High savings bring all goals
within easy reach
Rao is set for a smooth journey if he
raises his equity exposure and aligns his investments to goals.
Sanjiv Rao is on the right track, but needs directions to ensure that he
reaches the destination. While the 32-year-old is saving nearly 50% of his
income and has a creditable net worth of nearly `60 lakh, he needs to put his
surplus to work if he wants to reach his goals. As of now the goals include
getting married by next year, buying a house, and building corpuses for
emergencies and his retirement. Given his high income and robust portfolio, Rao
doesn't need to be overly concerned. However, he needs to lay out a plan and
follow it with discipline. To help him do this is financial planner Pankaaj
Maalde, who explains how he can achieve all his objectives with ease.
Existing financial status
Bengaluru-based Rao is a salaried
professional in the field of information technology and earns `1 lakh a month.
Since he is single, he manages to save a large portion of his income.His
financial outgo comprises household expenses of `37,084, which includes a house
rent of `12,000 a month. Besides this, he pays a monthly premium of `9,833 for
his insurance policies, and invests `3,000 in mutual funds. This leaves him with
a surplus of `50,083.
As for Rao's investments, nearly 67% of
his portfolio is in debt, 25% in equity and 8% in gold. At his age, he should
have a higher percentage in equity so that his money can grow at a faster clip.
Maalde plans to alter this by increasing the equity exposure to 70%. Rao has
also bought a house recently, whose possession he is awaiting. Maalde advocates
taking a loan for this house, but before that he assesses Rao's insurance
portfolio and recommends some changes.
Insurance coverage
Rao currently has three insurance
plans-term, Ulip and a traditional policy--for which he is paying a combined
annual premium of `1.18 lakh. After considering the traditional plan's present
surrender value, future premiums and expected maturity value, Maalde concludes
that its rate of return is likely to beat inflation. Hence, Rao is advised to
continue with it and include it in the debt portion of his portfolio. He should
also continue with his Ulip since it has low charges and is giving good
performance, and can review its performance after five years. The term plan
should also be retained, but Rao needs to buy another term plan of the same
amount when he takes the home loan, and it will cost him `7,000 per annum.
As for health insurance, Rao currently
has `3 lakh worth of cover provided by his employer. He is advised to buy
another `5 lakh of cover for himself, which will result in an annual premium of
`6,000. Besides this, he should pick up a critical illness plan and an accident
disability cover of `25 lakh each, which will cost `10,600 a year. This extra
cost can be funded by his surplus.
Road map for the future
Before charting a course for Rao,
Maalde suggests that he take a home loan for the house worth `95 lakh that he
has bought. Rao will have to pay `5 lakh from his own resources and take a loan
of `50 lakh, for which the EMI will be `44,500 assuming an interest rate of
10.15%. However, he doesn't need to start the EMI till the complete
disbursement of loan and can pay only the interest component till such time.
This will amount to `9,000-10,000 a month in the first year, `18,000-20,000 in
the second year and `27,000-30,000 in the third year. As for `5 lakh to be
given to the builder, Rao can amass it by deploying his surplus of `34,500 to
this goal for a year after getting married. He will also need to allocate his
infra bonds to this goal.
As for the other goals, Rao first needs
to focus on building an emergency corpus, which should be equal to three
months' expenses, which amounts to `2.8 lakh. For this, Rao can simply allocate
his current savings bank cash holding of `3 lakh. This money should be held in
an ultra short-term debt fund for easy access.
Next, Rao needs to collect funds for
his wedding, which is planned next year and for which he estimates a need of
`10 lakh. To achieve this goal in the short time frame, Rao should dip into his
existing resources and allocate investments, including stocks (`1.5 lakh),
mutual funds (`1 lakh), fixed deposit (`1 lakh) and gold (`1.5 lakh).
Combinedly, these amount to `5 lakh. For the remaining amount, he can start
saving his investible surplus of `34,500 a month for a year, which will help
build the required corpus.
Finally, Rao needs to prepare for his
retirement, which is 29 years away and for which he needs `6.8 crore. Maalde
has allocated his EPF and PPF investments, as well as the maturity value of his
Ulip and traditional insurance plan. These will add up to `4.87 crore in the
given period. For the remaining amount, Rao needs to invest `6,000 in a diversified
equity fund. Since he already has a SIP of `3,000, he should increase it to
`5,000 and invest another `1,000 in the PPF till retirement. This will help him
reach the goal without a problem.
While Rao also wants to plan for his
future children, he can put off the goals till after he is married and has more
investible surplus to invest for them.
