Rudderless in high seas

Thane-based Sanjeev Bhadane is banking on too many wrong instruments to achieve his goals. He needs to reorganise his portfolio and make fresh investments in equities.

Thane-based Sanjeev Bhadane is banking on too many wrong instruments to achieve his goals. He needs to reorganise his portfolio and make fresh investments in equities.

Sanjeev Bhadane with family
Sanjeev Bhadane
Age: 40 years
Monthly income: Rs 50,000 (post tax)
Financial dependants: Three (wife and two sons)

I don't think I am on the right track," says 40-year-old Sanjeev Bhadane. To address his apprehensions bluntly, he is absolutely right. Bhadane's financial books are messy. Though he has been working for 20 years, this manager in an auto company started investing seriously only in 2003. This is 14 years too late.

To make up for lost time, Bhadane decided to bet heavily on equities. Thus far, his redemption strategy was on the ball. Then he chose mutual funds and stocks "which were in the limelight" and he lost direction.

Bhadane's slim portfolio comprises about Rs 1.5 lakh parked in fixed-income instruments and approximately Rs 1.64 lakh in equities. So, out of his stockpile, a sizeable 40% is in equity funds and stocks that are completely wrong for his average risk appetite and low investment acumen. Besides, Bhadane does no research whatsoever before selecting these products. It gets worse. The monthly investment required to meet Bhadane's goals is to the tune of Rs 1.3 lakh. But his monthly investible surplus is only Rs 7,917. Obviously, he must downsize his goals massively or else it will be impossible to meet them. For instance, he may want to cancel an overseas holiday or postpone plans to buy a plot of land by a few years.

There are several challenges to Bhadane achieving a financial redemption, but perhaps the biggest is his ignorance about financial matters. Bhadane's reasons for exiting some funds and investing in others range from "I didn't like them" to "my friends said that these funds are bad". One can realise the fragility of the situation from the fact that it took several interactions to figure out his cash flow so that his monthly income did not exceed his outgo.

Clearly, even the best advice will be futile unless Bhadane takes time out to understand money matters. So our first advice is that he read books and visit Websites that will educate him on personal finance.

Portfolio analysis of Sanjeev Bhadane
Portfolio analysis of Sanjeev Bhadane

The next step is to streamline the cash flow. Bhadane brings home Rs 50,000 a month. Of this, about 20%, or Rs 10,000, is spent. Another Rs 25,000, or 50% of his income, is grabbed by his home and car loan EMIs of Rs 20,000 and Rs 5,000, respectively. The home loan was taken in August last year, when Bhadane bought an apartment in Mumbai worth about Rs 30 lakh. After subtracting SIPs of Rs 2,000 and the average insurance premiums of Rs 5,083, the monthly surplus works out to Rs 7,917.

As we said before, this amount is not enough. While it will be wishful thinking to achieve the target investment of close to Rs 1.3 lakh, any addition to the surplus will be welcome.

For this, our usual course is to tinker with insurance policies and redirect premiums to SIPs, but Bhadane's insurance basket does not have the scope for significant realignment. He has bought a term plan, which provides a cover of Rs 25 lakh at a cost of Rs 12,000 a year. Padding up the cover by Rs 7.5 lakh is a pension plan and four moneyback policies. The total annual premium outgo for these is Rs 29,000.

Bhadane can continue with the money-back plans as a part of the debt component of his portfolio. Only if he is very sure of diverting the premiums to equities should he surrender the policies or convert them to fully paid-up ones.

Therefore, the only way to increase the investible surplus is for Bhadane to prepay his car loan. The loan's rate of interest is about 10%, which is higher than what Bhadane earns from his fixed-income investments, such as the National Savings Certificate and the Provident Fund. So, he should withdraw money from them and foreclose the car loan. The downside to this strategy is that he will wipe out his long-term investments like the PF, which is used by the majority of investors as the mainstay of their retirement corpus. So he must replenish the deficit in his PF by proportionately increasing his contribution in it for some time.

Foreclosing the car loan pumps up the surplus to Rs 12,917 a month. Bhadane should not think twice before putting this amount in equities. It might seem contradictory to our previous advice of compensating the withdrawals from his PF. But it is just a question of multi-tasking with money. The increase in PF contribution should be done simultaneously with the investment in equities. Once the previous level of debt investment is reached, Bhadane should concentrate on equities alone.

Within equities, Bhadane seems to have a penchant for stock-picking. Unfortunately, it is not a habit that he should nurture. He had bought stocks worth about Rs 1.9 lakh, which have lost value by about 56%. It is easy to pin the blame on the market, but a comparison of the performance of his portfolio with an index fund shows that even in these dire circumstances, Bhadane's stock collection has fared badly.

What is wrong with Bhadane's picks? Everything. There is no strategy for the overall stock portfolio, which looks like a mish-mash of scrips of all market caps. So there is an Alok Industries sharing space with Tata Motors and a Pyramid Saimira Theatre alongside a Titan Industries. When asked about the strategy for selecting these stocks, he simply said that he chased names that hit the spotlight.

Bhadane has no profit-booking strategy either as he claims that these investments are for the long run, which is "at least five years". This is exactly what the pundits propose to do with stock investments, but for Bhadane our advice is just the opposite. He should get out of stocks as soon as he can. He does not have the time or knowledge about markets to dabble in stocks.

Ideally, we should suggest an exit strategy for Bhadane as stocks constitute about 46% of his financial assets. But it was extremely difficult as the suggestions changed on a daily basis. The reason? We assumed that Bhadane would be able to decipher market movements and tweak the strategy accordingly. As this seems highly unlikely, Iris suggests Bhadane do one of the two things: he can book losses right away and reinvest in equity mutual funds. Or he can wait for the markets to recover, and as soon as a majority of his stocks reach the cost price, he can sell them.

In both cases, we are betting heavily on equity mutual funds to pull up the growth of Bhadane's portfolio. Again, this aim will be thwarted if he invests in funds randomly. Iris suggests that he consolidate the fund basket by exiting all funds except DSP BR Top 100, HDFC Top 200, HDFC Taxsaver and Reliance Growth.

The idea is to stick to vanilla equity diversified funds which invest in large-cap stocks. For Bhadane, choosing funds like Franklin India Opportunities and Magnum Contra, which invest in a narrower universe of stocks, is like experimenting with the exotic. Even sector funds like Reliance Diversified Power, is a no-no for him. He has absolutely no idea about the portfolio of these funds or that they are more risky than their diversified counterparts.

Others like Fidelity International Opportunities and Magnum Global offer a geographical diversification that is unnecessary. Some funds have been shown the door because they duplicate exposure to the same stocks. So, between HDFC Taxsaver and Magnum Taxgain, Iris has only retained the former.

Revisiting Past Patients

We do a quick check-up to monitor the health of our past patients' portfolios.

Priya Shukla

Priya Shukla, 34

Financial Dependants: None

Old asset allocation: Real estate (58%), equity (29%), cash (9%) and debt (4%)

What we diagnosed:

  1. High saving ratio. Invests all savings.
  2. Investments across all asset classes.
  3. Adequate life insurance cover.

What we prescribed:

  1. Prune mutual fund portfolio from 14 to five or six funds.
  2. Exit sectoral funds like Reliance Diversified Power.
  3. Surrender or convert to paid-up policies all the money-back and endowment plans.
  4. Redirect premiums to a term plan when married.

What she followed:

  1. Converted money-back and endowment policies to fully paid-up plans.
  2. Exited sectoral funds and invested in DSP BlackRock Top 100.

Shukla is an informed investor. In the past year, she has bought more funds and stocks. As long as she monitors them closely and does not invest in ultra-risky, small-cap funds and stocks, she can continue investing in equities aggressively.

"I have shifted focus to large-cap funds and stocks as I understand that these are safer bets."