I am a 39-year-old defence officer with two dependents (wife and an 8-year old daughter). I started investing and saving late in life. Kindly analyse my portfolio and suggest an ideal portfolio and the amount of investment that I should be making to achieve my goals (See table).
– Mohan Puri
HIGH ALLOCATION TO TAX-SAVING INSTRUMENTS
A contribution of Rs 214,300 to tax-saving instruments is more than the exemption limit of Rs 1 lakh. Further, a high investment in PPF is making your portfolio biased towards debt. So, while you will be investing in an excellent debt avenue, you might be missing out on some extra returns and, at the same time, getting locked in for 15 years. This will make a major part of the portfolio illiquid.
INADEQUATE LIFE INSURANCE COVER
Adequate life insurance is necessary to deal with uncertainties of life. A life insurance policy takes care of a family’s financial needs in case of the earning member’s untimely demise. Ideally, your sum assured should be around 10 times of your family’s annual expenditure. You should consider increasing your insurance cover by supplementing your present policies with term insurance plans, which are the purest and the cheapest from of life insurance.
LOW EQUITY ALLOCATION
You should work upon an asset allocation pattern and keep rebalancing your portfolio regularly. At 39, age is on your side and, ideally, 50-60 per cent of your portfolio should be in equities. While you reach your goals, gradually decrease the equity allocation in your portfolio in favour of debt so as to keep the risk of sudden market movements at bay. All the cash required within the next five years should be kept in safer avenues, like a bank FD, or debt funds.
PORTFOLIO CONSOLIDATION
You have most of your investments in four- or five-star rated funds, which is a strong positive. However, you should limit the number of funds in your portfolio.
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A small allocation to a fund should be avoided as this only increases the count of funds in the portfolio without any significant effect on the performance of the portfolio. Investing in new funds offers (NFOs) should have been avoided, like you did by investing in ICICI Prudential Target Returns Fund.
REACHING GOALS
For your financial goals, the amount that is required to be invested each month might be far too much, given the current salary level. We have assumed that your daughter will get married when she is 23 years old, when she complete five years of education after school, which will also be the time when you retire.
Taking an inflation rate of 6 per cent per annum, an expenditure of Rs 20,000 today will be worth Rs 48,000 by that time. A monthly investment of Rs 41,500 will be required along with your current investments in mutual funds, bank FDs and PPF to meet expenses for your daughter’s marriage, gifts and your post-retirement income.
This will accumulate a corpus of Rs 1.77 crore which, if invested at 7 per cent, will provide you with a post-retirement income of Rs 48,000 per month for another 25 years.
However, if you consider postponing your retirement up to 60 years, then the monthly contribution towards these two goals needs to be Rs 25,200 per month, giving you a similar monthly income for 20 years.
For your current investments of Rs 15,000 per month, we suggest you limit your investments in PPF to Rs 5,500 per month and invest the rest in equity funds.
This amount, if invested regularly and coupled with your present investments, will give you an accumulation of Rs 60 lakh at the end of 15 years from now. We advise you to keep moving towards your goals even with current investments and keep increasing your investments at later stages, whenever you can.