I am 45 and have invested to fund my retirement. I earn Rs 2 lakh and my wife earns Rs 1 lakh a month. We have two sons and my wife invests for them. We live in our own house and have no loans outstanding. Our health and life insurance is from our employers. Please review my portfolio and suggest changes.
Ajay Singh
Your portfolio comprises of good stocks and funds, but there is lack of discipline in the way you invest. While your fund investments are regular and systematic, your investments in stocks seem random. Result: The annualised stock portfolio return is about 8 per cent as against 23 per cent. So, you need to be a regular investor to create wealth over the long-term. You also need to monitor, evaluate your investments and align them with your financial goals.
FIRST PRINCIPLES
Your financial plan should have adequate insurance to enable your dependents maintain the same lifestyle in case of any eventuality. You do not have any liabilities, insure your life adequately. Over the health cover from your employer, get a family floater plan. Also, insure your house, it is an asset.
GROUND RULES
The value of investments in funds and stocks change and what is a good stock/fund today need not necessarily be good later. Equity funds offer diversification that stocks do not. Single stocks are riskier as funds comprise of more than one stock, spreading the risk.
When investing for the long-term (10-15 years), approach with fixed allocations. Allocate 60-70 per cent to mutual funds that include large-, mid- and small-cap funds. Allocate 20-30 per cent to stocks. Base your stock selection on some principles; have investments in blue-chip stocks that are not too volatile.
Finally, have 10-20 per cent fun allocation. This will work only if you are an active investor. The case for this allocation is for you to make good returns, while being aware of the possibility of losses. Though risky, this allocation could give the much-needed boost to your portfolio's returns. Set price targets, stop-loss and track it.
DEXTERITY ADVANTAGE
Have 5-7 good equity funds. Any more will rarely give better returns. Likewise, have only as many stocks as you can keep track of. The choice of funds and stocks should be governed by your financial goals. For instance, a long-term goal for retirement should be growth-oriented, building on capital. A medium-term investment for a holiday should come from the fun allocation. You don’t dip into the long-term pool, yet have enough for your short- and medium-term goals.
To succeed, make sure you are investing regular and monitor it. From the details you have shared, there is investible surplus not being deployed. You should invest as much as you can to make use of the good opportunity.
TO SUM IT UP
- Invest regularly. The opportunity cost of being inconsistent is visible in your stock investments.
- Your mutual fund investments demonstrate the advantage of regular and systematic investments.
- Invest with a 60-70 per cent in mutual funds for growth, with a mix of market-cap allocation across funds that have a proven history and track record.
- Allocate 20-30 per cent of your investments to stocks in blue-chips that should be acquired over time.
- Allocate the balance 10-20 per cent into a fun allocation. This allocation will work only if you are regularly tracking your investments. Invest with price targets and stop-loss.
- Mutual funds offer natural diversification which stock investing cannot. Evaluate your fund holdings frequently to understand the diversification you get.
