Big on saving small on strategy

Big on saving small on strategy

Pune-based couple must set out investment objectives and chart a strategy to leverage the advantage of earning and saving well at a young age.

They’ve shopped for some of the best stocks, funds and bonds. A timely property purchase makes the collection even more impressive. Yet, something is missing. Working couple, Smita Chaturvedi, 27 and Samir Pathak, 30, invest randomly. A few stocks here, an insurance policy there…The absence of a strategy has robbed the zing from the snazziestpicks in their portfolio.

Consider this. Pathak is a manager in an insurance company while Chaturvedi is a trainer with a multi national company. Together, the couple earns a neat packet of about Rs 91,500 a month. Two EMIs and monthly expenses shave off nearly Rs 28,000. This leaves Rs 63,000 as pre-tax surplus. But of this corpus, incremental savings are a measly Rs 1,000. Nearly 68% of the earnings are lying un-invested in their bank accounts—a clear symptom of inadequate planning.

Stacking high-return investment instruments does not make a sound strategy. In fact, it is no strategy at all. There are no one-size-for-all stocks, funds, etc to fit every investor profile. Strategies must be constructed according to personal needs. Pathak and Chaturvedi have realised the same. Blessed with a daughter a few months ago, they are keen to fine-tune their portfolio for high and steady returns.

“We want to accumulate Rs 60 lakh for our daughter’s higher studies. Another target is saving Rs 2 crore for post-retirement days,” says Pathak, the more investment savvy of the two. With some changes in investment style, these targets should be achievable. But first, a look at their current portfolio.

For insurance, the couple has bought no less than eight plans. Total premium outgo is nearly Rs 60,000. Chaturvedi has picked two money back schemes and one endowment policy for a cover of Rs 3.5 lakh. A term plan, Ulip, pension plan and endowment policy cover Pathak for Rs 42.5 lakh. Missing in some of the best investor portfolios, he has picked up Rs 2.5 lakh worth health insurance too.

Inclined towards safe returns, Chaturvedi has made bulk of the Rs 3.5 lakh debt investments of the couple. Pathak is a fairly aggressive player of the markets. He has stashed away about Rs 60,000 in mutual funds. There is just one systematic investment plan (SIP) of Rs 1,000. Another Rs 1.9 lakh is invested in a bouquet of seven stocks. The collection includes blue chips like Bharti Airtel and Reliance Petroleum alongside latest stars like Idea Cellular and DLF.

In 2005, the couple bought an apartment in Pune for Rs 13.4 lakh.They took an 18-year home loan at 7.5% fixed interest rate to fund about 90% of the total cost.

Adding more shimmer to their portfolio is gold worth Rs 4 lakh. Till a few months back, Pathak and Chaturvedi kept Rs 82,000 in a liquid plus fund as another near-cash option. Now, this money has joined the pile in their bank accounts.

As the first step, the couple must define the objectives of their investments. List out short-, medium-and long-term goals. Fixing an investment strategy comes next. This will depend on their goals, funds, age and risk appetite. (see story “Financial Mistakes We Make” on our website) They’ve already mastered expense planning and save very well. All they should do now is invest heavily in equities.

Where will the funds come from? Clean out the savings account. Not more than two months’ expenditure should be kept in cash. A little tweaking in the couple’s insurance kitty will also add to the investible surplus. Not only will it cost less they will be better covered too.

Pathak should continue with the term cover, Ulip and pension plan. But all money back and endowment policies must go. This includes all his wife’s existing policies.

They have already paid three premiums for these schemes and should get some money as surrender value. But the real benefit comes from what they will save in terms of premiums. Chaturvedi can replace existing schemes with a term cover of about Rs 40 lakh for 20 years. It will reduce her premium burden and substantially jack up the sum assured.

There’s now Rs 65,000 to be invested every month. The couple should funnel most of this money in equities via mutual funds. Among existing fund investments, both taxplanning funds are good choices. But they could do better with equity funds. We recommend exiting Standard Chartered Enterprise Equity and investing the redeemed money in a more versatile equity fund like Franklin India Prima Plus or Reliance Vision.

Ideally, the couple should have invested in a mid-cap fund with good long-term performance record instead of ABN Amro Future Leaders. But since the fund’s performance has been good so far, they can continue with it. For fresh fund investments look at SIPs in HDFC Top 200, DSPML Equity, Birla Midcap or Reliance Growth.

Regarding direct equity, Reliance Petroleum alone accounts for 31% of Pathak’s total stock and fund investments. This is a very high concentration. If he implements the above strategy, this flaw will be automatically remedied. Else, he can consider selling a chunk of this stock and plough the redeemed money in equity funds.

DOC says

  • While formulating an investment strategy, factor in current assets and liabilities, dependents, future income and expenses, goals, expected rate of inflation and likely returns.

  • Do not concentrate equity investments in one fund or stock even if they are performing very well.Spread risk across six to seven stocks or funds for steady returns.

  • It is best to keep insurance and investment separate. Pure insurance policies like term plans cost less for a higher cover than endowment or money back schemes.

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