Early start to help clear financial blocks
In their 20s, the Joshis can look forward to a smooth financial trip if
they increase the equity exposure and start aligning their investments with
their long-term goals.
At first glance, the Joshis seem to be on track with their financial
planning. Perhaps the road seems smoother because they have a long way to go.
An early start invariably makes for a good start because there is much scope
for course correction and rectification. A second glance, of course, reveals
the flaws in the plan, which need to be amended to ensure achievement of goals.
The Pune-based couple has simple enough goals typical of an average Indian
family--building an emergency corpus, saving for the education and marriage of
their future child, buying a car and saving for retirement. According to
financial planner Pankaaj Maalde, these should not pose a problem if they start
investing keeping the goals in mind. Here's how they can do this.
Existing financial status
Darshit is a 27-year-old chartered
accountant, who stays with his 22-year-old wife, Prachi, in a rented house in
Pune.While Prachi is a homemaker, Darshit brings in a monthly income of
`80,000.Darshit has also bought a house worth `45 lakh in Ahmedabad jointly
with his mother. He has taken a loan of `21.5 lakh for this investment and is
currently paying an EMI of `25,600. The other monthly expenses include `33,583
for household management and `4,358 as insurance premium, besides an investment
of `1,000 a month. This leaves him with a surplus of `23,209.
Currently, almost 95% of the Joshis'
portfolio is invested in debt via the PPF, EPF, fixed deposit and jewellery,
while a minuscule 5% is in equity in the form of stock investment. Maalde advises
a change in this ratio, allocating nearly 70% to equity and the rest to debt
and gold.However, before he charts out a course for the Joshis, he considers
their insurance portfolio.
Insurance coverage
Darshit currently has life insurance
from a term plan and a traditional plan, which provide him a cover of `60 lakh.
Maalde advises him to continue with the term plan but surrender the expensive
traditional plan. Though he will lose the premium already paid, this move is
recommended because the low returns from this plan will not be able to beat
inflation in the long run. Instead, he should buy another online term plan
worth `50 lakh for 30 years, which will cost him `5,000 per annum. Since Prachi
is not working, she doesn't need to be covered as of now.
As for health insurance, though Darshit
is covered by his employer for `3 lakh, he has done the prudent thing by buying
an independent family floater plan for `5 lakh. Maalde suggests that he
increase this to `10 lakh, which will cost `8,000 per annum. He should also opt
for accident disability as well as critical illness plans worth `50 lakh each,
and these will cost him `15,500 annually. This cost can be easily covered by
his surplus and will, in effect, reduce his total premium outgo to `3,458 a
month, increasing the total investible surplus by `900.
Road map for the future
The first step in any financial plan is
making the provision for a contingency corpus, which can be equal to 3-6
months' household expenses. In the case of Joshis, they can save three months'
expenses amounting to `1.89 lakh by allcoating their cash holding of `14,500
and fixed deposit of `25,000. Besides this, they will need to save their
surplus for six months to build an emergency corpus of `1.9 lakh. This means
that they can start investing for all their goals only after six months.
Now, the Joshis can start planning for
their financial goals, beginning by saving for their future child's education
and marriage. The couple is planning a baby next year, so they should need the
funds for the respective goals in 19 and 26 years.
To accumulate funds for education
expenses, the Joshis estimate that they will require `70 lakh in nearly 19
years. For this, they should start investing `7,000 a month through a SIP in an
equity diversified fund, which at 13% annual growth rate, will yield the
desired corpus in the given time frame.For the child's marriage, the couple
needs a sum of `1.03 crore in 26 years. To meet this objective, they will need
to invest `5,000 in an equity diversified fund to give the required amount. No
other existing resource has been allocated for these goals.
As for retirement, the Joshis will
require `8.3 crore to maintain their current lifestyle. To achieve this, they
will have to assign their existing PPF and EPF corpuses, as well as the stock
investment of `15,700, which will yield `2.23 crore in 33 years. To make up for
the shortfall, the couple will have to start a fresh SIP of `10,000. Of this,
they can invest `9,000 in an equity diversified fund and `1,000 in a gold fund.
Combinedly, the investment should help reach the objective in the specified
time frame.
Besides these goals, the Joshis want to
buy a car worth `10 lakh in five years. However, after investing for the other
goals, they will be left with a surplus of `3,000 which will not be sufficient
for this goal. So, they should either lower their expectation and buy a cheaper
car or push back the goal by a few years. However, they can start investing
`3,000, which will help accumulate `2.42 lakh in five years. They are also not
advised to take a loan at that point because of the high interest rate. However,
they can review their plan after five years.
