He has all the makings of a successful investor—an inquisitive mind, perseverance, a long-term perspective and good saving habits. The fact that he has started investing early only proves that he can put these qualities to practice. At 25, U.N. Subhash is on a roll. Married with a 10-month-old daughter, this business development manager is every financial planner’s delight—a thinking investor.
To begin with, Subhash diligently saves about one third of his monthly income of Rs 38,000. Not onto the EMI bandwagon except for a personal loan of Rs 1.2 lakh, he has understood the wisdom of thrift well. Just one year into investing, Subhash has clear financial goals—“I hope to build a corpus of Rs 3-5 crore in the next 15 years through regular investments,” he says.
The sole breadwinner of the family, he has bought an endowment insurance policy worth Rs 2 lakh. His investments are distributed across all asset classes except real estate since he is currently living in his parents’ house.
Just beginning to toy with equity, Subhash has taken the SIP route to invest in a handful of mutual funds like Reliance Growth Fund, Reliance Vision Fund and Fidelity Equity Fund apart from picking a solitary Aviva Ulip. The only direct stock holding in his kitty are 100 shares of UCO Bank.
Subhash has chosen bonds worth Rs 25,000 to form the debt component of his portfolio. He seems to befond of gold and has invested about Rs 1.5 lakh in gold coins.
We endorse Subhash’s approach to financial planning. The benefits of starting early and diversifying investments cannot be emphasised enough. But there are a few weak areas in his portfolio that need immediate attention.
The biggest flaw is inadequate insurance cover. Considering that his spouse is dependent upon him, the sum assured of Rs 2 lakh is very small. His monthly household expenses are Rs 25,000. Should something happen to Subhash, his current sum assured would not provide for even a year’s expenses. Hence, he should go for a term insurance policy of at least Rs 20 lakh.
A medical insurance is essential for every family. Since Subhash is young, he will be able to buy a medical cover at a cheaper price now. Floater plans that include all members of the family are ideal for the purpose. Such a plan with a
cover of about Rs 4 lakh will be adequate for his family.
Subhash is in a dilemma over the Aviva Ulip that he bought in 2005. The policy is maturing in a few years and given the high costs involved, he wants to exit and invest the amount in pure mutual funds. We have always recommended that insurance and investments are best kept separate.
Also, Ulips involve very high costs in the initial years. In the first three years, up to 30% of the premium paid goes into charges and only 70% gets invested. But for Subhash, this pain period is almost over. From now on, the charges on the Ulip will be as much as in any mutual fund.
Having paid high charges during the lock-in period, he should now try and utilise the benefits of the Ulip. For a proactive investor, Ulips allow seamless and free switches from equity to debt and vice versa several times a year. What’s more, the profits from such switching is tax free. Hence, we think it would be a good bet for him to remain invested in the Ulip. (For details on how to make the most of investments in Ulips, read our story “Making Most of Ulips”, 22 February, at www.moneytoday. in.)
Unless he plans to buy shares of more companies, Subhash should sell the 100 UCO Bank shares he holds and invest the proceeds in a good mutual fund.
Since he is interested in gold, investing through gold exchange traded funds (GETFs) is a good option. With a brokerage fee of 0.5%, they are cost effective compared to physical gold which involves making charges of 5-10% of the weight.
The minimum lot is one unit, which is equivalent to 1 gram of the precious metal. Hence he can accumulate units over time and reap the benefits of rupee cost averaging. The units can be redeemed either from the fund directly or from the market.
Also, GETFs enjoy tax benefits unavailable to investments in physical gold. GETF units held for more than one year qualify for long-term capital gains at 20%, whereas the holding period in physical form has to be three years to qualify for longterm capital gains.
For less than three years, the gains made on sale of physical gold are taxed at 30%. Gold held in paper form is not liable for wealth tax either.
Subhash’s funds selection is fine. However, DSPML Tax Saver is a new fund and could have been avoided for the time being. With this composition, his portfolio will tend to be skewed towards mid- and small-caps but given his long-term horizon that should not be a problem. If he can ride through the intermittent volatility, these investments should prove to be rewarding.
Regarding the new funds he wants to add, Subhash can choose one out of HDFC Taxsaver or HDFC LT Advantage, and one out of HDFC Equity or HDFC Top 200. Adding all four will serve little purpose other than increasing the fund count.