfolio of mutual funds. This will not only have serious bearing on his returns but will also make effective tracking of his portfolio impossible

I am 38-year-old. My family include my wife, aged 33; 2 daughters, aged 8 and 4 years. I work for a private company as Regional Manager. For stocks I maintain portfolio at moneycontrol.com. Are my investments in the right direction?

Income Amount (₹)
Salary (Monthly Combined) 55,000
Rent (Monthly) 12,500
Expenses (Monthly) 35,000
RD (matures in Aug 2018) 48,000
Mutual fund: 24 funds 6,83,000
Stocks 6,50,000
FD 6,00,000
PPF (matures in March 2020) 1,70,000
Total 21,51,000
Insurance Premia  
Life Insurance Premium (endowment) 12,606
Health Insurance (Monthly) 0
Loans/Liabilities 0

What he has (Cash Flow)

  • Monthly income: ₹55,000

What he wants (Goals)

  • Children's Education - Current value ₹15 Lakhs each after 10 and 15 years
  • Both Daughter's Marriage - Current value ₹35 lakhs each after 15 and 20 years
  • Retirement - at age 58

What he should do?
Dealing with emergency
Amit should have a corpus for emergency situations. He can earmark ₹2,10,000 (his six months' expense) from his fixed deposit which is maturing in two months. He can utilise the balance for his other goals. He should opt for the sweep-in facility offered by banks to earn higher returns on this corpus.

Health is wealth
Amit has no medical cover for himself or his family. Buying a health plan while he is in the pink of health will be cost effective, and he can avail tax deductions as well. He can choose ICICI Lombard iHealth family-floater plan for a sum assured of ₹10 lakh. The annual premium would range from ₹17,000 to ₹18,000.

Securing dependents
Amit is under-insured; he has a traditional endowment plan with a sum assured of ₹3 lakh. He should surrender this as it is unlikely to offer returns that can beat inflation. Also, the premium is very high. The surrender value can be assigned to a goal, while the premiums saved can help boost the surplus. He can buy an online term plan worth ₹1 crore from Max Life at an annual premium of ₹12,700.

Growing money
Amit will need to bring down the value of his goals to be able to achieve all of them. We have reduced his children's marriage goal to ₹15 lakh (current value) for each child. His existing invested amounts have been allocated to his goals and further SIPs required have been calculated. He will be able to achieve his goals if his investments grow at 15 per cent. Otherwise, he will have to bring his goal values further down.

He should invest in stocks directly only if he understands the risk associated with them. Otherwise, he must stick to equity mutual funds.

Amit has 24 mutual funds in his portfolio. His equity-fund portfolio invests in a total of 352 stocks, of which 100 stocks form 75 per cent of it and the rest 252 make just 25 per cent. Such over-diversification will not serve the purpose of generating good returns from equity. Four to five funds from different categories are all that is required for diversification and efficient management. He can exit all other funds except for the funds recommended in the portfolio on the right-hand side.

Among his tax-saving funds, he can continue with either Axis Long Term Equity (a little conservative) or Reliance Tax Saver (aggressive). He can redeem the rest of his tax-saving funds when the lock-in periods get over. If he is doing a systematic transfer to an equity fund, he must choose well-rated debt funds of the same fund house.

He should switch to debt in a gradual manner two to three years prior to reaching his goals. He can create his portfolio of stocks and mutual funds on Value Research Online for consolidated tracking and detailed analysis. Also, he should review his portfolio periodically.