Aggressive investment will help reach goals
Increasing
equity exposure and systematic approach to goals will make the financial
journey easier.
Theerta
Prasad is on a learning curve. At 32, he may not have a big portfolio or a high
net worth, but he has defined his goals, covered his risks with adequate life
insurance and has started investing in mutual funds. While he requires guidance
on achieving the correct asset allocation and reaching his goals in the best
possible manner, he should be on track with minor alterations to his investment
pattern. It helps that he is in government service since it reduces the
financial burden of medical insurance and accommodation for him. Financial
adviser Pankaaj Maalde will help Prasad by preparing a plan for him so that it
can provide direction to him.
Existing financial status
Prasad is
a central government employee working at Sri Ganganagar, Rajasthan. He stays
with his 29-year-old wife Priyanka, who is a homemaker, and the couple is
planning a kid in about a year's time. Prasad brings in a monthly salary of
`70,000, of which `21,667 goes in household expenses. Since Prasad has
government accommodation, he doesn't have to pay rent.The other expenses
include `1,000 paid as insurance premium and `5,000 given to Prasad's parents.
He is also investing `7,000 in mutual funds through SIPs and along with EPF
contribution, the total investment comes to `29,000. This leaves him with a
surplus of `13,333, which along with his existing investment will have to be
put to judicious use to meet the goals.
Prasad's
portfolio comprises 94% debt and only 6% equity. He has `8 lakh in the EPF,
`50,000 as mutual fund corpus and holds `40,000 as cash. His goals include
building a continency corpus, save for the education and wedding of their
future child, set up a retirement corpus, buy a house and take a vacation.
While Prasad may not be able to fulfil all his goals at one go and may have to
put off some till his income rises, he can start working towards his primary
milestones.
To start
with, however, Maalde will consider his insurance needs and suggest changes, if
needed.
Insurance portfolio
When it
comes to life insurance, Prasad has bought a term plan worth `1 crore, for
which he is paying an annual premium of `12,000. This cover is sufficient for
his needs and Maalde doesn't suggest any more insurance for him. Since Priyanka
doesn't work, she doesn't need any cover for now.
As for
health insurance, Prasad has not bought any independent plan. He and his family
are, however, covered by the government for life and don't need any surplus
medical cover as of now. “Though I recommend the critical illness and accident
disability covers, Prasad can do without these since he is covered under the
government scheme,“ says Maalde. Hence, Prasad doesn't need to buy additional
insurance and can start planning for his financial goals.
Road map for the future
To take
care of eventualities, Prasad needs to have a contingency corpus that is equal
to six months of his expenses. This will amount to `1.68 lakh. To build this,
Prasad can allocate his cash holding of `40,000.He will also have to save his
investible surplus of `42,000 for three months to be able to build the required
emergency fund.This amount should be invested in a shortterm debt fund for easy
access and higher returns. This also means that Prasad will have to start
investing for his other goals after three months.
To begin
with, Prasad wants to save for the higher education expenses of his future
child. He estimates that after 19 years, he will require `60 lakh for the
child's graduation. This can be built by starting an SIP of `7,000 in an equity
mutual fund for the specified time. For the post-graduation funding in 22
years, he has estimated a requirement of `1.25 crore. Again, no existing
resources have been allocated to this goal and Prasad is recommended to start
an SIP of `10,000 in an equity fund. At a rate of 13%, he will be able to
accumulate the desired corpus in the given time.
Next,
Prasad wants to build a corpus of `1 crore for the wedding expenses of his
child. To achieve this goal in the specified time frame, he will have to start
an SIP of `4,000 in an equity fund and `1,000 in a gold ETF or gold bonds.
The next
crucial goal for Prasad is retirement, for which he will need `5 crore in 28
years, considering his current expenses and an inflation rate of 8%. Maalde has
allocated his EPF corpus of `8 lakh and mutual fund corpus of 50,000, which
will combinedly yield `1.97 crore. For the shortfall of `3.03 crore, Prasad
will have to start another SIP of `10,000 in an equity fund. He is also advised
to stop his additional contribution to the EPF and invest in equity to be able
to get higher returns.
Prasad
also wants to buy a house worth `50 lakh in five years. While he will not be
able to achieve this goal in the given time, he still has `10,000 left over and
can start investing this to accumulate the down payment for the house. He can
put this sum in a balanced fund and it will grow to `8 lakh in five years. At
that point he can review his goal and take a decision.
Finally,
Prasad wants to take a vacation after 10 years, which will cost `6 lakh in
today's value. However, he is not left with any surplus after investing for
other goals.Hence, he will have to wait for a sufficient rise in his income to
be able to start investing for this goal.
