Fund Talk

I am a 42-year old public sector employee drawing Rs 20,000 a month without a pension facility. I have a son and daughter aged 11 and 6 years respectively. Presently I am able to save about Rs 5,000 a month from my salary. I hold Rs 5,00,000- in the form of fixed deposits in banks. I am contributing the following sums by way of monthly systematic investments (SIP) in the following mutual funds.

1) Birla Sun Life Dividend Yield Plus - Growth- Rs 8000.

2) ICICI Focussed Bluechip Equity - Growth- Rs 5000.

3) IDFC Premier Equity Plan B - Growth – Rs 6000.

4) IDFC Small and Midcap - Growth- Rs 2000 per.

I opened a sweep account in HDFC Bank for an amount of Rs 5,00,000 to be made use of for the above SIPs. The SIPs were opened 4 months ago for a period of 5 yeaRs Do let me know if the funds I chose are good. Also please let me know if my portfolio strategy is right to reach a sum of Rs 1 crore by the time I retire?

M.C.S. Raju

Tirupati

You are investing too much of your savings in equity funds. Your four SIPs put together add up to Rs 21,000 per month. That is higher than the total monthly salary that you are earning. You may be able to afford the SIPs you mentioned for about two years by using up your balance of Rs 500,000 in HDFC Bank, but how will you continue with the instalments after that?

This is why, before we come to the choice of equity funds for you, we think you need to put a basic financial plan in place. Budgeting for retirement is a good move. However, you may need to save up towards other goals too in the intervening period - the education of both your children, possible emergencies for you and your family and other expenditures that may crop up before you retire at 60.

That is why even if you are targeting a Rs 1 crore corpus you cannot afford to have a 100 per cent equity portfolio. Your equity investments can suffer big swings in the short term and you may find it difficult to withdraw money from them at short notice. Therefore, before you divert your surpluses entirely into equity funds, we suggest that you set aside a portion of your savings towards emergencies. Your balance of Rs 5 lakh in HDFC Bank should be used for this purpose and not for funding your SIPs.

* Move Rs 1.2 lakh from your savings account into a fixed deposit that earns you 9 per cent or more. Lock into five-year deposits now, while the rates on offer are high. Don't use this money unless you come up against an emergency. This Rs 1.20 lakh covers six months of your gross salary. As and when your salary increases, do add to this emergency fund.

* Invest the remaining Rs 3.80 lakh in two Balanced Funds- HDFC Prudence and DSP Black Rock Balanced Fund. These funds may be able to generate a 15 per cent return with limited risk. These investments are likely to grow to about Rs 12 lakh in 8 years at an assumed 15 per cent return. We hope this will come in handy for your children's education.

* Coming to the Rs 1 crore corpus that you hope to have by retirement, that will require you to invest another Rs 9,500 per month in SIPs until you retire, in equity funds. However, as you work in a public sector company, we assume that you must be making a provident fund contribution from your salary every month. That will take care of part of your retirement needs.

Assuming that you contribute Rs 1500/month over 30 years of service and the provident fund balance earns 8 per cent a year, you will be able to accumulate Rs 22.50 lakh by the time you are 60. This will leave you with a shortfall of Rs 77.50 lakh that you will need to build. Now, calculations show that an investment of Rs 7000 per month in SIPs over the next 18 years will get you to that sum if equity funds deliver a 15 per cent return. Therefore, Rs 7000/month is the net sum you need to save in order to get to the targeted corpus of Rs 1 crore by retirement.

Given that you would be putting a large chunk of your savings into equity funds, we would suggest you stay with the most conservative options in the equity space. This cannot completely protect you from short-term erosion in your portfolio due to corrective or bear phases in the stock market. However, it can reduce the extent of losses that you face in an adverse situation.

Keeping the above in mind, we think funds such as IDFC Small and Midcap and IDFC Premier Equity (though good funds in their category) are not ideal fits for your portfolio. Instead of the funds you have listed, we suggest putting Rs 3,000 per month each in HDFC Top 200 and Birla Dividend Yield Plus and Rs 2,000 in FT India Dynamic PE Ratio Fund. Don't forget to check back on your portfolio at least twice a year to review your funds.

Queries may be e-mailed to >mf@thehindu.co.in , or sent by post to

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