Correct the realty
skew, take equity exposure
Kolkata-based
Singhs will need to rely on equity if they want to reach their goals with ease.
Despite
the slowdown in real estate, Indian investors are so conditioned to purchasing
property that they will do it even if it impacts their other goals.
Kolkata-based Gaurav Singh has as much as 87% of his portfolio in real estate
and the remaining is in debt. Given the large number of goals and limited time
available to achieve them, Singh will need his money to work harder for him.
This means that he will have to take significant exposure to equity, says
financial adviser Pankaaj Maalde.There are other flaws in his plan that will
have to be rectified, including a revamp of the insurance portfolio. He may
also have to delay some of his goals, but with the financial blueprint prepared
by Maalde, he should be able to reach his primary goals.
Existing financial status
Singh is
33 and stays with his wife, Swati, 29 and an eight-year-old son. He brings in a
salary of `1.15 lakh a month and his wife is a homemaker. The household
expenses take up `26,250, while `10,000 is given to Singh's parents and `5,000
is spent on their kid's education. Another `10,250 goes as insurance premium
and `36,750 is paid as the EMI for a home loan of `28.5 lakh. This leaves him
with a surplus of `26,750, which needs to be invested for his goals.
The goals
include building an emergency corpus, preparing for retirement, saving for the
child's education and wedding, buying a car and a house, and taking a vacation.
Singh's portfolio includes a house worth `30 lakh and a plot of land worth the
same amount. He has cash worth `2.6 lakh, `50,000 as fixed deposit, `50,000 in
the PPF and `20,000 in a debt scheme.
Insurance portfolio
To begin
with, Maalde will analyse Singh's insurance portfolio, which comprises six
traditional insurance plans. These cover him for `17 lakh and he is paying an
annual premium of nearly `1 lakh for these. Maalde suggests that he surrender
these plans since they are likely to give low returns that cannot beat
inflation. The surrender value will come to `50,000, which can be used to meet
a goal. Since Singh has inadequate cover, he should buy an online term plan of
`1.5 crore for 30 years and the premium will come to `18,000 a year. Since
Swati is not employed, she doesn't need a cover.
As for
health insurance, Singh has been more aware and has bought a `5 lakh cover for
his family and `3 lakh for his parents.However, he is advised to buy a top-up
plan of `15 lakh with a deductible of `5 lakh, which will cost him `7,000 a
year. He should also purchase a critical illness plan worth `25 lakh and an
accident disability plan of `50 lakh, which will cost him around `16,000 a
year. This should take care of his insurance needs.
Road map for the future
Before
planning for goals, Maalde suggests that Singh sell his plot of land and prepay
his home loan as he is paying a very high interest rate of 12% on it. This will
also free his EMI amount of `36,750, which can be used for his goals.
To begin
with, Singh should have a congtingency corpus of `4.7 lakh, which is equal to
six months of his expenses. This can be built by allocating his cash holding,
fixed deposit, insurance surrender value and `1.5 lakh from the sale of plot.
Next, he
wants to buy a car worth `10 lakh in five years. For this, he can start an SIP
of `18,000 in an equity income fund for the given duration. He is advised not
to take a loan as car is a depreciating asset.
He also
wants to save `54 lakh for his son's education in 10 years and `65 lakh for his
wedding in 19 years. To achieve the former, he will need to start an SIP of
`22,000 in an equity fund, while for the latter, he will need to start an SIP
of `7,000 in an equity fund and `1,000 in sovereign gold bonds. This should
help build the amount for the two goals.
Finally,
for retirement, Singh has estimated a need of `6 crore in 27 years considering
an inflation of 8%. Maalde has allocated his PPF corpus of `50,000, which will
yield `4.8 lakh in the specified time.He should also continue investing `1,000
a year in it. For the shortfall, he should start an SIP of `20,000 in a
diversified equity fund for the given period.
As for
his goals of taking a vacation and buying another house, he should begin
planning after a rise in income and getting a share in parental property.
