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Goals within reach with higher equity exposure
Despite heavy reliance on real estate,
the Patils will be able to meet their financial milestones with their high
saving rate and if they alter their investing preference and shift to mutual
funds.
The risk appetite for most investors ranges typically between low and
medium. This invariably translates into portfolios that veer alarmingly towards
real estate and debt investments, including fixed deposits and traditional
insurance policies. The more daring ones have a sprinkling of equity, with a
few stocks and mutual fund investments. The Patils, too, have found the nerve
to venture into equity, but the investment is inadequate since their focus has
expectedly been on real estate and debt. Still, the high income and savings
will ensure that the family reaches its goals comfortably.
Vivek Patil,35, is a scientist in a
government organisation and stays with his 33-year-old wife, Priti, who is a
school teacher, in Thane, Maharashtra. They have two kids--seven-year-old
Atharv and two-year-old Arnav. Vivek's monthly takehome salary is a comfortable
`65,000, which is supplemented by a rental income of `18,500 and `7,000 from
Priti's salary. The total household income adds up to `90,500.
As for the financial outgo, the Patils
spend `31,167 in household and miscellaneous expenses. A large chunk of their
income, `32,000, goes into paying the EMIs for the two home loans that they
took in 2006 and 2009. While they live in one of these houses, the other has
been rented out. The loan repayment for both the houses will end in 2021.
Besides these expenses, they spend `4,000 on Atharva's education every month,
while `2,750 goes as premium payment for their insurance policies. This leaves
them with a surplus of `21,583, which will have to be invested in equity if the
couple wants to reach their financial milestones. Their major goals include
building a contingency fund, corpuses for their sons' education and marriages
and their own retirement. “Since I didn't know how to calculate the amount I
would require for all these goals, I thought of approaching a financial
planner,“ says Vivek.
Before Pankaaj Maalde of Apnapaisa.com
lists out a road map for their finances, he wants to assess their insurance
portfolio. Vivek has adequately covered his life with a `50 lakh online term
plan and also has four traditional insurance policies. After considering their
present surrender values and future premiums payable, the expected maturity
values based on the current bonus rates are likely to beat inflation. Hence,
Maalde suggests that they retain all of these policies as the debt component of
their portfolio, and these will help meet some of their financial goals.
As for health insurance, the fact that
Vivek is a central government employee means that their medical expenses will
be taken care of even after retirement. So they don't require any medical
insurance, but Maalde suggests they buy an accident and disability insurance
worth `50 lakh, which will cost them `7,000 annually and can be easily covered
by their surplus.
Next, the Patils need to build a
contingency corpus since they have neglected one. Since they require `2 lakh,
which is equivalent to their three months' expenses, they should allocate their
cash reserve of `1 lakh and fixed deposit, which will suffice as emergency
corpus. They should invest this amount in a liquid or ultra short-term debt
fund.
To plan for their other goals, they can
begin by taking care of their sons' education needs. For their older son,
Atharv, the Patils will require `28 lakh in 11 years.To amass this amount, they can allocate their current mutual fund SIP of `1,500
and enhance it to `8,500 in an equity fund. The Patils are also advised to sell
their stock holding and invest in mutual funds. For their second son's higher
education, they have estimated a sum of `46 lakh in 16 years. To get to this
milestone, they need to invest `7,500 through a monthly SIP in an equity fund.
At a growth rate of 12%, they should be able to meet this target with ease.
To accumulate funds for their
children's weddings, the Patils have zeroed in on sums of `28 lakh and `45 lakh
in 18 and 23 years for Atharv and Arnav, respectively. To meet the first
target, Maalde advises the Patils to allocate their traditional insurance policies.
Besides these, they will have to start an SIP of `1,000 in an equity fund, and
another one of `500 in a gold fund. Combinedly, these will amount to the
desired amount. For Arnav's wedding expenses, the Patils need to start an SIP
of `2,500 in an equity fund and `500 in a gold fund. Together these will yield
the `45 lakh they require in 23 years.
To plan for their retirement, the
Patils can rely on their existing resources and don't need to make a fresh
investment. They will require nearly `5.5 crore in 25 years to continue with
their current lifestyle after retirement. For this, they can allocate their EPF
and PPF corpuses, which will yield about `78 lakh at 8% in the given time
frame. The bigger chunk will come from their second house, whose value will be
about 5.13 crore in 25 years at a moderate appreciation of 8%.These will
provide them with the required retirement kitty in the specified time.
The Patils have another goal of taking
a European vacation in another 10 years. This will cost them nearly `10 lakh at
the current cost. However, currently they don't have any investible surplus as
it has been exhausted in planning for the other, more important, goals. If,
after a few years, their income sees a sufficient rise, they can assess their
financial situation and allocate funds to this goal accordingly. If not, they
can postpone the goal till the time they think they can meet it, or abandon it,
but should not sacrifice the more important targets for it. Financial plan by
Pankaaj Maalde, Head, Financial Planning, Apnapaisa.com
