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Better late than never

Goutam Bhattacharyya started financial planning late in his career. But he can still build a reasonable portfolio by intelligent investing.

Print Edition: July 26, 2007

Goutam Bhattacharyya started financial planning late in his career. But he can still build a reasonable portfolio by intelligent investing.

The regret in his voice is almost palpable. Goutam Bhattacharyya, 44, knows he has blundered by not planning his finances. “I only hope it is not too late to build a reasonable corpus,” says the divisional engineer with Indian Railways apprehensively. Bhattacharyya’s concerns are understandable. The sole breadwinner of the family of four, his savings (net of EMIs and premium outgo) are a mere 3.2% of his income.

Naturally he has hardly built any portfolio at all. Bhattacharya spends a tidy 66% of the Rs 27,000 he earns every month; a proportion, by his own admission, much less than what it was even a few months back. A 15-year loan of Rs 4 lakh to extend his parental residence eats away Rs 4,420 every month as EMI. Nine insurance policies including three endowments, one money back and Ulip each plus four medical insurance schemes drain out an additional Rs 44,500 annually. But despite the heavy premium outflow, total sum assured is only about Rs 8 lakh.

Comfortable with parking money in debt instruments, Bhattacharyya has stashed away about Rs 2 lakh in fixed deposits, National Savings Certificates (NSCs), Public Provident Fund and bonds. Jewellery worth Rs 60,000 makes for the near-cash component of his portfolio.

Until early this year, Bhattacharyya’s equity exposure was zilch. Compelled by the sudden awareness to increase his net worth, he bought 10 stocks between March and June in an attempt to milk the boom in equity. The basket includes Bharti Airtel, Punj Lloyd, ICICI Bank and Bhel among others. But the holdings in each company are very small, ranging from six to 25 shares. IFCI is the odd one out with 150 units. Bhattacharyya explains, “I am currently in the hit and trial phase of investment planning. So these tiny holdings are an attempt to get a feel of the markets.”

Clearly, major restructuring of Bhattacharyya’s finances are in order. But first some solace. His financial condition is not as bad as it appears. A government employee, the defined pension and dearness allowance will take care of his routine expenses after retirement. This does away with the headache of scrimping for a chunky retirement corpus. Assuming that he continues to live in his father’s house which he will fully or partly inherit in future, Bhattacharyya does not need to buy a house either. Most investments are aimed at sustaining the living standards of an active career in the nonearning years too. Luckily, he can safely focus on meeting immediate needs and building a corpus for his children’s education and marriage.

Expense planning is a must. In the past few months, Bhattacharyya has heavily cut down on spending but wants to know whether he needs to reduce it further. There is no benchmark but experts suggest saving at least 30% of the take-home salary. Bhattacharyya wouldn’t be far off the mark but EMIs and premiums nearly wash out his investible surplus. In these circumstances, we highly recommend prepaying the Rs 4-lakh loan for home improvement purposes.

None of Bhattacharyya’s current investments offer him returns of 11% plus (except the net gain of his tiny stocks kitty), the current floating interest rate of the loan. It is thus advisable to get out of it and use the EMI amount for investments.

Bhattacharyya must definitely increase his exposure to equity. But even after adding up the EMI amount, the investible surplus is not enough to gain substantial returns from the markets. Rejigging his insurance kitty will do the trick. Bought primarily for tax-saving purposes, the set of nine insurance policies are very costly but do not cover him adequately. We suggest that Bhattacharyya exit all endowment and money back schemes.

Instead, he should buy a term cover of Rs 30 lakh to meet his high insurance needs. He can retain the Ulip for long-term benefits.

This restructuring reduces Bhattacharyya’s annual premium by about Rs 8,000 while increasing his cover significantly. But the best news is yet to come. The bonus and surrender value of his endowment and money back schemes will release nearly Rs 1.03 lakh, just the right amount to get started on significant equity investments.

Of this surplus, Bhattacharyya should funnel about Rs 80,000 to mutual funds via the systematic investment plan (SIP) route. Large-cap oriented funds like Franklin India Prima Plus, DSPML Top 100 Equity, HDFC Top 200 suit his risk appetite. The direct stocks basket has given him about 14.6% returns.

The stock selection is good but since Bhattacharyya is not market savvy he should book profits as soon market volatility provides a good opportunity. The profits can be reinvested in equities through mutual funds, anyday a safer bet for him.

The remaining part of this corpus could be invested in debt instruments such as fixed maturity plans FMPs) to meet planned expenses like buying a car. FMPs enjoy tax benefits that makes them a better choice over fixed deposits.

Also, Bhattacharyya has a fixed deposit maturing this year. We suggest he invest the amount in equity linked savings schemes (ELSS) to avail tax benefits under Section 80C while enjoying good returns from the equity markets.

Goutam Bhattacharyya: diagnosis and prescription

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