Greater need to align investments with goals
A focused approach to planning and the impending
rise in income should see the Kumar family meet their objectives. They also
need to ensure better risk coverage to secure their finances.
The term `financial planning' presumes the
existence of a plan which an individual follows. Haphazard investment without
an objective or goal in mind often translates to frittered effort or lost cost
of opportunity. This is the reason the Kumars have made a good decision in
seeking professional advice. While the Jammu-based couple has done well to
start saving and investing at an early stage in life, they have no focus and
have not aligned investments to their goals. This is the reason they are not
sure whether they will be able to reach these or not. Financial planner Pankaaj
Maalde will help them streamline their finances in a manner that they shall
have greater clarity about where they are headed and how to get there without
much struggle.
Existing financial status
Jitendra Kumar is 32 and stays in Jammu with his
25-year-old wife Neha, who is a homemaker. The couple is planning to have a kid
by next year, which has increased the urgency to get their finances in line.
Jitendra is an engineer who works with the government and brings in a salary of
`64,500 a month. However, he is expecting a rise of nearly 30% by next year,
which is likely to bolster his investments. Till such time, he can follow the
plan formulated by Maalde and make the necessary changes later.
Kumar's current outgo adds up to `61,162,
leaving him with a monthly surplus of `3,338. While household expenses take up
`25,000 a month, `8,000 is given out as car loan EMI. Besides these, he pays an
insurance premium of `1,662 and a big chunk of `26,500 is invested every month.
While `10,500 is deducted from his salary towards the NPS, he invests `4,000 in
the PPF and `12,000 in mutual funds through monthly SIPs. As for his portfolio,
Kumar has invested nearly 62% in debt, which include the NPS, PPF and bonds.
Another 20% is in equity in the form of mutual fund investments, and 18% is in
real estate. The latter comprises a plot of land worth `2.17 lakh.
Maalde will not only calculate the amount he
will require for his goals but also how to use his existing resources optimally.
He shall, however, begin by assessing the couple's insurance needs.
Insurance portfolio
Kumar has shown a degree of awareness by buying
both life and health insurance plans, but both are currently inadequate. He has
a life insurance policy worth `40 lakh, but he should have at least `1 crore
worth of insurance. So, he is advised to buy an online term plan that shall
cost him `12,000 per annum.Since Neha is not working, she doesn't require a
life cover as of now.
As for health insurance, Kumar has bought a `3
lakh family floater plan. However, Maalde suggests that he buy a `10 lakh
policy, the premium for which will come to `18,000 per annum. Kumar should also
buy an accident disability insurance policy worth `50 lakh, which will cost him
`7,000 a year. He is also advised to purchase a critical illness plan worth `25
lakh but only after an increase in his income since he doesn't have enough
surplus.
Road map for the future
To begin with, the couple need to have an
emergency corpus in place which is equal to their three months' expenses and
amounts to `1.08 lakh. For this goal, Maalde suggests they allocate `50,000 of
their cash holding, bonds worth `23,000 and mutual fund investment of `46,000.
After setting up the contingency corpus, Kumar
can plan for his other goals, the most important for him being the purchase of
a house even though the family is currently staying in government
accommodation. He is advised to buy a built property into which they can shift
immediately instead of one that is under construction. He wants to buy a house
worth `56.4 lakh in five years and make a down payment of `20.4 lakh. For this,
he will have to allocate the plot of land worth `2.17 lakh and mutual fund
investment of `2 lakh, which will contribute `6.65 lakh in five years. To make
up for the shortfall of `13.65 lakh, Kumar will have to start an SIP of `17,000
in a balanced fund for the first four years. In the fifth year, he should
consider shifting the corpus to a recurring deposit to ensure the safety of
capital.
After five years, Kumar will have to take a home
loan of `36 lakh for 25 years, which will result in an EMI of `32,800 at an
interest rate of `10%. Since he currently has a surplus of only `17,000, he can
fund it by the rise in his income and by redirecting the car loan EMI of `8,000
since the loan would have ended by then. However, he can review the plan at
this point according to his prevailing financial situation.
The next important goal for the couple is
retirement, for which they will need `6 crore after 28 years. For this, Kumar
should allocate the PPF and NPS investments, which are likely to yield `2.5
crore in the specified time period. To build the remaining corpus, he needs to
start an SIP of `10,000 in an equity fund. Since he doesn't have the required
surplus, he should start investing after the expected rise of 30% in his income
next year.
The couple also wants to start planning for
their future child's education and wedding.For the former goal, Kumar has
estimated a need of `40 lakh in 18 years. To achieve this, he will have to
start an SIP of `5,000 in an equity fund. However, since he doesn't have the
surplus, he can start doing it as soon as he has the required capital.
Kumar has decided to give priority to the
purchase of house over retirement and his future child's goals of education and
wedding even though he has the advantage of residing in a government house. As
such, he needs to ensure that the increase in his income is sufficient enough
to take care of his other goals.
