Name: Manoj Kumar Thakur
Age: 38 Years
Monthly Income: Rs 45,000 (Post Tax)
Financial Dependents: Three (Wife, Son And Daughter)
The better approach
|Could be paid as annual premium for a term insurance plan with a cover of about Rs 80 lakh.||Could be invested in equity diversified funds, which gave 16% annualised returns in the past 3 years.||Could be used to prepay his car loan of Rs 1.8 lakh, which was taken five years ago.|
|It would have spared him the additional expense of Rs 21,000 to increase his cover to Rs 50 lakh.||If continued, it is equal to the required investment for meeting the cost of his son’s wedding.||Would increase current surplus by Rs 3,625, which could be invested in equity funds.|
If he was focused on debt investments through most of his career, why is the invested amount so less? Thakur says that for a long time his income did not generate an investible surplus. As always, we take this explanation with a pinch of salt. However small the amount, it is wise to start investing early to multiply returns through the power of compounding.
This year is not the best time to foray into equity investments. The landslide in the markets would shake the faith of staunch equity loyalists. But Thakur is smart to realise that this is also the time for snagging good bargains.
So he has invested close to Rs 3.7 lakh in 17 stocks and 14 mutual funds. He invests in five of these funds through systematic investment plans of Rs 4,500.
By now our readers should be able to identify his biggest problem— a bloated fund portfolio. Iris has pruned it and advises Thakur to consolidate investments in six funds, including two Equity Linked Savings Schemes (ELSS), in which his investments are locked for three years.
The logic is that a smaller portfolio can be better managed. Moreover, it reduces duplication of exposure to the same companies through different funds. Doesn’t this compromise on diversification? Not really. Investing in different types of funds is a good idea only if you completely understand the fund categories. For instance, Thakur has invested in Magnum COMMA, which is focused on commodities.
Does he know enough of this market to time his entry and exit? Similarly, can he time the power sector accurately enough to understand when to exit Reliance Diversified Power? Ideally, Thakur’s investment objective and style should match those of his funds. Does he approve of the stock picks of Kotak Opportunities, which invests in a select group of industries believed to give good returns in the near future?
A vanilla equity diversified fund could give better returns than a sector fund if the particular industry has taken a beating while the rest of the market performs well. For adding a zing to his portfolio, Iris has retained Reliance Growth, which invests in high-growth midcap stocks.
Thakur’s stock kitty has chiefly large-cap companies which are safe bets. Though he claims otherwise, Thakur has been unable to diversify investments across major sectors.
Missing from his portfolio are pharma companies, banks, FMCG companies and information technology giants. This is a result of ignoring how the stocks fare in totality. A good way to remedy this flaw is to regularly review the performance of his stock kitty vis-a-vis a benchmark index. Then Thakur will realise that not all his companies are the best in their respective industries. Two good examples are IFCI and IDFC, which are not blue chips in the financial services sector.
Thakur’s collection of insurance policies acts as debt investments. Hence, he can retain most of them. Moreover, if he surrenders them now, it is likely that all his bonus benefits will be wiped out.
Making it slimmer and fitter
Thakur has a bloated mutual fund portfolio. Iris suggests that he consolidate his investments in six funds.
|Mutual fund||% of fund portfolio||Recommended action|
|DSPML Top 100 Equity Regular||1.1||Continue SIP|
|HDFC Top 200||11.2||Continue SIP|
|Kotak 30||14.1||Continue SIP|
|Magnum Taxgain||13.7||Locked in|
|Reliance Diversified Power Sector||7.2||Exit|
|Reliance Growth||3.2||Continue SIP|
|Sundaram Paribas Select Focus||10.2||Exit|
|Sundaram Paribas Taxsaver||3.5||Locked in|
However, we recommend that he exits from LIC Jeevan Surabhi as the sum assured is very small (Rs 50,000). He can stop paying the premium for Jeevan Nidhi after three years. But he must buy a term plan of Rs 50 lakh for 20 years. The annual premium will be Rs 21,000 approximately.
As for his Ulips, Iris suggests that he exit LIC Future Plus, as it has no sum assured, and ICICI Life Stage, as it is very expensive. He can continue paying the premiums for the other three Ulips for 10 years as the period of high upfront charges is nearly over. A longer investment period will help build a a sizeable corpus.
For health insurance, Iris suggests that Thakur buy a family floater plan of at least Rs 5 lakh. Despite restructuring his investments according to our recommendations, Thakur will be unable to meet all his financial goals. We suggest that he downsize some of them like his children’s wedding expenses. As his income increases, he will probably be able to close the gap for the other goals.
CEO & CIO, Quantum Mutual Fund
Consumers do a lot of homework before buying a car or a mobile phone. But when it comes to investment in stock markets, very few people spend time on research. They get information from TV channels, newspapers, brokers and friends. In fact, a quirky investor is believed to have based his research on information gathered from the bhel-puriwala close to the Bombay Stock Exchange.
It’s said that if you spend 1% of your time on research about investments daily, only 1% of your portfolio should be invested in stocks. For shortterm investors, the only research is to pray. But long-term investors can research either in ‘top-down’ or ‘bottom-up’ manner. The top-down approach is to analyse the economy and narrow down to individual stocks. The bottom-up approach is to analyse individual stocks first.
At a macro-level, sustainable real GDP growth rate (after inflation) should be tracked by every investor. The GDP growth rate determines how the economy is doing and gives a direction to the earnings of companies. It is available on the government’s Website.
The second aspect of market research is corporate earnings. Generally, a high GDP growth rate leads to high earnings, and vice versa. Flipping through the annual report and attending the annual shareholders’ meeting of a company is a vital source of information on corporate earnings.
Inflation and interest rates impact both the GDP growth rate and corporate earnings. Rising interest rates and inflation usually hurt economic growth and corporate margins. The general level of interest rates depend on those at which the government borrows, the details of which are easily available on the Internet.
Don’t hesitate to buy or rather invest in an authentic database on the economy. This small investment will help you in the long run. Finally, remember that research on the basis of historical data should always provide inferences for the future.