Skewed portfolio can endanger goals
Deploying resources in real estate and debt means that the Upadhyes have been missing out on gainful investment in other avenues.A drastic change of course is a must if they want to achieve all their goals.
AMIT KUMAR
The Upadhyes have defied every financial planners advice for diversification.They have nearly 85% of their portfolio in real estate,barely 5% in equity,have 17 traditional insurance plans and two Ulips.They hold very little cash in hand and are left with a negligible sum at the end of the month.Interestingly,they occupy none of the two houses that they own and plan to shift into one of them only after retirement.Their high monthly income will ensure that they achieve all their goals,including a sizeable retirement corpus.However,to do so they must subject their portfolio to a major overhaul.
Deploying resources in real estate and debt means that the Upadhyes have been missing out on gainful investment in other avenues.A drastic change of course is a must if they want to achieve all their goals.
AMIT KUMAR
The Upadhyes have defied every financial planners advice for diversification.They have nearly 85% of their portfolio in real estate,barely 5% in equity,have 17 traditional insurance plans and two Ulips.They hold very little cash in hand and are left with a negligible sum at the end of the month.Interestingly,they occupy none of the two houses that they own and plan to shift into one of them only after retirement.Their high monthly income will ensure that they achieve all their goals,including a sizeable retirement corpus.However,to do so they must subject their portfolio to a major overhaul.
Mahaveer Upadhye,36,stays with his homemaker wife Samata,35,6-year-old daughter Anushka and the recently born Anvika,in Hyderabad.The deputy general manager with a telecom firm brings in a monthly income of 1.5 lakh,and combined with the rent of 11,000 from one of their houses,it amounts to 1.61 lakh.After accounting for household expenses,average insurance premium,two home loan EMIs and SIPs,the family is left with a measly surplus of 334.The reason for the low investible sum is that nearly 50% of the income,or 79,000 per month,goes out as EMIs for two home loans and a car loan.Add to this the hefty insurance premium of 21,333 per month,and it explains the near-zero surplus despite a high salary.However,this does not bother the Upadhyes because Mahaveer is a firm believer in investing in real estate.
By renting out the flats,a major part of the EMIs is taken care of and I get to build an asset at the same time, says Mahaveer,content in his logic.Mahaveer bought a flat in Bangalore when the prices were low,and after a market revival,the prices shot up.The other property is located in Pune,where the Upadhyes plan to shift after retirement.The Pune property fetches a rent of 11,000 per month.However,its not without reason that experts urge on the need for diversification.The Upadhyes existing outstanding balance of 58 lakh for the home loan and EMIs of 58,000 are very high and not recommended for a family which is yet to achieve all its major goals.
Therefore,Pankaaj Maalde,chief financial planner of apnapaisa.com,advises the family to sell the Bangalore flat,which was bought in September 2010 for about 44 lakh.The current market value of the flat is about 50 lakh.Since the sale of the flat will result in short-term capital gains and Mahaveer will have to pay tax on it,he must consult a tax adviser to minimise this.The amount left after paying tax can be added to the contingency fund,which must be worth at least six months expenditure.This move accomplishes two things: the Upadhyes will get more investible surplus and a chance to venture into other investments.
However,before embarking on the investment road map,the family must address its insurance problems.The Upadhyes have a staggering 19 insurance policies,yet the total cover is a miserable 36.44 lakh for a monthly premium of 21,333.I have always looked at combining insurance and investment.A couple of my policies also promise good returns at the end of the maturity period, says Mahaveer.What he doesnt understand is that his present cover does not even take care of his loans,let alone ensure financial security for his family.Moreover,the term of some of his LIC plans will extend till he is 70 years old,which is not really required since insurance aims at replacing the income of the breadwinner in case something were to happen to him.Since Mahaveer plans to retire at the age of 60,he doesnt need life insurance after that.Moreover,traditional policies are neither flexible nor offer good returns in the long term,even failing to beat inflation.Therefore,Maalde advises the Upadhyes to discontinue the plans and surrender them even though it will result in some monetary loss.Mahaveer must immediately take a life cover worth 1.5 crore,preferably an offline term plan with a critical illness rider of 50 lakh,to secure his family in case of an unfortunate event.This will cost him around 42,000 per annum.
The other gaping hole in the Upadhyes insurance portfolio is the absence of health plans.For a family that spends about 3,000 per month on health and has just had a baby,the lack of health insurance is shocking.Any serious illness could be catastrophic to their financial well-being and,therefore,it is imperative that Mahaveer and his family have adequate medical coverage.Maalde suggests an individual health insurance plan with a cover of 3 lakh for each member,including Mahaveers mother.He should also buy an individual top-up plan of 5 lakh,with a deductible of 3 lakh,for all members.This will cost the Upadhyes about 32,000 per annum.Apart from this,Mahaveer must also buy an accident disability cover of 50 lakh for himself,which will cost him around 7,000 per annum.If the Upadhyes implement these recommendations,not only will they have a better,more comprehensive cover,but will also save about 4,250 in monthly premium.
Like most parents,the Upadhyes want to save for their two daughters education and marriages.To build an education fund of 50 lakh after 12 years for Anushka,the Upadhyes must allocate their HDFC Ulip plan and transfer their existing mutual fund investments to a balanced fund.Also,they must start a fresh monthly SIP of 7,500 in a balanced fund.Similarly,they aim to save 80 lakh after 18 years for Anvikas education.For this,they must start a monthly SIP of 9,500 in a balanced fund.
The couple also want to build a corpus of 43 lakh for Anushkas marriage after 19 years.For this,they must start an SIP of 4,500 in equity mutual funds and gold funds in a ratio of 70:30.Similarly,for Anvikas marriage,they want to build a corpus of 68 lakh after 25 years.This can be achieved by starting a monthly SIP of 3,000 in the same mix of gold and mutual fund.
For their retirement,the Upadhyes want to build a corpus of 5.54 crore.Of this,1.88 crore will be amassed through Maheshs EPF contribution of 11,000 (including that of the employer).To meet the shortfall of 3.66 crore,they should start an SIP of 19,000 in a balanced fund.After the above-mentioned changes are implemented,the Upadhyes will be left with a surplus of 9,083,which must be added to the cash in bank to build a contingency fund.After about a year,when the home loan is repaid,they can use the cash to build a contingency fund and then invest in various avenues.The Upadhyes will achieve their goals if they understand that a skewed portfolio,be it real estate or insurance,can prove disastrous for their financial freedom.
RECOMMENDATIONS
MUTUAL FUNDS
SIPs:
HDFC Prudence,Reliance Regular SavingsBalanced & Birla Sun Life 95.
Advice:
Given the low risk appetite of the Upadhyes and the fact that they do not have much exposure to the segment,balanced funds will be a safe option to start with.They are advised to allocate equally in these three funds as these have a proven track record and performance.
INSURANCE
Advice:
Continue with HDFC Ulip.Rationale: The applicable charges are very low1 % for allocation and 0.80% for fund management.The fund has beaten its benchmark in both 1-year and 3-year performance.The other Ulip,Birla Sun Life,must be reviewed after the completion of five years.The fund performance is good compared with its benchmark,but there are charges that require revision.
Financial plan by Pankaaj Maalde,Head,Financial Planning,apnapaisa.com
