FINANCIAL PLANNING
Cutting down on expenses, planning for contingency and investing for future goals are the way to go, says financial planner Pankaaj Maalde
Cutting down on expenses, planning for contingencies and investing for the future are the way to go, says financial planner Pankaaj Maalde
Harish Chandra, 44, stays in Delhi with his wife Jyoti Uniyal, aged 42, and two children – 11-year-old Ujjwal and nine-year-old Udita. Harish runs an electronics manufacturing unit and jointly operates an events advertising agency with his wife. Jyoti also works as a freelance content writer. The Delhi-based couple is looking to plan their finances to make sure they are on the right track. The family wants to vacation in Europe in the near future and buy a luxury car by 2018.
Financial planning starts with a review of their overall financial profile. Cutting down on expenses and maintaining a contingency fund are a few good moves that the couple has adopted. However, paying high interest on loan and not investing to fulfil future goals are bad decisions (see Table: Current Assets). Harish should keep three months’ surplus for contingency and then start investing to meet future goals. He should also increase the family’s health cover as the existing cover is too low for a family of four. Also, it is always wise to keep insurance and investment separate for better results. Here is what the family should do.
CONTINGENCY AND RISK PLANNING
Contingency funding: As savings bank deposit, cash balance, fixed deposit and postal monthly income scheme (POMIS) have been allocated for repayment of personal loan, Harish must keep three months’ surplus for the contingency fund and then start investments for future goals. The contingency fund should be invested in ultrashort-term funds. Also, it should be earmarked for contingency purpose only and must not be used for any other purpose. The key to success is discipline.
Life insurance: Harish has already purchased 13 traditional plans and a unit-linked insurance plan (ULIP), and he is paying an annual premium of Rs 3 lakh. It is always advisable to keep insurance and investment separate for better results. The internal rate of return (IRR) of LIC’s Jeevan Saral policy bought in 2011 and the Children Money Back Plan bought in 2014, after considering present surrender value, future premiums payable and expected maturity value based on current bonus rates, is unlikely to beat inflation. Hence, he is advised to surrender both plans. Taking into account the same parameters, the IRR of all other traditional plans of LIC is likely to beat inflation. So, he should continue those plans as debt portfolio.
Returns on ULIP look good compared to benchmark, but ongoing charges will further reduce them. Therefore, Harish should review the plan after completion of five years, after the lock-in period is over.
According to need-based theory, Harish is not adequately covered for life insurance and requires an additional life cover of Rs 1 crore. He should buy an online term plan for 15 years, which will cost him around Rs 20,000 per annum. His wife Jyoti does not require any additional life insurance.
When buying fresh insurance, make sure to disclose all relevant information accurately, including health history, habits (if any) and existing insurance plans in the new proposal form. Harish is advised to discontinue and surrender the plans mentioned above after he gets the online term plan.
Health and disability: Harish has done it right to buy health insurance for himself and his family, but the sum assured – just Rs 3 lakh – is too little for a family of four. He should increase the health cover to Rs 5 lakh for each and also top up the health insurance plan for the family for Rs 15 lakh sum assured, with deductible of Rs 5 lakh. This will cost around Rs 36,000 a year. He should also buy critical illness cover worth Rs 50 lakh and accident disability insurance worth Rs 50 lakh for himself. This will cost around Rs 35,000 per annum. The premium paid up to Rs 25,000 for self and family and an additional Rs 30,000 paid for parents will be eligible for deduction under section 80D of the Income Tax Act. Disclose all information and be accurate while buying fresh insurance.
If parents or parents- in- law are dependent on Harish, it is advisable to take adequate health cover for them as well. Today, medical and hospital bills are running in lakhs and are rising faster than consumer infl ation rate. So, it is always better to take necessary steps that will help you meet medical emergencies.
Loan planning: Harish is paying a high rate of interest on his personal loan. He should repay the entire loan amount from existing cash, savings bank deposit, fixed deposit, POMIS and direct equity investment. This will free up his EMI of Rs 35,000 for future goals.
Investment planning: Harish’s exposure to real estate is 96 per cent of the total investment, which is too high and not desirable. He is strongly recommended to reduce the exposure and invest the corpus for his retirement.
The investment returns from fixed deposits and postal schemes are subject to normal tax rates as per his individual tax slab, which will reduce his overall returns. This disadvantage is reason enough to stay away from fixed deposits.
We strongly believe that direct investment through stock markets requires in-depth research and analyses. It is not possible for individuals to devote so much time and therefore, we do not recommend it.
To ensure adequate retirement funds, the investments made in real estate have been reallocated to retirement. Real estate investments should be reduced for better asset allocation
GOAL PLANNING
Retirement: This is of vital importance and must not be compromised at any cost. Both Harish and his wife are planning to retire at 60 and they will require a corpus of Rs 10.25 crore to take care of their retired life till they reach the age of 80. The corpus is determined assuming that household expenses will be Rs 70,000 per month in present term plus eight per cent inflation. To ensure adequate retirement planning, the investments made by Harish in real estate have been reallocated to retirement (see Table: Assets Reallocated). He should reduce his real estate investments for better asset allocation. Once that is done, no additional investment is required for the retirement corpus.
Education: To build a graduation corpus of Rs 15 lakh in today’s value for the son ( future value will be Rs 29 lakh when he turns 18), Harish needs to start a monthly systematic investment plan ( SIP) of Rs 23,000 under balanced mutual funds. For a post- graduation corpus of Rs 15 lakh in today’s value ( future value will be Rs 39 lakh when the son is 21), he will have to start a monthly SIP of Rs 16,000 and opt for equity funds.
For the daughter’s graduation corpus of Rs 15 lakh in today’s value (future value Rs 35 lakh when she turns 18), Harish needs to start a monthly SIP of Rs 19,000 and invest in balanced funds. For the post-graduation corpus of Rs 15 lakh in today’s value (future value will be Rs 47 lakh when she is 21), he should start a monthly SIP of Rs 14,000 and put the money in equity funds.
Marriage: To build a marriage corpus of Rs 15 lakh in today’s value for the son ( future value will be Rs 57 lakh when he turns 25), Harish has to start a monthly SIP of Rs 14,000. He can invest Rs 12,000 in equity funds and Rs 2,000 in gold. To build a marriage fund of Rs 25 lakh in today’s value for his daughter ( future value will be Rs 1.15 crore when she is 25), he should start a monthly SIP of Rs 21,000. He can invest Rs 18,000 in equity funds and Rs 3,000 in gold.
Dream vacation: Harish and his family want to go on a dream vacation after four years, which will cost around Rs 10 lakh in today’s value (future value will be Rs 13.60 lakh). He is advised to start a monthly SIP of Rs 25,000 in equity income funds for three years and equity arbitrage fund for the last year.
Insurance maturity will also be there to fund any of these goals if the accumulated amount falls short.
The plan (see Tables: Asset Allocations and Action Plan) is presented on the basis of the information and details provided by Harish Chandra. The plan assumes that dual income will continue till retirement. Harish is advised to review the plan and rebalance his portfolio periodically, preferably every year.