The first aspect of your financial life that you must give careful consideration to is life insurance. Since a number of people are dependent on you, go in for a huge sum assured which would be adequate to meet your family expenses in the case of any eventuality.
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| Since we do not advocate mixing insurance and investment, we recommend that you stay away from unit linked insurance policies (ULIPs) and endowment policies. You can consider a pure term insurance policy, or even one which offers a guaranteed maturity value (though they are little more expensive than pure term plans).
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| The next step is to increase the amount you have set aside for your contingency fund to at least three-four month's expenses.
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| There are various aspects of your portfolio to be considered.
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TAX SAVING
Let's start with tax saving. You have not considered any Equity Linked Savings Schemes (ELSS) for tax planning. Instead, you have put in huge amounts in Public Provident Fund (PPF). You can keep the PPF account running by putting in the minimum amount required per annum (Rs 500).
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| Instead, consider some funds like SBI Magnum Tax Gain, Sundaram Tax Saver or Principal Tax Saver. They are superior in terms of return and liquidity.
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| You consider the home loan to be more of an expense rather than an investment. But it does give you tax benefits for interest payment (Section 24) and principal repayment (Section 80C). But since you save a huge amount every year, have you considered pre-paying your home loan?
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| The sooner you do that the better. Here's why. In the initial years of repayment, the equated monthly installment (EMI) is more tilted towards interest payment and towards the end, it is principal repayment.
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| For instance, around 80 per cent of the EMIs component in the first year will be interest payment. So you save the most when you make your pre-payments during the initial years of the loan repayment.
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PORTFOLIO BALANCING
Your current portfolio is quite risky. It is unbalanced between equity (86 per cent) and debt (3.9 per cent). It has a significant tilt towards mid- and small-cap stocks (46.7 per cent).
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| Fifty per cent of your equity portfolio comprises of two sector funds (ICICI Prudential Infrastructure and Reliance Diversified Power). You also have a high exposure (47 per cent) to one single fund house - Reliance Mutual Fund.
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| A sector fund should never form the core of your portfolio. Should the sector turn bearish, your portfolio will take a big hit. Do invest in sector funds if you wish to, but don't let the entire portfolio be dependent on that.
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| Well performing diversified equity funds should form the core of your portfolio. You can look at the Value Research website to consider some four- or five-star rated funds. We suggested Reliance Vision and HDFC Equity.
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| Gradually reduce exposure to Reliance Diversified Power and ICICI Prudential Infrastructure (as they are riskier funds and you have already multiplied your wealth in these). Put the redemption amounts in a liquid fund like HDFC Cash Management Savings and then opt for a systematic transfer plan (STP) to the diversified equity funds.
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| To increase your debt component and add stability to the portfolio, we suggested funds like Kotak Flexi Debt. We exited from Reliance Equity and Fidelity India Special Situations and channelised that amount here.
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SMART INVESTING
When investing in mutual funds, there are two principles you must keep in mind, both of which you have violated.
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| One, always invest periodically over time. We never recommend a one-time investment. Instead we suggest that you do so via a Systematic Investment Plan (SIP).
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| The second is to avoid New Fund Offerings (NFOs). Consider them only if there is something unique about it in terms of a different style of diversification or a novel theme, and it fits well with your overall investment strategy.
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| For instance, when you purchased ICICI Prudential Infrastructure, there were not too many such offerings in the market. Reliance Gold Exchange Traded Fund offers some diversification but Reliance Equity, ICICI Prudential Fusion and Franklin India Special Situations could have been skipped.
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| Some of the NFOs that you invested in are amongst the best performers. The annualised return for the Sensex over the past four years has been 36 per cent. Your mutual funds portfolio has appreciated by more than 200 per cent in just three years.
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| You have been extremely lucky! From now on, play it safe and be smart. |
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