Financial Plan published in The Finapolis (June'2016 issue)

Realign Investments and Gradually Reduce Exposure to Real Estate

This monthly series in The Finapolis talks to different families to understand their attitude towards financial planning.

Rajib Patra is a 45-year-old living with his family comprising his spouse Mahuya, aged 37-year-old, two daughters, i.e. Ritu (16) and Rai  (7). Mr Rajib has a jewellery business. His monthly income is Rs 1,40,000. Of this, Rs 53,667 goes towards household expenses, Rs 20,000 for education of two daughters, Rs 20,000 towards home loan EMI, Rs 20,000 is contributed to dependent parents, Rs 8,333 goes towards insurance premiums and Rs 18,000 goes into investments. Financial Goals Rajib’s goals include building a corpus for his children’s education, marriage expenses and for his retirement. Financial advisor Pankaaj Maalde analyses his monthly cash flow, existing investments, insurance policies and future goals.  Analysing Life Insurance Portfolio Rajib has six traditional and one pension insurance plans. He pays annual premium of Rs 85,000 on these policies. Analysing his insurance portfolio, Pankaaj recommends continuing all the traditional plans as debt portion in his portfolio and to continue with his pension plan. As per need based theory, Rajib is inadequately covered for life insurance. So, Pankaaj advises him to buy an online term plan of 15 years for Rs 1 crore, at a cost of Rs 31,000 p.a.    Health and Disability Insurance Planning As for health insurance, Rajib has bought a policy with a cover for Rs 5 lakh from Oriental Insurance. This policy has room rent sub-limit of 1% of sum assured. So, Pankaaj advises him to port the same to another insurer, which does not have such sub-limit clause and also increase his sum assured to Rs 10 lakh. This will cost around Rs 30,000 p.a. He even advises  Rajib to buy critical illness cover of Rs 25 lakh and accident disability insurance of Rs 50 lakh. This will incur cost of approx Rs 22,000 p.a., but ensures a cover for him in case of future misfortune.   The Road Ahead Contingency Funding: Rajib must set aside three months of expenses as a contingency fund, which amounts to Rs 3.24 lakh. For this, Pankaaj aligns his existing saving bank balance of Rs 80,000, postal investment of Rs 2 lakh and fixed deposit of Rs 50,000. He advises him to invest the amount in ultra-short-term funds.  Repayment of home loan: Rajib has outstanding home loan of Rs 4 lakh. He is paying EMI of Rs 20,000 at interest rate of 10.75%. Pankaaj advises him to sell the plot of land and repay the entire home loan. This will make him debt free and savings of EMI can be used to build the desired corpus for his future goals. For life’s major goals Pankaaj advises:  Children’s education: Ritu, elder daughter of Rajib, requires Rs 8 lakh in present value for her education after two years, which will grow to Rs 9.33 lakh (future value). Pankaaj has allocated Rs 8 lakh from the sale value of plot of land and advises Rajib park the funds in an arbitrage fund till the goal is achieved.  Similarly, Rai, his younger daughter, requires Rs 15 lakh in present value for her education after 11 years, which will grow to Rs 35 lakh (future value). Pankaaj has allocated existing mutual fund investments in Birla Sunlife Frontline Equity, Sundaram Smile and Franklin Templeton Blue Chip. The current value of investment in these schemes is Rs 1.89 lakh, Rs 1.36 lakh and Rs 42,000, respectively. He advises to continue monthly SIP of Rs 3,000, Rs 2,000 and Rs 2,000, respectively, in these schemes to accumulate the desired corpus.  Children’s marriage fund: To build  a corpus for Ritu’s marriage, Rajib requires Rs 15 lakh in present value. The required corpus will grow to Rs 30 lakh (future value) after nine years. Pankaaj advises Rajib to start monthly investment of Rs 15,000 in an equity fund and Rs 1,000 in a gold fund. Similarly, for his younger daughter Rai, Rajib requires Rs 15 lakh in present value. The required corpus will grow to Rs 60 lakh (future value) after 18 years. To achieve this goal, Pankaaj allocates direct equity investment of Rs 7 lakh and advises to start monthly investment of Rs 1,000 in gold fund. Pankaaj even advises shifting direct equity investments to a diversified equity mutual fund scheme. This execution should accumulate the desired funds for his daughters’ marriage. Retirement funding: Rajib is planning to retire at the age of 60 year. Pankaaj aligns his existing investments in second home, commercial property, mutual funds (HDFC Mid-Cap Opportunity and Reliance Equity Opportunity), PPF and insurance maturity. This promises Rajib amounts of Rs 3.34 crore, Rs 83.5 lakh, Rs 6.63 lakh, Rs 28.55 lakh and Rs 28.82 lakh, respectively, after 15 years, as his retirement corpus. Additionally, Pankaaj advises that Rajib continue his monthly investment of Rs 3,000 in each of the two mutual fund schemes (HDFC Mid-Cap Opportunity and Reliance Equity Opportunity) to build the desired corpus for his retirement. This execution will aid him in building his desired corpus for retirement, which is Rs 5.14 crore, and will be used up to 80 years of age after retiring at 60. The corpus required has been calculated assuming household expenses of Rs 52,500 per month in present value at 8% inflation.  Concluding remark - Rajib has higher exposure to real estate (82% of overall portfolio). This is too high and not desirable. So, it’s strongly recommended he sell the plot of land amounting to Rs 12 lakh. He is also advised to review his other real estate investments at regular intervals. -  Shift existing investments in direct equity to diversified equity mutual fund schemes.  -  Reinvest insurance maturity into balanced category of mutual funds.  -  Review the plan and rebalance portfolio periodically, preferably every year.

Financial Plan published in The Finapolis (March'2016 issue)

Consolidate Mutual Fund Portfolio and Align Existing Investments with Goals - Financial Plan of Shivanand Pandit

Shivanand Pandit is a 41-year-old living in Goa and working with a private organisation. His monthly income is Rs 57,000. Of this, Rs 26,667 goes towards household expenses, while Rs 4,442 goes towards insurance premiums and Rs 20,000 goes into investments. He is left with a surplus of Rs 5,892.

“I want recommendations on my existing investment portfolio and insurance policies” –  Shivanand Pandit

Financial Goals Shivanand’s goals include building a corpus for a down payment of a home that he plans to purchase within the next five years and creating a retirement fund. Financial advisor Pankaaj Maalde analyses his monthly cash flow, existing investments, insurance policies and future goals. Analysing Life Insurance Portfolio Shivanand has two traditional and three ULIP insurance plans. He pays annual premium of Rs 44,000 on these policies. Analysing his insurance portfolio, Pankaaj recommends continuing both the traditional plans as the debt portion in the portfolio and ULIP plans until his home purchase goal is achieved. There is no additional requirement of having term plan or life cover, since no one is financially dependent on him. Health and Disability Insurance Planning As for health insurance, Shivanand has bought a policy with a cover for Rs 5 lakh. Pankaaj advises him to buy a top-up health insurance plan for sum assured of Rs 15 lakh, with deductible of Rs 5 lakh. He even advises Shivanand to increase his critical illness cover from the existing Rs 5 lakh to Rs 25 lakh and accident disability insurance from Rs 12.5 lakh to Rs 25 lakh. This will incur cost of approx Rs 20,000 p.a., but ensures a cover for him in case of future misfortunes. The Road Ahead - Contingency Funding: Shivanand must set aside six months of expenses as a contingency fund, which amounts to Rs 1.92 lakh. For this, Pankaaj aligns existing saving bank balance of Rs 1.20 lakh and postal investment of Rs 1 lakh. He advises him to invest the amount in ultra-short-term funds. For life’s major goals Pankaaj advises - Buying home: Buying a house is top priority goal for Shivanand. He plans to buy a house having total cost of Rs 30 lakh in present value after five years. Out of this value, 65% will come from the bank in the form of a home loan, while the remaining 35% will have to be funded by self. Pankaaj worked out how Shivanand could buy a house as explained in the table (refer to table Working for ….). To build a corpus for funding the 35% down payment required on the home, Pankaaj has aligned the three existing ULIP plans. This will give a corpus of Rs 8.62 lakh after five years. Assuming return of 11.5% after switching from equity to balanced category and with Shivanand continuing to pay the premium in these policies for next five years. Additionally, an investment of Rs 10,500 is required to meet the shortfall. For this, Paankaj advises Shivanand to invest in balanced funds for the first four years and from the fifth year, consider investing either in an arbitrage fund or a recurring deposit till goal is achieved. For the balance amount (65%), Shivanand should opt for a home loan. Assuming rate of interest at 9.50%, the EMI would be Rs 32,700 (refer to table Working for…). To pay this monthly EMI, Shivanand can use the surplus ofRs 25,000 savings from rental expense and ULIP premiums which will stop by the time his home is purchased. - Retirement funding: Shivanand is planning to retire at the age of 60 year. Pankaaj aligns his existing investments in direct equity, mutual fund and PPF, which promise a corpus of Rs 50.98 lakh, Rs 61.19 lakh and Rs 4.32 lakh, respectively (after 19 years) to attain the retirement corpus. Additionally, he should start monthly investment of Rs 14,500 through SIP in diversified equity mutual fund scheme to build the desired corpus for his retirement. Investing in an ELSS scheme will help him save on taxes if required. This execution will aid him in building his desired corpus for retirement, which is Rs 2.56 crore, and can be used up to 80 years of age after retiring at 60. The corpus required has been calculated assuming household expenses of Rs 27,000 per month in present value at 8% inflation. Concluding remark Shivanand should shift existing investments in direct equity and thematic (sector) funds to diversified equity mutual fund schemes, since it is not possible at an individual level to track the performance of stocks and various sectors while investing. Also, consolidation is required in the existing mutual fund portfolio which is over-diversified at this stage. Paankaj advises him to invest only in four to five good mutual fund schemes instead of investing in too many schemes. He must review the financial plan from time to time and take corrective action to increase sum assured in his health insurance policies.

Financial Plan published in The Finapolis (February'2016 issue)

Time-Bound Investments will Ensure You have the Money When You Need it - Financial Plan of Priya Jaiswal

A monthly series in The Finapolis where we talk to a diverse set of families to understand their attitude towards financial planning.

Priya Jaiswal is a 35-year-old private employee living in a rented house in Hyderabad. Her monthly income is Rs 65,000. Of this, Rs 24,500 goes towards household expense which includes house rent, utility bills, conveyance and other expenses, while Rs 1,417 goes towards insurance premiums and Rs 8,333 goes into Priya’s investments and left with surplus of Rs 30,750. “I want advice from a financial expert on tax savings and building a corpus for my goals” –  Priya Jaiswal Financial Goals Priya’s goals include building a corpus for her marriage, building a corpus for a down payment on a home that she plans to purchase within the next three years and creating a retirement fund. Financial advisor Pankaaj Maalde analyses her monthly cash flow, existing investments and future goals. Analysing Life Insurance Portfolio Priya has two traditional insurance plans i.e. LIC’s Jeevan Amrit and LIC’s New Bima Gold, and pays combined annual premium of Rs 6,000. However, her life insurance cover is inadequate. Based on need based theory, she requires total life cover of Rs 70 lakh. Analysing her insurance portfolio, Pankaaj recommends continuing both traditional insurance policies and advises her to buy an online term plan of Rs 70 lakh for a term of 25 years. The premium for this term plan would be around Rs 10,000 p.a. Health and Disability Insurance Planning As for health insurance, Priya is solely dependent on employer-provided insurance with a cover for Rs 5 lakh. Pankaaj advises her to buy a separate individual health plan of Rs 5 lakh sum assured, since employer-provided health policy will not continue after retirement or when she leaves her job. He also suggests buying critical illness and accident disability insurance policies with sum assurance of Rs 25 lakh each. This will incur an additional cost of approx Rs 12,000 p.a., but ensure a cover for her in case of future misfortunes. The Road Ahead - Contingency Funding: The first goal for Priya is to set aside six months of expenses as a contingency fund. This amount will take care of any monthly expenses due to job loss, disability or unforeseen expenses. For this, Pankaaj appropriates Rs 85,000 from Priya’s existing savings bank account and advises her to invest the amount in ultra-short-term funds. Pankaaj advises - Marriage Funding: Priya’s immediate goal is to build a corpus of Rs 2 lakh within 12 months for her marriage. To achieve this goal, Pankaaj uses the balance Rs 65,000 in Priya’s savings bank account and asks her to invest it in liquid or ultra-short-term fund until her marriage. He also recommends she add Rs 15,000 from her salary every month to this corpus till marriage. - Buying Home: Buying a house is Priya’s next goal. She plans to buy a house having total cost of Rs 25 lakh in present value after three years. Out of this value, 75% will come from the bank in the form of a home loan, while the remaining 25% will have to be funded by self. Pankaaj worked out how Priya could buy a house as explained in the table. Build a corpus for funding her 25% down payment. Invest Rs 20,000 per month in an equity income fund and balance in debt for two years. Then, in the third year, consider investing the same amount in an arbitrage fund for one year. She should buy ready to move in property and not under construction property. For the balance amount, opt for a home loan. Assuming rate of interest at 9.50%, Priya’s EMI would be Rs 23,300 (see table Working for...). To pay this monthly EMI, Priya can use the Rs 20,000 she is currently saving to build her down payment, and the money she will save from not paying rent. - Retirement funding: Existing investment in direct equity, PPF and EPF, are allocated toward retirement which promise a corpus of Rs 21.20 lakh, Rs 9.55 lakh and Rs 41.75 lakh, respectively, after 25 years to attain her retirement corpus at age 60 years. Additionally, after marriage, start monthly investment of Rs 15,000 after through SIP in diversified equity mutual fund scheme or in equity-linked savings scheme (ELSS) to build the desired corpus for her retirement. Investing in an ELSS scheme will help her save on taxes. This will aid her in building her desired corpus for retirement, which is Rs 4 crore, and will be used up to 80 years of age after retiring at 60. The corpus required has been calculated assuming household expenses of 25,000 per month in present value at 8% inflation. Shift existing investments in direct equity to diversified equity mutual fund schemes. Since it is not possible at an individual level to track the performance of stocks and invest in them. Concluding Remark Priya should review the plan after her marriage since goals and time frame to achieve them might change. She should start monthly investments in ELSS mutual funds for tax-saving purpose post marriage, which is aligned with her retirement goal, and take corrective actions on her insurance cover as discussed.

Financial Plan published in The Finapolis (January'2016 issue)

Realign Loan and Insurance on Priority - Financial Plan of Navneet Kumar

A monthly series in The Finapolis where we talk to a diverse set of families to understand their attitude towards financial planning.

Navneet Kumar is a 35-year-old private employee living in Trivandrum. He lives in a rental house with wife Sweta, 35. His monthly income is Rs 65,250. Of this,  a big chunk goes towards household expenses Rs 29,433 (includes house rent Rs 12,756). Additional, Rs 10,091 goes towards EMI for car loan, Rs 6,708 for insurance premiums and Rs 12,000 goes into investments.

“I want advice from a financial expert to purchase my own house in three years and build a corpus for my retirement”– Navneet Kumar

Financial Goals of the Family The goals for Naveneet’s family include building corpus for down payment of house purchase in three years and creating a retirement fund. Financial advisor Pankaaj Maalde analyses his monthly cash flow, existing investments and future goals. He first analyses his current insurance portfolio and gives recommendation on necessary changes required. Analysing Life Insurance Portfolio Navneet has two Unit Linked Insurance Plans (ULIPs) i.e. Aviva Freedom Life and ICICI Life Time Super Pension. He also holds one online term plan from HDFC with life cover of Rs 50 lakh. Currently, Navneet is adequately covered under life insurance. However, a chunk of his savings goes towards paying the premium of insurance policies. At present, he pays an annual premium of Rs 72,000. Analysing his insurance portfolio, Pankaaj recommends continuing the online term plan from HDFC which has a life cover of Rs 50 lakh and ICICI Pru Pension Plan. He, however, advises to surrender the Aviva ULIP plan immediately due to high on-going charges which reduces the return in long term. Health and Disability Insurance Planning As for health insurance, Navneet has bought Reliance Health Gain, insurance policy from Reliance General Insurance with a cover for Rs 6 lakh. The policy bought has permanent exclusions of few common ailments like cataract, gout, hernia, kidney stone which is normally not seen in other health insurance policies. Due to this exclusions, Pankaaj advises to port to other insurer who does not have such restrictive conditions. He advises Navneet to increase the cover from Rs 6 lakh to Rs 10 lakh. This change in health insurance policy will cost around Rs 14,000 p.a. Pankaaj also suggests buying critical illness and accident disability insurance policies with sum assurance of Rs 25 lakh each. This will incur an additional cost of Rs 12,000 p.a. approximately but will ensure a cover for any uncertainty in future. Analysing  Loan Portfolio Navneet has a car loan of Rs 4 lakh with an interest rate of 10.25%. He pays an EMI of Rs 10,091 to the bank. This is one of the major cash outflow from his income. Pankaaj advises that Navneet repays the entire loan from his existing fixed deposit which earns him 7% returns post tax deduction. By repaying personal loan with high interest he will become debt free. This will increase his monthly surplus and the amount saved can be invested in assets with better returns to build the desired corpus for future goals. The Road Ahead Having taken care of insurance requirements and becoming debt free, Navneet can start planning for his financial goals. The first goal is to set aside six months of expenses as a contingency fund. This amount will take care of any unforeseen expenses for his family. For this, Pankaaj aligns Rs 2 lakh from surrender value of Aviva ULIP plan and Rs 30,000 of recurring deposit (RD). He suggests surrendering the Aviva ULIP plan and stop further investments in RD. This will create surplus funds to invest for house purchase goal. He recommends investing in ultra short term funds with amount from Aviva ULIP plan and RD. Buying a house is the top priority for Navneet. He plans to buy a house for the total cost of Rs 40 lakh in present value after three years. Out of which 75% will be from bank as home loan and remaining 25% self funding. Pankaaj did the working to achieve house purchase goal for Navneet as explained in the  table 1. Pankaaj advises  - Invest the part of Aviva ULIP (Rs 1 lakh) from surrender value in equity income plan of mutual fund for three years time. This investment is expected to grow at 9% and value of investment at a time of house purchase will be Rs 1.30 lakh. - Build a corpus for self funding (25% down payment). Invest Rs 30,000 per month in equity income fund for two years. Then in third year, consider investing same amount in recurring deposit or arbitrage fund for one year. - For the balance amount of Rs 40 lakh in house purchase, opt for a home loan. Assuming rate of interest at 9.50% EMI would be Rs 37,300 as explained in table. To pay this monthly EMI, use surplus of Rs 30,000 from current house purchase down payment goal and savings from rental expenses. - Align ICICI Prudential Pension Plan, Agricultural land, PPF and EPF which promise a corpus of Rs 41.11 lakh, Rs 4.11 crore, Rs 1.23 lakh and Rs 1.18 crore respectively after 25 years i.e. at the retirement age of 60 years. No additional investment is required to build the desired corpus for retirement which is Rs 5.70 crore and will be used up to 80 years of age after retiring at 60. The corpus required has been calculated assuming household expenses of Rs 35,000 per month in present value at 8% inflation. - Review the real estate investment periodically since major investment is into this asset to build retirement corpus. - Shift the fund from balanced fund to 100% equity fund in ICICI Pension plan as the goal is long term and to continue investing Rs 1,000 p.a. in PPF account. Concluding Remark Navneet should review the plan, rebalance his portfolio periodically and take corrective actions for insurance policies as discussed. Expert - Certified Financial Planner Pankaaj Maalde prepares a financial plan and gives his recommendation to the family.

Financial Plan published in The Finapolis (December'2015 issue)

Chintak Dalal is a 46-year-old resident of Mumbai who works for a private company. He lives in his own house with a family comprising his wife Yogita, 43, 17-year-daughter Mitshu and 14-year-old son Udbhav. His monthly income is Rs 1,05,000 and his wife earns an additional income of Rs 5,000 as an insurance advisor. He even earns rental income of Rs 10,000 per month from a second home. Of this overall income, a big chunk goes towards household expenses; Rs 59,667 and Rs 16,667 for children’s education. Rs 10,500 goes towards EMI for personal loan, Rs 27,417 for insurance premiums and Rs 1,000 goes into public provident fund (PPF).

Financial Goals of the Family

The goals for Dalal family include planning for on-going expenses toward children’s education, building corpus for their marriage and Chintak’s own retirement. Financial advisor Pankaaj Maalde thinks that sound financial decisions in the past would have ensured a smooth inflow for Chintak. To begin with, he first analyses his current insurance portfolio and gives recommendation on necessary changes required. 

Analysing Life Insurance Portfolio

Chintak has six traditional life insurance plans, two offline term plans with life cover of Rs 25 lakh each and one online term plan with life cover of Rs 50 lakh. Currently, Chintak is adequately covered under life insurance. However, a chunk of his savings goes towards paying the premium of insurance policies. At present, he is paying an annual premium of Rs 2.9 lakh. He even holds one ULIP plan but has stopped paying the premium after completing five years of minimum premium paying term in the policy. Analysing his insurance portfolio, Pankaaj recommends continuing the online term plan from Aviva which has a life cover of Rs 50 lakh. He however, suggests discontinuing both the offline term plans of LIC due to high premium cost after taking new online term plan with life cover of Rs 50 lakh. 

Further, Pankaaj recommends surrendering traditional plans of LIC (Jeevan Astha and Jeevan Saral on Chintak’s wife’s name) as the internal rate of return (IRR) of both these traditional plans post considering present surrender value, future premiums payable and expected maturity value based on current bonus rates, is unlikely to beat inflation. If these policies are ​continued then IRR will be around 5% - 6% only. So, as for corrective action on insurance portfolio, it’s advised to better exit from both the traditional plans of LIC and invest the proceeds received for other goals. It is also advised to continue with other traditional plans and Max life’s plan as Chintak has opted for limited premium payment term option in those policies.

Health and Disability Insurance Planning

As for health insurance, Chintak has bought health insurance policies from New India with a cover for Rs 5 lakh and from LIC with a sum assurance of Rs 8 lakh. Both the plans are family floaters covering wife and children. Analysing both the plans, Pankaaj explains New India Assurance has room rent sub-limit of 1% on sum assured, which means it reduces limit on all other expenses if a patient admitted in higher costing room while undergoing treatment. Even, LIC health plus is not a pure mediclaim plan. It is a ULIP plan covering only major surgical benefits as mentioned in the policy document. This plan has ongoing allocation charges of 6% on premium paid and also Rs 25 per month as policy admin charges. Such charges reduce overall returns from ULIP.   

Due to this deceive in both the policies, porting of the New India insurance plan to other insurers such as Apollo Munich or Bajaj Allianz is advised as both these insurers do not have room rent sublimit clause unlike New India. He suggests discontinuing the LIC health plan and buying a top up health insurance of Rs 15 lakh with deductible amount of Rs 5 lakh for family. This change in health insurance policies will cost around Rs 35,000 p.a. as against Rs 39,000 p.a. incurred at present thereby substantially increasing the cover.  

Pankaaj also suggests buying critical illness and accident disability insurance policies with sum assurance of Rs 50 lakh each. This will incur an additional cost of Rs 35,000 p.a. approximately but will ensure a cover for any uncertainty in future.

Analysing  Loan Portfolio

Chintak has a personal loan of Rs 3 lakh with an interest rate of 13%. He pays an EMI of Rs 10,500 to the bank. This is one of the major cash outflow from his income. Pankaaj advises that Chintak repays the entire loan from his existing fixed deposit which earns him 7% returns post tax deduction. By repaying personal loan with high interest he will become debt free. This will increase his monthly surplus and the amount saved can be invested in assets with better returns to build the desired corpus for future goals.

The Road Ahead

Having taken care of insurance requirements, Chintak can start planning for his financial goals. The first goal is to set aside six months of expenses as a contingency fund. This amount will take care of any unforeseen expenses for his family.  For this, Pankaaj recommends allocating the existing sum of Rs 6 Lakh from fixed deposits. He recommends investing 50% in ultra short term fund and 50% in arbitrage fund.  

The next goal is to fund children’s educational expenses of Rs 2 lakh p.a. and have a corpus of Rs 3 lakh for their higher education as safety of margin. Pankaaj has computed education expenses in the monthly cash outflow which takes care of this expense over a period and aligned fixed deposits of Rs 3 lakh towards this goal. 

Further, Chintak wants to build a corpus for children’s marriage expenses. For his daughter’s marriage, Chintak requires a corpus of Rs 15 lakh in today’s value (future value will be Rs 28 lakh) if she were to get married at the age of 25. This goal is 8 years away from now. So, Pankaaj recommends  a monthly investment of Rs 18,000 in a balanced mutual fund scheme to accumulate this corpus. Gold investment of Rs 75,000 is also aligned towards this goal. For his son’s marriage, Chintak requires Rs 10 lakh as corpus in today’s value (future value will be Rs 23 lakh) with the same consideration of marriage at the age of 25, which is 11 years away from now.  Pankaaj aligns maturity proceeds of Rs 14 lakh from LIC Jeevan Shree plan towards this goal and recommends starting a fresh monthly investment of Rs 3,500 in diversified equity mutual fund scheme to accumulate the desired corpus. Currently, Chintak’s income is limited, so it is recommended to start this investment when there is growth in his income.

Another important goal for Chintak is his retirement. The corpus required here is of Rs 3.85 crore and will be used up to 80 years of age after retiring at 60. The corpus required has been calculated assuming household expenses of Rs 50,000 per month in present value at an 8% inflation. Pankaaj has aligned second home, direct equity investments, Birla Sun Life ULIP and PPF which promise a corpus of Rs 2.27 crore, Rs 1.11 crore, 8.85 lakh and Rs 10.25 lakh respectively after 14 years i.e. at the retirement age of 60 years. Even EPF contribution is aligned towards retirement goal which will give a corpus of Rs 7.40 lakh at the time of retirement provided Chintak continues to contribute to the EPF account. It is also recommended to shift from direct equity investments to diversified equity mutual fund schemes, then review real estate investment periodically as the retirement corpus is largely dependent on appreciation in price. Additionally, surrendering Birla ULIP plan to reinvest this amount in a diversified equity mutual fund scheme and continue investing Rs 1,000 in PPF account is also suggested by Pankaaj. The balance corpus of Rs 20 lakh will come from Max and LIC traditional plans at maturity. No further monthly investment is required towards retirement goal as the aforementioned investments will help build a corpus of Rs 3.65 crore by the time Chintak turns 60.

Concluding Remark

Chintak should review the plan, rebalance his portfolio annually, raise his investment amount with increase in income and take corrective actions for insurance policies as discussed. 

http://www.thefinapolis.com/article.aspx?c=1171

Financial Plan published in The Finapolis (November'2015 issue)

Chitrang Shah is a 29-year-old resident of Mumbai and works for a private company. He lives in his own house with his family comprising his wife Shital, 29, five-year-old son Vihaan and mother Surekha, 69. His monthly income is Rs 23,500 and his wife earns additional income of Rs 5,000 as commission from postal investments. Of this, a big chunk goes towards household expenses Rs 19,700 and Rs 2,500 for child’s education; Rs 4,000 goes towards investment (Rs 2,000 in EPF and post office recurring deposit respectively) and Rs 1,958 for insurance premium.

   

 Financial Goals f the Family 

The goals for Shah Family include building corpus for balance amount of new house, savings for children education and his own retirement. However, due to constraints on cash inflow, it’s difficult to achieve all the goals in specific time as prescribed by Shah. Maalde advices him to postpone his goal for new house purchase and use current surplus funds for child’s education and retirement goals. To build a corpus for balance amount of new house, he recommends starting a savings account when his income grows in the future. To begin with, Maalde will first analyse his current insurance portfolio and gives recommendation on necessary changes required.

 Analysing Life Insurance Portfolio 

Shah has two traditional insurance policies with life cover of Rs 4 lakh from life insurance corporation (LIC) for which he pays an annual premium of Rs 11,000. Maalde thinks Shah is inadequately covered despite paying such a huge amount towards insurance premium. He recommends having an online term plan with a life cover of Rs 50 lakh for a term of 30 years. This will cost around Rs 6,500 which is half the current premium amount he pays. 

Maalde suggests surrendering of the other two existing life insurance policies. Since, the internal rate of return (IRR) of both traditional plans of LIC after considering present surrender value, future premiums payable and expected maturity value based on current bonus rates is unlikely to beat inflation. If these policies are continued then IRR will be around 5% to 6% only. So, as for corrective action measures on insurance portfolio, it’s better to exit from traditional plans and invest the insurance proceeds received for other goals. 

 Health and Disability Insurance Planning 

As for health insurance, Shah and his wife are covered for Rs 3 lakh and child for Rs 50,000. Maalde advises continuing the policy, but suggests increasing the cover for son to Rs 3 lakh during the next renewal. He also suggests buying a top-up plan of Rs 10 lakh with deductible of Rs 3 lakh for family and Rs 25 lakh accident disability insurance. These both will have additional cost around Rs 10,000 p.a. He recommends buying when income increases in future.  

 The Road Ahead 

Now, after taking care of insurance requirements, Shah can start planning for his goals. The first goal is to set aside six months of expenses as a contingency fund. This amount will take care of any uncertain expenses of his family.  For this, Maalde has allocated his existing cash and bank balance of Rs 10,000, postal investment of Rs 75,000 and insurance surrender value of Rs 75,000. He recommends investing this amount in ultra short term fund wherein returns are comparatively higher than bank savings account. Shah also discussed buying a new home for Rs 50 lakh by selling his existing home valued at Rs 40 lakh (present value) in the next five years. As there is no surplus for investments or resources available for servicing the loan of Rs 10 lakh, Maalde has advised Shah to postpone it until an increase in his income. 

The next goal is to build a corpus for children’seducation. He wants to build an education fund of Rs 5 lakh in today’s value for his son (future value will be Rs 13.5 lakh) at age of 18 years. This goal is 13 years away from now and he requires monthly investment of Rs 3,500 in the equity scheme of mutual fund to accumulate. At present, Chitrang has surplus of Rs 2,500 per month so Maalde advised starting this amount and increasing the investment when income increases in future.

The only other goal left is retirement fund for which he will require a corpus of Rs 3.9 crore i.e. up to 80 years of age after retiring at 60 years. The corpus required assuming household expenses of Rs 15,000 per month in present value and assuming 8% inflation. Maalde has aligned EPF corpus towards his retirement goal which will give corpus of Rs 39 lakh at retirement provided he continues to contribute to the EPF account. Additionally, he is required to start monthly investment of Rs 7,000 via systematic investment plan in diversified equity mutual fund scheme to build the desired corpus. Since, the funds are not available to invest for his retirement goal, Maalde suggests starting an investment when his income increases in future. Alternately, he can take a reverse mortgage of his house which will help to meet part of his retirement needs if he can’t build the desired corpus. 

 Concluding Remark 

Shah should review the plan, rebalance his portfolio annually, raise his investment amount with increase in income and continue to invest in a disciplined way. Timely execution of this plan helps his family to achieve desired goals without many hurdles.