A shift in investing gear needed to reach targets
The Bhavsars must diversify their portfolio and cover their risk to secure their financial future.
SAKINA BABWANI
The Bhavsars must diversify their portfolio and cover their risk to secure their financial future.
SAKINA BABWANI
BHAVSARS GOOD MOVES ...
Having a high rate of savings.
Having a high rate of savings.
Buying a house at an early stage.
AND THE BAD ONES
Inadequate health and life insurance.
AND THE BAD ONES
Inadequate health and life insurance.
Not earmarking funds for future use.
The Bhavsars may be predictably
boring,but boring can be good when it comes to financial planning.As with most
Indians,the Bhavsars have nearly 70% of their portfolio in real estate,have a
high savings rate,may have erred with their insurance purchases,but are working
towards typical,realistic goalssaving for retirement and their daughters
education and wedding.This predictability and adequate income mean that with a
little juggling by financial planner Pankaaj Maalde of ApnaPaisa.com,and
diligent action by the Bhavsars,the family should reach their goals without
much strain.
Anukul,37,works with an infrastructure firm and lives with his wife Trupti,32,and five-year-old daughter Meethli,in Mumbai.Anukul takes home a monthly salary of 65,000,while Trupti is a homemaker.I did not have a specific plan to invest in real estate.My father bought the house almost a decade ago,which now belongs to me, says Anukul.Besides this,they have another house in which they currently live and which has been bought through a home loan.Of the remaining portfolio,they have about 13% invested in debt,while 6% is held as cash.
As for their expenses,22,000 is spent on the household,while Meethlis education costs 5,000 a month.Another 3,000 is expended on travel and vacation,while Anukul sends 5,000 to his parents,who also stay in Mumbai.Apart from this,he is servicing two loans,with the home loan EMI working out to 5,000,and the one for the two-wheeler amounting to 3,650.Accounting for the insurance premium of 2,017 a month,Anukul is left with a surplus of 19,333.This needs to be invested carefully in order to achieve all the goals.
However,the Bhavsars need to secure themselves against emergencies and purchase adequate insurance before their financial road map is laid out.In order to build an emergency fund that is equal to three months expenses and which amounts to 1.33 lakh,they can use the 50,000 that they have in their savings account.However,they still need 83,000,which can be built with an increase in salary.Since their surplus is limited,Maalde suggests that it should be used only to meet their goals,not to build the contingency fund.
Next,the Bhavsars must make sure they have adequate life and health insurance.Currently,Anukul has a traditional plan,which provides him with a measly cover of 1 lakh.Hence,he must buy a term plan worth 1 crore,which will cost him 1,050 a month.As for health insurance,Anukul relies on the cover of 2.5 lakh provided by his employer,as well as his own family floater policy of 3 lakh.Maalde suggests that he port the existing health plan to Apollo Munichs Easy Health Standard Plan as his current plan is more expensive.He should buy an additional individual top-up plan of 5 lakh,with a deductible of 3 lakh for each family member,including his parents.This will cost him 950 every month.Maalde also recommends that Anukul repay his vehicle loan of 32,000 with the help of his bank fixed deposit of 30,000.This will free 3,650 every month,which can be used to pay the additional insurance premium.
After covering the risk,the Bhavsars can plan for their goals,among which funding their daughters education is a priority.They need 27 lakh in 13 years to meet this goal,for which Anukul must start a monthly SIP of 5,400 in equity mutual funds.He must also invest 600 every month in his PPF account.The combination of these funds is assumed to generate an annual return of 14.3%,which will help in achieving the target.To fund Meethlis marriage expenses of 14 lakh in 16 years,Anukul will have to start a monthly investment of 2,000 in equity mutual funds and gold funds in the ratio of 90:10.
Next on the priority list is their own retirement,for which they need 4 crore in 23 years.Anukuls EPF balance will contribute 80 lakh towards this goal,while his second two-room house in Mumbai,which is currently valued at 6 lakh,will give him 54 lakh.His LIC policy,which matures after 12 years,will fetch nearly 8 lakh,which should be invested in equity and the PPF in the ratio of 90:10.His existing mutual fund investments are likely to generate 8 lakh,which can be added to this goal.To meet the shortfall of 2.5 crore,the Bhavsars will have to start a fresh monthly investment of 12,000 in equity mutual funds and the PPF in the ratio of 90:10.This combination of funds is expected to generate a return of 14.3% every year.
Another of Bhavsars goal is to shift into a bigger house in two years and this is likely to cost them about 70 lakh.Selling their current house would fetch them 40 lakh,but the family will need a loan to make up for the remaining 30 lakh.However,since Anukul does not have a surplus to service the EMI,he will have to postpone this goal till his income rises sufficiently.
Financial plan by Pankaaj Maalde,CFP,Head,Financial Planning,ApnaPaisa.com
