She is near the end of the first stage of life cycle investing. The glorious combination of high income, no responsibilities and strong power of compounding is nearly over. The good news is that 29-year-old Jasneet Bindra hasn’t squandered away the time. Starting with small investments when her income was low, this assistant general manager in a media company has built financial assets worth about Rs 29 lakh. This effort is commendable.
Taking no credit away from her, this was the easiest time for financial planning. All that was required was disciplined investments in high-return investments to exploit her high risk appetite. But now Bindra is at the threshold of a significant change. Her parents will retire in a couple of years and will be at least partially dependent on her. Plus, marriage is on the cards. So her responsibilities will rise and so will expenses. How can she best leverage these years to add more meat to her portfolio?
What should be her strategy so that it is flexible enough to accommodate changes in the next few years? We will address Bindra’s concerns, but first a look at her current assets. Bindra earns Rs 90,000 a month post tax. Of this she spends nearly Rs 20,000—a reasonable 22% of her income. Like most investors, she invests in spurts. This means that unless she has made a lump sum investment, her monthly surplus is a handsome Rs 70,000.
Early in her career, Bindra concentrated on building a debt cushion. She now has Rs 12.5 lakh invested in Provident Fund, National Savings Certificates, bonds, etc. In 2006, Bindra ventured into equities through mutual funds. Since then her fund corpus has grown to about Rs 5 lakh. She has invested in seven funds including two equity-linked savings schemes (ELSS), a gold exchange traded fund and equity diversified funds. An aggressive investor, Bindra isn’t shy of direct equities. She has bought stocks of 20 companies including Bharti Airtel, ICICI Bank, etc.
For insurance, Bindra bought an endowment policy which covers her for Rs 5 lakh. Annual premium is Rs 24,000. Our first suggestion is to start investing via systematic investment plans (SIPs). This way, her money will not idle between lump sum investments in a savings bank account that earns 3.5%—nearly half of the current inflation rate. For making the best of her current high risk appetite, she should funnel all investments in equities. Her debt cushion is sufficient and Bindra can avoid further investments in them for a few years.
Reallocating your assets
Bindra will have to tweak her asset allocation in the coming years. Here is when, why and how you should rejig your portfolio:
WHEN Change in the value of investments
WHY It changes the asset allocation to more risky (if stock prices rise) or more conservative (if they fall)
HOW If equities shoot up, sell some or buy more debt. If they crash, buy more stocks. This way, you sell at highs and buy at lows
WHEN Change in your circumstances
WHY Your risk appetite does not remain constant. For instance, at 25 you can allocate 90% investments to equities which may drop to 65% at age 35
HOW Best done gradually. Invest more in the asset class which should have higher proportion in the portfolio. Alternatively, swap pre-existing investments
Also, to leave room for manouevering her investments, Bindra should avoid instruments which have a long lock-in period. Within mutual funds, Bindra should invest Rs 30,000 a month in an equity-oriented balanced fund. Bindra plans to buy a house in the next 3-5 years and requires Rs 25-30 lakh for the down payment (see facing page for goals). Investing in a balanced fund will ensure that her investments grow briskly but are somewhat secure. Balanced funds have a larger debt component and within their equity investments they focus more on large-cap stocks.
Hence, they are safer than a pure equity fund. Iris recommends investing in HDFC Prudence. Bindra should also start an SIP in an equity diversified fund that invests in large-cap stocks. This is simply for accelerating the growth of her portfolio. She can choose either HDFC Growth or Franklin India Bluechip fund. Until she takes the home loan, Bindra should invest in an ELSS for saving tax. A good option is to start an SIP in ICICI Prudential Tax Plan of the required amount. The balance should be allocated to the the large-cap fund with a long-term investment. As her income rises, Bindra can increase contribution to this fund.
Bindra has a collection of good stocks. Yet the portfolio has underperformed the index. One reason is that her investments do not follow a strategy. Moreover the stocks portfolio is unbalanced with a high exposure to the financial services sector. Bindra must read up more about direct equity and formulate a plan according to her risk appetite and goals. She can consult a financial planner for advice.
Regarding insurance, Bindra has obviously picked an expensive plan. She bought it in 2002. Since three premiums have been paid, she can either convert the policy into paid up or surrender it. We suggest that she increase her insurance cover only after marriage. In the meanwhile, she could buy a family floater health insurance policy of about Rs 5 lakh that will cover the medical expenses of her parents.
Bindra wants to know whether her estimation of a Rs 10-crore retirement corpus is accurate. This is difficult to say right now as marriage will change her financial situation drastically. But going by her current expense level, Iris estimates that she requires a corpus of Rs 3.5 crore.