Create a portfolio

Create a portfolio that has large-, multi- and mid-cap funds

Make sure that you have an emergency fund in place before you start investing in equity

I am 40 years old and earn around Rs.12 lakh a year. I have about Rs.7 lakh invested in direct equities, Rs.10 lakh in a Public Provident Fund (PPF) account and a company provided health insurance plan. As of now, I do not have any investments in mutual funds. Should I continue relying on directly investing in equities to build my savings?

—Thomas John

The asset mix you are currently holding is at 59% debt and 41% equity. If we go by the thumb rule, then the asset mix at your age should just be the reverse i.e. 60% equity and 40% debt. At the same time it is prudent that you do your risk profiling. There are many websites available where you can do this for free. This exercise will let you know how much risk exposure you should be taking and how much of the investments can be in assets with higher risk. This information is critical as there may be instances when your financial needs demand higher risk exposure versus what you can actually take.

At the same time, you are building your equity exposure via direct stocks. This can be a good strategy provided you have in-depth knowledge and time to manage the stocks. However, if you are not able to offer both, then mutual funds is a preferred option as these offer multiple benefits such as a team of experts managing your portfolio, low cost, diversification, transparency along with convenience.

Apart from these, being a salaried employee, you can plan to start monthly investments via systematic investment plans (SIPs) in mutual funds, wherein a monthly fixed amount (such as a recurring deposit) gets debited from your bank account on a fixed day and you are allotted units based on the price of that day’s investment.

This approach helps accumulate wealth over a long term, and along with bringing in discipline and helping you reach your financial goals, it carries the benefits of rupee cost averaging, and power of compounding, which help in the long run.

You can also consider equity funds as you already have debt exposure through PPF.

However, what is lacking in your portfolio is liquidity.

Make sure that you have an emergency fund in place before you start investing in equity because equity investments are meant to be held for a long term, and PPF is not a liquid asset. Within equity, you could consider 3-4 funds and create a portfolio with a combination of large-cap, multi-cap and mid-cap funds.

For your insurance needs, while you do have a health insurance, it is provided by the company and will last only as long as you serve there. It is recommended that you have your own health insurance policy as well. You could start with a lower cover, and increase it gradually. Also, consider taking a life cover; a term plan is a good option. This is recommended if you have dependants.