Streamline portfolio to maximise potential
Hyderabad-based
R. Sreenath will have to align his investments with goals to realise them with
ease.
Nobody
sets out to build a bad portfolio. However, ignorance and prejudices allow the
flaws to filter in. The mistakes are typical and common to most investors: low
or inappropriate insurance, skew towards real estate, low exposure to equity,
bad debt or erratic investments not linked to financial goals. Hyderabad's
R.Sreenath has managed to steer clear of many mistakes. With a reasonably high
salary, he has saved and invested well, taking a high exposure to equity for
his long-term goals, has bought a house, and aligned some of his investments to
goals.There are some flaws in the insurance portfolio, but financial adviser
Pankaaj Maalde will take care of these as he prepares a plan for Sreenath.
Existing financial status
Sreenath
is 37 years old and works in a private company in Hyderabad. He stays with his
33-year-old wife, Aranganayahi S., who is a homemaker, and two daughters, aged
seven and two. Sreenath brings in a monthly salary of `1.53 lakh, of which
`31,500 is spent on household expenses, `6,000 on children's education, `14,704
is paid as insurance premium, and `20,000 is given to Sreenath's dependant
parents.Sreenath also invests `54,000 in mutual funds via monthly SIPs, as well
as the PPF, leaving him with a surplus of `26,796.
Sreenath
has a long list of goals, which includes building an emergency corpus, saving
for the education and weddings of his daughters, buying a car, taking a
vacation and building a retirement kitty. His existing resources include equity
mutual funds worth `13.75 lakh and stocks worth `87,000, `2.57 lakh of debt
funds, `27,500 worth of gold funds, `1.7 lakh in the PPF and 76,000 in the EPF,
`1.4 lakh of fixed deposit and `1.5 lakh in cash. These resources, along with
his existing investments and the surplus amount will be allocated in a way that
his goals are met with ease. First, however, Maalde will take a look at
Sreenath's insurance portfolio.
Insurance portfolio
To begin
with, Maalde analyses Sreenath's insurance portfolio, which comprises six
traditional insurance plans. These cover Sreenath for about `20 lakh and for
which he is paying an annual premium of `1.55 lakh. Maalde suggests that
Sreenath surrender three of these traditional plans and retain the remaining
three as their returns are likely to beat inflation. Since he is inadequately
covered for life, Sreenath should buy an online term plan worth `1.5 crore for
25 years. This will cost him `22,000 a year and can be sourced from the
surplus.Maalde does not advise a term plan for Aranganayiha as she is a
homemaker.
Though
Sreenath's company provides him a family cover of `3 lakh, and he has bought an
independent cover of another `3 lakh, Maalde suggests he buy a `15 lakh plan,
which will cost him `30,000 a year.Sreenath has also done well to buy an
accident disability insurance and Maalde advises him to continue with it.
However, he needs to buy a critical illness cover worth `50 lakh, which will
come for an annual premium of `18,000. Maalde also suggests that Sreenath buy
health insurance for his parents if they are not already covered. This will
take care of the family's insurance needs.
Road map for the future
For his
first goal of building a contingency corpus equal to six months' expenses,
Sreenath will have to amass `4.2 lakh. For this, Maalde suggests he allocate
his cash holding of `1.5 lakh, fixed deposit of `1.4 lakh and debt mutual fund
corpus of `2.57 lakh. This should be invested in an ultra short-term fund for
getting better interest rate and easier access to money.
Sreenath
wants to buy a car worth `10 lakh in fours years. For this, Maalde suggests he
start an SIP of `13,500 in an equity savings fund to accumulate the desired
corpus. He also wants a family vacation after four years, which will cost `6
lakh. To build this amount, Sreenath should start an SIP of `10,000 in an
equity income fund for the specified period.
Next,
Sreenath wants to accumulate funds for his daughters' education. For the older
daughter, he wants `47 lakh in 11 years. To build this corpus, he can allocate
his stocks and continue with his existing SIPs worth `9,000 in equity mutual
funds.Similarly, for the younger daughter, Sreenath has estimated a need of `68
lakh, for which he should increase his SIP in an existing equity fund to `8,000
to build the desired corpus.
As for
the daughters' weddings, Sreenath wants to amass `74 lakh and `1 crore in 18
and 23 years, respectively. To achieve the former, he should continue with the
existing SIP of `9,000 in the equity fund and start another SIP of `500 in a
gold fund. For the latter, he will need to start a fresh SIP of `8,000 in an
equity fund and `1,000 in a gold fund to muster the required amount in the
given time.
Finally,
for retirement, Sreenath is likely to need a kitty of `4.6 crore in 23
years.Maalde has assigned a part of his mutual fund corpus, and PPF and EPF
corpuses, which will combinedly yield a sum of `1.3 crore in the specified time
provided he continues to contribute to the EPF till retirement and invests at
least `1,000 a year in the PPF. For the shortfall, he will have to continue
with his SIP of `20,000 in an equity fund to fetch the specified amount.The
corpus required assumes household expenses of `30,000 per month in present
terms and 8% inflation, and is likely to last till his wife is 80 years old.
After all
the investments, Sreenath will still be left with a surplus of `3,000, which he
can invest in an equity fund for wealth creation or for any other goals.
