High
surplus, early start to help meet all goals
Goal-oriented investment
and better risk coverage will ensure a smooth journey for Babu.
An early start, focused
planning, regular savings and right investment make for a good recipe to ensure
financial and security. Chennai-based Babu S has imbibed most of the traits
essential for productive financial planning. At 29, he has a net worth of nearly
`40 lakh, has bought a house, invested in equity and debt, formulated his goals
and is looking at ways of achieving these. There are typical flaws in his
portfolio--skewed asset allocation, insufficient insurance, not earmarking
investments to goals, investing in chit funds and stocks--but nothing that
cannot be rectified. Financial planner Pankaaj Maalde lists out the steps Babu
needs to take and corrections to be carried out to ensure he is on track for
his goals.
Existing financial status
Babu is an IT employee
married to 28-yearold Renuga M, who is a homemaker, and the couple is expecting
a child in about a year.The two stay with his parents, aged 50 and 45 years.
Babu brings in a monthly salary of `1 lakh, in addition to the rental income of
`11,000 he draws from his house worth nearly `40 lakh. He also has a plot of
land worth `8.5 lakh.
His outgo comprises
household expenses of `32,167, which includes `11,000 that he gives to his
parents. Besides these, he spends `4,458 as insurance premium, and a big chunk
of `28,000 goes out as EMI for a home loan of `16.5 lakh that he has taken.He
also makes an investment of `18,000 in mutual fund SIPs every month. This
leaves him with a surplus of `28,375 which, along with his current investment,
needs to be allocated to his goals. These include building a contingency
corpus, saving for the child's education and wedding, buying a house and
retirement.
Insurance portfolio
Babu has a traditional
insurance plan, which he can retain as the debt component of his portfolio
since its returns are likely to beat inflation. Since he is inadequately
covered, Babu should buy an online term plan worth `1.5 crore, which will cost
him `15,000 per annum.
As for health insurance, he
has a family floater plan worth `4 lakh, which covers all four of them and has
been provided by his employer. Maalde suggests he buy an independent family
floater cover worth `10 lakh for himself and his wife. This will cost `13,000
in terms of premium. Babu is also advised to buy critical illness and accident
disability plans worth `50 lakh, which will come for `19,000 a year. This will
cost an additional `3,917 a month, which can be sourced from the surplus.
Road map for the future
After taking care of the
insurance needs, Babu can start planning for his goals, beginning with the
contingency corpus. He needs to have an emergency fund equal to six months'
expenses, which will amount to `4.14 lakh. However, he is also advised to keep
a medical buffer of `1.5 lakh for his parents, bringing the total to `5.64
lakh. For this, he can assign his cash holding of `1 lakh, chit fund of `1 lakh
and fixed deposit of `3.4 lakh.
Next, he wants to save for
the education of his child in 18 years, for which he has estimated a need of
`80 lakh. To achieve this, he should start an SIP of `10,000 in an equity fund.
As for the child's wedding, he will need `68.5 lakh in about 25 years. To meet
this goal, he should start an SIP of `3,000 in an equity fund and `1,000 in
gold fund.This will help yield the desired amount in the specified time.
Babu also wants to buy a
house worth `39 lakh in 10 years at his native place. For this, he should
assign his plot of land, which is likely to contribute `22 lakh. For the
remaining amount, he should start an SIP of `7,000 in a diversified equity fund
to get the required amount.
Finally, for retirement,
Babu is estimated to need `9.37 crore in 30 years. To achieve this, Maalde has
assigned his EPF corpus, stock value and equity mutual fund corpus, which are
likely to yield `2.2 crore. For the shortfall, he will need to invest `18,000
in a diversified equity scheme and should continue with his current mutual fund
investment of the same amount. This will yield the desired amount. However, he
is advised to sell his stocks and invest the amount in mutual funds as he is
unlikely to have the time or expertise to handle his stock portfolio.
