Analysing Investment Portfolio – Mutual Funds, Insurance, Equities And Real Estate

Goal setting for a secure future

Sanjay, 30, is working in a pharmaceutical firm as a product manager. His is a well-paid job that hands him a net salary of Rs. 60,000 each month. Sanjay is married with a two-year-old child and has no big liabilities at present. The monthly expense of the trio is approximately Rs. 25,000, apart from Rs. 9,000 that goes in paying rent for the flat they are currently living in.

Sanjay's goals are:

1. To invest in a property (preferably, a flat worth Rs. 50 lakh) in 2015
2. To build education corpus of Rs. 20 lakh for his son in 2027
3. To build marriage corpus of Rs. 20 lakh for his son in 2034
4. To cover himself sufficiently, i.e., buy a life insurance policy
5. To build a retirement corpus
6. To maintain the same standard of living, with no major increase in expenses, at the time of retirement

Risk Appetite: Medium to high

Does Sanjay have the right asset allocation?

Sanjay is truly a family man, for he started keeping money aside for future quite early. Over the years, he has made quite a number of investments that can be summed up as follows:

Sanjay's investments:

1. A medical cover of Rs. 3 lakh for the family, provided by his employer
2. Rs. 2 lakh in three ULIPs that provide a total insurance cover of Rs. 10 lakh
3. Rs. 2 lakh in four tax-saving mutual funds (ELSS)
4. A term insurance plan of Rs. 20 lakh
5. Other mutual fund investments – Rs. 3 lakh
   • SBI Blue Chip – Rs. 20,000 (NFO – Jan 20, 2006)
   • HDFC Top 200 – Rs. 50,000 (June 2006)
   • DSPBR Small and Mid Cap Reg – Rs. 40,000 (NFO- Oct. 18, 2006)
   • Fidelity International Opportunities – Rs. 30,000 (NFO- April 30, 2007)
   • Principal Large Cap – Rs. 20,000 (June 2008)
   • Religare Growth – Rs. 40,000 (NFO- July 19, 2007)
   • Reliance Growth – Rs. 60,000 (Oct 2008)
   • Tata Infrastructure – Rs. 40,000 (March 2009)
6. Fixed Deposits – Rs. 2.4 lakh

What do we say?

Life insurance, health insurance, fixed deposits, ULIPs and mutual funds, Sanjay made every sort of investment that was possible and desired. But the question remains as is the investment wholesome and capable to meet his goals. Let's find out.

Investment in ULIPs

ULIPs involve high initial costs, with a large chunk of the premium going towards paying insurance commissions. Moreover, they do not offer adequate insurance cover. Thus Sanjay can avoid ULIP investments altogether. Though he has already paid three annual premiums, he can surrender the plans and save a good amount in premiums. Even though the IRDA's recent cap on ULIP charges will increase overall returns on ULIPs, they cannot match up with returns generated on mutual funds. So, Sanjay should consider ULIPs only if he plans to stay invested for a minimum period of 20 years.

Insurance cover

Sanjay's life insurance cover of Rs. 30 lakh (Rs. 20 lakh (term plan) + Rs. 10 lakh (ULIPs)) seems inadequate for the risks involved. He should consider buying a minimum cover of Rs. 80 lakh (as per a rule of thumb, insurance cover should be 10 times one's annual salary). Sanjay can buy two term plans – one of Rs. 40 lakh for 20 years at an annual cost of Rs. 10,800 and another of Rs. 40 lakh for 30 years at an annual cost of Rs. 14,280. The two term plans have been recommended because his proposed liability of Rs. 40-lakh home loan (Rs. 50 lakh – Rs. 10 lakh (20% down payment)) will be paid off in 20 years. Sanjay should immediately surrender the ULIPs and buy some mutual funds with the available amount instead.

Medical cover

In the current environment of escalating medical costs, Sanjay requires sufficient medical cover to deal with any unforeseen events in his life.
Here the point is Sanjay is the only breadwinner of the family but he has not taken a medical cover for himself, and the medical cover of Rs. 3 lakh provided by his employer is for the entire family. So apart from this cover, Sanjay should consider buying a family floater health insurance scheme of Rs. 4 lakh at an annual cost of Rs 8,899.

How effective are Sanjay's MF investments?

Now let us turn to Sanjay's mutual fund and other investments.

Mutual fund

Sanjay has put a good portion of his total investment in mutual funds during their NFO period. It is always recommended to invest in a MF scheme which has shown good performance over past few years – steady growth during the bull period and resistance in bear period. Also, instead of investing in too many schemes, Sanjay should concentrate on 3-4 good diversified equity schemes. Moreover, he has made lump sum investments in mutual funds till now, so he can start five SIPs in the following schemes:

• Birla Sun Life Front Line Equity Plan A – an SIP of Rs. 3,000 per month
• HDFC Top 200 – an SIP of Rs. 3,000 per month
• IDFC Premier Equity Plan A – an SIP of Rs. 3,000 per month
• Reliance Growth – an SIP of Rs. 3,000 per month
• Sundaram Tax Saver – an SIP of Rs. 4,000 per month

Real estate

Sanjay would be buying a Rs. 50-lakh flat in 2015, for which he would take a home loan of Rs. 40 lakh (Rs. 10 lakh will be the down payment). His down payment would well be sourced from his investments in FDs and earlier lump sum investments in mutual funds.

Other investments

Sanjay also needs to balance his portfolio with a regular investment in other fixed income products such as PPF and debt mutual funds such as income funds. He can invest Rs. 52,000 in PPF to complete the Rs. 1-lakh investment limit for income tax benefits under Sec 80C of the Income Tax Act.

How will Sanjay fulfil his goals?

Sanjay's monthly equity investments of Rs. 16,000 through mutual funds will grow to Rs. 2.12 crore at an interest rate of 10 per cent compounded monthly. This will take care of the child education and marriage expenses at an inflation adjusted rate of 5 per cent. Sanjay's annual PPF investment of Rs. 52,000 will become Rs. 54.06 lakh at an interest rate of 8 per cent over a period of 29 years. So, Sanjay will also be able to maintain his present lifestyle with the corpus built at the time of retirement.

Moreover, Sanjay's income will increase steadily and so will his consequent investments. This will have a good impact on his corpus which will grow accordingly. Also, when Sanjay has some extra money, after making the regular investments, he can invest it in Gold ETFs and diversify his portfolio further.

Summing it up

• So far Sanjay had stuck with NFOs of mutual funds and ULIPs for major investments. But he needs to rejig his portfolio to align it with his future needs. As far as MF investment is concerned, it is always recommended to put money in good diversified mutual fund schemes with a history of 3-5 years. Hence Sanjay will have to streamline his MF investments by focusing on some specific schemes.
• ULIPs do not seem a good investment option for him as they involve high transaction costs, and also do not provide enough insurance cover. So Sanjay should get rid of ULIPs as early as possible unless he plans to remain invested for a long term.
• Sanjay is underinsured; he needs to buy adequate health insurance and life insurance cover for himself and his family to cover all his liabilities in case of any unforeseen events.
• If Sanjay is left with some extra money, he can consider investing in Gold ETFs as a hedge against inflation.