Chitrang Shah is a
29-year-old resident of Mumbai and works for a private company. He lives in his
own house with his family comprising his wife Shital, 29, five-year-old son
Vihaan and mother Surekha, 69. His monthly income is Rs 23,500 and his wife
earns additional income of Rs 5,000 as commission from postal investments. Of
this, a big chunk goes towards household expenses Rs 19,700 and Rs 2,500 for
child’s education; Rs 4,000 goes towards investment (Rs 2,000 in EPF and post
office recurring deposit respectively) and Rs 1,958 for insurance premium.
Financial Goals f the Family
The goals for Shah Family include building corpus for balance
amount of new house, savings for children education and his own retirement.
However, due to constraints on cash inflow, it’s difficult to achieve all the
goals in specific time as prescribed by Shah. Maalde advices him to postpone
his goal for new house purchase and use current surplus funds for child’s
education and retirement goals. To build a corpus for balance amount of new
house, he recommends starting a savings account when his income grows in the
future. To begin with, Maalde will first analyse his current insurance
portfolio and gives recommendation on necessary changes required.
Analysing Life Insurance Portfolio
Shah has two traditional insurance policies with life cover of Rs
4 lakh from life insurance corporation (LIC) for which he pays an annual
premium of Rs 11,000. Maalde thinks Shah is inadequately covered despite
paying such a huge amount towards insurance premium. He recommends having an
online term plan with a life cover of Rs 50 lakh for a term of 30 years.
This will cost around Rs 6,500 which is half the current premium amount he
pays.
Maalde suggests surrendering of the other two existing life
insurance policies. Since, the internal rate of return (IRR) of both traditional
plans of LIC after considering present surrender value, future premiums payable
and expected maturity value based on current bonus rates is unlikely to beat
inflation. If these policies are continued then IRR will be around 5% to 6%
only. So, as for corrective action measures on insurance portfolio, it’s better
to exit from traditional plans and invest the insurance proceeds received for
other goals.
Health and Disability Insurance
Planning
As for health insurance, Shah and his wife are covered for Rs 3
lakh and child for Rs 50,000. Maalde advises continuing the policy, but
suggests increasing the cover for son to Rs 3 lakh during the next renewal. He
also suggests buying a top-up plan of Rs 10 lakh with deductible of Rs 3 lakh
for family and Rs 25 lakh accident disability insurance. These both will
have additional cost around Rs 10,000 p.a. He recommends buying when income
increases in future.
The Road Ahead
Now, after taking care of insurance requirements, Shah can start
planning for his goals. The first goal is to set aside six months of expenses
as a contingency fund. This amount will take care of any uncertain expenses of
his family. For this, Maalde has allocated his existing cash and
bank balance of Rs 10,000, postal investment of Rs 75,000 and insurance
surrender value of Rs 75,000. He recommends investing this amount in ultra
short term fund wherein returns are comparatively higher than bank savings
account. Shah also discussed buying a new home for Rs 50 lakh by selling his
existing home valued at Rs 40 lakh (present value) in the next five years. As
there is no surplus for investments or resources available for servicing the
loan of Rs 10 lakh, Maalde has advised Shah to postpone it until an increase in
his income.
The next goal is to build a corpus for children’seducation. He
wants to build an education fund of Rs 5 lakh in today’s value for his son
(future value will be Rs 13.5 lakh) at age of 18 years. This goal is 13 years
away from now and he requires monthly investment of Rs 3,500 in the
equity scheme of mutual fund to accumulate. At present, Chitrang has
surplus of Rs 2,500 per month so Maalde advised starting this amount and
increasing the investment when income increases in future.
The only other goal left is retirement fund for which he will
require a corpus of Rs 3.9 crore i.e. up to 80 years of age after retiring at
60 years. The corpus required assuming household expenses of Rs 15,000 per
month in present value and assuming 8% inflation. Maalde has aligned EPF corpus
towards his retirement goal which will give corpus of Rs 39 lakh at retirement
provided he continues to contribute to the EPF account. Additionally, he is
required to start monthly investment of Rs 7,000 via systematic investment plan
in diversified equity mutual fund scheme to build the desired corpus. Since,
the funds are not available to invest for his retirement goal, Maalde suggests
starting an investment when his income increases in future. Alternately, he can
take a reverse mortgage of his house which will help to meet part of his
retirement needs if he can’t build the desired corpus.
Concluding Remark
Shah should review the plan, rebalance his portfolio annually,
raise his investment amount with increase in income and continue to invest in a
disciplined way. Timely execution of this plan helps his family to achieve
desired goals without many hurdles.
