We reviewed the finances and investments of one of our clients and discussed the following strategies for the year 2025.
1. Consolidation of investments:
Over the years, the client had invested in many funds, shares, bonds, etc. As a result, investments were spread across more than 45 different mutual fund schemes, five odd ETFs, in shares of more than 45 companies, three Sovereign Gold Bonds, five tax free bonds, etc. In addition the client had investments in PPF, NPS and EPF. He had a life insurance cover of Rs 2 crores and a health insurance cover of Rs 10 lakhs. There was a new 50 lakhs investment with a PMS manager as the client had already concluded that the investments were too diversified and needs a focussed approach to earn alpha.
We plan to review all the mutual fund investments. Sell the underperforming schemes and shift the funds to those expected to outperform over a long period of time. We also plan to sell the shares of companies that have underperformed the index over the last five years and move the funds either to the PMS manager or to the active mutual fund schemes. Given the age and financial status of the client, we recommended a strategic asset allocation of 75% equity, 20% in debt (fixed income) and 5% in Gold. Of the equity portion, given the current high valuations, a major portion was recommended to be in large cap funds or flexi cap funds. The investments in mid and small cap schemes were not be reduced but to be re-allocated to better performing schemes. The number of schemes is to be brought down to 7-9 over a 2-3 year period since most of the schemes had significant unrealised gains. Hence withdrawals will be made via Systematic Withdrawal Plans (`SWP’). So that gains are realised over a period of time and taxes are also spread over a few financial years.
It was debated whether the tax cost would be worth the consolidation. We did an analysis of the same. We assumed that the current investment is sold, taxes paid and the net amount is invested in another scheme and if the scheme gives a 1% alpha over the next few years, then the new investment will return more than the original investment after a period of three years. Of course, there is no guarantee that the new scheme will outperform the index or the old scheme. Even if there is no guarantee, it makes sense to stick to a few schemes just so that the process of review and evaluation of the schemes becomes easier. It is better to have a 20 stock and a 6-7 mutual fund schemes portfolio rather than a portfolio that has more than 100 line items. It becomes an unwieldy portfolio, difficult to track and leads to inaction which in the long term may not be good for the overall portfolio return. We have seen clients with more than 100 stocks in their portfolio and our advice always is to have not more than 25-30 stocks and keep re-balancing the same rather than adding to them. Having said that, most actively managed mutual funds have more than 50 stocks in their portfolios. Since fund managers of these schemes start with the benchmark, they tend to follow a benchmark +/- strategy and hence their performance tends to be around the benchmark and mostly lower due to fees of more than a one percent.
2. Risk coverage
In addition to a life cover of Rs two crores, the client had a personal accident cover of Rs 1 crore. Given the financial status of the client and age, we do not recommend any increase in life cover. However, we did recommend the client to increase the health insurance cover to Rs 50 lakhs with a super top up cover of another Rs 50 lakhs. The client’s family had a history of cardiac issues as well as cancer. Though, there were no current health issues, it was suggested to have this cover to meet any contingencies in the future. We determined that the cost of an open heart surgery today is Rs six lakhs. Assuming an 8% inflation every year in this cost, the cost of the surgery may be Rs 13 lakhs, 28 lakhs and 60 lakhs after 10,20 and 30 years. Accordingly, a cover of 50 + 50 lakhs has been recommended.
3. Expenses
The client has plans to go abroad as well as purchase a new vehicle. Given the client has a business, it was suggested to fund the vehicle with a loan to take advantage of tax breaks on the interest portion of the loan as well as on the depreciation of the vehicle. Other normal expenses were under control.
About EquiZen
EquiZen is a registered mutual fund and PMS distributor. We are well qualified in investments and finance and offer investment and risk products in accordance with your needs. We will do a thorough analysis of your current investments, future requirements and then plan your investments. We will not offer any investments that we will not invest in. Do review our website at www.equizen.in and contact us on call or whats app at 9820605203 or write to us as sanjay@equizen.in
