Family Finances: How to rectify portfolio flaws to get optimal returns?
Sandipan Mallicks equity portfolio has 60 stocks and mutual fund schemes. The number has bloated beyond manageable levels. It is getting completely out of control, says the 41-year-old Mallick. While he is unnerved by the size of his portfolio, Mallick doesnt know that he also has some dud investments which are draining his resources.
Still, realising ones follies is the first step towards reformation. Before we expound on the solution to his problem, let us consider Mallicks financial status.
Mallick is a salaried man earning Rs 70,000 per month and he lives in Mumbai with his wife Mithu, a home-maker. Though they dont have a child, they expect to have one and have included his/her education and marriage among their goals. Retirement is another goal they want to stock up for. This may not be a problem as their expenses are likely to shrink by a sizeable amount very soon.
At present, Mallicks expenses amount to Rs 59,458, which eat away about 85% of his monthly take-home salary. He sends Rs 10,000 every month to his mother, who lives in Kolkata. He also pays a rent of Rs 9,000 for his flat in Mumbai and a monthly instalment of Rs 5,250 for his car. However, all these expenses will end when Mallick shifts to Kolkata.
I am relocating to live with my mother. We have our own house and the car loan will also be paid by April this year, he says. So, by the second half of the year, the couples monthly investible surplus will increase to about Rs 40,000, which will be sufficient to meet the investment needs for achieving their financial goals.
Returning to Mallicks portfolio, he invests Rs 7,000 a month through systematic investment plans (SIPs). He has also made one-time investments, currently valued at Rs 7.6 lakh, in stocks, monthly income plans (MIPs) and mutual funds, including equity-linked saving schemes (ELSS). W! e apprec iate Mallicks savviness in using these instruments, but it is not prudent to resort to so many tools just to experiment. Sandipan has invested in 11 equity mutual funds, 10 ELSS for saving tax and 38 large- and mid-cap stocks.
I make my investments either by using my own judgement or on the suggestion of my financial adviser. However, some of the investments have also been impulsive picks, says Mallick.
It is apparent that Sandipan does not follow a focused investment plan. His overall portfolio is not well-diversified across different asset classes. His house in Kolkata cant be considered an asset as it is used for living and, hence, has zero financial value. Besides this, he has worth only Rs 2 lakh in fixed deposits.
Even if he justifies such a portfolio by diversifying within equities, the strategy is not appropriate for two reasons. One, a part of his equity portfolio, mainly comprising stocks, is over-diversified, making it tough and relatively expensive to manage. Besides, he is spreading his investments too thin because it moderates the efforts and resources put into winning bets.
The other part of his equity folder, consisting mainly of funds, is completely bereft of diversification. Simply investing in a large number of similar mutual fund schemes does not constitute diversification. In fact, financial experts believe that such a portfolio is almost guaranteed to underperform or, at best, give a mediocre performance.
The large number of schemes and stocks makes one wonder how Mallick keeps track of his inve! stments, leave alone manage them. One would need a professional fund manager and a team of stock analysts to juggle such finances. Hence, we suggest that Mallick restrict his mutual fund investments to around five equity schemes, two equity-linked schemes and two or three debt-oriented funds.
Calibre Investments suggests that he direct all his SIPs and one-time equity investments to Birla Dividend Yield Plus, HDFC Equity Fund, Franklin India Bluechip Fund, IDFC Premier Equity Fund and Reliance Growth Fund. All these are diversified equity funds and suitable for small investors as they usually have a long-term perspective.
Still, realising ones follies is the first step towards reformation. Before we expound on the solution to his problem, let us consider Mallicks financial status.
Mallick is a salaried man earning Rs 70,000 per month and he lives in Mumbai with his wife Mithu, a home-maker. Though they dont have a child, they expect to have one and have included his/her education and marriage among their goals. Retirement is another goal they want to stock up for. This may not be a problem as their expenses are likely to shrink by a sizeable amount very soon.
At present, Mallicks expenses amount to Rs 59,458, which eat away about 85% of his monthly take-home salary. He sends Rs 10,000 every month to his mother, who lives in Kolkata. He also pays a rent of Rs 9,000 for his flat in Mumbai and a monthly instalment of Rs 5,250 for his car. However, all these expenses will end when Mallick shifts to Kolkata.
I am relocating to live with my mother. We have our own house and the car loan will also be paid by April this year, he says. So, by the second half of the year, the couples monthly investible surplus will increase to about Rs 40,000, which will be sufficient to meet the investment needs for achieving their financial goals.
Returning to Mallicks portfolio, he invests Rs 7,000 a month through systematic investment plans (SIPs). He has also made one-time investments, currently valued at Rs 7.6 lakh, in stocks, monthly income plans (MIPs) and mutual funds, including equity-linked saving schemes (ELSS). W! e apprec iate Mallicks savviness in using these instruments, but it is not prudent to resort to so many tools just to experiment. Sandipan has invested in 11 equity mutual funds, 10 ELSS for saving tax and 38 large- and mid-cap stocks.
I make my investments either by using my own judgement or on the suggestion of my financial adviser. However, some of the investments have also been impulsive picks, says Mallick.
It is apparent that Sandipan does not follow a focused investment plan. His overall portfolio is not well-diversified across different asset classes. His house in Kolkata cant be considered an asset as it is used for living and, hence, has zero financial value. Besides this, he has worth only Rs 2 lakh in fixed deposits.
Even if he justifies such a portfolio by diversifying within equities, the strategy is not appropriate for two reasons. One, a part of his equity portfolio, mainly comprising stocks, is over-diversified, making it tough and relatively expensive to manage. Besides, he is spreading his investments too thin because it moderates the efforts and resources put into winning bets.
The other part of his equity folder, consisting mainly of funds, is completely bereft of diversification. Simply investing in a large number of similar mutual fund schemes does not constitute diversification. In fact, financial experts believe that such a portfolio is almost guaranteed to underperform or, at best, give a mediocre performance.
The large number of schemes and stocks makes one wonder how Mallick keeps track of his inve! stments, leave alone manage them. One would need a professional fund manager and a team of stock analysts to juggle such finances. Hence, we suggest that Mallick restrict his mutual fund investments to around five equity schemes, two equity-linked schemes and two or three debt-oriented funds.
Calibre Investments suggests that he direct all his SIPs and one-time equity investments to Birla Dividend Yield Plus, HDFC Equity Fund, Franklin India Bluechip Fund, IDFC Premier Equity Fund and Reliance Growth Fund. All these are diversified equity funds and suitable for small investors as they usually have a long-term perspective.
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