Piyush Bhurangi, 26, a software engineer in Noida, UP, is getting married in November and wishes to have a long-term investment plan to suit a larger family. He invests Rs 1,000 each month in mutual funds via systematic investment plans (SIPs). Currently, on a take-home salary of Rs 25,000 a month, his expenses add up to about Rs 10,000, apart from investments. He has a term insurance plan of Rs 25 lakh, with additional death benefits (ADB), taken in September 2009. All his investments are tilted towards equities. While that wasn't a big problem as he is young, yet diversification is crucially necessary, as he is the only bread-earning member of his family right now.
GOALS
Car: Rs 300,000 in 3 yrs
Holiday expense: Rs 300,000 in 3 yrs
Home: Rs 20,00,000 in 9 yrs
Child's Education: Rs 15,00,000 in 20 yrs
With current investments totaling Rs 5,000 monthly, you will not be able to meet your goals. Inferring an annualised return of 10 per cent on investments, you will need to invest Rs 9,490 more, that is, Rs 14,490 per month to achieve your current goals over the respective years.
These monthly investments, growing at the rate of 10 per cent per annum, will let you achieve your goals. The table 'Goals' shows how.
PRIORITISING GOALS
This is a crucial aspect of your investment plan. Goals, including going for a holiday or buying a car, are negotiable ones. Since your investment requirements will depend on the timing of withdrawals, you may shift the flexible goals to a later date, perhaps even to the extent of a few years, depending on priorities. Goals like buying a house and child's education are non-negotiable; therefore, these should be on the high priority list.
Since it might be difficult for you to raise your investment to the desired level, you can progressively increase your investment levels.
FIXING FUND MIX
It's good that you have limited the number of funds in your portfolio to seven, except that you stopped SIPs in two, and also all of them are 4- or 5-star rated funds, except for Reliance Tax Saver, which is rated 3-star, but the concern is about the mix of funds.
The current fund selection makes your portfolio quite aggressive. Out of seven funds, five are aggressive or thematic funds, apart from Birla Sun Life Frontline Equity and Reliance Tax Saver. Although you have stopped investments in Sundaram BNP Paribas Select Focus and Tata Infrastructure, still 60 per cent (Rs 3,000) of your current monthly investment of Rs 5,000 goes into aggressive and thematic funds. For any long-term term investor like you, it is always advisable to have well-diversified large-cap funds as core holdings in your portfolio.
The allocation to sector funds should be limited to 10-15 per cent of the portfolio. In addition, of the five funds you are investing in currently, three are from Reliance Mutual Fund and 60 per cent of your current monthly instalment goes to the funds of this fund house. It is not advisable to have high allocations in funds of a single fund family because of the possibility of a single fund house's research teams coming to uniform investment decisions. There may be too many similarities for comfort.
Here is a tailor-made allocation for you:
ASSET ALLOCATION PROBLEM
The debt component is entirely missing in your portfolio. Depending on your risk appetite, you can decide on your allocation to these respective asset classes.
The debt fund can also be used to rebalance your portfolio regularly -- securing gains when markets rally and investing more when the equities are cheap to ensure safety alongside gains.
As you approach your goals, gradually shift the money allocated for these to debt, to prevent any last-minute market crashes from wiping out a goodly portion of the sum.
ADEQUATE INSURANCE
It's good that you have taken a term plan. Your insurance cover is sufficient to meet the current needs of the family in case any unfortunate events come to pass after marriage. However, it is advisable to have medical insurance, too, as it will be helpful in meeting any sudden expenses arising from illnesses.
CONTINGENCY FUND
You have not mentioned any allocation to an emergency fund. There is no ideal ratio, but in case of any urgency, one should be able to meet his or her expense for four to five months. You can keep these funds in saving banks accounts or money market funds. You also have an option to keep these in liquid funds, but that will not be as liquid as a savings bank account, as you get the money only after one working day.
