Prashant Chavan, with wife Rajashree and children Radhika(standing right) and Padmanabh,in Pune
Need to put investment plan on a fast track
The Chavans have been either very bold or very conservative in their approach so far.They need to find the middle path and tread cautiously to avoid losing track of their goals.
AMIT KUMAR
The Chavans have been either very bold or very conservative in their approach so far.They need to find the middle path and tread cautiously to avoid losing track of their goals.
AMIT KUMAR
CHAVANS GOOD MOVES
Investing early in a second home.
Adequate life cover through a term plan.
Controlled expenses and debt.
AND THE BAD ONES
Not buying sufficient health insurance.
Not maintaining a contingency fund.
No planning for retirement and other financial goals.
Investing early in a second home.
Adequate life cover through a term plan.
Controlled expenses and debt.
AND THE BAD ONES
Not buying sufficient health insurance.
Not maintaining a contingency fund.
No planning for retirement and other financial goals.
The Chavans are an apt example of how safety of our investments often makes us ignore the returns that we earn from them.They do not invest in mutual funds,but buy blue-chip stocks,while real estate and debt portfolio constitute 90% of their investments.However,there is still enough time for the Chavans to understand that diversification remains the key to achieving their goals and that they must come out of their comfort zone.
Prashant Chavan,46,works with Tata Motors,and lives with his wife Rajashree Chavan,a 45-year-old private tutor and their children Radhika (19) and Padmanabh (13) in Pune.Their monthly income is 84,000 and after meeting all expenses,the family is left with a substantial sum of 48,525.This is an extremely high rate of saving for a couple at this stage of their lives,but it also begs a questionwhy havent they started saving for their retirement and other goals,like their childrens education and marriage Prashant cannot offer a reasonable answer,but thankfully,he still has a minimum 10 years to rectify their investment model and ensure that from now on,every rupee they invest will earn the right amount,says certified financial planner Pankaaj Maalde.
The Chavans have two properties.The first one,bought for 5 lakh in 1995,is the one where they stay and it is currently valued at 40 lakh.The second one,bought for 10 lakh in 2005,has an outstanding loan of 5 lakh and has been rented out for 8,500 a month.It is currently valued at 30 lakh.The annualised return of just 3.4% is a very low figure,and in order to achieve their goals,Maalde suggests that the Chavans must sell this flat and invest the proceeds in balanced funds,even if this means that their monthly income falls by 1,000 (they will lose out on the 8,500 they receive as rent,but will save on the 7,500 they pay as EMI on the home loan).Their goals are pretty straightforwardto save for their two childrens education and marriage and,of course,for their retirement.Apart from these two properties,they also have an ancestral joint property,from which they earn a monthly income of 5,500 as well as a commercial property,which gives them a monthly income of 3,000.
If the Chavans sell their property worth 30 lakh,they will be left with 22 lakh after paying the loans and charges.This,in turn,can be easily invested in a balanced fund through SIPs of 1 lakh each for the next 22 months to contribute about 1.07 crore to the desired retirement corpus of about 1.8 crore.The remaining amount will be contributed by their existing EPF and PPF account,which will contribute 73 lakh to the retirement kitty.However,for this,the Chavans must increase their contribution to PPF to 70,000 a year.
For Radhikas education,the Chavans want to build a corpus of 5.44 lakh,which they will need after four years.To attain this goal,they must start an SIP of 9,000 in a balanced fund.For their son,Padmanabh,they will require 11.1 lakh after eight years.For this,they must start an SIP of 7,000,also in a balanced fund,which will give them about 12% returns.Maalde suggests balanced funds given the moderate risk level of the Chavans and the relatively short duration in which the goals have to be achieved.
Similarly,to build a marriage fund of 9.5 lakh after six years for Radhika,the Chavans should invest 9,000 a month in balanced funds,such as HDFC Prudence,Reliance Regular Savings (Balanced),Birla Sun life 95 and ICICI Pru Balanced.For Padmanabhs marriage,a corpus of 16.31 lakh will be required after 11 years,so they must put 4,500 a month,again in balancedfunds.
One area where the Chavans have done well is to insure their lives.Considering that they have an asset base of 50 lakh,this,along with a term plan of 50 lakh,is enough to take care of the need for life insurance.Chavan accepts,however,that this was something he realised only recently.Insurance was never on my radar and only recently,in April 2011,I opted for a cover of 50 lakh for a 10-year-period.I was very sure that I would take a term plan as Ulips would have been not only expensive,but an unviable option considering my age, says Prashant.Taking a term plan has been a wise decision,as the Chavans pay only 975 a month for this.They have been smart enough to not fall for traditional,expensive life covers, says Maalde.However,a cover for 10 years is insufficient.A better choice would be to extend it to 15 years,says Maalde,as this will ensure that when they retire,they still have a cover for a few years.The Chavans must reconsider this aspect of their term plan.
However,the Chavans have strangely been very lackadaisical about health insurance and have no health cover at all.Prashant says that one reason has been that Tata Motors annually gives him 15,000 per family to pay for medical bills.But even then,a total of 60,000 for the whole family is alarmingly low.Also,depending on the company can be a dangerous affair as the cover will cease when Chavan retires and buying a health cover when he is 60 years old will be an expensive affair.Maalde advises that Chavan must buy a family floater plan for a cover of 5 lakh and also buy a top-up health cover plan of 10 lakh.This will cost around 24,000 a year.However,the Chavans will be able to claim up to 15,000 of the premium paid as deduction under section 80D.
One aspect of Chavans financial strategy which is very different from his otherwise conservative approach has been his investment in direct equity.I have always found it an easy affair.I have bought bluechip stocks and have remained invested for a long time.I find this easier than researching and finding the right mutual fund for investments.Of the 16 scrips that I hold,only DLF is currently at a loss, says Chavan.The Chavans have,till now,invested a corpus of 4 lakh in stocks such as L&T,Bhel,RIL and NTPC.The collective value of these holdings is about 5 lakh.However,looking at their asset allocation and risk appetite,Maalde advises them to invest through balanced schemes of mutual funds with good track records and high ratings.
The family must also build a contingency fund to cover at least six months expense.In Chavans case,the desired amount is 1.68 lakh.A part of the Chavans existing FDs can be allocated to this goal.The contingency fund should be invested in liquid plus fund or a savings-linked FD account (which has an auto-sweep facility).This amount should not be used for any other goal.
RECOMMENDATIONS
HEALTH INSURANCE
Advice: For a family of four,it is appalling that they have no health cover at all.They must immediately get a family floater plan for a cover of 5 lakh and a top-up health insurance plan for a cover of 10 lakh.
BALANCED FUNDS
HDFC Prudence Fund,Reliance Regular Savings Fund (balanced option),Birla Sun Life 95 and ICICI Prudential Balanced Rationale: These are the best performing balanced funds and considering the relatively short tenure of the Chavans financial goals,these are a safer bet than the comparatively risky equity funds.
STOCK PORTFOLIO
The Chavans should not be investing in direct stocks,given their risk appetite.Also,as they near retirement,they should look at consolidating their earnings and assuring returns.Their current investment in stocks,which include companies such as L&T,Bhel,RIL and NTPC,should be sold in stages and the proceeds should be invested in balanced funds.
Financial plan by Pankaaj Maalde,Certified Financial Planner
RECOMMENDATIONS
HEALTH INSURANCE
Advice: For a family of four,it is appalling that they have no health cover at all.They must immediately get a family floater plan for a cover of 5 lakh and a top-up health insurance plan for a cover of 10 lakh.
BALANCED FUNDS
HDFC Prudence Fund,Reliance Regular Savings Fund (balanced option),Birla Sun Life 95 and ICICI Prudential Balanced Rationale: These are the best performing balanced funds and considering the relatively short tenure of the Chavans financial goals,these are a safer bet than the comparatively risky equity funds.
STOCK PORTFOLIO
The Chavans should not be investing in direct stocks,given their risk appetite.Also,as they near retirement,they should look at consolidating their earnings and assuring returns.Their current investment in stocks,which include companies such as L&T,Bhel,RIL and NTPC,should be sold in stages and the proceeds should be invested in balanced funds.
Financial plan by Pankaaj Maalde,Certified Financial Planner
