No Alternative to Equity

The way inflation has increased over the last few years, there is a great possibility of cost over-runs in all your goals. Shed the conservative approach...

                         -         An article from Value Research Online

My husband and I are both aged 38 and our combined net income is around Rs 2,06,000 per month. We pay house loan EMIs of Rs 43,000 and Rs 40,000 respectively from our incomes. We get a combined rental income of Rs 32,000 from both these houses. Our monthly expenditure is Rs 45,000. Since January 2012, we have monthly SIPs of Rs 70,000 in 9 different funds. Both of us also have term plan for Rs 1 crore each and a health cover provided by our respective employers.

Both of us plan to retire by 60 and want to save for higher education of our two sons (keeping aside Rs 50 lakh each in current value) and accumulate a corpus of Rs 3 crore for our retirement.

My husband will also withdraw Rs 10 lakh from his PF account soon. Can we use this amount to bring down our liabilities? Are our SIPs sufficient to meet the goals that we have set?                                                                                                     - Vijaya

It's good that you have clearly-defined goals and have set a definite duration to achieve them. But one thing that comes out upon seeing your portfolio is over-dependence on debt. While it is true that one should have a sufficient amount which is there for taking all the time, returns from debt are way too moderate to fulfil long term plans. So, to begin with, change your style of investing and increase your investment into equities. Second, you also lack sufficient health insurance cover. Buy a separate policy of your own that offers a lifetime renewal. This will meet unforeseen medical expenses.

Insurance

Continue with your term life insurance plans as they cost less. It is good that your employer offers a Mediclaim which have now become portable too at an additional cost. However, it may not be sufficient. Go for a family floater policy of your own where the sum insured can be utilised by any of the insured members. Continuing with the same health policy over the years might actually provide higher benefits than the costs. If you do not make any claims for a few years, no-claim bonuses will add up and offer a larger cover without any increase in premiums due to the higher sum insured. Continuing the same policy from young age will allow you a greater coverage in the later years when buying a new policy becomes difficult.

Investments

Your current portfolio is doing good. But if we look at your current investments and savings you have a portfolio allocation of around 75 per cent into debt and remaining into equities. Adding to it is your home loan liability. You have a long time to go for your goals which means you can do with greater risk to improve your returns considerably over time. Change your strategy to invest at least 90 per cent into equities. Exit from HDFC MIP and the two Balanced schemes in your portfolio and switch to other schemes in a proportionate manner. Make sure to review your portfolio regularly to check any deviations and take corrective actions. Start shifting your funds to debt to lock-in equity returns as you near your goal. Take a look at our recommended portfolio wherein we have retained three of your existing schemes and added three new ones which you should consider.

Goals
You have accumulated around Rs 13.40 lakh through SIPs which will grow further. Your first goal to accumulate for your sons' higher education can be met within the time frame mentioned. Consider the following points to save the desired amount for your rainy days:

* Keep an amount equal to your 6 months' expenses in bank FD as contingency fund which comes to around Rs 3 lakh. After doing that, take out the surplus and invest into equities through Systematic Transfer Plan wherein you park your funds in debt mutual funds that get invested into equities systematically

* Once you get rid of your loans, you can use the surplus to increase your investments towards retirement planning

* You may use your husband's PF amount to repay your loan. This will reduce the principal amount you owe and your interest costs will also reduce

* Use your KVP maturity proceeds to either pay your loan in advance or increase investment in equities through STP. Compare both the options before bringing your KVP proceeds to use.