Seema Lamba, 37, has been investing for four years now. But she had never put all her investments together to see the big picture. Not before she was forced into it for getting her finances analysed by MONEY TODAY’S Portfolio Doctor. “I did not know what my portfolio looked like,” admits the senior manager in a business solutions company. This, despite the fact that it is Seema who makes all the investments for her family. Her husband Praveen Lamba, a 38-year-old marketing professional takes care of other aspects of their household. They have two financial dependents—a five-yearold daughter and Seema’s mother.
Seema’s surprise doesn’t surprise us. Often, investors make the mistake of evaluating returns of individual instruments only and do not check the performance of their portfolio. This is a symptom of investing without a financial plan— a complete no-no.
Compiling all investment details has made Seema review her investment strategy and realise some flaws. For instance, the pile of 12 insurance plans. So even before our diagnosis, the patient has benefited from visiting the doctor.
Seema and Praveen have a post-tax income of Rs 78,000 a month. Of this, nearly 39% goes into routine household expenses. A home- and car-loan EMI skims off another Rs 24,000—31% of their income. Seema invests Rs 14,000 every month in five mutual funds through systematic investment plans (SIPs). This leaves close to Rs 6,000 as monthly surplus. Despite investing 18% of their monthly income in equity mutual funds, the Lambas’ portfolio is skewed towards debt.
About Rs 3 lakh is invested in fixed-income instruments such as provident fund and fixed deposits. Explains Seema: “I followed the safety-first philosophy. Now that I have a sizeable debt cushion, I want to aggressively invest in equities.” Though common, this is not the best strategy. Asset allocation ensures investments in all categories proportionate to the risk appetite and financial goals of the investor. So, it was possible for Seema and Praveen to invest in equities earlier and build a debt cushion alongside.
Apart from the SIPs, Seema has invested Rs 95,000 in four mutual funds. She recently bought shares worth Rs 32,000 of five companies. The stocks kitty is a mix of large and mid-caps.
In 2004, the couple bought a three-bedroom apartment in Ghaziabad for Rs 16.5 lakh. The purchase was timed right and the value of the house has jumped to about Rs 35 lakh. Seema and Praveen took a home loan of Rs 16 lakh for 20 years to fund part of the purchase and furnishing costs. Insurance is definitely their biggest muddle. Not only are there too many expensive policies but the total cover of Rs 28 lakh is short by at least Rs 20 lakh. Annual premium outgo is a whopping Rs 1.5 lakh.
Home loan protection |
The Lambas invested in Ulips to cover a home loan of Rs 15 lakh.That’s wrong. There are much cheaper alternatives
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To cover a home loan of rs 15 lakh for 20 years
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| Scheme Type | Premium Term (years) | Premium (Rs)*
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| Home loan insurance | 13 | 7,500
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| Single-premium insurance | 1 | 32,000 |
| Regular Term Plan | 20 | 5,000 |
| Ulips | 3 (minimum) | 70,000 |
| *Figures are approximate and will vary for different insurers |
Adding current surplus, current investments and the home loan EMI, the couple can invest approximately Rs 33,000 every month—a very tidy sum indeed. This can be increased by Rs 2,000-3,000 if they prune their insurance collection. Following a broker’s advice, Seema has invested in three Ulips for covering her home loan. This is a blunder. There are better alternatives for protecting a house loan (see box). Also, Seema is completely unaware of Ulip’s benefits. To make matters worse, she has adopted the wrong strategy of using two SIPs for paying the annual premiums of her Ulips. This means that in the month that she withdraws all SIP investments of the year, she pays an entry load of about 2.5% for just 30 days.
Moreover, such a short-term approach to equities is incorrect. Instead, Seema should check with the insurer and switch to monthly premiums for the same policies. We suggest she stick to the Ulips and look at them as pure investments. Our past story ‘Make the Most of Ulips’ available at www.moneytoday.in should help.
The couple must either exit their money back and endowment policies or convert them to paid up. The schemes for which three premiums have been paid and which are not near maturity should be converted into paid up. No more premiums need to paid for them. The investment component of previous premiums will provide for the cover.
If only one or two premiums have been paid for the policy, the couple can simply exit them. They will bear some losses but it should be fruitful in the long run. Seema and Praveen should then buy a term plan of Rs 20 lakh each. Total annual premium will be about Rs 14,000. Considering their investment needs, Iris suggests clubbing all SIPs in one fund—HDFC Growth. This will not compromise their portfolio’s diversification since all other funds have exposure to similar industries.
Seema should ensure that direct equity never exceeds 2-5% of her portfolio. Stock-picking requires expertise that she currently does not have. If she is unable to manage stocks, it is best to sell them and shift investments to the equity diversified fund.
The Lambas are on track to meet all goals except retirement. Seema wants to retire at 47. This is not financially feasible. She requires a retirement corpus of Rs 2 crore which means monthly investments should be Rs 1 lakh. But if she pushes retirement by 13 years, Seema will have to invest only Rs 12,000 a month for the same amount. The strategy we have drawn out makes this easy to achieve.
