Floundering in high seas

Name: Kapil and Garima Oberoi Age: 33 and 32 Years Monthly Income: RS 70,000 (post tax) Financial dependants: Two (daughter and Garima’s mother)

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Lucky? Definitely yes. Kapil Oberoi, 33, missed the ravages of the bears by a hair’s breadth when he withdrew about Rs 70,000 invested in mutual funds and stocks (64% of his total equity portfolio) in January this year—just before the market free-fall began.

Exiting at the market peak was unintentional. Kapil, a Major in the Indian Army, required the money to pay the balance of the down payment for his apartment in Gurgaon. For someone who admits to struggling with jargon like ‘PE ratios’, it was clearly not an attempt at market timing (a feat accomplished consistently only by a few investors). But there is no reason why he shouldn’t be given credit where it is due. Inadvertent though it was, Kapil has followed a crucial financial planning rule—to exit investments only when the goal is near.

Many readers have written to Money Today in panic over their portfolios, which are mostly in the red. The question they ask is whether it is time to halt investments till the market stabilises? Through various stories, we have explained why this is not the remedy. Iris puts it simply— as long as the goals exist, so should your investments, in the requisite asset class. Exit or shift to debt only if the goal is to be realised in the short term.

Kapil should be lauded for another decision. Having used up his equity portfolio, he wants to rebuild it as soon as possible, irrespective of the current market condition. In fact, he sees opportunity in this downturn.

But this is as far as we will go with the praise, because the execution of his plan is shoddy. Though Kapil knows he has little knowledge of the markets, he intends to build a stock portfolio and has already invested Rs 20,000 in Reliance Petro and Reliance Power.

SAY YES TO STOCKS IF... The doctor cautions most patients against buying stocks. This is true for the Oberois too. Find out if you qualify.
1. Do you know why you bought each share?	Yes	No
2. Do you have a time frame for keeping the stocks?	Yes	No
3. Do you know whether a particular stock is for investment or for trading purposes?	Yes	No
4. Do you know what to do if the stock falls/rises by 50%?	Yes	No
5. Do you understand portfolio construction?	Yes	No
6. Do you have a reliable source for consultation?	Yes	No
7. Do you know the average return from your portfolio on an annual basis?	Yes	No
8. Do you compare the returns of your stock portfolio with a benchmark index?	Yes	No
9. Are you comfortable with doing a fundamental analysis of the stocks in your portfolio?	Yes	No
If your answer is YES to at least six of the above listed questions, then you may consider investing in direct equity.

His choice of funds is also inappropriate. Iris has suggested exiting both the funds that he has chosen for systematic investment plans (SIPs)—DSPML India T.I.G.E.R and DWS Investment Opportunity. Of the two other funds in his collection, HDFC Taxsaver and SBI Magnum Balanced, he is advised to retain only the former.

We shall explain the reasons for this overhaul later, but by now it should be clear that Kapil must refine his choice of financial products. The good news is that if he does so, he can reach all his goals (see ‘Go Get It’). Before we tell you how, let’s take a look at the current resources at his disposal.

Kapil earns Rs 30,000 a month after tax. His wife, Garima, 32, is a consultant with an IT company and brings home Rs 40,000 a month. The Oberois’ routine expenses are about Rs 15,000—21.4% of their combined income. Another Rs 18,000 is skimmed off as an EMI for their apartment in Gurgaon that was booked in 2003. This amount is for two home loans—Rs 16 lakh at 7.75% interest rate for 20 years and Rs 5 lakh at a floating rate of interest for 17 years. The apartment cost the couple Rs 28 lakh. Today, it is valued at about Rs 60 lakh—a whopping 53.3% jump in four years.

After subtracting the two SIPs of Rs 1,000 each, the Oberois are left with Rs 35,000 as monthly surplus. We suggest that they funnel the entire amount in equities as the couple has an average risk appetite. They have already built a reasonable debt cushion of about Rs 2 lakh through contributions to their provident fund and the Public Provident Fund. Garima owns gold jewellery worth about Rs 2 lakh, which adds to the security quotient.

Kapil has life insurance of Rs 15 lakh, courtesy the Army Group insurance. The premium is Rs 1,500 a month. In addition, he has picked up an endowment policy, a money-back policy and a pension plan for himself, which add Rs 5 lakh to his life cover. The total premium for these policies is Rs 42,300 per annum. Garima is covered for Rs 2 lakh through a money-back policy, which costs Rs 12,600 annually. All premiums are deducted from the couple’s provident fund contributions.

Despite a collection of four policies, Kapil is under-insured. We suggest that he buy a term plan of about Rs 65 lakh for 20 years. The annual premium should be Rs 21,000 approximately.

Of the current policies, Iris suggests that the couple surrender the money-back policy in Garima’s name as it is very expensive. Moreover, it is over three years old and should have a reasonable surrender value now. They can retain Jeevan Anand as a debt investment.

If Jeevan Surabhi does not offer a guaranteed bonus, they should convert it into a fully paid-up policy. When we shared this action plan with Kapil, he was not convinced.

GO GET IT At first glance, the Oberois seem to have unattainable goals. But some rejigging later, they are within easy reach.
Goal	Time horizon (years)	Future cost (Rs)	Monthly investment (Rs)
Overseas holiday	5	2.6 lakh	3,190
This goal is achievable but in case the Oberois fall short of money, it is dispensable.
House	10	45 lakh	18,346
Assuming that Kapil and Garima make the minimum down payment of 20% of the cost, they will have to shell out Rs 9 lakh only and can take a loan for the balance amount. In 10 years, they should be able to build this corpus.
Daughter’s education	20	48 lakh	4,245
Daughter’s marriage	25	51 lakh	2,292
These two goals can be easily met by investing in the recommended equity diversified funds. But the couple must avoid withdrawing funds from this kitty to meet any other need.
Retirement	21*	2.7 crore	22,420
Kapil expects a post-retirement pension of about Rs 40,000. Given their current income to expense ratio, this amount should be enough to meet the couple’s daily expenses after retirement. However, the couple must earmark some equity investments towards any unforeseen expenditure after retirement.
*This is the minimum number of years for retirement and may increase if Kapil attains a higher rank in the army.

His logic—the premiums come back to his provident fund after some time. We were stumped by this explanation. No insurer reimburses the premiums. After some discussion, we realised that Kapil was referring to the returns that are given to the policyholder of a money-back policy. This misconception is yet another outcome of mis-selling of insurance policies.

Kapil admits that he bought most of them because an agent pitched them as one-of-their-kind life covers. We hope that he now knows better.

The equity-to-debt ratio of Kapil’s pension plan is 80:20. Iris suggests that he should convert it to 100% equity and turn the policy into a fully paid-up plan after five years. This will ensure that he has built a sizeable corpus before quitting.

Regarding equities, Iris emphatically recommends that the Oberois stay away from stocks. Kapil should sell the two stocks in his portfolio and reinvest the money in equity diversified funds.

The premium for his house loan should take care of the tax-saving investments for Kapil. Garima should take an SIP in HDFC Taxsaver to avail of tax benefits.

Iris has suggested exiting the DWS Investment Opportunities fund because the invested amount is very small. Moreover, why should the Oberois take a risk with a small fund house when they don’t have other A-listers in their collection?

DSPML T.I.G.E.R has also been shown the way out because a very small amount is invested in it. SBI Magnum Balanced has not performed as well as some of its counterparts like DSPML Balanced which makes the cut in our recommendations.

The couple can build a mutual fund portfolio, comprising DSPML Balanced, HDFC Top 200, HDFC Equity and the Templeton Pension Plan using the monthly surplus of Rs 35,000. This mix of balanced and equity diversified funds fits into the couple’s average risk appetite. As for the debt component of their portfolio, the contribution to the couple’s provident fund and the premium for the endowment policy are sufficient for the next few years.

This plan should set right the highly skewed asset allocation of the Oberois’ portfolio. Over time, they can go slow on equities and bet more heavily on safer debt products. But before that, an equity boost is indispensable for reaching their goals.

REVISITING PAST PATIENTS We do a quick check-up to monitor the health of our past patients’ portfolios Goutam Bhattacharyya, 44 Financial dependants: Three Old asset allocation What we diagnosed » Very low savings rate. » Investments concentrated in debt instruments. No mutual fund investments. » Low insurance cover. What we prescribed » Invest in mutual funds via SIPs. » Buy a term cover of Rs 30 lakh for 15 years. It would cost Rs 18,000. » Buy a term plan of Rs 10 lakh. » Exit low-yield endowment and money-back policies. What he did » Surrendered all endowment and money-back policies. » Started investing in two mutual funds, SBI Magnum Taxgain and HDFC Long-Term Advantage via SIPs. What he didn’t » Buy a term insurance. » Increase savings as his expenses are at the minimum possible level. Bhattacharyya waited for the sixth Pay Commission revision to implement the plan fully. It wasn’t the best decision, but he should not delay any longer despite the recent market downturn. "I follow the doctor’s advice given to those whose financial situation is similar to mine."