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Not enough aggression

Panchkula-based Meenu and Amit Sharma must invest more and increase equity exposure to make full use of the power of compounding.

Print Edition: December 13, 2007

Panchkula-based Meenu and Amit Sharma must invest more and increase equity exposure to make full use of the power of compounding.

With a sound investment strategy and sizeable monthly surplus, one would expect Amit and Meenu Sharma to have a meaty portfolio. They enjoy all the financial advantages of a young, well-heeled couple — high risk appetite and no dependents.

Yet, the total value of their investments is much lower than it should have been. What went wrong? Two things—they don’t invest all that they save. And they don’t invest enough in equities. Still in their twenties, the power of compounding can work wonders on their investments—the longer they stay invested, higher will be the returns. So the few thousands idling in savings accounts will cost the Sharmas a few lakhs in the long run. It’s time to rev things up in their portfolio.

Amit and Meenu
Name: Amit (left) and Meenu Sharma
Age: 29 and 28 years
Monthly income: Rs 80,000 (post-tax)
Financial dependent: None

Click here to see their portfolio analysis

Twenty-nineyear-old regional manager, Amit, is open to risk. Meenu, a manager with an asset management company supports his view. But before we set about putting their finances in top gear, a quick look at their current investments. The Sharmas’ monthly pay packet is Rs 80,000 (post-tax).

Routine expenses skim off nearly Rs 20,000. Another Rs 13,300 goes towards the combined EMI of a personal and car loan. The couple has booked an apartment for which they pay a pre-EMI of Rs 10,000. Once they take possession of the property, tentatively in February 2008, this amount will be replaced by an EMI of nearly Rs 16,000.

Net of these expenses, the Sharmas have a handsome surplus of Rs 36,700 a month. Of this they invest Rs 13,000 in equity-linked savings schemes (ELSS) via systematic investment plans (SIPs). Their mutual fund corpus is now about Rs 5.5 lakh. Recently Amit bought stocks of Rs 1 lakh.

“I borrowed the money from Meenu with the promise of returning much more,” he says. The kitty includes stocks like Reliance Industries and Reliance Petroleum. Not very keen on debt instruments, the couple has parked only Rs 1.3 lakh in national savings certificates (NSCs) and provident fund.

“The investment in NSC was a blunder. The long lock-in period has me fretting,” says Amit. The apartment that the couple has invested in (under construction) is valued at about Rs 21 lakh. A home loan of Rs 16 lakh reduces net investment in property to about Rs 5 lakh. Jewellery worth Rs 3 lakh forms the near-cash component of their portfolio.

The couple are not heavily insured. Meenu has no life insurance while Amit has one whole life policy of Rs 3 lakh. Annual premium is Rs 13,000. The Sharmas have rightly avoided fixing any longterm goals. That should happen once they have children.

But it is always better to have a rough estimation of a retirement corpus. To maintain their current expenditure level (which is quite low), they will require a whopping Rs 5 crore at retirement. This calculation should help focus their strategy towards invest -ments that accelerate growth. In another three years the couple will require about Rs 2 lakh for furnishing their house.

This requires a monthly investment of Rs 5,000 which can easily be met from their current investments. It is the surplus of Rs 23,700 (net of all investments) which is the eyesore of their finances. So much money sitting in savings accounts and depleting in value. We suggest investing all of the Rs 23,700 in mutual funds via SIPs.

HOW TO CHOOSE A MUTUAL FUND
The Sharmas have invested in some funds on advice from friends. This can be risky. Consider the following parameters before choosing a fund:
Consistent performance: Choose a fund that has been consistently performing well over the long term (3-5 years)
Track record of AMC: Invest in a fund house that enjoys an impeccable reputation of timely service and prudent management
Scheme portfolio: Large-cap funds are slow but steady movers. Mid-cap and small-cap funds are high-risk high-return propositions. Balanced funds are low-risk low-returns
Investment horizon: If short term (6-18 months), go for debt funds. If medium term (2-3 years), it’s balanced funds. Long-term (over 3 years) go for equity funds
Cost: Besides entry and exit loads, funds also charge an annual management fee

But the couple must be careful about choosing the right funds. Already, they have too many funds (13) in their portfolio. Worse, the portfolio lacks high-quality funds— star performers which have a long track record.

Another fault in their mutual fund investments is low diversifica -tion. About 74% of total fund investments is in one asset management company (AMC)—Franklin Templeton. Of this, 48% is in a sin -gle fund—Franklin India Blue Chip. It is better to spread investments across select funds and fund houses to benefit from research ideas of different AMCs.

The Sharmas should reduce exposure in Franklin Templeton funds and invest in funds like Reliance Vision and HDFC Equity. If they want a small debt component in their portfolio, we recommend investing in balanced funds and monthly income plans (see recommended list of mutual funds).

However, they must be careful not to further bloat their portfolio. Ideally, all fund investments must be consolidated in 3-4 funds with distinct features. Amit has just started investing in direct equities.

This is consistent with our thrust on accelerating growth of their investments. But buying stocks is tricky. Amit should invest in them only if he has the three Ts: time to monitor their performance, talent to spot good stocks and the temperament to absorb big losses.

Regarding life insurance, Amit has bought a costly plan and he knows it. Also, the cover is abysmally low at Rs 3 lakh. Since the couple has no dependents they can post -pone increasing their life cover. However, they would lose out on the cost advantage of buying an insurance policy at a young age.

We suggest Amit discontinue this life insurance policy. But he should do it only after three years when the policy acquires a surrender value. In the meanwhile, Amit can buy a term insurance of Rs 20 lakh for the maximum period available. It would cost about Rs 8,000 annually. Meenu should also consider buying a term cover of Rs 5 lakh. The couple will have to review their life insurance after a few years when they have financial dependents and responsibilities increase.

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