Focus on property may
jeopardise other goals
The
Kinariwalas have been aggressive investors with a well-diversified portfolio,
but their desire to buy a larger house may impact the planning for other
crucial goals like retirement.
Not many
young investors in India are daring enough to assign nearly 55% of their
holding to equity. At 33, Abdulquader Kinariwala has done just that. His
well-balanced portfolio has the right mix of stocks, equity mutual funds, and
debt in the form of EPF, PPF and debt funds. In fact, he has a reasonably high
net worth of `56.7 lakh, has bought an online term plan to secure his life, has
no debts or liabilities and, having started with his financial planning early,
wants to ensure that he meets all his goals with ease.
However,
on the flip side, Kinariwala's goal of buying a house in three years may
jeopardise his other financial objectives. He also has an inordinately large
and unwieldy portfolio of stocks and mutual funds that should be pruned. To
help Kinariwala streamline his finances, financial adviser Pankaaj Maalde will
prepare a plan that can serve as a guide.
Existing financial status
Kinariwala
stays in Mumbai with his 27-yearold wife Zenab, who is a homemaker, as well as
his parents, who are aged 64 and 56 years.Employed in a private company, he
brings in a monthly salary of `65,000. Of this amount, nearly `40,000 is spent
on household expenses, `6,401 goes out as insurance premium and `6,833 is
invested. This leaves him with a monthly surplus of `11,766 to invest in
avenues that will help him reach his goals.
The goals
include building an emergency corpus, buying a house, saving for their future
child's education and wedding, as well as for their own retirement. Since the
family lives in their own house, there should be no urgency to buy a new
property, but this goal is high on Kinariwala's priority list and Maalde will
attempt to accommodate it in the plan. To begin with, however, he shall analyse
Kinariwala's insurance portfolio
Insurance portfolio
As for
life insurance, Kinariwala has two traditional plans, one Ulip for which he has
stopped paying the premium, and one term plan worth `1 crore. Since he is
adequately covered for life, Kinariwala doesn't need to buy any more insurance.
Besides, Zenab is a homemaker so she doesn't need any life cover either.
Kinariwala
should continue with his Ulip for the next three years and should not pay the
future premiums. He should also shift 70% of the holding to debt funds and
retain 30% in equity. However, as far as the tradi tional plans are concerned,
he should surrender both as their returns are unlikely to beat inflation. This
will also help bring down the total premium and raise the investible surplus.
He is also advised to buy a `50 lakh accident disability insurance for himself,
which will cost `7,000 per annum, and a `50 lakh critical illness plan once his
income increases.
As for
health insurance, Kinariwala has a `5 lakh policy provided by his employer,
which covers him and his wife. However, Maalde suggests he buy a family floater
plan worth `10 lakh, which will cost him `11,000 annually. He has also bought a
`3 lakh cover for his parents and is advised to raise it by another `3 lakh at the
next renewal.
Road map for the future
To begin
with, Kinariwala needs to have a contingency corpus that is equal to six
months' expenses, for which he will require `2.67 lakh. To build this, he can
allocate the cash in his savings bank account, debt funds and the surrender
value of his two insurance plans, each worth `1 lakh.
After
this, he can focus on his goals, the foremost being the purchase of a house
worth `1 crore in three years. For this, he will need to sell his parents'
existing property worth `35 lakh, and should ensure that he buys a built house,
not one that is under construction. Further, he will have to allocate the
stocks (`4.59 lakh), equity funds (`3 lakh), as well as the Ulip (`3.71 lakh)
in a fund with 30% equity holding and 70% debt since the goal is short-term in
nature. This investment will yield `61.6 lakh in the given peri od.
Additionally, he will have to start an SIP of `20,000 in an income fund for the
first two years. He can consider shifting the amount to a recurring deposit to
ensure safety of capital as he approaches the goal.
For the
balance amount of `30 lakh, he will have to take a home loan for 24 years,
which will result in an EMI of approximately `27,600 at an interest rate of
10.15%. Currently, he has a surplus of `20,375--increased after the revamp of
insurance portfolio and other investments--and the remaining amount can come
from the increase in salary in three years' time.
The next
crucial goal is retirement, for which the Kinariwalas will require `6.5 crore
after 26 years. For this, Maalde suggests allocating his EPF and PPF
investments, which will yield `1.15 crore in the specified period.He should not
only continue investing in the PPF, but also try to contribute to the New
Pension System (NPS). However, to make up for the shortfall, he will have to
start an SIP of `21,000 in an equity fund. Since he does not have any surplus
for the next few years to invest for this goal, he will have to do it as soon
as there is a rise in income.
Similarly,
for the other goals, which include saving for his future child's education and
wedding, he will have to start investing once he has enough surplus. Since he
has a long time to achieve these goals, he can plan for these at a later date.
However, Kinariwala must understand that focusing on real estate will impact
his other goals and, if possible, he should scale down his goal value so that
he can start investing for other goals, especially retirement, simultaneously.
As for
the secondary goal of an annual vacation, he will have to keep it in abeyance
till he has enough funds and his primary goals are taken care of.
