M (43) and H (45) have invested heavily in real estate. They own three properties (apart from the house in which they reside) with a combined value of around ₹2 crore. They started MF investments in 2017. Initially, the funds did well, and they ended up investing more money. Their investment in equity markets was about ₹55 lakh. However, their equity investments have been struggling over the past year and they are looking at a big loss. The current equity portfolio value is ₹42 lakh.

They want to review their equity portfolio. They have also contemplated exiting equity investments altogether and putting the money in realty. Apart from realty and equity MF investments, they have about ₹75 lakh in liquid funds and bank FDs. They can invest ₹1 lakh per month.

1. They are a single-income household.

2. They need ₹50 lakh for their son’s education in seven years.

3. They have a family floater health insurance plan of ₹20 lakh. H’s employer also covers them for ₹10 lakh. In addition, H has a term cover of ₹2 crore.

4. Their current expenses are about ₹80,000/month. After retirement, they will need about ₹60,000/month in present terms.

The couple started investing in mid- and small-cap mutual funds in 2017. Even though the equity markets have struggled in general over the past 18 months or so, the pain has been significantly more in mid- and small-caps. This is also the reason why they want to stop equity investments altogether and shift back to real estate.

They must understand that equity markets are volatile. They will see ups and downs on a regular basis. Rather than quitting equity investments altogether, I will advise to get their allocation right within the equity space. They must also consider exposure to large-cap funds. They can keep their large-, mid- and small-cap exposure at 50:30:20. Since they are new investors and have had very little experience in the markets, they can also consider allocation to a hybrid fund. While mid- and small-cap funds can give super returns during phases, they are extremely volatile and can fall sharply during market downturns.

They must look at the asset allocation from the portfolio perspective. They have ₹2 crore of real estate, ₹42 lakh of equity funds and ₹75 lakh of fixed-income assets. Though they seem to be heavy on realty, I wouldn’t advise them to exit from some of it now because they may not be very comfortable doing so. However, as their comfort with financial assets beyond bank FDs grows, they can consider selling some real estate and moving it to financial assets. They seem to have adequate life and health coverage. Therefore, no action is required on that front.

Contingency funds

They should keep 8-12 months of expenses in an emergency fund. They can earmark ₹10 lakh of fixed deposits/liquid funds for emergencies. I will advise them to earmark another ₹10 lakh for any medical contingencies.

For their son’s education, they need ₹50 lakh in seven years. As I see, they will not need this at one go. They will need it over 3-4 years. I suggest they earmark ₹30 lakh from their existing investments for their son’s education. They can use ₹15 lakh from their equity portfolio and shift it to a hybrid equity fund. They can earmark another ₹15 lakh from their bank FD/liquid fund portfolio for their son’s education.

For retirement, they must target a corpus of around ₹7 crore in 15 years. This is assuming an annual inflation of 8 per cent, monthly expense of ₹60,000 per month and post-retirement life of 30 years. H’s retirement is in 15 years. After accounting for emergency funds and their son’s education, we are left with ₹2 crore in real estate, ₹27 lakh in equity and ₹40 lakh of bank FDs/liquid funds — a total of ₹2.67 crore. Even if we discount real-estate assets and assume a post-tax return of 10 per cent of existing and fresh investments, they need to invest about ₹1.05 lacs per month.

I have not considered any increases in salary and concomitant increase in investment ability. They can invest ₹1 lakh per month. Given that we have not even considered real-estate assets, they seem to be in a comfortable financial position.

Since their experience with equity markets has not been good, I would advise them to stick to 50:50 equity-debt allocation. There is no need to add to real-estate assets. For equity allocation, they can consider 50 per cent to large-cap funds, 30 per cent to mid-cap funds and 20 per cent to small-cap funds. For the debt portion, they must consider contributing to the PPF account. They can divide the remaining amount between bank FDs and good credit quality debt mutual funds.

Over a period, they can consider reducing the real-estate exposure and shift it to financial assets.

The writer is founder, PersonalFinancePlan.in

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