He is not a spendthrift. He is not overleveraged. He allocates his assets well. He has bought the cheapest form of insurance (term plans) and has a fund portfolio that Iris has failed to find a fault with. Hitesh Desai, the 37-year-old assistant manager of distribution training, seems to have got it right. Yet, he might not be able to meet his goals. Why?
Iris calculates that the monthly investment required to meet his goals is about Rs 70,000. This is not a very high figure, but Desai’s takehome salary is Rs 36,000—51% of the investment required.
In finance, it is the end that makes the means good or bad. Your goal—its cost, time period and necessity—decides the investment strategy that suits it the most. While we try to increase Desai’s investment from the current Rs 8,000 a month, it will be impossible to meet the goals at his current income level.
Before we chart a course, let’s try and make the target achievable. This means we must downsize or postpone some of Desai’s goals. Obviously, this is a task he must undertake himself, but we can help by providing some leads.
For instance, Desai might want to forego his plan to retire at the age of 52 and work for at least another eight years. This will reduce the required investment for a retirement corpus. Another option is to delay the purchase of his second apartment by a couple of years or opt for a house with a lower budget.
Having brought the goals to a more realistic level, we must check if Desai is making optimum use of his current income. The routine monthly expenses are reasonable— Rs 11,000, which is 30.5% of his income. When we rechecked with Desai, it turned out that he had not included the average of one-time expenses like a holiday or gadgets. After including these, Desai’s monthly expenses increase to about Rs 13,000 a month.
In 2006, Desai bought a twobedroom apartment in Vadodara for nearly Rs 7 lakh, which is currently valued at double the amount. To finance this purchase, he took a home loan at 10% interest. The EMI is Rs 3,126 and the outstanding loan is about Rs 3 lakh.
Desai has also taken a personal loan of Rs 2 lakh to help a relative. The loan is expensive as the interest charged is about 15% and the EMI works out to Rs 5,196.
After subtracting these two EMIs, the average premium for his insurance policies and SIPs in four mutual funds, Desai’s monthly cash flow generates a surplus of Rs 5,934. Can we increase this amount?
No, not for the next few months at least. Usually, we attack expensive insurance policies to squeeze out money, but as Desai has chosen a single-premium Ulip and three term plans, this strategy does not work. The other option, to reduce EMIs by prepaying an expensive loan, is also not possible.
Even though the personal loan is an eyesore because of its high interest, Desai’s portfolio does not have enough money invested in lowreturn instruments such as bonds and fixed deposits. He has salted away only Rs 10,000 in a fixed deposit and Rs 23,000 in the Provident Fund. We do not recommend withdrawing money from equity mutual funds as they are meant for long-term goals.
Desai has two choices. He can stop the SIPs for the next few months and concentrate on prepaying the personal loan. By doing so, Desai will not invest anything for about 11 months. After this, he can invest about Rs 19,000 a month, which is a fairly good amount.
The second option is to continue investing and paying the EMI simultaneously. In this way, Desai will be able to invest about Rs 14,000 a month (adding the current surplus which shouldn’t be kept idle) for the next three years or so.
While both the strategies are feasible, only the market returns in the next three years will decide which one is better. It is, however, impossible to predict this. So, Desai should opt for the method that is more suitable to his investing discipline and his need for flexibility in cash flow.
The best place to invest is equity mutual funds. Astonishingly, this is the third mutual fund portfolio to which Iris has given a thumbs up. The reason? The presence of a combination of staple equity diversified funds such as DSP Black Rock Equity, HDFC Equity, Reliance Equity Advantage and Reliance Regular savings fund.
Isn’t there scope for duplication of exposure to stocks? Yes, but as the total number of funds is limited to 10, Iris has not advised any reshuffling in the basket.
For saving tax, Desai has chosen DSP Black Rock Tax Saver and Sundaram BNP Paribas Tax Saver. Both are sound choices as they have been performing consistently well in the past few years.
Adding zing to his portfolio are Reliance Growth, a mid-cap fund, and Sundaram BNP Paribas Select Focus, which invests in a blend of growth and value stocks. Iris endorses these choices for the purpose of investment, which is to accelerate growth of the fund basket. HDFC High Interest STP is an uncommon choice for a debt fund, but we have no complaints as long as the size of investment is limited. Iris suggests that Desai increase his SIP in HDFC Equity so that the unused surplus in his cash flow can be channelled to this fund.
However, we do not agree with Desai’s strategy of investing in funds with high beta if they are meant for a short-term goal. This means that he is willing to take more risk with such investments. A high beta indicates that the fund is more volatile than the index. If the market rises, the fund tends to rise more, and if the market tanks, the fund is likely to lose more.
Next page: Hitesh Desai's portfolio analysis