High savings and income to ensure security
Noida-based Kumars will need to take a
higher equity exposure to realise all their goals.
Despite being taxable and offering a low interest
rate, fixed deposit continues to be a favourite mode of saving. This may not be
the right investing instrument for long-term goals because it doesn't offer
returns that can beat inflation and the maturity amount dwindles due to
taxation. However, the debt route is considered safe enough to peg crucial
goals to it and Noida-based Hemant Kumar has done just that. With a portfolio
that is heavily skewed towards debt at 98%, Kumar has not allowed his money to work
as hard as it could with equity. This is the reason financial planner Pankaaj
Maalde has suggested changes in his asset allocation and the optimal route to
reach his goals.
Existing
financial status
Kumar is 39 years old and lives with his homemaker wife,
Monica, and their two children aged 10 and seven. Kumar's parents, aged 60 and
55, are also financially dependent on him. Kumar works in a private company and
brings in a monthly salary of `1.75 lakh. Of this amount, nearly `1.3 lakh is
spent under various heads, including `61,250 on household needs, `20,000 on
children's education, `10,000 as contribution to parents, `6,250 as insurance
premium, `33,200 as loan EMI and `15,000 is invested every month. This leaves
him with a surplus of `29,300, which, along with the existing investments,
needs to be put to work in a way that it yields desired returns.
Kumar's goals include building an emergency corpus,
saving for the children's goals of education and weddings, retirement, buying a
car and taking a vacation. However, given his requirements and available
surplus, he may have to put off some of his goals till a rise in income. Maalde
begins by analysing Kumar's insurance portfolio.
Insurance
portfolio
Kumar has four traditional plans, for which he is
paying a yearly premium of `60,000.Maalde advises him to continue with these as
a debt portion of his portfolio since their returns are likely to beat
inflation. However, he needs to increase his life insurance to `2 crore for a
term of 20 years. This will result in an annual premium of `30,000. Since his
wife is not working, she doesn't need any life insurance.
As for health cover, Maalde suggests that Kumar shift
his `5 lakh family floater plan to an insurer that doesn't have a room rent
sub-limit. He is also advised to raise the sum assured to `10 lakh, which will
cost `22,000 a year. He should also pick up a `3 lakh plan for his parents at a
cost of `18,000 a year.Kumar is advised to buy critical illness and accident
disability plans worth `50 lakh, which will cost `30,000 a year. The additional
cost can be sourced from the surplus.
Road
map for the future
Before suggesting a blueprint for Kumar's goals,
Maalde suggests that he reschedule his home loan by shifting to a lender who
offers a lower rate of interest. He should also increase the tenure of his `25
lakh outstanding loan to 20 years, which will help reduce his loan EMI from
`33,200 to `23,300. This will provide an additional surplus of `9,900 to help
achieve the goals.
Kumar can start by building a contingency corpus of
`7.68 lakh, which, along with a medical buffer of `2 lakh for his parents, will
rise to `9.68 lakh. To achieve this, Kumar can allocate a part of his fixed
depos it and invest the amount in an arbitrage or ultra short-term fund.
Next, Kumar wants to save for his children's education
in eight and 11 years, for which he has estimated a need of `37 lakh and `47
lakh, respectively. To achieve the former, he should assign the remaining `16
lakh in his fixed deposit. He should put it in an ultra short-term fund and
start a systematic transfer plan of `1 lakh per month for 16 months. It will
help him reach the target in the specified period. For the latter, Kumar should
allocate his insurance maturity amount of `12 lakh and, in addition to this, he
will need to start an SIP of `12,000 in an equity mutual fund for the given
time.
For the wedding goals of his kids, Kumar will need to
start SIPs of `5,800 and `4,700 in equity funds to accumulate sums of `32 lakh
and `40 lakh in 15 and 18 years, respectively. However, since he doesn't have
enough surplus to invest for these goals, he should put these off till a rise
in income.
Finally, for his retirement, Kumar needs a sum of
`6.58 crore in 21 years. To meet this goal, he will have to assign his EPF and
PPF, as well as stock and mutual fund corpuses, which will yield `1.98 crore.
For the shortfall, he will have to start an SIP of `35,000 in a diversified
equity fund.
As for his goals of buying a car and vacation, he will
have to put these off till there is a rise in his income.
