Streamlined investing to ensure smooth ride
The
Kumars need to increase their equity exposure, cover their risks adequately and
align their investments with goals to guarantee financial security for the
future.
Most
people are blind investors. They don't work to a plan, never link investments
to financial goals and put in money randomly in any avenue that takes their
fancy. Among the many drawbacks of this trait is that one never knows if the
goal is within reach or if one is making the money work as hard as it can. Much
like the average Indian investor, Chennai-based Veerendra Kumar has made this
mistake. Despite saving and investing diligently for years, he doesn't know how
and, whether, he will meet his goals. So approaching a financial adviser is a
good step to take a reality check and execute course corrections, if required.
To assist him in this endeavour is financial planner Pankaaj Maalde, who will
define the course and prepare a plan for the Kumars.
Existing financial status
Kumar is
34 years old and stays in Chennai with his homemaker wife Sujana, 31, and two
children, aged five and one. Among his other financial dependants are his
parents, who are 61 and 58 years old, and his brother.Kumar brings in a monthly
salary of `85,000 and his financial outgo is `70,100, leaving him with a
surplus of `14,900 each month.Kumar spends `28,000 on household expenses and
`10,000 on house rent, while `7,000 goes for kids' education, `16,700 as
premium for insurance policies and `8,400 as EMI for the car loan he has taken.
As for
Kumar's financial portfolio, he has split it almost evenly between debt (48%)
and real estate (46%), with a minuscule 6% in equity. If he wants to achieve
his goals, he will need to increase his equity exposure and reduce real estate.
The goals are simple enough: build an emergency corpus, construct a house, save
for children's education and weddings, and plan for retirement. Before Maalde
formulates a plan for them, he will assess their insurance portfolio and
suggest changes, if required.
Insurance portfolio
Kumar has
three traditional plans and two Ulips, but these offer a low cover at a high
premium. Kumar has paid all the premiums for the first plan, but he is advised
to surrender the second one and can continue with the third one as it is likely
to give returns that can beat inflation in the future. As for the Ulips, he is
advised to surrender one and stop paying the premium for the other one.However,
since he doesn't have sufficient life insurance, he should buy a term plan of
`1.25 crore for 25 years, which will cost him `12,000 per year.
As for
health insurance, Kumar is currently relying only on the cover provided by his
employer. Hence, he should buy a family floater plan worth `10 lakh, which will
result in an annual premium of `20,000. He has, however, taken the right
decision about purchasing a medical plan for his parents and should continue
with it.Kumar should also consider buying a personal accident disability cover
of `50 lakh as well as a critical illness plan of the same amount. These will
cost him an additional `18,000 a year.
Despite
purchasing fresh covers, Kumar's premium outgo will reduce by `5,667, which
will help increase the investible surplus to `20,567 a month.
Road map for the future
Now,
Kumar can start planning for his goals, the first of which is building a
contingency corpus equal to six months of his expenses.This amounts to `3.86
lakh and can be sourced from his existing resources. He can deploy his cash of
`50,000, fixed deposit of `1 lakh, and debt investment of `2.25 lakh.These will
amount to `3.75 lakh and will suffice as an emergency corpus.
Next,
Kumar wants to build a house on one of his plots of land in a year's time. This
will cost him `10 lakh and he can get the funds by selling his second plot
worth `6 lakh and using his fixed deposit of `4 lakh.He doesn't need to make
any fresh investments for this goal.
Kumar
also wants to plan for the education expenses of his children in 13 and 17
years. For his son's higher studies, he has estimated a need of `41 lakh, and
to meet this goal, he will have to start an SIP of `10,000 in an equity mutual
fund. Similarly, for his daughter, he wants to amass `56 lakh and will again
have to start an SIP of `7,500 in an equity fund. This will help him accumulate
the desired amount in the specified period.
Retirement
is another important goal for Kumar, and for this he wants to acquire `7 crore
in 26 years to be able to maintain his current lifestyle. To be able to meet
this, he will have to assign his EPF savings worth `7.32 lakh, stocks
(`56,000), debt investment of `1.6 lakh, surrender value of Ulip and the
maturity value of two of his insurance policies. Combinedly, these are likely
to yield `4.95 crore in the given time. To make up for the shortfall, he will
have to start an SIP of `8,500 in a diversified equity plan.However, since he
will be left with a surplus of only `3,000 after investing for other goals, he
can start with this amount and increase it next year when he shifts into his
own house and stops paying the rent of `10,000.
Kumar
also wants to save for his children's weddings when they turn 25 and has
estimated that he will require `47 lakh for his son and `63 lakh for his
daughter. To achieve these goals, he will need to invest `4,000 and `3,500,
respectively, in equity funds through SIPs. However, since he doesn't have the
required surplus now, he will have to put these off till next year, when he
saves on rent and gets a salary increment.
