The self-assured voice elaborating on the rationale of his investment strategy and choice of instruments tells you one thing for sure—Ankur Varshney knows what he wants from his money. “I want to build a corpus of Rs 5 crore by the age of 50,” says this 29-year-old software engineer. And he has a fairly good idea of how to get there too.
Earning a tidy Rs 58,000 a month, Varshney has committed about Rs 11,000 in mutual funds through systematic investment plans (SIPs). This is in addition to Rs 1.5 lakh invested in them since last December. Focused on high returns, Varshney has kept away from debt and fixedincome instruments except for the mandatory contribution to provident funds.
For insurance, Varshney has purchased two policies. An SBI Life term plan covers him for Rs 20 lakh for 25 years. Annual premium for this policy is about Rs 13,000. Interestingly, the sum assured increases by 50% for every five years that he continues with it. The other policy is a single premium Ulip that covers him for Rs 2.4 lakh.
Though real estate is not a part of his portfolio, it was the first thing Varshney wanted to invest in. “For the first four years of my career I was saving for the down payment of a property in Bangalore,” he says wistfully. But the boom in real estate market meant that prices leapt beyond his budget. When home loan rates also crept up, Varshney was forced to give up the purchase and funnel the accumulated savings into mutual funds.
Most investors go wrong in what they have invested. With Varshney it is just the opposite. The biggest flaw in his strategy is what he hasn’t invested. Not that he spends heavily. At Rs 10,000, Varshney limits his monthly expenditure to a reasonable 17% of his pay packet. But net of all incremental savings, expenses and insurance premiums, a whopping 57% (nearly Rs 4 lakh) of his annual income lies un-invested. Add to this his cash reserves of nearly Rs 2.5 lakh and the figure totals to Rs 6.5 lakh, almost equal to Varshney’s yearly take-home salary.
Should Varshney continue to invest only Rs 11,000 a month, the money must grow at an average annualised rate of 21% for the next 21 years to reach his dream corpus. This is betting a little too high. Ideally, Varshney should invest with moderate expectations of 14-15% returns. So he must up the ante and invest about Rs 32,000 a month. Not very difficult given that he is literally rolling in cash. The investment style stays nearly the same: more and more equity with just a dash of debt for stability and diversification. While Varshney’s selection of mutual funds is good, he has invested an extremely high proportion of his money in just one fund house.
Seven out of his 10 funds belong to SBI mutual fund. Ideally, one should try and diversify investments at the fund house level as well. Therefore, we recommend redeeming SBI One India Fund. He should also consider exiting Magnum IT since exposure to the technology sector is already very high. The money so realised can be invested in two other funds— one a mid-cap fund (like Birla Mid-cap Fund) and the other a core fund (HDFC Equity or Birla Sun Life Equity). This will reduce concentration in SBI funds, while adding two good ones to his portfolio.
Varshney is interested in increasing investments in Magnum Contra and Magnum Global. While both funds have performed well, we advice against this. The reason is the same—too much concentration in SBI funds. It’s a good idea to have a flavour of international equity in the portfolio. Varshney should continue investing in Principal Global Opportunities and Templeton India Equity Income Fund. Investing in stocks is tricky. Only if Varshney understands market dynamics and has the time to monitor his investments should he venture into direct equity. Else mutual funds is the way to go. He can choose any of the recommended funds to increase his equity exposure. Going the SIP way works best with his investor profile.
Contrary to popular perception, fixed-income and debt instruments are the best investment for shortterm goals. Not only do they ensure safe returns, one can sync their lockin period with the time when these investments need to be liquidated. Varshney plans to start his own software venture in the next six to seven years and wants to save for raising the initial capital. In the meanwhile an MBA in finance is also in the pipeline. He can invest in debt mutual funds, fixed maturity plans (FMPs) or fixed deposits. Debt funds are not affected by stock market movements and are less volatile because they invest in safer options.
Investment in debt funds is especially attractive right now. Analysts believe these funds will do well in the coming months as interest rates are expected to fall a bit. This would increase the value of the highinterest bonds purchased by these funds recently. Varshney can consider parking some money in these funds for steady returns that are higher than what a fixed deposit or FMP would give him. What’s more, they are more tax efficient than fixed deposits.
Regarding insurance, Varshney is well covered and through the right policies. By the end of his term plan, sum assured will have grown to a healthy Rs 45 lakh which should be enough for his family. A pro-active investor, the Ulip will allow him to switch from debt to equity and vice versa as per market conditions. We also think Varshney should reconsider his rigid stance on real estate. Home loan rates are expected to soften but property prices will also rise. So while we do not recommend a hasty investment in real estate, in case he gets a good bargain, it will be wise not to let the opportunity pass by.
