Intelligent investing can make all the difference. And if you want proof, don’t look beyond Priya Shukla’s portfolio. We’ve analysed finances of people who earn much more than her but still find it extremely difficult to meet their long-term goals like retirement corpus. Reason—sloppy investing. Or worse, no investing at all.
But 34-year-old Shukla got it right. A district coordinator with a social welfare organisation, she is our only patient to invest all that she saves. The result is that all her financial goals seem within reach. Ironically, Shukla is insecure about her finances. “Since my work is project based, I don’t have a regular pay cheque.
I want to sync my financial planning with such a career,” she says. That’s an angle we haven’t explored much. But before we see what can be done to ensure steady income from investments, a quick look at her strategy we are all praises for. Shukla earns Rs 20,000 a month (post-tax). Routine expenses eat away half this amount.
Of the balance Rs 10,000, she invests Rs 4,300 in five mutual funds through systematic investment plans (SIPs). The remaining Rs 5,700 goes towards a home-loan EMI for a plot in Dehradun. An aggressive investor, Shukla has built a corpus of Rs 10 lakh in equities.
Not at all shy of dabbling in direct equities, three-fourth of this amount has been invested in a bouquet of 18 stocks. Some biggies in her kitty are Reliance Communications, ITC, Reliance Capital and Power Grid. While the mutual fund investments are comparatively lower in value—Rs 2.5 lakh—it is spread across a basket of 14 funds.
There is scope for consolidating equity investments, but Shukla seems to have an eye for good stocks and funds. “I don’t take advice from others but research about my equity investments,” she says. While in office, she never forgets to monitor the performance of her stocks on the Net and if possible catch up on the latest buzz about them.
Public Provident Fund and National Savings Certificates worth Rs 1.5 lakh are her only debt investments. Including her mother’s three-bedroom apartment and the plot in Dehradun, real estate investments are valued at approximately Rs 50 lakh. Jewellery of Rs 90,000 forms the near cash component of her portfolio.
For insurance, Shukla has bought four policies—a Ulip, pension plan, an endowment and a money-back policy. Annual premium outgo is Rs 39,000. She claims to pay this amount from the returns of her past investments. The clutch of four policies provide a cover of Rs 10 lakh. She has also bought health insurance of Rs 1 lakh and a critical illness cover of Rs 3 lakh. By investing aggressively in equities, Shukla is making the best use of her high risk appetite.
She needs a corpus of Rs 2 crore to maintain her living standard after retirement. If her present monthly investments are continued for 26 years, they should accumulate to a tidy Rs 1.5 crore. Shukla’s home loan will be repaid in another nine years.
After that she can further increase equity exposure by funnelling in the money now spent on the EMI—Rs 5,700—in mutual funds. This should add another Rs 45 lakh to her nest egg taking it to Rs 1.95 crore. But we have a few suggestions to fine-tune Shukla’s mutual fund portfolio.
While all 14 funds are well-rated, it is prudent to prune her collection to five or six best performers. Too many funds do not guarantee better diversification as majority of them may be invested in the same sectors and stocks. Shukla has four equity-linked savings schemes (ELSS) in her kitty.
After the three-year lock-in period, she should consolidate investments in consistent performers like SBI Magnum Taxgain, HDFC TaxSaver and Franklin India Tax Shield. Sectoral funds are more risky than equity diversified funds. Unless Shukla can monitor their performance closely, she should consider exiting Reliance Diversified Power and DSPML T.I.G.E.R funds.
Franklin India Bluechip and Franklin India Opportunities have been average performers. Shukla can switch to better funds like HDFC Equity and Franklin India Flexi Cap which are already there in her portfolio. Since Shukla does not have financial dependents (her mother is a government employee and will retire with a reasonable pension) she could have avoided insurance altogether.
When income is irregularPriya Shukla has irregular income and wants a suitable financial plan. Here are five tips for those without a fixed salary:
• Meet your savings targets first and spend the rest rather than vice-versa
• Keep expenses within pre-determined limits for easy cash flow
• Maintain high liquidity in portfolio. Don’t invest in instruments with long lock-ins
• Ensure that fixed-income instruments have a staggered maturity
• Avoid very long-term loans or any other long-term liability
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But when she gets married this situation will change. We suggest continuing with the Ulip and pension plan. She bought the Ulip in 2004 and has crossed the period of high upfront charges. Further, Ulips allow investors four to five free switches between equity and debt in one year.
An involved investor like Shukla can make optimum use of this facility. Thanks to her sound investment strategy, she does not need a pension plan but it won’t hurt to have some regular income after retirement. However, Shukla can consider exiting the money-back and endowment policies.
They do not provide her with significant cover and returns on maturity (after 11 and 15 years respectively) will be only about 6-7%. Since these policies were bought before three years, they have acquired a surrender value. After exiting the policies, Shukla can re-direct the amount paid as premium into equities or buy a term plan if she gets married. Now some tips for aligning her financial plan with her career.
It is important that Shukla maintains high liquidity in her portfolio. Equity investments fit the bill as they are easy to redeem and attract no penalty. (except ELSS within the three-year lock-in period). She should choose the dividend option in her mutual fund investments. Encashing these profits will loosen up her cash flow.
If they are heavy amounts, she can re-invest them in equities or debt options. But the fixed-income instruments should not have a long lock-in period.
