Vedant (47) is married. He has two children. His daughter is in college and his son is in the 10th standard. His goals include education and marriage of his children and his own retirement. Vedant already has a good accumulated sum in equity funds but he is concerned that he has too many funds and too much money in mid and small caps. He also has some investments in stocks, PMS, real estate, EPF and PPF.
Vedant has Rs 22 lakh in fixed deposits. He should create an emergency corpus of Rs 7.5 lakh (equal to about six months' expenses) and keep it partly in short-term funds and partly in a sweep-in fixed deposit. He should also place the balance amount (Rs 14.5 lakh) in short-term debt funds to pay for his son's education goal, which is just two years away. He can go for Aditya Birla Sun Life Short Term Fund and UTI Short Term Income Fund.
Action: Move money from traditional FDs to a sweep-in fixed deposit and short-term funds to create an emergency corpus.
Vedant has a term life-insurance cover of Rs 2 crore. Considering his accumulated savings, this amount is sufficient to take care of his insurance needs. Term life insurance is the right form of life insurance because it does not mix insurance and investment and provides good insurance cover at a substantially lower cost.
Action: Maintain existing term life-insurance cover. Avoid any insurance policy which mixes insurance and investments.
Vedant has a Rs 3 lakh health cover from his employer. He and his wife are also covered by a government health scheme on account of his wife's government employment. However, since both of these are employer-provided, he should look at supplementing them with a family-floater plan which will cover his wife and children and will be independent of his employment.
For this he can look at ICICI Lombard Family Floater or Apollo Munich Easy Health Family Floater Plan for a Rs 5 lakh cover. It will cost him Rs 22,000 to Rs 24,000 per annum and allow him to avail of the tax deduction under Section 80D.
Action: Supplement the health insurance provided by respective employers with a family-floater plan.
Vedant has a monthly income of Rs 4 lakh. His expenses are Rs 1.25 lakh per month. However, he also a flat and an under-construction flat which are together likely to generate rental income of Rs 36,000 per month in his retirement. Rental income typically grows with inflation. Thus, he only needs to plan for the part of his expenses that exceeds his rental income. This comes to Rs 89,000 per month at today's prices.
Vedant will need a retirement corpus of about Rs 6 crore when he retires in eight years to to meet this expense gap. His SIPs of Rs 2,75,000/ per month, increased at 10 per cent per year, will give him Rs 5.5 crore.
In addition to his SIPs, Vedant has around Rs 1.15 crore in the EPF and PPF. He can keep contributing the mandatory/minimum amount in his EPF and PPF savings, whilst increasing his allocation to equity funds. In the long run, equities substantially outperform fixed-income options such as EPF/PPF.
He can transfer his provident-fund money to liquid funds on retirement and move it to equity funds through STPs. This amount will provide him with a comfortable margin of safety, even if his rental income gets disrupted.
Action: Increase allocation to equity funds. Move the EPF and PPF corpus to equity funds via STPs after retirement.
Kid's education and marriage
Vedant estimates that he will need about Rs 1.88 crore for the marriages and education of his children. This amount will be needed over different periods of time, ranging from two-10 years. He can finance this requirement from his corpus in equity funds, stocks and cash balances. He should move money from equity funds to short-term debt funds at least two years before the date of each goal. This is to avoid ending up with a diminished corpus should the market go down at the time of the realisation of the goal.
Action: Use the existing mutual fund portfolio to finance kids' education and marriage. Move money to short-term funds at least two years before each goal.
Vedant currently has 17 funds, making portfolio management a difficult and cumbersome task. Several of his funds have the dividend rather than the growth plan A large proportion of his corpus is concentrated in a few funds. As a consequence of this, he has roughly 40 per cent exposure to a single fund house.
His portfolio also has approximately 54 per cent exposure to mid- and small-cap funds. However, factoring his EPF and PPF allocations, his overall portfolio is in effect a balanced fund, with a roughly 65-35 split in favour of equity.
He will need much of his mutual fund money over the next two-10 years as he begins to pay for his childrens' education and marriages. The following suggestions can help Vedant meet his objectives and tackle the problems with his current portfolio.
- Vedant should have not more than three-four funds in his portfolio so that he can effectively rebalance and manage it. (Read more about the ideal number of funds at vro.in/s34270)
- He should reduce his exposure to the fund house that accounts for 40 per cent of his investments.
- Depending on his risk appetite, Vedant should opt for either three-four balanced funds or three-four multi-cap funds or two multi-cap and two mid-cap funds. Choosing the most conservative option will tilt his portfolio to roughly 55-45 in favour of debt. In case of his SIPs, he should take care to increase them by at least 10 per cent per annum.
- He should shift his funds from dividend to growth plans. Dividend plans do not allow him to benefit from the full effect of compounding.
- He should look to move his investments in direct equity and PMS to mutual funds. Small ancillary investments perform the same role that excessive number of funds do - they over-diversify and prevent investors from effectively managing their portfolios.
Option 1 (Conservative)
- HDFC Balanced
- Tata Balanced
- ICICI Prudential Balanced
- Franklin India Balanced
Option 2 (Moderate)
- ICICI Prudential Value Discovery
- Birla Sun Life Equity
- DSP BlackRock Opportunities
- Franklin India High Growth Companies
Option 3 (Aggressive)
- Mirae Asset Emerging Bluechip
- Birla Sun Life Equity
- HDFC Midcap Opportunities
- Franklin India Prima Plus
Action: Reduce the number of funds, reduce exposure to the largest fund house and move from the dividend to the growth option.