PROFILE
I am 30 years old and want to plan systematically to reach goals on schedule. I am married and the father of a four-month son.
My mutual fund investments consist of two tax-planning funds (paying via SIPs), but investments in two other schemes were lumpsum payments in January 2008. My ongoing investments are monthly systematic investment plans (SIPs) of Rs 1,500 in two tax-planning funds, Rs 1,235 to Employees Provident Fund (EPF), which is my monthly contribution and Rs 5,000 per annum in Public Provident Fund (PPF).
For insurance, I have a money-back policy and one endowment policy from LIC, which give me a total life cover of Rs 5.75 lakh.
After a deduction of Rs 3,000 against repayment of my education loan, payment of Rs 33,000 per annum against the life insurance policies and EPF, I am left with about Rs 8,000 a month.
I have also planned to take life insurance policies for my wife and son, a family medical insurance with a cover of about Rs 8-10 lakh and a pension plan - unit-linked insurance plan (Ulip) - to secure my retirement.
I am open to risks, as I'm currently at the beginning of my career. How should I invest to achieve my goals?
-Sandeep S Slathia
CURRENT PORTFOLIO
Of the total investments of Rs 2.09 lakh, Rs 1.15 lakh are in debt (PPF, EPF and bank deposits). This amounts to 55 per cent allocation to debt. We find two problems here - the allocation to debt is too high and there is a complete omission of a debt fund. So, let us explain first, the importance of having debt, and that too through debt funds.
DEBT ALLOCATION
Equities can see extreme increases and decreases in their values due to market movements, but debt is relatively stable. Debt provides a cushion and stability to your portfolio by reducing the impact of market volatility. Since it is important to keep the debt allocation maintained at a specific level, rebalancing can be more convenient through debt funds.
However, we do believe you should limit debt allocation to 20-30 per cent, as none of your goals are near. This will enable the equities to generate meaningful returns in your portfolio. You should decide an ideal allocation for yourself, based on your risk appetite.
EQUITY FUNDS
Your portfolio consists of two tax-planning funds, which can double as diversified equity funds to form the core of your equity portfolio. You had invested a lumpsum in the two funds when the markets were at their peak and the funds were just launched. Going with the market momentum is not the right way to invest for achieving long-term goals and should be avoided.
Importantly, you should invest in thematic funds only if you understand the peculiar nature of the sectors where the fund invests and are in a privileged position to benefit from it.
LIFE INSURANCE
Insurance has a lot of relevance for you, as breadwinner of the family; then, in an unforeseen eventuality, your family will not be left at the mercy of others. The proceeds from life insurance will take care of them financially, by restoring the lost income and aid in fulfilling their financial goals.
But, insurance can only restore a financial loss. If there is no one getting financially disrupted from someone's absence, then that person should not buy insurance. Insurance should be seen as a cost, and not as an investment. We suggest you avoid taking life cover for your wife (if not working) and son. However, do increase your own life cover.
ACHIEVING GOALS
You have mentioned the desire to receive a retirement income of Rs 25,000 at today's price levels, or Rs 1.65 lakh when you superannuate (the growth counters an assumed inflation rate of 6-7 per cent). You need to accumulate a corpus of Rs 2.93 crore.
