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Just goals, no strategy

Mumbai-based Ashfaque Ahamed must re-strategise his investments for achieving his financial goals. Read why and how.

Print Edition: February 21, 2008

Ashfaque Ahamed with family
Ashfaque Ahamed with family
Age:
34 years
Monthly income: Rs 36,000 (post-tax)
Financial dependents: Three

CLICK HERE TO VIEW THEIR FINANCIAL ANALYSIS

What if your total monthly salary is 70% of the amount you must invest for meeting all your financial goals? The most likely reaction— panic. But it needn’t be. That’s what we want to assure 34-year-old Ashfaque Ahamed. Though this is his chief financial ailment, the doctor has remedies.

There are three ways to deal with the problem. One is to try and increase income. While this may be possible to an extent, expecting a drastic jump is unrealistic. Aggressive investments in equities is another option. The third, not-so preferable solution is to down size goals. We suggest that Ahamed, a member of the enterprise resource planning team with Bharat Petroleum, attempt to partly accomplish all three. Ahamed earns Rs 26,000 a month (post-tax and deductions).

The rent from his apartment in Noida adds another Rs 10,000 to his income. Routine monthly expenses are Rs 17,000—nearly 50% of his earnings. He has taken a housing and a car loan of Rs 12 lakh and Rs 2 lakh respectively. Since the loans are subsidised by his employers, the rates are nominal (5.5% for home loan and 4% for car loan). The total EMI of Rs 9,000 is deducted from his gross salary. The chunkiest part of Ahamed’s portfolio is property.

He bought a three-bedroom apartment in Noida for Rs 21.5 lakh. This was in 2002, when the real estate boom had just begun. Since then, the value of the apartment has appreciated sharply and is now worth about Rs 60 lakh. A tidy sum has been allocated to debt instruments. Total investments in Public Provident Fund, provident fund and National Savings Certificates is Rs 2.7 lakh. His exposure to equities is only through mutual funds.

He began investing in them since late 2007 and has built a fund portfolio of Rs 1.32 lakh. All incremental investments are through systematic investment plans (SIPs) of Rs 1,000 each in seven mutual funds. He has also invested lump sums in five other equity funds. For insurance, Ahamed has bought six endowment plans that provide a life cover of Rs 8 lakh. The premium of two of these is deducted from his salary—Rs 2,300 a month).

Why equity diversified funds
The annual premium outgo of the other four adds up to Rs 50,000. Ahamed realises that he has blundered with insurance. “These endowment plans are very expensive. Plus they do not give me adequate life cover,” he laments. The good part is that he has already stopped paying the premiums for these four plans after the first year. Though he will lose Rs 50,000, he should now withdraw the policies and switch to a term plan of about Rs 50 lakh for 20 years.

Annual premium will be nearly Rs 20,000. After the inventory of his corpus, let’s calculate the cost of Ahamed’s financial goals. As cautioned earlier, on first glance it might seem impossible to achieve. But don’t jump to conclusions. To meet all his short- and longterm goals, Ahamed must invest about Rs 53,000 a month.

This does not include the expenses of the Haj trip of his parents which Myiris suggests should be funded by withdrawing his provident fund contributions. Ahamed’s cash flow generates a surplus of Rs 12,000 a month. Going back to the three-pronged strategy described in the beginning of the analysis, he should try and curtail expenditure. But we do not think it is feasible.

Ahamed is in that stage of his life where expenses will only increase as his children grow up. Hence we suggest that he try to expand his skills and accelerate career growth. This will increase income and hence the investible surplus. Ahamed should also try to supplement his pay cheque without compromising on his regular job (see profiles of such people in My Idea). Meanwhile, Rs 12,000 must be ploughed into equities for maximising returns.

His current portfolio has too many mutual funds. Value Research suggests that he consolidate all investments in SIPs of four funds—SBI Magnum Taxgain, Kotak 30, HDFC Prudence and Sundaram Select Mid Cap. Avoid investing in lump sums but stagger investments. This averages out returns and reduces risk. His recent picks like Reliance Diversified Power fund indicates that Ahamed chases recent performance. Always invest in funds with a good track record.

Also, he shouldn’t bet heavily on sectoral funds. Instead stick to equity diversified funds. Sectoral funds are more risky and hence not viable for Ahamed who is struggling to meet his goals. However, even after following the above steps, down sizing some goals might be unavoidable. For instance, Ahamed may want to reduce expenditure on his daughters’ marriage so that the required monthly investments come down.

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