I am 36 and have a wife and a seven-year old son as dependants. I draw a salary of Rs 60,000 from my own business. After meeting my monthly expenses, paying EMIs, mutual fund SIPs (Rs 1,500), post-office deposits (Rs 1,000 pm), and insurance premium, I have a surplus of Rs 5,000 per month.
In a couple of years I want to buy a house worth Rs 25-30 lakh. I would also like to plan for my son's higher education when he turns 15 and my own retirement at 55. However, I have not determined the amount for these.
I have a life cover of about Rs 10.50 lakh by way of a term plan and endowment plans. I have also invested in stocks currently valued at Rs 80,000. Ongoing mutual fund SIPs are split equally among Reliance Growth, Reliance Equity Advantage and Fidelity Equity.Please help me revamp my portfolio.
-Kapilesh
The task of financial planning should ideally begin at an early age and must have clarity on three counts: what, when and how much is required. While reviewing your portfolio, we encountered many gaps in this regard. You do know what you need money for and when - a house, son's education and retirement. But you have not yet decided what amount you will need to meet those goals. Quantifying your goals is important, so please do so.
We have first addressed your goals and then revamped your portfolio.
Buying a house
Whenever you buy a house, you will need to take a home loan. Our suggestion is that you defer your plan until five years from now, because if you withdraw money for your house within two or three years, your investments will not have accumulated to a sizable sum. Assuming a return of 10 per cent on your investments, your regular investments of Rs 6,500 (you will have to increase the amount invested through SIPs every year by 10 per cent) along with your present investments of Rs 4.6 lakh in stocks and mutual funds will accumulate to Rs 12 lakh in five years. You may partly use this. But do not redeem all your investments at this stage as you also need to take care of your son's higher education and your retirement.
The malady
Your mutual fund portfolio has an equity exposure of around 67 per cent. While large-cap stocks constitute around 48.29 per cent, mid- and small-cap stocks occupy a significant 43.31 per cent of your equity assets. Since you have time and your goals are several years away, increase your exposure to equities.
A look at the date of purchases tells us that you have bought most funds (11) during a new fund offer (NFO) or immediately after. New funds lack long-term track records and so it is difficult to predict how they are likely to behave in different market cycles. Holding such funds is riskier than funds that have a performance history.
Like many investors, you too have committed the mistake of investing lump sum amounts in mutual funds. SIP is a safe, easy and convenient method of investing that allows you to automatically buy more units when prices are low and fewer units when prices are high, resulting in lower average per unit cost.
We have noticed multiple funds that have similar investment objectives. For example, Reliance Natural Resources Retail and DSPBR Natural Resources and New Energy have almost the same investment themes. Likewise, DSPBR TIGER Reg and HDFC Infrastructure mainly invest in infrastructure stocks. Having more than one fund with the same objective doesn't make sense.
Currently six funds in your portfolio have not been rated, including two close-ended funds. Another flaw in your portfolio is that you have made a lump sum investment in Escorts Opportunities which constitutes a major portion of your investment (40 per cent). This is a hybrid fund that may invest up to 49 per cent in debt. All other funds have such small holdings that a good performance from any one of them will have a negligible impact on your overall portfolio.
The Prescription
Your portfolio needs major restructuring. Let's see how we can trim your portfolio to make it more focused.
1. Consolidate all your holdings into fewer funds - six or seven.
2. Do away with funds that have the same investment theme or investment style.
3. The core of your portfolio should be made up of 3-5 star rated large-cap equity funds that are consistent performers.
4. Though your total exposure to thematic funds is not large - around 7 per cent - we suggest that you reduce the number of such funds from four to one or two. Invest in them only if you understand and are knowledgeable about the theme.
5. Stop further SIPs in Reliance Equity Advantage Retail Fund. Being a new fund it is risky. Continue investing in Fidelity Equity and Reliance Growth. Above is our suggested portfolio. Choose funds from them for investing your monthly surplus of Rs 5,500 (Rs 5,000 + Rs 500 from exited fund). But remember that DSPBR Tax Saver and DWS Investment Opp Reg are aggressive funds. Limit your exposure to such funds (20-25 per cent).
6. Add debt funds to your portfolio. They will help you rebalance your portfolio.
Roadmap
1. Avoid bulk investing. When investing in funds, stick to SIPs. This way your investments will be less susceptible to extreme market movements.
2. Avoid NFOs. Let new funds prove their mettle in the market first. Rather than opt for these untested offerings, go for funds with proven credentials.
3. Avoid thematic funds. While returns from them can be high, their volatility is high too. Stick to proven diversified equity funds.
4. Since your goals are far off and you have ample number of earning years in hand, increase your exposure to equities to 80 per cent of your portfolio. Once a year, rebalance your portfolio to ensure that the equity to debt allocation is maintained. As you get closer to your goals, the money allocated to equities should be gradually moved into debt.
5. If you want to invest directly in the stock market, go ahead. But ensure that you have the time, inclination and patience to research companies and understand industry trends on your own.
6. Do you think the term insurance that you currently have is sufficient to provide for the regular expenses of your dependants and their future goals in your absence?
7. Don't forget to create a contingency fund to meet immediate cash requirements in case of an emergency. For this you must keep cash accessible 24x7, in case you need it in future.
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