Aggressive investors, poor planners
Sudipto and Abantika,with their 4-year-old son Sagnik,in Delhi.
Though the Duttas are prudent savers and have made a headstart by investing in equity voraciously,they need to streamline their investments if they want to achieve all their goals.
AMIT KUMAR
At first glance,the Duttas appear to be cruising their way to goal fulfilment.After all,they are big on savings,have made a heady start,and cut a picture of slick professsionalism in the way they have retained their focus on investments and goals.However,a detailed analysis of their strategy points to a mixed picture: they are on track for their major goals,but unless their income rises in 3-4 years or they alter their plans,they are unlikely to meet some of the secondary goals.
Sudipto Dutta,a 35-year-old aircraft engineer,and Abantika Dutta,a 28-year-old housewife,have a monthly income of 1.38 lakh.They live with their four-year-old son,Sagnik,in an apartment in Delhi,for which they are paying a monthly rent of 15,000.They have also bought a house worth 45 lakh of which 16 lakh has been paid till now.They have taken taken a 4 lakh home loan and are currently paying an EMI of 3,385 per month.The Duttas need to pay the remaining amount,29 lakh,before possession,which will be in December 2013.After accounting for all their expenses,which includes household spends,home loan EMI,insurance premium,SIP payments,PPF deposit and school fee,the couple is left with a surplus of 25,314.Besides the primary goals of building a corpus for their childs education and marriage,a retirement corpus,and completing the deal for their house,they have secondary goals like going on a foreign trip every five years,buying a car and furnishing their house.Heres how they can go about fulfilling these.
The Duttas have been very active when it comes to investments,but their aggression needs to be reined in as far as their equity investments are concerned.The Duttas have SIPs of 47,500 in more than 25 mutual funds and have also invested 1 lakh in 10 equity-linked saving schemes.Sudipto says these funds have been picked over time.I started investing in these with the idea of saving taxes,but as my salary grew,the portfolio kept becoming bigger, says Sudipto.While the regular SIPs have given a good headstart to the Duttas,they need to cut down on the number of funds,says financial planner Pankaaj Maalde.They should focus on investing in 4-5 funds,keeping one fund for one goal.If they keep this in mind,it will be easy for the Duttas to achieve their goals in time, says Maalde. Like many other families,the couple has been caught unawares on the insurance front,both health and life.For someone who has an annual income of 16.56 lakh,Sudipto has a combined cover of only 12.32 lakh,for which he is paying a monthly premium of 5,000.Although his current insurance policiesLIC Jeewan Shree,LIC Bima Kiran,LIC Jeevan Sathiare expensive,Maalde says that he should continue with these as they will contribute to his retirement corpus.The low cover is particularly undesirable since he has six dependants (wife,child,parents and inlaws ).Sudipto says that this has been mainly because term plans are still considered a waste of money.So,while he has invested close to 4.09 lakh in mutual funds and 16 lakh for a house,insurance has taken a backseat.Now,Sudipto must get a cover of at least 1.5 crore for 25 years (till retirement).It will cost him about 25,000 per year if he opts for an online term plan.As for health insurance,the Duttas need to increase the family floater policy of 3 lakh to 5 lakh.Apart from this,they must get a top-up cover worth 10 lakh (floater).They must also take a floater health cover for the senior members of the family, says Maalde.He also suggests an accident cover for Sudipto worth about 50 lakh.The Duttas will end up paying an additional 4,200 per month for this reworked insurance plan.
The other important goal for the Duttas is to complete the deal for their house.It is a construction-linked plan and we hope to get possession by the end of 2013.Till that time,we need to pay 4-5 lakh every six months on an average, says Sudipto.Maalde suggests that the couple take a loan for this amount and repay through EMIs,which can be facilitated from the investible surplus.Since the possession is two years away,this might lead to a situation where the couple has to bear the twin burden of paying the EMIs as well as the rent for their current house.This means that they may need to put some of their other goals on hold for some time.These include spending about 10 lakh in furnishing their house and buying a car worth 10 lakh.Once they move to their new house,they can start saving 15,000 for one of these goals.The Duttas will also need to pay about 4 lakh for the stamp duty and registration of the house,which can be financed through fixed deposits.
The couple also wants to go on a foreign vacation every five years.This goal can be easily achieved by consolidating some of their 1,000 SIPs scattered over various funds to 8,000 per month in a balanced fund,preferable HDFC Balanced Fund,over five years.Again,if this can be postponed,they can use the cash to pay for the down payment of a car.
The other two important goals for the Duttas are to build a corpus for the education and marriage of their child.This can be done by consolidating the smaller SIPs into fewer mutual fund schemes.They can opt for ICICI Pru Focused Blue Chip Equity Fund,HDFC Top 200,Reliance Equity Opportunity Fund and Birla Sun Life Dividend Yield Fund.For the childs education,the Duttas need to channelise 10,400 of SIPs per month in the abovementioned funds,which will help them achieve the target of 58 lakh in 14 years.Similarly,they must put 9,400 in SIPs to meet their target of 1.4 crore in another 20 years.
The Duttas are also on track for their retirement corpus,which would be about 5.8 crore.They should deposit 70,000 per year in the PPF till retirement,which will give them a corpus of 73.5 lakh.This,along with their insurance policies and mutual fund investments,will add up to 1.73 cr.For the balance,they should redirect 10,200 through SIPs in diversified equity mutual funds.The existing mutual fund investments of 47,500 per month will come down to about 38,000 a month after the revised plan.This will also allow the couple to finance the increased insurance cost.Till the time they do not take the home loan,the surplus of 28,614 can be added to the cash in bank to create a contingency fund of about 2 lakh.
Maintaininga high level of savings Investing early to buy a house. Managing to control their debt. AND THE BA DONES Having inadequate life and health insurance covers. Having too many mutual fund SIPs. Not maintaining an adequate contingency fund. RECOMMENDATIONS EQUITY MUTUAL FUNDS THROUGH SIPs ICICI Prudential Focused Blue Chip Equity Fund,HDFC Top 200,Reliance Equity Opportunity Fund,Birla Sun Life Dividend Yield Fund and HDFC Balanced Fund. Rationale: The Duttas have too many funds in the portfolio.They must understand that diversification isnt achieved by mere numbers.To meet most of their goals,they need to invest in a few,but wellperformingfunds. INSURANCE Advice:
Sudipto must get an online term plan of about 1.5 crore at the earliest and also increase the cover of the family floater plan from 3 lakh to 5 lakh.He must also get a personal accident cover.
Financial plan by Pankaaj Maalde,Certified Financial Planner |
