Ask Mint Money | Recurring deposit gives less returns over a long-term period

My take-home salary is Rs 80,000. I invest via systematic investment plans (SIPs) in the following: HDFC Top 200 (Rs 2,500), Birla Sun Life Dividend Yield Plus (Rs 2,000), Birla Sun Life Frontline Equity Fund (Rs 2,000), HDFC Equity (Rs 1,000), Reliance Gold Saving (Rs 2,000), ICICI Prudential Dynamic Plan (Rs 3,000), IDFC Premier Equity Fund-Plan A (Rs 3,000), Reliance Equity Opportunities (Rs 1,000), HDFC Gold Fund (Rs 2,000) and ICICI Prudential Top 100 (Rs 2,000). I have a recurring deposit of Rs 28,000. I have two life insurance policies for which I pay a yearly premium of Rs 24,000 and a monthly premium of Rs 2,042. Is my savings enough to build a corpus of Rs 2.5 crore in 10 years?

—Chitra Mukherjee

Your total monthly outflow is Rs 52,542 and annually it is Rs 6,30,504. Assuming you continue saving this amount for the next 10 years with an average interest rate of 10%, you will attain a corpus of around Rs 1.10 crore. If we take the annualized return at 12%, the corpus becomes Rs 1.24 crore. You may consider an even higher interest rate but it will be difficult to achieve considering your equity and gold funds exposure.

The return on recurring deposit over the long term will be much less than the projected rate of interest and this gets even lower for insurance plans as the same has been included in the corpus.

There are a few structural changes which you can bring to your portfolio. You currently have 10 SIPs and all are schemes with good performance and track records. However, you need to reduce your exposure to so many funds. Currently you have a few funds with same asset allocation. In large-cap funds you have three schemes which can be reduced to one. Similarly one gold fund should be enough.

As mentioned above, recurring deposit is where your overall returns take a hit. If you consider tax-adjusted return, it gets even worse. Based on your risk profile, you may consider increasing your equity exposure from existing 39% to 70%. You can build this exposure by investing in hybrid funds. These funds have a minimum 65% exposure in equity and the remaining 35% or less is invested in debt securities and is a tax-efficient product. Funds such as HDFC Prudence and HDFC Balanced are few good options. You can also opt for monthly income plans (MIPs) where the equity exposure is up to 25%. Schemes which have done well in this category are Reliance MIP and HDFC MIP. If you don’t want to increase your equity exposure or want to limit it, you can consider dynamic and short-term funds. Funds such as Birla Sun Life Dynamic Bond and Templeton India Short Term Income have done well.

At the same time, your expectations are unrealistic—you expect your money to grow four times in 10 years. And to achieve the same you cannot take undue risk.

Surya Bhatia is certified financial planner and principal consultant, Asset Managers

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