Redirect savings to equity to meet goals
Solapur-based
Gaikwads have done well to save aggressively, but they should align their
future investments with goals to be able to reach them and secure their risks
adequately.
The
safety of debt is a big lure for most investors. This is the reason fixed
deposits are popular de spite their tax-inefficient structure. This is also the
reason 36-year-old Amit Gaikwad-Patil has a large amount deposited in this
instrument. To be fair, though, he has also invested in equity, with 26% of his
portfolio allocated to this asset class. In fact, the Solapur-based couple has
done well when it comes to savings and has a net worth of nearly `96 lakh. They
have also done well to buy a house. However, the Gaikwads have accumulated the
funds without defining goal values or knowing whether they will be able to meet
the goals. “I need advice on my portfolio and also suggestions on where I can
make investments to be able to reach all my goals,“ says Amit. To help them
gain clarity on their finances and list out the instruments they can invest in,
financial adviser Pankaaj Maalde will prepare a financial plan to serve as a
guide for them.
Existing financial status
Amit and
35-year-old Shalaka are medical practitioners, who bring in a combined monthly
income of `1 lakh. They live in their own house and are expecting a child this
year. Their expenses include `48,000 on household needs, `5,117 as insurance
premium, and `21,057 as the EMI for an outstanding home loan of `6 lakh. They
are also investing a sum of `23,500 in mutual funds and the PPF, leaving them
with a small surplus of `2,326.
The
existing financial resources of the couple comprise a plot of land worth `5
lakh, while the debt component includes `10 lakh in fixed deposit, `1 lakh in a
post office scheme, `10 lakh of PPF, `4 lakh in debt funds and `3 lakh in gold.
The equity holding has `7 lakh in stocks and `3 lakh in mutual funds. They also
have a cash holding of `1.5 lakh. Maalde will explain how these resources can
be allocated to various goals.
The
couple's goals include building an emergency corpus, saving for the twin goals
of their child, which include education and wedding, going on a foreign
vacation and saving for their retirement in 24 years. However,
before preparing a plan for Gaikwads, Maalde will consider their insurance
needs and offer suggestions, if any.
Insurance portfolio
Gaikwads
have three traditional plans, one Ulip and one term plan, for which they are
paying an annual premium of `56,000.Maalde suggests that they retain the
traditional plans since their returns are likely to beat inflation. However,
they should surrender the Ulip and invest the proceeds in a diversified equity
mutual fund. Amit doesn't need to buy any more life insurance since the `1
crore cover is sufficient. He should, however, buy a `50 lakh online term plan
for his wife for 25 years, which will cost `7,000 a year.
As for
health insurance, the couple has a `3 lakh family floater plan, which costs
them `5,100 a year, but Maalde suggests they increase it to `10 lakh, which
will cost them `14,000. The couple should also buy `25 lakh critical illness
plans as well as `25 lakh accident disability plans, which will come for an
annual premium of `24,000.This will take care of their insurance needs.
Road map for the future
Before
the couple can start planning for their goals, they should set up an emergency
corpus worth six months of their household expenses. This means they will need
to amass a sum of `3.3 lakh and this can be done by allocating `4 lakh from
their fixed deposit of `10 lakh. This amount should be invested in an ultra
short-term fund.
Maalde
also suggests that the couple repay their outstanding home loan of `6 lakh
using their fixed deposit since it is not advisable to repay a debt at a rate
that is higher than an investment which offers lower returns. Hence, they
should repay the entire home loan with their remaining fixed deposit, which
will free their EMI of `21,057 that can be used to invest for other goals.
Now they
can start planning for their first goal, which is a foreign vacation in four
years. They estimate a need of `5.4 lakh for this goal and Maalde suggests that
they allocate their debt fund corpus of `4 lakh for this goal. They should
shift it to an equity income scheme that invests 25% in equity and the
remaining in debt.
Next,
Gaikwads want to save `1.08 crore for their child's higher education in 18
years. To meet this goal, they can allocate an SIP of `11,000 in an equity
mutual fund.Considering an annual rate of return of 13% for equity funds, this
will yield the desired amount in the given time.
As for
their child's wedding, the couple have estimated that they will need `1.03
crore in 25 years' time. For this, they can allocate their gold investment of
`3 lakh, which is likely to grow to `19 lakh. They should also start an SIP of
`5,000 in an equity fund to amass the specified sum.
Finally,
for their retirement, they want a kitty of `8 crore. While they wanted to
retire at 55, Maalde suggests they push it to 60 years to be able to reach the
goals comfortably. For this goal, they will need to allocate their plot of
land, stocks, mutual funds, PPF corpus and Ulip fund value.
The stock
holding of `7 lakh and Ulip fund value of `2.25 lakh should be invested in a
diversified equity fund, and the couple should continue to invest `5,000 a
month in the PPF till retirement. Besides this, they will have to start an SIP
of `21,000 in a diversified equity mutual fund. All these investments will help
yield the desired amount in the given period
