Jun 02 2014 : The Economic Times (Mumbai)
Tweaking of portfolio crucial to meeting goals
A reasonably high income, limited goals and a good savings rate will
allow the Rohatgis to achieve their goals, but they will need to realign their
asset allocation and junk some insurance plans.
ROHATGIS' GOOD MOVES...
Maintaining a high saving rate.
Buying a house early in life.
Buying adequate life cover with an online term plan.
Buying a house early in life.
Buying adequate life cover with an online term plan.
AND THE BAD ONES...
Relying solely on health insurance from employer.
Investing heavily in debt instruments.
Not planning investments for future goals.
At first glance, it seems that the finances of the
Rohatgis are on an even keel. But look closely and you will notice the chinks
in their planning. Like most other investors, they also have several high-cost
traditional life insurance policies. There is also too much of fixed income and
too little exposure to equities. This is because their long-term home loan has
elbowed out all other investments.
Sumit Rohatgi, 34, lives with his homemaker wife
Bharti, 33, and three-year-old son Aarav in Gurgaon. A chartered accountant, he
brings home a monthly salary of `1.5 lakh. Of this, `50,000 goes into the
family's living expenses and another `58,000 flows out as the home loan EMI. After
paying Aarav's playschool fee and Sumit's life insurance premiums, the family
is left with a surplus of `16,300 per month. Their flat in Gurgaon is worth
`1.3 crore, but they still have an outstanding home loan of `58 lakh.
The good part is that the Rohtagis have realised it
very early that they need to put their finances in order. Sumit has two term
insurance plans for himself--one to cover the home loan and the other for
protecting his income. “He has done the right thing by buying insurance early.With
a total cover of `1.58 crore, he is adequately covered,“ says Pankaaj Maalde of
Apnapaisa.com. However, Maalde is not so appreciative of the five traditional
policies in Sumit's portfolio. These policies gobble up `83,000 per year and
give him a combined cover of `21.5 lakh. So, Maalde suggests that Sumit
surrender the four endowment policies he has purchased since 2005. Only the
money-back plan that was purchased in 1999 should be retained because it is
nearing maturity in 2019. Surrendering the costly endowment policies will not
only yield around `3.15 lakh but also free up almost `7,000 a month for other
goals.
While the Rohatgis have taken adequate life
insurance, they are not very well-covered on the health front, as they only
have the group health cover provided by Sumit's employer. This is inadequate
and they should buy an additional family floater cover of at least `5 lakh.
Sumit's professional qualifications will prove useful here. The Institute of
Chartered Accountants has tied up with the New India Assurance Company to
provide group health insurance cover to chartered accountants at nominal rates.
Being the sole income earner of the family, Sumit
should also consider taking a personal accident cover. Accident insurance is
very cheap and a cover of `25 lakh will cost no more than `1,200 a year. If the
cover is enhanced to include disability and medical and hospitalisation
expenses, the premium is higher at `3,000 a year. Even so, it is an important
cover that no other form of insurance provides. The new policies will result in
an additional premium of `600 a month, which can be taken care of by the
surplus.
Right now, the Rohatgis have an investible surplus
of `16,300, which will shoot up to `23,683 after the suggested life insurance
policies are junked, allowing the couple to invest for other key goals. The
goals include building a contingency fund, saving for Aarav's education and
marriage, as well as for their own retirement.
To build the contingency corpus equivalent to three
months' expenses, the couple need to have `3.79 lakh. However, they will be
able to muster only `2.5 lakh by allocating their existing cash balance, fixed
deposit and debt fund investments. They can build this up gradually with the increase in Sumit's income.
Like other parents, the Rohatgis too have Aarav's
education and marriage among their key goals. The `20 lakh they are targeting
for his higher education would be actually `63 lakh in 18 years. They should
start a monthly SIP of `12,000 in an equity fund for this. His marriage 25 years
from now will cost them `54 lakh. Maalde suggests they start putting `4,000 in
an equity fund and `1,000 in a gold fund to reach this goal.
Finally, the couple needs to plan for retirement.
Sumit wants to quit working at 55 and is targeting a monthly income of `1.5
lakh at current prices. However, early retirement is a double whammy. Not only
do you have lesser time to accumulate, but the corpus has to be larger to fund
a longer period during retirement. Assuming an 8% inflation, the Rohatgis will
have to accumulate almost `10 crore that will fund their expenses for 25 years
after Sumit stops working. This is why Maalde suggests that he push back his
retirement plan by five years.Then he will have to save `9.25 crore, which will
be adequate for funding the retirement expenses over 20 years.
The couple is advised to deploy the surrender
proceeds of the insurance policies in equity mutual funds for retirement. This,
along with their existing investments in stocks, equity mutual funds, NPS, PPF
and Provident Fund, will yield `7.11 crore in the specified time frame of 26
years. For the balance, the Rohatgis will have to start fresh SIPs of `9,000 in
equity funds. However, since their current investible surplus is not adequate,
they can start by putting in `6,000 for this goal and increase it to the
required level as and when they can increase their surplus.
The Rohatgis must also aggressively try to pay down
their home loan. They are currently paying a huge EMI, but their outstanding
loan amount is reducing at a very slow pace because of the high rate of 10.4%
and a long tenure of 19 years. Hence, any windfall gain or lump-sum income
should be used to prepay the home loan.
