Need to
streamline existing investments
The Chauhans not only need to realign their portfolio, with a rise
in equity exposure, but also make fresh investments to be able to reach their
primary goals with ease.
The saving habit is
engrained so deeply in Indian investors that most do it instinctively and,
often, blindly. They save as and when the funds are available, in any
instrument they like or is suggested to them, irrespective of the terms of
their goals or the amount required. As a result, the investments and goals are
often mismatched, and in some cases, the financial milestones are not achieved.
This is where planning comes in. It not only helps connect with reality by
defining the exact amount required in a given time, but also the path that can
take one there. Gujarat-based Kiran Chauhan is undertaking this exercise a bit
late in life, but given his disciplined savings, financial planner Pankaaj
Maalde will be able to chart out a course that can help him achieve most of his
goals.
Existing financial status
Chauhan is 38 years old and
works in a public sector company at Bhuj, Madhapar, in Gujarat. He stays in his
own house with wife Chetna, 37, and two children aged 13 and eight. While
Chetna is a homemaker, Kiran earns `50,000 a month. Of this amount, `21,250
goes in household expenses, `3,283 as insurance premium, `3,000 for children's
education, and `13,847 as EMIs for home and car loans. Of the remaining amount,
Chauhan invests `8,000, and is left with a surplus of `620 a month. “I want to
know how and where I should invest to meet all my goals,“ says Chauhan. The
goals include building an emergency corpus, saving for the children's education
and weddings, and for their own retirement.
Chauhan's existing portfolio
comprises 14% real estate, including a self-occupied house and a plot of land;
58% in debt, in the form of EPF and PPF, fixed deposits and debt funds; and the
remaining 28% in equity in the form of stocks and mutual funds.However, before
Maalde suggests changes in Chauhan's portfolio, he will assess the family's
insurance needs.
Insurance portfolio
Chauhan currently has four
traditional plans and two term plans, for which he pays an annual premium of
`39,400. Since the traditional plans are likely to yield returns that can beat
inflation, Chauhan is advised to retain these as a debt part of his portfolio.
As for life insurance, he will require an additional cover of `75 lakh, for
which he should buy an online term plan for 25 years at a cost of `15,000 per
annum.Chetna doesn't require any life cover because she is not employed.
Since Chauhan is employed
in government service, his and his family's medical insurance needs are taken
care of. However, Maalde suggests he take an independent family floater cover
worth `10 lakh, which will cost him `22,000 a year. He should also pick up a
critical illness plan and an accident disability cover worth `25 lakh each, and
these will come for a premium of `12,000 a year. The fresh insurance plans will
cost Chauhan an additional `4,092 as premium, which can be sourced from the
investible surplus.
Road map for the future
Before suggesting a course
of action, Maalde suggests that Chauhan repay his outstanding car loan of `4
lakh so as to boost his investible surplus. To do so, he can use his fixed
deposit partially. It will help him save the EMI of `7,143 and increase his
surplus to `15,763.
After this, Chauhan should
consider keeping a contingency corpus of `2.28 lakh, which is equal to his six
months' expenses. For this, he can rely on his cash holding of `50,000 and debt
mutual fund of `1.5 lakh. Now, Chauhan can consider planning for his other
goals, the first of which is saving for his children's education. His son is 13
years old and, for his higher education in five years, Chauhan has estimated a
need of `14.5 lakh. To amass this sum in the short period that is available to
Chauhan, he can depend on his existing resources. He should assign his
remaining fixed deposit amount and plot of land worth `5 lakh to meet this
goal. The FD amount should be deposited in a balanced fund, while the plot
should be sold at least two years before the goal.
As for his daughter's
education, Chauhan will need `21.5 lakh in 10 years. For this, he can utilise
his stock and mutual fund investments, which will yield the desired sum in the
specified period. He should, however, exit the stocks and invest in an equity
diversified fund to ensure safety of investment.
Next, Chauhan wants to save
for his daughter's wedding, for which he will need `37 lakh in 17 years. To
achieve this goal, he will need to start a fresh investment of `4,000 in an
equity fund and `1,000 in a gold fund through SIPs. For his son's wedding,
Chauhan will need `12.6 lakh in 12 years. For this, he should invest `4,000 in
an equity fund via an SIP, but since he doesn't have enough surplus, he should
do it after an increase in salary.
Finally, for retirement,
the couple will require `3.28 crore in 22 years. To achieve this goal, Chauhan
will have to allocate his PPF and EPF corpuses, besides his traditional
insurance plans and partial mutual fund investment. These instruments will
yield a sum of `2.33 crore in the given time, and for the balance amount,
Chauhan should continue with his existing SIP of `6,500 in two equity funds. He
is also advised to stop the additional VPF contribution of `4,500 a month and
invest it in an ELSS fund.
