Pune-based Talwalkars have invested in so many products that it is impossible for them to manage their finances or plan accurately.
This portfolio invokes the feeling that we have been too harsh in the past. After all 20-odd mutual funds and stocks don’t seem daunting enough when you confront a basket comprising 60 funds and 50 stocks. Which is precisely the size of Anand Talwalkar’s portfolio. More shockingly, this distribution has not resulted in any real diversification. For instance, 47% of his stock portfolio is made of just two scrips, SBI and Reliance Industries. Why did he binge on so many funds?
“I realise that the investments are spread too thinly. Initially, I followed the advice of a friend, who claimed these funds were good. Most of them have actually given me reasonable returns,” says the 48-year-old chief manager in a public sector company.
Talwalkar has fallen for the most common and deadly temptation: to bag everything that promises double-digit returns. We can’t stress this enough—a financial plan is a selection of the products most suitable for an individual’s financial needs. It is not an accumulation of all that is labelled the best. Let’s see if we can seek financial redemption for Talwalkar.
Talwalkar’s monthly pay cheque is Rs 49,000. His wife, Arundhati, 43, also works for a PSU and brings home Rs 29,000 a month. At about Rs 23,000, the monthly expenses of the couple are a reasonable 29% of the combined income. The Talwalkars extend the principle of plenty to their loans too: they are repaying two home loans, a car and a personal loan. The collective EMIs are Rs 22,000. The couple also has a basket of 12 insurance policies, comprising two term plans, two money-back polices, two endowment policies, three Ulips, a pension plan, a single-premium home loan cover and one group insurance policy, which provide a cover of Rs 4.9 lakh for Anand and Rs 28.25 lakh for Arundhati. The average monthly premium is Rs 7,106. An additional Rs 12,500 is diverted to SIPs in six funds. After subtracting the outflow, the couple’s cash flow generates a surplus of Rs 13,394.
Unfortunately, there is no scope for increasing the surplus significantly. Iris does not want the Talwalkars to exit any insurance policy as expensive options like the endowment and money-back plans are close to maturity and the initial pain period of the Ulips is over. In fact, as Anand is underinsured, he should pick up a term plan for the tenure equivalent to the number of years left for his daughter to start earning. This will reduce the premium, which is typically high for people of his age.
Our second option, to prepay loans, is also not viable. Anand pays only the interest for his personal loan as the principal is subsidised by his company. The car loan rate is 8%, equal to the interest earned by most debt instruments. Therefore, it will not be beneficial to withdraw money from these.
If we combine the surplus and the existing SIPs, the couple’s monthly investment will be Rs 25,894, scarily short of the required Rs 1.1 lakh. The good news is that some negotiation of goals is possible. For instance, as the Talwalkars are employed in PSUs, which offer job security, they need not build an emergency corpus, that too as large as Rs 12 lakh. At best, they can stow away three months’ expenses in a sweepin account.
Also, as both are eligible for pension, there is no need for a nest egg. The only two goals left are their daughter’s education and marriage, which will cost nearly Rs 37 lakh. Of this, about Rs 20 lakh has already been accumulated in the provident fund of the spouses (the couple shouldn’t withdraw money from their PF). Hence, they need not be intimidated by the numbers.
Now to tackle the numbers that overawed us—the couple’s equity portfolio. Iris has consolidated their investments in 16 funds. DSP Black Rock Equity, DSP T.I.G.E.R, DSP Top 100, HDFC Equity, HDFC Top 200 and HSBC India Opportunities are equity diversified funds and should form the core of the couple’s investments. This is three or four funds more than we usually suggest because the total investment is nearly Rs 22 lakh.
For saving tax, Iris has picked Franklin India Taxshield, HSBC Taxsaver, Reliance Taxsaver, Sundaram BNP Taxsaver and ICICI Pru Taxsaver. The funds that have a higher risk-reward ratio and will add zing to the portfolio are Sundaram Paribas Select Focus and Reliance Growth. Lowering the risk are three balanced funds, HDFC Prudence, HDFC Children’s Gift and ICICI Prudential Child Care fund. Iris suggests that the Talwalkars also invest in an MIP, which has a 75:25 debt-to-equity ratio. With age, the couple should increase investments in the MIP and balanced funds.
Regarding Anand’s stock collection, we have already said that it is skewed. Iris suggests that he get out of direct equity and reinvest the money in mutual funds. Otherwise, he will require professional assistance to manage the stock portfolio. In fact, given its size, the couple should use an online portfolio tracker. For the record, 20 funds are still too many.