UnTying the financial knot

Name: Zubin Ruttonji & Sumitha Ganapathi Age: 30 and 27 years Monthly Income: Rs 40,000 (post tax) Financial Dependants: None

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At an age when his peers in the finance and engineering streams are dreaming of their third or fourth promotions, Zubin Ruttonji, 30, has just kickstarted his earning life. While his friends are probably lamenting the loss in their portfolios, he is beginning to build one. No, he is neither lazy, nor careless. Ruttonji is a doctor and has recently completed his studies. He is also planning to get married soon. Not surprising, as the woman he wants to marry is also a doctor. Sumitha Ganapathi, 27, is still pursuing her MD in medicine. It is not a long wait though as the doctor couple is set to marry in a month’s time. They want to do everything right, which includes having a sound financial plan for their married life.

Though the reasons are justifiable, it is definitely a late start and comes with the usual disadvantages. Or so you would think till you find out Zubin’s perspective: “We may have lost out on the early bird advantage, but we will also be earning for a longer period.”

He is right. As both Zubin and Sumitha intend to start private practice eventually, they haven’t fixed any age for retirement. This helps in increasing the number of investing years and reducing the amount required for their retirement corpus.

However, Zubin does not want to overrule the possibility of hanging his boots at the age of 60. The confusion about such long-term goals can be addressed with a flexible financial plan. But first, let us look at the couple’s starting corpus.

Zubin earns a monthly salary of Rs 25,000 after tax. Another Rs 15,000 is added to the kitty through various incentives. Sumitha receives a stipend of Rs 8,000. Of this, Rs 3,000 is deducted as payment for a laptop. Zubin has asked us not to include the net income of Rs 5,000 in our calculations as it is spent in travelling.

Financial Pre-nups If you are planning to get married like Zubin and Sumitha, it is important that you have a new financial plan. Here are some tips: Review insurance cover: The era of zero responsibilities is over. If it is not your spouse, then it could be your parents who could be dependent on your income. So increase your life insurance cover. It won’t hurt to buy a health insurance plan worth a couple of lakhs too. Frame your financial goals: Work out your financial goals and the amount you need to save for each of these. Reduce your debts: It is best to start without any financial liabilities. But if there is a car or a personal loan you are repaying, bring it to the table to help decide about future debts. Make a budget: There are too many new expenses on the anvil. Sit with your partner to decide where you want to spend and how much. Make a budget and stick to it. Decide on managing the finances: Do you want to operate separate accounts or a joint account? Who will take care of the expenses? Who will invest and where? Structure your finances to allow for maximum mileage from a combined income and ensure that there is financial freedom for both. Decide how to distribute the financial errands: Identify each person’s strengths, availability of time and other responsibilities. Then assign financial tasks accordingly.

Currently, Zubin pegs his expenses at about Rs 9,000 a month. After marriage, he estimates that it will go up by another Rs 3,000—a reasonable 30% of his income. This means that the couple will have a monthly investible surplus of about Rs 28,000 till 2010 when Sumitha starts working. Her income will shore up the surplus by at least Rs 25,000.

Eight months ago, Zubin started investing in equities through systematic investment plans (SIPs) of Rs 4,000 in three mutual funds. He has stacked up Rs 45,000 in six other funds through lump-sum payments. The recent downturn in the market has inspired many newbies to try their hands at bottom-fishing for stocks. Zubin has also been struck by the bug and has invested Rs 15,000 in the shares of ICICI Bank, Adlabs, Reliance Petroleum and Reliance Industries.

The thrust of the couple’s infant portfolio is on the mark—equities. Zubin has stayed away from debt instruments except for a fixed deposit of Rs 25,000. There is also a recurring monthly deposit of Rs 2,000, which Zubin started on his mother’s insistence. She believes that some money should be invested in ultra-safe financial products.

It is sound advice. But Zubin and Sumitha are close to the end of the golden period of their high-risk appetite. As they grow older and their responsibilities increase, the couple’s risk appetite will dip. Hence, focusing on equities for the next few years is a good idea.

The catch is that the equity instruments should be relatively safe. Topping the list of these products are equity diversified funds. Zubin has already invested in nine such funds. We cannot call it a bloated portfolio, but the choice of funds is not appropriate for someone with the risk appetite and investment acumen of Zubin. Sector-specific funds like HDFC Infrastructure are best for investors who have a firm understanding of the sector and can time their entry and exit according to the sector’s growth curve. Hence, Iris suggests that he exit this fund (see Streamlining Funds). Reliance Natural Resources and Reliance Diversified Power also need to be out for the same reason.

Instead of distributing investments in specific sectors, Zubin should start SIPs in diversified funds such as HDFC Top 200. Balanced funds like HDFC Prudence are also suitable as they provide more stability due to their debt exposure.

Though it seems very tempting, Iris suggests that Zubin and Sumitha stay away from direct equity till they have read up more on them. Blue-chip stocks are available at very good bargains right now, but it is not a sufficient reason to go shopping for them. The stocks must fit into the overall financial plan. For instance, a stock that will give good returns over a 10-year horizon may not be a good bet if you intend to use this money after four years. Also, the 52-week high and low prices, used by Zubin as a valuation tool, are not adequate if they are not supported by other information.

Streamlining Funds Zubin’s fund collection is not suitable to his risk profile and investing acumen. Here’s how he should consolidate his fund kitty:
Name of the fund	% of fund	Portfolio recommended action
Birla Sun Life TaxPlan	14.7	Stay invested for 3 years
DSPML T.I.G.E.R	14.1	Continue with SIP
DSPML Taxsaver	10.1	Stay invested for 3 years
DSPML World Gold	7.8	Sell
HDFC Infrastructure	7.9	Sell
ICICI Pru Fusion S-III	8.6	Stay invested for 3 years
Principal Personal Taxsaver	5.7	Stay invested for 3 years
Reliance Diversified Power	15.4	Sell, stop SIP
Reliance Natural Resources	15.6	Sell, stop SIP
Choose from these funds to start new SIPs from the surplus: HDFC Top 200, DSPML Balanced, HDFC Prudence
Invest in a mid-cap fund like Reliance Growth for accelerated returns, but this should be low in the priority list. From these funds, choose the best-performing large- or mid-cap equity diversified fund to build a nest egg.

According to the recommended asset allocation, Zubin and Sumitha should invest 35% of their assets in debt. This can be easily achieved through the recurring deposit and the debt component of balanced funds.

Zubin has his own house in Belgaum and is in no hurry to invest in real estate. But as the couple’s income rises, it may be a good idea to keep an eye out for investment options in property. This will diversify their investments and also boost asset creation.

Sumitha will receive a lump sum of Rs 80,000 at the end of her course. We suggest that she invest the amount in two or three equity mutual funds from our recommendation list. This investment should be staggered over a couple of months to reduce the vulnerability to market risk.

Regarding insurance, Iris suggests that Zubin back out of the Ulip that he bought early this year. The policy covers him for Rs 7 lakh at the annual cost of Rs 25,000. This is very expensive. Moreover, Zubin does not know how to make optimum use of the facilities of a Ulip. He also admits to being in the dark about the high upfront charges of the policy. Hence, it makes better sense to bear the loss of his first premium and not to compound the mistake.

As both Zubin and Sumitha are working, there is no immediate need for an insurance policy. But considering that they will have dependants when they have children, the couple can opt for a term policy of Rs 25 lakh. The annual premium outgo for this will be about Rs 5,700.

Even when their surplus swells, the couple can stick to this plan with a minor tweaking in asset allocation. We wish them a financially secure future.

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

Srinivas Ganapathi, 39
Financial dependants: Two

What we diagnosed
» Portfolio spread across all asset classes, except real estate.
» Concentrated debt investments in the National Savings Certificates (NSCs) and Public Provident Fund (PPF).

What we prescribed
» Sell direct equity and plough back investments in mutual funds.
» Don’t add new funds to the portfolio. Exit Sundaram BNP Paribas Growth fund and invest in DSPML Opportunities.
» Buy a term plan of Rs 10 lakh.
» Consider fixed maturity plans for debt.

What he did
» Exited all holdings in direct equities, except Dabur.
» Exited Franklin India Prima fund.
» Increased all his SIPs from Rs 1,000 to Rs 2,000.

What he didn’t
» Increase investment in DSPML Opportunities fund.
» Buy a term plan as the Navy provided him with a life cover of Rs 30 lakh.

Ganapathi should continue investing in mutual funds to optimise returns.

"Contrary to your advice, I bought the shares of Bhel and REC as I thought their order books were sound."