Goals
need to reconcile with available surplus
Biswas will have to
supplement his income and raise equity exposure to meet his financial goals.
A crucial aspect of
financial planning involves not only having realistic goals and calculating
their future values correctly, but also reconciling these with one's investible
surplus. A flawed assumption in the case of former or a shortfall in latter can
result in unmet goals. For 36-year-old Santu Biswas, a bit of both means he may
find it difficult to meet his goals. Still, financial planner Pankaaj Maalde
will try to streamline his finances and suggest a course that will focus on
financial security both for him and his mother.
Existing financial status
Biswas stays with his
63-year-old mother in their own house at at Nadia, West Bengal.He is in
government service and draws a monthly salary of `29,000. His mother also draws
a pension of `10,000 a month.
Of this amount, nearly
`10,000 goes in household expenses, while `1,027 is paid as insurance premium.
Another `11,035 is the EMI amount Biswas pays for three personal loans. While
one has been taken from the bank, the other two are from his company and don't
incur any interest outgo. Since the bank loan will be fully repaid by February
next year, Maalde suggests he continue to pay the EMI.
Biswas also invests `3,000,
of which `2,000 goes in the PPF account and `1,000 is the mutual fund
investment that Biswas has started recently. This leaves him with a surplus of
`3,938 a month. This is a small amount to take care of his various goals, which
include building an emergency corpus, buying a car, taking a vacation, building
a corpus to start his own venture at 50, and saving for retirement. Given the
low investible surplus and few assets or resources, it is unlikely he will be
able to achieve all the goals.
Biswas has a meagre
portfolio, comprising 100% debt investment, which includes the PPF and fixed
deposit. Maalde suggests he increase the equity exposure, but begins his
financial planning by taking care of his and his mother's insurance needs.
Insurance portfolio
Biswas has one traditional
insurance plan, and Maalde suggests he retain it as a debt component of his
portfolio because the return is likely to beat inflation. However, he has
inadequate life insurance and should purchase a `25 lakh cover for 25 years. It
will cost him `10,000 per annum.
As for health insurance, he
is covered by the government scheme, but Maalde advises him to buy an
independent health cover worth `5 lakh, which will cost him `7,500 a year. He
is also advised to buy an accident disability cover worth `25 lakh at a cost of
`2,500 a year. As for his mother, Biswas should pick up a `5 lakh insurance
plan from her pension income and it will come for an annual premium of `30,000.
Road map for the future
Now, Biswas can focus on
his goals, the first of which is to build an emergency corpus equal to three
months' expenses. This means he should save `2.2 lakh, which can be sourced
from his cash holding of `5,000 and fixed deposit of `2 lakh. This amount
should suffice for now. Next, Biswas needs to plan for his retirement, for
which he will need `1.63 crore in 24 years to be able to maintain his existing
lifestyle. To meet this goal, he will have to allocate his existing resources,
which include the PPF and EPF corpuses, as well as the proceeds from the
traditional insurance policy. These are likely to yield `58.8 lakh in the given
time frame. For the remaining amount, Biswas will have to increase his SIP
amount from the existing `1,000 to `5,000 in a diversified equity fund. The
pension he gets from the government on retiring will also act as a cushion,
though it has not been taken into consideration here.
As for his goals of buying
a car and taking a vacation, Biswas does not have enough surplus to save for
these. For the car, he needs `6.3 lakh in three years, while for a holiday, he
will need `4.2 lakh in four years.To achieve the former, he will require to
invest `15,000 in a monthly income plan via SIPs, while for the latter, he will
have to start an SIP of `7,000 in an equity income plan for the specified time
period. Since he doesn't have this amount, he will have to wait till there is
an increase in his income or he can find a way to supplement it.
This also means that he
will not be able to build a corpus to start his own venture when he is 50 years
old till he can arrange for requisite funds.
