Being overly cautious can impede goals
The Agarwals have been diligent savers and early starters,but even their simple goals may prove hard to aachieve if they do not make their money grow through equities and alter their risk coverage.
AMIT KUMAR
The Agarwals asset allocation will leave many people stumped.With 100% allocation in debt,they make even retired people seem adventurous.They have no SIPs or lump-sum investment in mutual funds,no stock holding and pay a premium of 12,948 for a cover of about 60 lakh.They do have a healthy net saving,but without allowing their money to grow,how can they hope to build a large enough corpus to achieve their goals Actually,they can,provided they direct their surplus to equity.They will also be helped by the fact that they are young and can benefit from the power of compounding.
Vivek Agarwal is 29 and works for an MNC.He lives with his wife Jyoti,a 27-year-old homemaker,and their 1-year-old son Vansh,in Bangalore.He brings in a monthly income of 97,000,and after accounting for household expenses,insurance premium,rent and home loan EMI,they are left with a surplus of 23,552.Considering that they save nearly 25% of their salary,the Agarwals are wellplaced to meet the expenses that are bound to rise in the future and can start investing in the right avenues to achieve their goals.It is not as if the Agarwals have been wasting money.As Vivek points out,almost all their savings and investments have been used to make the down payment for their house in Bangalore.It is a construction-linked plan and I have paid 8 lakh till date.For the remaining amount,I have taken a 12-year loan and will pay an EMI of 40,000 from May this year.For the time being,I am paying a rent of 16,500 and an EMI of 16,000 for the partially disbursed loan, he says.
Before we explain how the Agarwals should invest to secure their future,they must review their life insurance cover.Vivek says he has opted for Ulips and money-back policies as they combine both investment and insurance.However,he does not understand that these are expensive policies and the promised returns will not even beat inflation,let alone grow the money.Considering his annual salary and the fact that he has taken a home loan,he should ideally have a cover of 1.41 crore.He should opt for an online term plan of 1 crore till the age of retirement.The plan will cost him around 12,000 annually.The other three traditional insurance plansMarriage Endowment,Jeevan Anand and Endowment Assuranceare expensive.The Agarwals are paying too high a premium for the risk covered.These are traditional plans,which are not flexible,dont give good returns in the long term,and are unlikely to beat inflation.It is also advisable to discontinue the term plan bought from the LIC and,instead,buy a single online term plan of 1.25 crore, says Pankaaj Maalde,chief financial planner at Apnapaisa.com.They should surrender their other plans after they get this additional life cover.
It is a similar story when it comes to their health cover.Although the Agarwals have a family floater policy of 5 lakh provided by Viveks employer,it is advisable to buy one of their own.For one,it will be very difficult for the Agarwals to buy insurance once Vivek retires.He might also change his job in the future,which will leave him without a cover during the interim period.So,Maalde suggests that they buy an individual mediclaim plan of 3 lakh and also a top-up individual plan of 5 lakh for the family.This will cost them around 13,000 per annum.Vivek should also buy a 50 lakh critical illness policy and a 50 lakh disability accident cover.Despite all these recommendations,the Agarwals will end up spending less on insurance and the money they save can be added to the investible surplus.
Like most parents,the Agarwals want to save for their sons education and marriage.For building an education fund of 55 lakh for Vanshs higher education after 17 years,the couple needs to start an SIP of 6,000 in a diversified equity fund.As for the corpus of 95 lakh that they want to build for Vanshs marriage after 24 years,they need to start an SIP of 3,500,again in equity mutual funds.
The Agarwals want to build a corpus of 5.45 crore in another 31 years for their retirement,which,according to Maalde,can be easily achieved.To build this nest egg,their EPF allocation of 11,000 per month (including the employers contribution) will add up to 2.66 crore,while the LIC plan will provide another 22 lakh.For the shortfall of 2.57 crore,they should start a fresh SIP of 6,500 in balanced funds till retirement.The balanced fund is assumed to give an annual return of 12%.
The Agarwals also need to build a contingency fund of 3.78 lakh,which will be sufficient for their expenses for six months.This can be invested in either a liquid plus fund or a savings-linked fixed deposit account.This amount should not be used for any other purpose.However,they do not have this amount yet and,hence,are advised to build the same within a year.They have a home loan liability of 16,000 at present and till their EMI goes up to 40,000 in May,Maalde suggests that they keep aside the balance amount of 24,000 per month as a contingency fund and build the corpus.
The Agarwals have been unduly cautious and must understand that while being conservative ensures the safety of captial,it doesnt make it grow.So,they must opt for equity investments at the earliest to make their money work for them.Viveks initial attempt to buy stocks directly,without enough knowledge and relevant information,was too risky.Its for people like him that mutual funds offer the best optionan exposure to equity through the experience of experts.
After making all the recommended changes,the Agarwals will be left with a surplus of 3,250.This can be used to add to the contingency fund.
RECOMMENDATIONS
EXISTING EQUITY FUNDS
SIPs:
Franklin India Bluechip,ICICI Pru Dynamic.
Advice:
The Agarwals must start SIP investments with immediate effect.These funds have a proven track record and history and,hence,are ideal for Agarwals,who are new to investing in equity funds.
SUGGESTED BALANCED FUNDS
HDFC Prudence,Reliance Regular Saving (Balanced) and Birla Sun Life 95.
Rationale:
Agarwals must invest in these balanced equity funds to bring more stability to their portfolio.
AGARWALS GOOD MOVES ...
Investing in real estate at an early stage.
Maintaining a healthy savings rate.
The Agarwals have been diligent savers and early starters,but even their simple goals may prove hard to aachieve if they do not make their money grow through equities and alter their risk coverage.
AMIT KUMAR
The Agarwals asset allocation will leave many people stumped.With 100% allocation in debt,they make even retired people seem adventurous.They have no SIPs or lump-sum investment in mutual funds,no stock holding and pay a premium of 12,948 for a cover of about 60 lakh.They do have a healthy net saving,but without allowing their money to grow,how can they hope to build a large enough corpus to achieve their goals Actually,they can,provided they direct their surplus to equity.They will also be helped by the fact that they are young and can benefit from the power of compounding.
Vivek Agarwal is 29 and works for an MNC.He lives with his wife Jyoti,a 27-year-old homemaker,and their 1-year-old son Vansh,in Bangalore.He brings in a monthly income of 97,000,and after accounting for household expenses,insurance premium,rent and home loan EMI,they are left with a surplus of 23,552.Considering that they save nearly 25% of their salary,the Agarwals are wellplaced to meet the expenses that are bound to rise in the future and can start investing in the right avenues to achieve their goals.It is not as if the Agarwals have been wasting money.As Vivek points out,almost all their savings and investments have been used to make the down payment for their house in Bangalore.It is a construction-linked plan and I have paid 8 lakh till date.For the remaining amount,I have taken a 12-year loan and will pay an EMI of 40,000 from May this year.For the time being,I am paying a rent of 16,500 and an EMI of 16,000 for the partially disbursed loan, he says.
Before we explain how the Agarwals should invest to secure their future,they must review their life insurance cover.Vivek says he has opted for Ulips and money-back policies as they combine both investment and insurance.However,he does not understand that these are expensive policies and the promised returns will not even beat inflation,let alone grow the money.Considering his annual salary and the fact that he has taken a home loan,he should ideally have a cover of 1.41 crore.He should opt for an online term plan of 1 crore till the age of retirement.The plan will cost him around 12,000 annually.The other three traditional insurance plansMarriage Endowment,Jeevan Anand and Endowment Assuranceare expensive.The Agarwals are paying too high a premium for the risk covered.These are traditional plans,which are not flexible,dont give good returns in the long term,and are unlikely to beat inflation.It is also advisable to discontinue the term plan bought from the LIC and,instead,buy a single online term plan of 1.25 crore, says Pankaaj Maalde,chief financial planner at Apnapaisa.com.They should surrender their other plans after they get this additional life cover.
It is a similar story when it comes to their health cover.Although the Agarwals have a family floater policy of 5 lakh provided by Viveks employer,it is advisable to buy one of their own.For one,it will be very difficult for the Agarwals to buy insurance once Vivek retires.He might also change his job in the future,which will leave him without a cover during the interim period.So,Maalde suggests that they buy an individual mediclaim plan of 3 lakh and also a top-up individual plan of 5 lakh for the family.This will cost them around 13,000 per annum.Vivek should also buy a 50 lakh critical illness policy and a 50 lakh disability accident cover.Despite all these recommendations,the Agarwals will end up spending less on insurance and the money they save can be added to the investible surplus.
Like most parents,the Agarwals want to save for their sons education and marriage.For building an education fund of 55 lakh for Vanshs higher education after 17 years,the couple needs to start an SIP of 6,000 in a diversified equity fund.As for the corpus of 95 lakh that they want to build for Vanshs marriage after 24 years,they need to start an SIP of 3,500,again in equity mutual funds.
The Agarwals want to build a corpus of 5.45 crore in another 31 years for their retirement,which,according to Maalde,can be easily achieved.To build this nest egg,their EPF allocation of 11,000 per month (including the employers contribution) will add up to 2.66 crore,while the LIC plan will provide another 22 lakh.For the shortfall of 2.57 crore,they should start a fresh SIP of 6,500 in balanced funds till retirement.The balanced fund is assumed to give an annual return of 12%.
The Agarwals also need to build a contingency fund of 3.78 lakh,which will be sufficient for their expenses for six months.This can be invested in either a liquid plus fund or a savings-linked fixed deposit account.This amount should not be used for any other purpose.However,they do not have this amount yet and,hence,are advised to build the same within a year.They have a home loan liability of 16,000 at present and till their EMI goes up to 40,000 in May,Maalde suggests that they keep aside the balance amount of 24,000 per month as a contingency fund and build the corpus.
The Agarwals have been unduly cautious and must understand that while being conservative ensures the safety of captial,it doesnt make it grow.So,they must opt for equity investments at the earliest to make their money work for them.Viveks initial attempt to buy stocks directly,without enough knowledge and relevant information,was too risky.Its for people like him that mutual funds offer the best optionan exposure to equity through the experience of experts.
After making all the recommended changes,the Agarwals will be left with a surplus of 3,250.This can be used to add to the contingency fund.
RECOMMENDATIONS
EXISTING EQUITY FUNDS
SIPs:
Franklin India Bluechip,ICICI Pru Dynamic.
Advice:
The Agarwals must start SIP investments with immediate effect.These funds have a proven track record and history and,hence,are ideal for Agarwals,who are new to investing in equity funds.
SUGGESTED BALANCED FUNDS
HDFC Prudence,Reliance Regular Saving (Balanced) and Birla Sun Life 95.
Rationale:
Agarwals must invest in these balanced equity funds to bring more stability to their portfolio.
AGARWALS GOOD MOVES ...
Investing in real estate at an early stage.
Maintaining a healthy savings rate.
AND THE BAD ONES
Having no exposure to equity.
Buying traditional,expensive insurance policies.
Not buying adequate health insurance.
Not maintaining a contingency fund.
Having no exposure to equity.
Buying traditional,expensive insurance policies.
Not buying adequate health insurance.
Not maintaining a contingency fund.
Financial plan by Pankaaj Maalde,Head,Financial Planning,apnapaisa.com
