Hey, you can do it too

It is the doctor’s annual break from routine analysis. This fortnight’s schedule includes lazy mornings, monopoly games and catching up on the India-Australia test matches. Looking back, this year was good for us. Our patient list crossed 50. The analysis expanded to four pages, including expert comments and reviews of past patients.

Requests for analysis continue to pour in even as our questions have become more intrusive and your answers more candid. So Iris and our team can afford to put up our feet for a while. In the meantime, we hope you can look after your finances.

But how will you do that? Being a conscientious investor is one thing. To review your progress is a different ball game altogether. Besides objectivity, you must also possess financial planning skills, a rare pursuit for professionals. And in uncertain times like these, you must want to especially ensure that your money is safe.

No, we aren’t going to ditch you when portfolios across the board are in the red. In fact, we go a step further from our regular analysis. We tell you how to identify a potential crisis brewing in your personal balance sheet much before it reaches the Lehman level. The best way to do that would be to present five alerts which have been chosen on the basis of our two-year experience.

They are the most common and deadly mistakes made by investors. We have explained how they damage your portfolio in more ways than are apparent. But the featured case studies need not panic. Precise solutions are a part of the package. If you nip the problems in the bud, they will seem trivial. We suggest that the readers don’t follow the advice blindly. Focus on why the solution works for the mistakes—the learning will then be beneficial for your entire investing lifetime.

Read the warning signs
• You have too many funds and stocks.
• Your insurance cover is low and living standard is high.
• You earn well, but don’t have money to invest.
• You have too many loans.
• Your portfolio is choc-a-bloc with debt instruments.

ALERT: 1
FUNDS AND STOCKS GALORE

Kinner Ashar, 32, Bank manager Monthly income: Rs 50,000 Financial dependants: Two (parents)

Yes, the doctor recommends equities for portfolios suffering from low growth. But we never meant that you binge on stocks and funds.

One look at Mumbai-based Kinner Ashar’s portfolio (25 stocks, 37 funds) and we knew he was a victim of over-enthusiasm.

This is also symptomatic of lack of strategy and incorrect diversification. There is an unnecessary duplication of exposure to companies and sectors, which increases the cost of investment.

Solutions
• Prune stock and fund portfolio as advised below.
• Do not add any new funds to your collection.
• Evaluate the performance of the stock portfolio regularly by comparing it with a benchmark.

MUTUAL FUNDS

Exit: FT Capital safety-3 years (after some time), FT Capital safety-5 years (after some time), Franklin I Flexi Cap, HDFC Taxsaver, Birla SL Tax Relief (after shifting to growth option), ICICI Pru Power, ICICI Pru Tax Plan, JM Small and Mid cap, Kotak Taxsaver, Principal Personal Taxsaver, Principal Tax Savings, Reliance Tax Saver, Reliance Vision, SBI Magnum Contra, Sundaram Select Mid Cap, Birla SL Tax Relief ’96, Fidelity Special Situations, Fidelity Tax Advantage, IDFC Taxsaver, Reliance RSF Balanced, SBI Blue Chip, SBI Infrastructure

CONTINUE/ KEEP: DSPML Balanced, DSPML Equity, DSPML Top 100 Equity, HDFC Prudence, ICICI Pru Dynamic Plan, Reliance Growth, Reliance Liquid, Tata Infrastructure, HDFC Top 200

DO SIP: DSPML India T.I.G.E.R (Rs 2,000), Franklin India Prima Plus (Rs 2,000), HDFC Equity (Rs 2,000), HDFC Long Term Advantage (Rs 2,000), DSPML Tax Saver (Rs 1,000)

STOCKS: Out of 11 sectors, retain six: power, cigarettes, petroleum, IT, steel and engineering. Stick to power companies of the public sector only and sell stocks of the other four private companies

ALERT: 2
HIGH LIVING, LOW COVER

Rajneesh Sood, 49, Medical officer Monthly income: Rs 50,000 Financial dependants: One (son)

In two years, the doctor has developed a set of memos that is handed out to almost every patient. One such memo reads: “Increase life insurance cover. Buy a term plan.”

This advice works for Chandigarh-based Rajneesh Sood too. His life cover is grossly inadequate. This is because insurance policies are usually bought for saving tax or as a debt investment.

Buying high-cost endowment and money-back polices also shrinks investible surplus.

Problem

Total insurance cover: Rs 9.7 lakh
Annual premium outgo: Rs 82,146
Reduces monthly surplus by: Rs 7,000 (the same cover could cost as low as Rs 3,000 a year)
Minimum insurance requirement: Rs 40 lakh
Falls short by: Rs 30.3 lakh

Solutions

• Buy a term plan of Rs 35 lakh for 20 years. Annual premium will be Rs 30,000.
• Repay car loan as soon as possible. This will increase monthly surplus that can be used to fund the term plan’s premium.
• Surrender all policies in your wife’s name as no one is dependent on her.

ALERT: 3
DISAPPEARING SURPLUS

Rakesh Shah, 34, Associate project manager Monthly income: Rs 60,000 Financial dependants: Four (wife, son and parents)

This one is the easiest to track. The income is high and expenses (including EMIs) are reasonable. Yet, there is hardly any investment. So we ask patients like Bengalurubased Rakesh Shah,”Where is the money going?” After some probing, we discover that the money is stacked in savings accounts where it is eroding in value. Or it is actually spent and there is no account in the monthly cash flows. Such carelessness reduces the earning potential of the income, resulting in ultra-slim portfolios.

Problem

Income (post tax): Rs 60,000
Expenses: Rs 15,000
Home loan EMI: Rs 17,000
Average Insurance premium: Rs 7,791
Surplus: Rs 20,209

This surplus is not invested
Result: Very thin portfolio
Debt: Rs 70,000
Shares: Rs 5,000
Property: Rs 19 lakh

 Solutions

• Invest in HDFC children plan for son’s education.
• Invest in HDFC Top 200, HDFC Prudence and Templeton India Pension to build retirement corpus.

ALERT: 4
BORROWING BEYOND MEANS

Mani Karthikeyyan, 38, Finance manager Monthly income: Rs 50,000 Financial dependants: Two (parents)

Ideally, the doctor should frown at loans for depreciating assets. But as credit is now a way of life, a reasonable proportion of all types of loans is fine. Also, most investors fear over-leveraging.

Then patients like Chennai-based Mani Karthikeyyan check in. His EMIs form 60% of his income. This is a double whammy. Such rashness reduces the surplus. And as car and personal loan rates are higher than the returns on investments, you pay more than you earn.

Problem

Income: Rs 50,000
Monthly expenses: Rs 14,714
Car loan EMI: Rs 6,200
Home loan EMI: Rs 13,579
Personal Loan EMI: Rs 10,507
Insurance premium: Rs 5,000
Surplus: 0

Result: Very few financial assets
Debt: 0
Shares: Rs 30,000
Property: Owns a house

Solutions

• Continue repaying the home loan.
• Prepay car and personal loan as soon as possible by borrowing against life insurance policies which will offer about 5% lower loan rates.
• Try to reduce expenses and start investing in mutual funds.

ALERT: 5
BETTING ON LOW RETURNS

Mohammad Asad, 38, Manager Monthly income: Rs 45,000 Financial dependants: Four (wife, son and parents)

It isn’t the best time for this advice, but overflowing debt products spell doom for portfolios, especially the younger ones. Kharagpur-based Mohammad Asad is better off now with 70% assets in debt.

But this will not last. Too much debt makes the portfolio growth sluggish. You barely beat inflation. Such a portfolio is also not diversified.

Problem

DEBT PORTFOLIO

National Savings Certificates: Rs 2.7 lakh
Kisan Vikas Patras: Rs 3 lakh
Endowment and money-back policies: Rs 13 lakh*
Fixed deposits: Rs 2 lakh
Bonds: Rs 30,000
Recurring deposits: Rs 2.6 lakh
Monthly income plans: Rs 3 lakh
Total: Rs 26.6 lakh

*Amount invested till date

• Stop investing in Kisan Vikas Patras, National Savings Certificates, bonds, recurring deposits and monthly income plans (MIPs).
• When the Kisan Vikas Patras mature, reinvest the amount in Reliance Growth Fund (Mid-cap).
•  Break all fixed deposits, encash bonds and withdraw investments from MIPs. Accumulate the entire amount in a liquid fund, a short-term floater fund or an HDFC mutual fund.
•  Systematically transfer money to HDFC Top 200 at the rate of Rs 8,000 a month.