|Name: Suman Saha|
|Monthly income: Rs 60,000 (post tax)|
|Financial dependents: One (wife)|
Uncertainty is in the air. So we can't really be blamed if the investment strategy of Suman Saha, a 30-year-old associate director in a media management company, has us sitting on the fence. This, because we are finding it difficult to classify his financial plan as good or bad.
Saha's budgeting skills earn full marks. He is one of the very few patients to have marked his annual expenses separately and to have included them in the computation of his average monthly expenditure. But at about Rs 40,000, the expense is 66.6% of his monthly income of Rs 60,000. Obviously, this is an uncomfortable situation because Saha is yet to enter the peak stage of spending.
Similarly, we were glad to discover that Saha endorses sweep-in accounts and has parked close to Rs 75,000 in them. The euphoria was shortlived; Saha has stored about Rs 50,000 in a savings bank account. He plans to invest this money in stocks if the Sensex drops below 8,000. It's a strange decision but more about it later. By now, the point should be clear: Saha is very adept in some aspects of financial planning. In others, he is yet to master the technique.
One of the areas that needs brushing up is his monthly budget. His income incudes a variable component of about 20%. So the 67% outflow becomes 83% of the income if he gets only the fixed pay. This percentage is dangerously high. More so because this means Saha will have to forego some of his financial goals. His current cash flow generates a surplus of Rs 13,334. This falls short of the required monthly investment by a whopping Rs 1.27 lakh. That he must downsize his goals is obvious. But if Saha does not curtail his expenses, then even the prospect of meeting the trimmed down version of his goals will become remote.
What will also determine Saha's success is where he invests his savings. Saha wants to maintain an equity to debt ratio of 60:40. This is conservative compared with Iris' suggestion of a 70% exposure to equities. Saha is currently enjoying the highest risk appetite of his investing life. Therefore, we suggest that he up the ante in equities.
As usual, we suggest that he make mutual funds his core equity investment, but Saha is firmly against this advice. According to him, the current market downturn is a rare chance to invest in blue chips at very low prices. Moreover, he has a "reasonable" understanding of various stock valuation tools. So what is the problem?
Following this philosophy, Saha has bought a basket of 15 stocks for Rs 2.3 lakh, with the majority of them being large caps such as Bharti Airtel, Larsen & Toubro and Reliance Industries. He has also stopped his systematic investment plans (SIPs) in HDFC Taxsaver, ICICI Prudential Tax Plan, Magnum Contra and Magnum Global to divert the funds to stocks.
Saha's strategy, if we may call it so, is juvenile. First, it is presumptuous to believe that he is equipped to do cherry-picking simply because he understands financial jargon. If he was, then the top five stocks in his portfolio ought to have bested the Nifty BeES, which tracks the performance of the index. But only Infosys has been able to do so in a one-year period. Saha should trace the performance of his stock portfolio over many such time frames to assess his capability to score over the index or even the best equity diversified funds. If he hasn't been able to do so consistently, why should he make stocks the core of his investments?
Let's go back to his strategy of waiting till the markets tank below 8,000 to invest Rs 50,000. Saha explains that he increases the investment in stocks as the markets go down. The corollary is that when the markets go up, there will be a point when his investment in equities will be minimal. This is an attempt to time the market, a strict no-no for ordinary investors.
Saha should have a ceiling for his stock investments to reduce the vulnerability of his portfolio. As the majority of his stocks are listed on the Nifty, he can increase his investment in the Nifty BeES because it invests in all the stocks of the index and in the same proportion. This spreads the risk. Also, he can exit this investment whenever he wants.
Iris suggests that he restart his SIPs in HDFC Taxsaver and ICICI Prudential Tax Plan. As we have often said in this space, Magnum Contra and Magnum Global invest in a narrow range of stocks, which is more risky and requires sectorspecific knowledge. Hence, Saha can skip these.
His investments in Magnum Taxgain and UTI Dividend Yield can stay, but he should avoid fresh investments as this would largely duplicate his stock exposure through the other two funds.
Saha plans to buy a house in another year and estimates that the down payment would be about Rs 5 lakh for the loan. Given the short time period, he should withdraw the money from his current corpus. Saha is willing to cough up a home loan EMI of Rs 20,000 (the loan will amount to Rs 15 lakh). If he wants to do so, our advice to him to restrict his expenses becomes imperative. With this budget, Saha can hunt for property in Faridabad, Ghaziabad or Kundli in Delhi.
For the debt component of his portfolio, Saha should concentrate on fixed deposits and debt funds.
Regarding insurance, Saha has made the typical mistake of investing in a money-back plan, which offers him a cover of Rs 2 lakh at the cost of Rs 21,000 a year. As the plan is more than three years old, he can either surrender it or convert it into a paid-up policy. He also has a Ulip that covers him for Rs 60,000. The annual premium is Rs 6,000. Obviously, this is a very expensive plan, but Saha has completed the early stage of high upfront charges. Ordinarily, we would have suggested that he continue with the plan, but as his cash flow is very tight, he should stop paying the premium after the minimum term.
We also suggest that he buy a term plan of Rs 35 lakh, for which he will have to cough up an additional Rs 10,000 a year. Saha already has a term plan of Rs 15 lakh, so the two plans will provide him with adequate life cover.
Iris had totted up his insurance need as a little over Rs 1 crore on the basis of his financial goals. As we have already suggested, Saha will have to downsize them. This will automatically reduce his insurance requirement.