Let your money work more

The monthly investment required to meet the goals of Raipur-based Thakur is higher than his current monthly income. So he must maximise the earning potential of his surplus.

Print Edition: October 16, 2008

Manoj Kumar Thakur with family
Name: Manoj Kumar Thakur

Age: 38 Years

Monthly Income: Rs 45,000 (Post Tax)

Financial Dependents: Three (Wife, Son And Daughter)

Walk into any office canteen and you’re bound to think that the young, urban Indian is a very aware investor. The conversation invariably steers towards market performance. Colleagues exchange stock-picking tips or sob stories of how a jet-set stock halved in value. They debate the future of interest rates, and hence, the impact on their EMIs.

One such representative of this breed of ‘aware and active’ investors is 38-year-old Manoj Kumar Thakur, who works as a senior manager in a premier cement company. It’s easy to catch him discussing the valuation of an IT stock. After all, he boasts a portfolio, which has 95% of his investment in equities through a collection of 17 stocks and 14 mutual funds. Not to forget three Ulips, which have an equity to debt ratio of 60:40.

So all these people, including Thakur, must be in a robust financial condition, right? Not really. Having analysed Thakur’s portfolio in detail, we can say with conviction that it is far from healthy.

To give you a sneak preview, the monthly investment required to meet his goals is 71.6% more than his current monthly income. If his friends, colleagues and other ‘aware’ investors have a similar investing style, their finances may well be in trouble too.

What is the problem? Mostly, these people are ignoring the basics of financial planning. Thakur has made the same mistake. His monthly income is Rs 45,000 after tax. Of this, he spends about Rs 15,000, or 33% of the take-home salary.

This is a small proportion for a family with two children in the 8-12-year bracket. On rechecking, we discovered that this figure did not include the children’s school fees and other annual expenses. Thakur does not average out expenses and, consequently, is unable to give us his average monthly surplus.

After clarifying with him, we concluded that Thakur spends Rs 22,000 a month. An additional Rs 3,625 is skimmed off by a car loan, whose outstanding amount is Rs 80,000. The interest rate of 8.5% is low, so Thakur can continue with it.

As he is a mining engineer, Thakur will be provided accommodation by his company throughout his career. This is why he plans to invest in a house when he approaches retirement. This is not the best strategy, but Iris thinks it works for him as a smaller time horizon will require a high investment.

For 15 years, Thakur’s investment was driven by tax-saving. He bought four money-back policies, one endowment policy and a pension plan, which collectively cover him for Rs 5.5 lakh. The annual premium adds up to about Rs 35,000. These plans act less as insurance and more as a debt investment. In addition, Thakur has invested Rs 2.62 lakh in bonds, fixed deposits, Public Provident Fund and National Savings Certificates.

The better approach
Thakur has been paying about Rs 35,000 for the past three years for a cover of Rs 5.5 lakh. Here’s how he could have used this money in a better way:
Rs 35,000
 ↓ ↓ ↓
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 portfolioRecommended action
DSPML Top 100 Equity Regular1.1Continue SIP
HDFC Top 20011.2Continue SIP
Kotak 3014.1Continue SIP
Kotak Balance3.2Exit
Kotak Opportunities9.6Exit
Magnum Balanced3.7Exit
Magnum COMMA11.2Exit
Magnum Contra6.9Exit
Magnum Taxgain13.7Locked in
Reliance Diversified Power Sector7.2Exit
Reliance Growth3.2Continue SIP
Sundaram Paribas Select Focus10.2Exit
Sundaram Paribas Taxsaver3.5Locked in
Tata Infrastructure1.1Exit


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.

Devendra Nevgi
Devendra Nevgi

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.

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