 Name: Soumik Majumdar and Vandana Kothari |
Her husband, Soumik Majumdar, 41, is a senior lecturer at Visva Bharti University and only too glad to let her handle money matters. Kothari is worried about the couple’s investments. Especially since she does not have a regular income. A fellowship programme pays about Rs 10,000 a month but this amount will stop after August 2009. Thereafter, she hopes to earn about Rs 1 lakh a year from the sale of her paintings.
“I don’t want to compromise my creativity for the sake of money. My ultimate goal is to build a corpus that generates some fixed income every month. This way I’ll be free to pursue painting without any pressure,” says Kothari. For this, she has been investing her entire income of the past few months
into equities. There is an additional Rs 1 lakh in her bank from last year’s fellowship arrears. Kothari wants to know where to invest the money for accelerating her portfolio’s growth. But before we tell her how to do it, let’s take a look at the couple’s current assets. All routine expenses are met from Majumdar’s take-home salary of Rs 27,000. This is Rs 9,000—24% of the couple’s total income. Another Rs 11,000 is gobbled away by the EMI of a housing loan.
A two-storey bungalow in Shantiniketan is Kothari and Majumdar’s biggest asset worth about Rs 22 lakh. They have taken three loans of 15 years at about 9% interest to fund the purchase. The first loan was for buying the land. Since their loan requirement for house building was higher than what the banks were ready to provide (on the basis of their income) Majumdar took an additional housing loan from Visva Bharti Cooperative Bank.
Majumdar invests Rs 3,500 every month in an insurance policy and provident fund. Kothari has committed Rs 1,000 every month in mutual funds via a systematic investment plan (SIP). She has also invested Rs 30,000 in infrastructure funds and pays Rs 25,000 annually for a Ulip.
In addition to the money back policy from LIC which provides him cover of Rs 1 lakh, Majumdar has bought health insurance that provides a Rs 3-lakh cover to the couple. Kothari and Majumdar have the right approach to investing.
They understand that it is important to formulate a plan and stick to it, especially since one of the spouses does not have a regular income. Where they are going wrong is in making too many assumptions. Kothari expects to earn Rs 1 lakh a year from the sale of her paintings; the couple expects to earn Rs 6,000 after letting out a portion of their bungalow.
While it is very important to invest for expected expenditure, never plan investments on expected income. This might make your portfolio look slimmer on paper but it will be fitter. If more money comes in, invest according to the plan. But don’t pin your hopes on it. The couple’s cash flow generates a surplus of Rs 10,400 a month.
This is about Rs 2,000 short of the investment requirement to meet their short- and medium-term goals. We would have suggested a reduction in expenses but that seems highly improbable given that the couple spend a very small proportion of their income. Hence it is advisable to put some short-term goals like extensive travelling plans on hold and concentrate on building a portfolio.
We recommend investing the entire surplus in equity diversified funds for maximising returns. Kothari is keen on buying stocks. But it is very risky and not ideal for relatively new entrants in equities. Kothari has three mutual funds in her portfolio. Lotus India Infrastructure and UTI Infrastructure Advantage fund are new funds.
We discourage investments in new fund offers (NFOs) especially when there are better rated infrastructure funds available. Kothari should exit these funds and invest the amount in equity diversified funds with a good track record. SBI Magnum Equity is a good choice but it accounts for a minuscule portion of the couple’s fund portfolio.
Value Research recommends increasing exposure in this fund and to choose from HDFC Equity, Reliance Vision, Birla Frontline Equity and Sundaram BNP Paribas Select Focus for future investments. In addition to the monthly surplus, the Rs 1 lakh sitting in Kothari’s bank should also be invested in the funds suggested above.
The investments must be staggered over few months to reduce risk. For increasing equity exposure further, she can switch a small portion of her investments in the Ulip—currently invested in government securities—to equities. For insurance, Majumdar should increase his life cover substantially. He should exit the money back policy since the sum assured is very low.
There are better instruments for investment and insurance. He should buy a term plan of Rs 20 lakh for 20 years. The annual premium will be around Rs 17,000.
Investing future incomes
Kothari is betting heavily on expected income in her investment strategy. But the role of future income in your investment planning should be limited. Here’s why:
Future income streams may include
• Expected increment in income
• Expected gifts
• Expected rent
• Expected dividends
Factor in these incomes, but don’t
• Make them the core of your portfolio
• Plan your tax saving investment with them
• Tie a big financial goal to them
• Plan to prepay any loan with this money
