The Hindu Business Line : Focus on asset allocation

I am 36, working in a gulf country. My wife is a homemaker, aged 30. I have two daughters, aged five and three. I plan to retire on achieving my financial goals (by 2025). I started investing in mutual funds from 2004 and my risk appetite in mutual fund investments is above average.

I invest for the long term in order to meet my targets. I have not booked profits since 2006 and use the SIP route. Whenever I have surplus money, I invest it through additional SIPs. If there is a major fall in the market, I buy additional units through lump sums.

I expect a 15 per cent return over the long term from MFs, through a combination of diversified equity funds, balanced funds and MIPs. I avoid sector funds. I intend to remain invested till my financial targets are achieved. I believe NRIs are not allowed to invest in index and ETF funds. I have, therefore, not invested in these schemes.

As for my risk appetite in direct equity, I invest mainly in large-cap stocks. I depend on services from a research house for my investment decisions. I generally sell on meeting predetermined target returns. But I don’t intend to invest more than Rs 15 lakh in direct equity investments.

Assets

Currently, I save Rs 1,00,000 a month after various expenses. Other assets include a house, where my parents reside (valued at Rs 50 lakh). I had land in Chennai that I sold to book profits in May 2008. I invested the capital gains of Rs 19 lakh in capital gain bonds.

I have taken adequate insurance to protect my goals. I hold a term insurance for Rs 1.4 crore, endowment policy for $50,000 with double accident benefit and whole life policy for Rs 6 lakh.

My employer provides medical cover to the tune of Rs 36 lakh to my family. The company also provides an additional life (term) cover for Rs 25 lakh. Apart from this, I have six insurance policies maturing at different periods starting from 2022.

Avinash (name changed on request)

Solution

Given the size of your portfolio and its diversification, you should be able to see your goals through. However, there can be improvement in your portfolio. Before moving ahead with further investments you ought to fix your asset allocation pattern.

Currently, close to 36 per cent of the assets are invested in equity; with the SIP (planned by you over the next 18 months), this will increase to 56 per cent. If the market moves up by 25-30 per cent in 18 months, your portfolio might be overweight on equity.

It is important to dynamically balance your portfolio to suit your risk appetite. Considering your age and goals it might be prudent to have 60 per cent of the portfolio in equity for now.

As your risk appetite is above average, you can construct an investment portfolio in the ratio of 60:20:15:5 in the order of equity, debt, real estate and gold. Your equity exposure can be divided between MFs, direct equity investing and portfolio management services. From the current value of Rs 1.22 crore, if you can manage a modest return of eight per cent per annum for the next 17 years you can achieve your goals. The house you own has not been taken into consideration for our calculation as you plan to spend your retired life there.

The only major concern for now is inflation, which has been assumed to be 6 per cent, to achieve your goals. If there is any substantial variation in inflation the final figure might be altered. The surplus of Rs one lakh a month can be invested in the appropriate ratio mentioned above and accumulation from this can be left as estate for your kids or used to increase your living standard post-retirement.

MF and Construction of portfolio

Your portfolio has a lot of overlap. You should seek to restrict the overall portfolio to 10-12 funds (because you prefer to manage the funds with portfolio management service). As you are anticipating a 15 per cent return you can consider adding index funds as some of them have given 16 per cent compounded annualised return over the past six years. The lower expense ratio can help you achieve reasonable returns with less risk.

If you are looking for an above-average risk return profile, you can construct a portfolio with index funds, diversified funds and aggressive mid-cap funds to earn higher returns, as you have another 17 years for your goals. However, you need to actively book profits.

Also, NRIs are allowed to invest in index funds and ETFs. Kindly verify with the mutual fund concerned. If favourable market conditions help you to reach the target earlier, consider moving a good proportion of the assets to debt, to lock into the returns.

You can also consider investing in international funds and Gold ETFs to build a portfolio spread over various asset classes. You can retain the holdings in Magnum Contra, HDFC Top 200, HDFC Prudence, Reliance Growth and Sundaram BNP Paribas Select Midcap. Index funds or ETFs could be a good option too. On the debt front, you can consider adding UTI Mahila Unit scheme.

Capital gains

As capital gain from the land sold by you was long term, you could have opted for paying the tax at a flat 10 per cent or 20 per cent with indexation. In either of these cases you would not have paid beyond Rs 1.9 lakh. Had you paid the taxes and opted to invest your money with a bank for an interest of 10.5 per cent, the net yield could have been higher.

Further, given the softening interest rate, you can consider moving money from liquid funds to an NRO account and invest in a fixed deposit. If you do this, you will have a total interest income of Rs 2,10,000 (as against Rs 1.05 lakh alone from REC bonds). As this would attract income-tax, the effective yield on your investment will be close to 9.3 per cent. This would nevertheless be superior to liquid fund returns.

Insurance

Your insurance is sufficient to protect your goals. As you are covered by health policy of Rs 36 lakh you can derive comfort on that front too. The maturity proceeds of the six insurance policies can help during your children’s higher education and marriage.

Queries can be sent tofinancialplanning@thehindu.co.in

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