Flawed investments, but goals in sight
Despite a late start and skewed investments, the Tyagis should be able to meet their goals with relative ease given their high savings and provided they follow a disciplined investment approach.
The Tyagis financial plan is replete with the usual fissuresin their early 30s,the couple is yet to start saving for retirement,has a very small life insurance cover,and has no investment in mutual funds.The reason their plan has not been unhinged is because they have managed to tick some of the right boxesthey have invested in real estate at an early age and have a high combined monthly income.This is the reason that despite the plans shortcomings,the Tyagis will be on course to meet all their financial goals with a little fine tuning.Ritu,32,works with an NGO,while Deepak is a 33-year-old product technician who works for a buying agency.The two bring in an impressive salary of 1.45 lakh per month.Accounting for a monthly expense of 35,000,a home loan EMI of 29,000 for two real estate properties (a house each in Gurgaon and Noida),and an average monthly premium of 8,230 for various insurance policies,they are still left with an investible surplus of 72,770.However,as Ritu says,this surplus has been a recent development.In 2010,our salaries took a huge jump.Before that,we never had much to invest, she says.In 2004,the couple bought the flat in which they currently live in Gurgaon with the help of a loan of 16 lakh.This,along with the car loan EMI,ate into most of their investible surplus.Apart from our investments in real estate and stocks,all others have been done to save tax, says Ritu. The Tyagis can still achieve all their goals,including building a corpus for retirement,saving for their four-yearold daughters and their future childs education,and buying a house worth about 1.1 crore.The key, according to financial planner Pankaaj Maalde, is to instil discipline in their investments and tweak the portfolio for better returns and protection.
As for protection, the Tyagis have a total insurance of only 12.8 lakh, which is frightfully low. It doesnt even cover the 19 lakh loan they have taken for their properties. Both must get online term insurance plans to give them adequate cover. Ritu should buy a cover of 25 lakh, and Deepak,50 lakh, which will cost them about 11,000 annually. In return, they should surrender their LIC Jeevan Anand policy, says Maalde. This endowment plan was taken in 2004 and it gives them a cover of only 5 lakh for an annual premium of 25,000.The couple has also taken a child Ulip, Aviva Young Scholar, which gives them a cover of 4.8 lakh for an annual premium of 60,000.Considering the high premium for such a low cover, the couple must review this policy after it completes five years. The Tyagis have done better while buying health insurance. They have an Apollo Munich Easy Health family floater plan of 5 lakh for an annual premium of 6,370.Besides,Deepak has a personal accident cover of 5 lakh, while Ritu has the Apollo Munich Optima Cash Gold daily cash policy for accident/sickness worth 5 lakh. However, they should discontinue the Optima Cash Gold and top up the health cover with a 10 lakh plan for the family. The premium will amount to 5,000 per year, the same as is being paid for the Optima Cash Gold. Also, considering that Deepaks parents do not have any health insurance, they should be covered with a family floater plan of 5 lakh. The Tyagis will pay around 24,000 for this, out of which they can claim 15,000 as deduction under Section 80D, says Maalde. The Tyagis also need to start saving for their retirement corpus. After tweaking the insurance requirements, the monthly expenditure of insurance premium will rise by 1,244 to 9,474.This still leaves them with 71,526 a month. Of this, they should invest about 17,500 per month in diversified equity mutual funds, along with 70,000 per annum each in the PPF by both Ritu and Deepak. This, along with their existing investment worth 1.15 lakh in the NSC, and the 10-year Ulip Aviva New Life Bond Plus, will help them achieve a target of 4.4 crore, which will ensure a comfortable life for the Tyagis.
The couple has earned a rich dividend in its real estate investment. Currently, about 87% of their asset allocation is in this sector. Both our houses have seen a considerable appreciation in value and we are now considering buying a house worth 1.1 crore, says Deepak. This is a feasible plan and can be worked out along with their other goal amassing funds for the education of their daughter and another kid that they plan to have in a year. For the education, we suggest two investments in mutual funds. For their daughter, they should invest 7,300 per month in equity mutual funds to build a corpus of 70 lakh in 15 years, while for the future child, they should invest 4,700 for 20 years to build the same corpus.
After investing for their main goals and insurance, the Tyagis are left with a surplus of 30,359.This can be saved for the first five months to be used for their daughters admission fee. Subsequently, they can save this amount to meet the other short-term goal of renovating the Gurgaon house, which will cost about 1.5 lakh. After this, they can buy the house worth 1.1 crore, using the proceeds from the sale of the existing houses and taking a home loan. The sale will fetch them about 78 lakh (prepaying their existing loan of 19 lakh and paying stamp duty and brokerage charges, which will come to about 3 lakh),and they can take a loan of about 52 lakh. The EMI for 20 years at 11% will be about 53,674.This can be paid by combining the surplus of 30,359 and the redirected EMI of 29,000.This still leaves them with 6,929.The Tyagis have about 1 lakh in cash, but they need to build a contingency fund of 2.9 lakh, which will suffice for four months. This can be done by combining the cash, using one months surplus of 30,359 before they begin amassing for their short-term goals, using the proceeds from surrendering the LIC policy (about 50,000),and investments worth about 1.11 lakh in mutual funds and direct equity. Direct equity is only for people who understand the markets. While they made a profit of 80,000 from selling stocks of L&T, Bhel and Moser Baer in 2008-9,a number of their stocks are in the red. They can direct this money towards the contingency fund. This money should be invested in a liquid plus fund or a saving-linked FD account and should not be used for any other goal, says Maalde.
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