Financial Plan published in The Finapolis (February'2016 issue)

Time-Bound Investments will Ensure You have the Money When You Need it - Financial Plan of Priya Jaiswal

A monthly series in The Finapolis where we talk to a diverse set of families to understand their attitude towards financial planning.

Priya Jaiswal is a 35-year-old private employee living in a rented house in Hyderabad. Her monthly income is Rs 65,000. Of this, Rs 24,500 goes towards household expense which includes house rent, utility bills, conveyance and other expenses, while Rs 1,417 goes towards insurance premiums and Rs 8,333 goes into Priya’s investments and left with surplus of Rs 30,750. “I want advice from a financial expert on tax savings and building a corpus for my goals” –  Priya Jaiswal Financial Goals Priya’s goals include building a corpus for her marriage, building a corpus for a down payment on a home that she plans to purchase within the next three years and creating a retirement fund. Financial advisor Pankaaj Maalde analyses her monthly cash flow, existing investments and future goals. Analysing Life Insurance Portfolio Priya has two traditional insurance plans i.e. LIC’s Jeevan Amrit and LIC’s New Bima Gold, and pays combined annual premium of Rs 6,000. However, her life insurance cover is inadequate. Based on need based theory, she requires total life cover of Rs 70 lakh. Analysing her insurance portfolio, Pankaaj recommends continuing both traditional insurance policies and advises her to buy an online term plan of Rs 70 lakh for a term of 25 years. The premium for this term plan would be around Rs 10,000 p.a. Health and Disability Insurance Planning As for health insurance, Priya is solely dependent on employer-provided insurance with a cover for Rs 5 lakh. Pankaaj advises her to buy a separate individual health plan of Rs 5 lakh sum assured, since employer-provided health policy will not continue after retirement or when she leaves her job. He also suggests buying critical illness and accident disability insurance policies with sum assurance of Rs 25 lakh each. This will incur an additional cost of approx Rs 12,000 p.a., but ensure a cover for her in case of future misfortunes. The Road Ahead - Contingency Funding: The first goal for Priya is to set aside six months of expenses as a contingency fund. This amount will take care of any monthly expenses due to job loss, disability or unforeseen expenses. For this, Pankaaj appropriates Rs 85,000 from Priya’s existing savings bank account and advises her to invest the amount in ultra-short-term funds. Pankaaj advises - Marriage Funding: Priya’s immediate goal is to build a corpus of Rs 2 lakh within 12 months for her marriage. To achieve this goal, Pankaaj uses the balance Rs 65,000 in Priya’s savings bank account and asks her to invest it in liquid or ultra-short-term fund until her marriage. He also recommends she add Rs 15,000 from her salary every month to this corpus till marriage. - Buying Home: Buying a house is Priya’s next goal. She plans to buy a house having total cost of Rs 25 lakh in present value after three years. Out of this value, 75% will come from the bank in the form of a home loan, while the remaining 25% will have to be funded by self. Pankaaj worked out how Priya could buy a house as explained in the table. Build a corpus for funding her 25% down payment. Invest Rs 20,000 per month in an equity income fund and balance in debt for two years. Then, in the third year, consider investing the same amount in an arbitrage fund for one year. She should buy ready to move in property and not under construction property. For the balance amount, opt for a home loan. Assuming rate of interest at 9.50%, Priya’s EMI would be Rs 23,300 (see table Working for...). To pay this monthly EMI, Priya can use the Rs 20,000 she is currently saving to build her down payment, and the money she will save from not paying rent. - Retirement funding: Existing investment in direct equity, PPF and EPF, are allocated toward retirement which promise a corpus of Rs 21.20 lakh, Rs 9.55 lakh and Rs 41.75 lakh, respectively, after 25 years to attain her retirement corpus at age 60 years. Additionally, after marriage, start monthly investment of Rs 15,000 after through SIP in diversified equity mutual fund scheme or in equity-linked savings scheme (ELSS) to build the desired corpus for her retirement. Investing in an ELSS scheme will help her save on taxes. This will aid her in building her desired corpus for retirement, which is Rs 4 crore, and will be used up to 80 years of age after retiring at 60. The corpus required has been calculated assuming household expenses of 25,000 per month in present value at 8% inflation. Shift existing investments in direct equity to diversified equity mutual fund schemes. Since it is not possible at an individual level to track the performance of stocks and invest in them. Concluding Remark Priya should review the plan after her marriage since goals and time frame to achieve them might change. She should start monthly investments in ELSS mutual funds for tax-saving purpose post marriage, which is aligned with her retirement goal, and take corrective actions on her insurance cover as discussed.