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Skewed portfolio will hurt future goals
The clear bias towards real estate and a conspicuous lack of equity means that the Joshis will not be able to save for their child’s education and marriage unless their income rises in the next few years.
AMIT KUMAR
Real estate may not be the favoured investment avenue for financial experts, but the Joshis clearly believe otherwise. They have overindulged in this asset class and it is going to reflect adversely in their financial plan. It doesn’t help that they have boosted their realty investment with debt and have a negligible exposure to equity. Though this strategy has worked partially—they are on course to buying a house and building a sizeable retirement corpus—the overdependence on realty means that they will not be able to earmark funds for their future child.
Rohit Joshi, 28, works as a senior manager in an education company, and lives with his wife Neha, 23, in a rented house in Ahmedabad. He brings in a monthly income of 52,725, and after accounting for all their expenses, including household outgo, insurance EMI and PPF contribution, the Joshis are left with a handsome surplus of 24,306. However, Rohit is not in a position to do much with the surplus as he has to pay 6.45 lakh for a piece of land that he bought in Ujjain a few months ago. “The land is poised to grow in value over the next few years and I plan to sell it and use the proceeds to make the down payment for a new house worth 33 lakh,” says Rohit.
Pankaaj Maalde of apnapaisa.comsuggests two levels of financial planning for the Joshis. The first stage will last three years, starting now, and the Joshis will pay for the piece of land in three instalments during this period. The first instalment can be paid with their fixed deposit of 2.2 lakh after maturity. For the remaining two instalments, they will have to immediately start a monthly recurring deposit of 25,000 till the balance amount is paid. Assuming that the land sells for 10 lakh, they will need to take a home loan of 23 lakh. Considering the present rate of interest of 10.5% on a home loan for 30 years, the monthly EMI will be around 21,000. However, as his current investible surplus is marginally short of his requirement for the recurring deposit, he needs to cut his expenditure. In order to do this, life insurance will be a good place to start.
It is not as if the Joshis have done a poor job of life insurance planning. The couple have a total cover of 76 lakh, but shell out about 43,000 per year for this cover. They have two traditional insurance plans, three Ulips and one online term plan. While they must continue with the online term plan of 70 lakh, they should get rid of their LIC endowment and Bima Kiran policies. These are expensive and offer neither flexibility nor good returns in the long term. Even the Ulip, LIC Market Plus, hasn’t performed well compared with the benchmark index. The Nifty has given a return of 25.7% in three years, whereas the plan’s equity option has given a 17.1% return. Hence, they should surrender this and withdraw the amount. Rohit should also consider increasing his life cover after having a child and taking a home loan since the number of dependants and his liability will increase considerably.
The Joshis don’t need a major alteration to their health insurance needs. They currently have a cover of 3 lakh each from ICICI Lombard. Maalde suggests they increase it to 5 lakh through a top-up plan and buy an accident disability cover for 50 lakh and a critical illness cover of 50 lakh. These adjustments in insurance policies will help them save 1,294 per month, which can be added to the investible surplus for the RD requirement.
As for the second stage of their financial planning, it will start after three years when the Joshis are through with their land payment. The Joshis plan to retire after 30 years with a corpus of 6.57 crore. Since they have time on their hands, this goal can be easily achieved. Their PPF balance, including a further contribution of 60,000 per year, will give them a corpus of around 77 lakh. In order to meet the shortfall of 5.8 crore, they must start a monthly SIP of 13,000, with 90% in equity and 10% in debt/gold fund of a mutual fund. However, the investment for this goal will start only after three years and can be funded from the rent they save and the amount they are left with after paying the home loan EMI.
The biggest glitch for the Joshis? The EMI for the new house, along with the savings for retirement, will mean that they will not be able to amass funds for their future child. They won’t have a surplus to build a corpus of 37 lakh and 55 lakh needed after 19 years and 25 years for their child’s education and marriage, respectively. For these goals, the couple needs to invest 6,200 per month through mutual fund SIPs. However, if they sell the land at a better price or buy a cheaper house, and considering the incremental rise in Rohit’s income, the Joshis may yet manage to save for these two important goals.
RECOMMENDATIONS
MUTUAL FUNDS
SIPs: HDFC Top 200, UTI Dividend Yield and Reliance Equity Opportunity.
Advice: The Joshis should acquire exposure to equity to allow their investments to grow. Since they are new to the market and have a low risk appetite, they should do so through SIPs in mutual funds. All these funds have a proven track record and history, and will help them build a corpus to achieve their goals.
JOSHIS’ GOOD MOVES ...
Buying adequate life insurance through a low-cost term plan.
Buying adequate life insurance through a low-cost term plan.
Maintaining a healthy savings rate.
… AND THE BAD ONES
Having no exposure to mutual funds.
Concentrating investments in real estate.
Buying traditional, expensive insurance products.
