Build an equity-debt portfolio of 70:30 ratio

MANUJ Sinha is 31-year-old who lives with his wife and mother. The family income is around Rs 8.2 lakh per annum while the monthly expenditure is around Rs 16,300. He has a two-year-old car loan with a monthly EMI of Rs 10,000 and an outstanding of Rs 170,000. He has invested in Rs 30,000 in SBI MF and has a Rs 2,000 SIP since February 2007.

Manuj has a ULIP with HDFC Standard Life for 15 years with an annual premium. He plans to take a home loan of Rs 10 lakh for 5-8 years to extend and repair his current house. He also wants to invest in health insurance and a pension plan.


RECOMMENDATION

The family has a comfortable financial condition with more than adequate monthly surplus with a good budget already in place.

It’s advisable for him to have a minimum cover of Rs 10 lakh for, say, 10 years with a dependent mother as a nominee (as wife is financially independent) a term cover would be best suited and price effective for this.

He could consider taking a family mediclaim policy for himself and spouse and a senior citizen policy for his mother. This should cost approximately Rs 20,000 per annum.

Cash Management

Currently, his investment is 100% in equity. Based on young age and risk profile, he should be building his portfolio over the years to have a 70: 30 equity: debt ratio. While SIPs are the best way to passively invest in the market and build up one’s corpus, options for investments in debt include PPF, VI Year NSCs, 5-year Bank FD rates (all U/S 80C qualification) or also in hybrid products such as MIP schemes of mutual funds, which have a 80:20 exposure in debt-equity.

Based on the information available, the family has a monthly surplus of approximately Rs 38,000. If he were to consider going for a home loan for renovation, the EMI would cost approximately Rs 22,000 for five years, leaving him with a surplus of Rs 14,750 per month, after health insurance premium costs.

This amount per month could be partly invested in PPF (say, 5,000) p.m. and VI year NSC papers and partly in diversified mutual fund SIPs up to Rs 5,000 in a tax-effective manner. The remaining corpus could be used to build up an emergency liquid fund corpus at Rs 2,000 p.m. for a few years and later this money could be switched to equity funds.

The above planning is an alternative to pension plans. While pension plans could prove to be rigid, spreading risks helps investors enjoy the flexibility of diversification as well as retaining control over their asset allocation and investment strategies. Also, any wrong investment choices can be corrected without any cost implications, the same would not hold true for structured pension plans. His current monthly surplus is lying idle, which is not an ideal situation.