Personal Finance

Diversification and asset allocation hold the key

Deepesh Raghaw | Updated on March 03, 2019 Published on March 03, 2019

I am 28 years old, married and have a daughter. My post tax-income is ₹60,000 per month. I can invest about ₹20,000 per month. In addition, I contribute ₹6,000 per month to my EPF account. I invest ₹5,000 per month in PPF, too. I recently started investing.

These are my monthly investments.

Diversified fund: Franklin India Prima Plus - Direct - Growth (Franklin India Equity) - ₹6,000

Mid-cap funds: ₹3,000 each in L&T Emerging Businesses Direct Growth and Mirae Asset Emerging Bluechip - Direct Plan

Balanced fund: L&T India Prudence Direct Plan - Growth (L&T India Hybrid Fund) - ₹2,000/

PPF contribution: ₹5,000 per month

PF contribution: 6,000 per month

Term Insurance - ₹50-lakh coverage

Life Insurance for me and my wife

I have the below goals. I am aware that I am bit short on investment, and will increase the investment amount as my salary increases.

House — ₹1 crore — 25 years

Retirement — ₹5 crore — 30 years

Daughter’s education — ₹50 lakh — 20 years

Daughter’s wedding — ₹1 crore — 25 years

Could you please assess my goals and advise

If the existing funds are sufficient to meet the goals. Please recommend any fund that can diversify my portfolio.

If any change in funds is required. If yes, how to close the current fund (SWP or the entire amount in one go), and will I loose significant money as all invested funds are less than three years?

In which existing fund should I top up the contribution based on the current market situation? I can top up by ₹3,000.

Shall I open a Sukanya Samraidhi account for my two-month-daughter, or is there any loophole/restriction in this policy?

My employer provides a health cover of ₹5 lakh. Should I buy a health insurance? If yes, how much?

Please advise which fund to link with which goal and how much money to be invested in each fund.

There is no information about the existing investments. However, since you are young and new to investments, we can ignore your existing investments.

Being a new investor, there are a few things you must keep in mind. Diversification and asset allocation are extremely important. It is easy to load your portfolio with the asset class that has done well in the recent past. However, that is not a good way to build your portfolio over the long term. Adverse market movements can severely impact concentrated portfolios. Diversification will reduce risk in the portfolio.

Invest in debt products for short-term goals. Consider equity-heavy portfolios for long-term goals. For long-term goals, start with a target asset allocation. At your age, you can start with a 60:40 or 70:30 equity-debt portfolio for your long-term goals. You must also rebalance your portfolio at regular intervals. Reduce equity allocation as you move closer to the goal.

When planning for goals, do consider the impact of inflation — ₹50 lakh today is not the same as ₹50 lakh after 30 years. At inflation of 8 per cent, the purchasing power of ₹50 lakh after 30 years will be same as that of ₹5 lakh today. The impact of inflation is especially important while determining the target retirement corpus.

To begin with, you must ringfence your finances from emergencies and unplanned expenses. For this, first build up an emergency fund of about six months’ expenses in a fixed deposit or a liquid fund. Even though you have a health insurance plan of ₹5 lakh from the employer, this cover is only till retirement. Moreover, this cover will cease if you quit your job. Your new employer may not offer you the same level of coverage. You will not be covered during the break between the two jobs. Therefore, purchase a health plan for your young family. This plan will cost around ₹12,000 per annum.

You need to purchase a term insurance plan, too. You can purchase a life cover for about 15 times your annual income, i.e., about ₹1 crore. As you already have a term cover of ₹50 lakh, you can purchase an additional ₹50-lakh cover. This will cost about ₹7,200 per annum.

You need to invest about ₹47,000 per month. You can invest ₹20,000 per month, in addition to the ₹11,000 you are investing in EPF and PPF. An additional ₹1,600 per month will go towards insurance. Clearly, you are short on what you need to invest. Increase the allocation when your cashflows permit. Over the years, your income will rise and this may provide you with an opportunity to invest more. At the same time, expenses will also rise for your family. You must figure out a way to invest more.

You have a stable multi-cap fund (Franklin India Equity), a balanced fund (L&T Hybrid Equity), a large- and mid-cap (Mirae Fund) and a small-cap fund (L&T Emerging Business).

You can continue with the same funds and earmark the existing funds for your goals.

Retirement

L&T Prudence: ₹4,000 per month

Franklin Prima Plus: ₹4,000 per month

EPF: ₹6,000 per month

PPF: ₹5,000 per month

House purchase

Mirae Asset Emerging Bluechip: ₹4,400 per month

Daughter’s education and wedding

L&T Emerging Businesses: ₹3,000 per month

SSY: ₹1,000 per month

Emergency fund

ICICI Prudential Liquid Fund: ₹2,000 per month

Sukanya Samriddhi is a good scheme to invest for your daughter’s education and wedding. The returns are quite high for a fixed-income product.

The EEE (exempt-exempt-exempt) tax treatment also adds to the attractiveness of the scheme. At the same time, you must understand that SSY is a debt product.

Since your daughter’s education and wedding are many years away, you must also consider equity funds for the same.

The writer is founder of PersonalFinancePlan

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