Invest in equity,
stagger goals for an easy ride
An early
start means that Kumar will be able to reach his long-term goals in a phased
manner.
One
should not let a mediocre income at the start of one's ca reer come in the way
of finan cial planning. Take Bilaspur based P. Pradeep Kumar, who has not only
started investing but has also taken crucial baby steps to secure his future.
He has formulated his goals, started investing in equity through mutual funds
and is in the process of buying term insurance.Though these steps may not be
enough, they are a start in the right direction and financial planner Pankaaj
Maalde will guide Kumar in a way that he is able to get his finances on track
and reach his milestones with ease.
Existing financial status
Kumar is
25 years old and works as a banker in Bilaspur, Chhattisgarh. He stays with his
parents and is planning to get married in a couple of years. He brings in a
monthly income of `32,000 and uses about `9,000 for household expenses. Another
5,000 is given to his parents, while `2,125 goes as insurance premium. He is
also investing `12,500 a month in mutual funds and the PPF. This leaves him
with a surplus of `3,375, which along with his current investment, needs to be
invested for his goals. The goals include building an emergency fund, saving
for his wedding, buying a car and a house, and building a retirement kitty.
Kumar's
portfolio is small and comprises PPF and EPF corpuses of `30,000 and `80,000,
respectively. He also has `85,000 in cash and `65,000 in equity mutual funds.
Before suggesting ways to optimise these resources, Maalde will assess Kumar's
insurance portfolio.
Insurance portfolio
Kumar has
a slim insurance portfolio with a single traditional policy, which covers him
for `3 lakh and for which he is paying an annual premium of `25,500. It's a
limit ed premium paying plan, with the last premium to be paid next year. Since
the returns are likely to beat inflation, Maalde suggests that he continue with
the plan as a debt component of his portfolio. Kumar is inadequately covered
for life and, hence, he needs to purchase an online term plan of `50 lakh for
35 years. This will cost him `6,000 a year.
As for
health insurance, Kumar is covered for `4 lakh by his employer. Maalde suggests
that he buy an independent plan of `3 lakh and a top-up plan of `10 lakh with a
`3 lakh deductible, for which he will pay an annual premium of `9,000. He
should also buy critical illness and accident disability plans worth `25 lakh
each, which will also cost him `9,000 a year.
Road map for the future
Now Kumar
can start planning for his goals, the first of which is building a contingency
corpus worth `48,000, which is equal to his three months' expenses. For this
goal, he can allocate his cash holding of `50,000, which should be invested in
an ultra short-term debt fund.
Next,
Kumar wants to save `5 lakh for his wedding in two years. However, Maalde
suggests that he bring down this amount to `3 lakh since he will be unable to
save for this goal. To achieve this milestone, Kumar should end his SIPs in the
ELSS scheme and start a monthly SIP in an arbitrage fund. “Though stopping the
ELSS investment will increase his tax liability by `7,000 per annum since he is
in the 10% tax bracket, it is advisable to take this step instead of opting for
a high interest personal loan,“ says Maalde.
Next,
Kumar wants to save for his retirement in 35 years, for which he will need `4.4
crore. To build this, he can allocate his PPF and EPF corpuses, which are
likely to yield `1.85 crore in the given time. For the shortfall, he should
start an SIP of `3,000 in an ELSS scheme. He should also continue to invest
`1,000 a year in the PPF.
Kumar also
wants to buy a house worth nearly `86 lakh in 10 years. Since he doesn't have
the surplus to invest for this goal, he can start doing so after his wedding in
two years. He can begin investing `12,000 in an equity fund via SIPs and it
will help build a sum of `20 lakh in the specified time for the down payment.
He can review the situation at that time and plan accordingly.
Kumar
also wants to buy a car worth `10 lakh after three years, but will have to put
off this goal till a rise in his income as there is no surplus left to invest.
