I am a 65-year-old retired engineer and live with my wife, 58. Both my children are married and well-settled. My wife and I have a mediclaim policy of base value Rs 1 lakh each (now approximately Rs 1.5 lakh). We would like to be financially independent all our lives. Advise me as to any change required in my financial plan, particularly with regard to regular investment in mutual funds.
Investment Fixed Income Rs 20 lakh Shares Rs 5 lakh Mutual Funds Rs 10 lakh (appox. 50 schemes) Total Assets Rs 35 lakh (current value)
You have made one glaring error and that is to assume the more schemes you have, the more diversified you are. With around six schemes from different fund houses you can easily achieve your target. Going with 50 only adds to the unnecessary clutter in your portfolio.
Moreover, you have numerous schemes from single-fund houses. For instance, six schemes from Reliance Mutual Fund, and Sundaram BNP Paribas Mutual Fund. You also have a number of tax saving schemes (five), thematic schemes and sector-focused schemes.
EQUITY
Going by the fact that you have invested in shares and all your mutual funds are equity oriented schemes, you have a massive equity exposure. Our suggestion is that you offload direct equity holdings.
Among the funds, get rid of the underperformers like JP Morgan Equity and JM Basic and reduce your equity linked saving schemes (ELSS). Do check out your tax incidence now that you have retired and also a senior citizen. If you have completed the three-year lock-in period, then sell these. Sector funds and thematic schemes also need not find a place in your portfolio.
DEBT
You have not provided us with many details on your fixed-income portfolio. We are assuming you have not invested in any fixed-income schemes of mutual funds. We are also further assuming that your investments are in bank fixed deposits or post office schemes. Our suggestion is that on maturity of these instruments, move into debt funds.
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OTHER ASPECTS OF FINANCIAL PLANNING
You have not spoken of any liabilities, so we take it for granted that you have none. You should also look at options to increase the sum assured of the medicalim. The amount mentioned is inadequate for both of you.
WHERE to INVEST?
Create a portfolio of a few balanced funds that will corner 45 per cent of your total portfolio. Since such funds keep 65 per cent of their assets in equity, you will simultaneously get an exposure to the stock market and to debt. Three good options you can consider are FT India Balanced, DSPBR Balanced and HDFC Prudence.
As for the debt schemes, Fortis Flexi Debt and JM Money Manager can be considered.
After you sell your existing funds, you can invest the proceeds in the above schemes. But we advise investors to avoid lumpsum investments. What you can do is sell these and put all the money in a liquid fund, say JM Money Manager Super. Then, every month via a systematic investment plan (SIP), channelise the money into the funds you have selected for further investment.
HOW TO GET A REGULAR INCOME
This is a grey area. We are not aware as to the exact amount of your monthly expenses and whether or not you avail of a pension. Or whether or not your current debt investments give you a regular return by way of interest payments.
Should you need a regular income, we suggest you make an estimate of how much money you need for the year, then opt for a systematic withdrawal play (SWP) from the balanced funds.
HOW TO RE-BALANCE
Arriving at a pre-determined allocation to balanced and debt funds is just the first part of managing your portfolio. You have to religiously rebalance your investments every year. That would translate into you selling off some of your holdings in either balanced funds to invest more into debt funds or vice versa.
HOW YOUR INVESTMENTS WILL PAN OUT
Taking the average returns given by the categories of balanced funds and ultra short-term debt funds, we have calculated the annual value of the portfolio and have rebalanced accordingly.
| Balanced Funds: | Rs 15.75 lakh |
| Debt Funds: | Rs 19.25 lakh |
| Inflation: | 6.5 per cent per annum |
| Expenses: | Rs 15,000/month |
Expenses will be inflated every year, with the assumption of annual inflation at 6.5 per cent.
GOING FORWARD
- As your fixed income investments mature, encash these
- Stick to around five funds and opt for balanced funds
- Have an exposure to debt funds, too
- Stick to a 30:70 debt-equity ratio
- Every year, look at the value of your portfolio and rebalance it to ensure the debt-equity ratio is maintained.
- The older you get, gradually increase your debt exposure.