Unnecessary complications

Hyderabad-based Shivanand Yalsangi must overhaul his investment strategy and increase monthly investments to meet his financial goals.

     Print Edition: April 17, 2008

Shivanand with family
Name: Shivanand Yalsangi (centre) with family
Age: 52 years
Monthly income: Rs 39,000 (post-tax)
Financial dependents: Three
Click here to see Yalsangi's complete portfolio analysis
He has 16 mutual funds including six equitylinked savings schemes (ELSS). He pays an annual premium of about Rs 1.2 lakh for 13 insurance policies that covers him for only Rs 13.2 lakh. His monthly surplus is only Rs 6,065 when the amount required to meet his goals is close to Rs 90,000 a month. But the biggest financial worry for Shivanand Yalsangi is lack of time. At 52, this manager with a public sector bank has only eight years before he retires. And all long-term financial goals need to be fulfilled (read funded) within this period.

“I am worried about the future. How should I plan my savings to avoid a financial crunch?” asks Yalsangi. It is a question that ought to have been asked at least a decade ago. But Yalsangi began investing seriously only in 2001. He cites his siblings’ marriage as the reason for this very late start. However, even small savings accumulated over time would have contributed a hefty chunk to his corpus. There are many such lessons from the flaws in Yalsangi’s investment strategy. But before we put his finances on the fast track to recovery let’s take a look at his current assets.

Yalsangi earns Rs 35,000 a month post-tax. Rent from his Pune apartment adds another Rs 4,000. Routine monthly expenses are Rs 10,000. An additional Rs 12,600 is skimmed off by his home and car loan EMIs. On an average, insurance premiums gobble up nearly Rs 10,335 a month. This leaves a surplus of Rs 6,065.

His investments are distributed across all asset classes. He owns an apartment in Pune currently valued at Rs 10 lakh. Last October, Yalsangi bought a two-bedroom apartment in Hyderabad for Rs 18 lakh. A home loan financed Rs 7.5 lakh of the cost. The loan tenure is seven years and three months. It is a wise decision to close the loan before his retirement.

About Rs 3 lakh invested in fixed deposits, bonds and provident funds give him a debt cushion of his portfolio. He has invested about Rs 4.5 lakh in 16 mutual funds. “I want to increase mutual fund investments and so keep on adding more funds to my portfolio,” says Yalsangi. This is a common mistake among investors. Too many funds are difficult to manage and do not necessarily improve diversification of your portfolio.

Bought during the equity boom before the Harshad Mehta scam hit the markets, Yalsangi has a collection of penny stocks like DR Industries and Ojas Technichem that have hardly any value. The only two scrips bought later are Reliance Petroleum and Fortis Healthcare. Yalsangi has gone overboard with insurance too. He has bought four endowment policies, five money back schemes, a pension plan and three Ulips.

Property as investment

Yalsangi has a flawed investment strategy. But investing in property is a wise move. Here’s how he can leverage it to add to his post retirement income:

Keep it on rent: Ensures monthly income. He should invest in improving his property to hike rent

Reverse mortgage: He can retain ownership of property while enjoying monthly income. Possible only for the house he occupies
To squeeze out more funds for investments, let us first prune his insurance policies. We suggest Yalsangi discontinue payments for the Ulips after this year. Ulips are an investment-cum-insurance instrument. However, Yalsangi bought them in 2005 for insurance cover alone. The first three years of this product are cost inefficient. But after this period, they closely resemble a mutual fund with the advantage of some free switches between debt and equity or a combination in a year.

Considering Yalsangi’s investment acumen, it is best that he stops paying premiums after this year when three installments will be over. This will free about Rs 84,000 a year which should be invested in mutual funds. The remaining corpus will provide him some insurance cover for a few years.

We suggest Yalsangi convert all money back policies to fully paid-up except those that mature before 2012. In such a short time, the benefits of a paid-up policy are not much but this might ease his cash flow given that heavy expenses are lined-up in the next few years. He should retain the Asha Deep policy as it covers critical illness too. He should buy health insurance of Rs 2 lakh for himself and his wife. The annual premium will be around Rs 6,000. A term plan of Rs 10 lakh till he retires should provide adequate life cover. Annual premium will be about Rs 9,000.

These moves will add about Rs 8,000 to his monthly surplus. Yalsangi should invest the entire amount in a combination of equity diversified, tax saving and balanced funds. He should consolidate ELSS investments in HDFC Taxsaver and Franklin India Taxshield. Among the nine non-ELSS funds, six are sectoral funds. These are very risky. We suggest he exit such funds retaining only those which have performed consistently well like UTI Energy and Tata Infrastructure. Instead he can invest in a balanced fund like HDFC Prudence and equity diversified funds like Reliance Vision and HDFC Equity. For efficient management, he should not have more than five to six funds in his portfolio. All fund investments should be via systematic investment plans (SIPs) to ensure regular savings.

Regarding stocks, it is best that Yalsangi sells all scrips and reinvest the amount in mutual funds. Despite these changes, Yalsangi will not be able to meet all his financial goals. He should prioritise them and downsize some goals.

At his age, retirement is a big concern for Yalsangi. The strategy explained above should accelerate his corpus growth. To maintain his current living standard, Yalsangi requires a corpus of Rs 40 lakh. As a government employee, he is entitled to pension but Yalsangi has opted for a one-time payment of Rs 20 lakh. Yalsangi must invest the amount in a balanced fund, post office monthly income scheme and senior citizens plan for regular monthly income. The rent from his Pune flat should add another Rs 8,000 (assuming a 10% annual increase). He can also sell the property and reinvest the proceeds in the instruments mentioned above. Reverse mortgage of the house he is living could add to his income from property.

While restructuring his portfolio, Yalsangi may face some difficulty. For a review of his progress as well as solutions to problems that may arise, he can write to the portfolio doctor again after a few months.

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