The Hindu Business Line : Planning an actor’s finances

Ms Neetu, 21, an upcoming film actor, has worked in the field as a child artiste, though she has earned fame only in the last two years. She has been able to earn substantially from her career in modelling, acting and as brand ambassador for companies in the cosmetics space, She recently appointed a qualified financial planner to manage her finances as well as administration.

Her assets include:

Residential bungalow worth Rs 56 lakh built recently in which she stays.

A modern flat bought two years ago at a cost of Rs 38 lakh in Chennai, which is worth Rs 56 lakh at today’s value, fetching her annual rent of Rs 1,50,000. (Taxes to municipality a sum of Rs 9,000).

Urban plots numbering 10 bought in various places in and around Bangalore at a total cost of Rs 40 lakh, worth now around Rs 1.2 crore.

Jewellery and personal assets worth Rs 15 lakh and Rs 5 lakh, respectively.

Two cars costing Rs 6 lakh and Rs 8 lakh, bought using car loans. Liabilities as on date are Rs 3 lakh and 4 lakh, with the EMI for both the cars totalling Rs 40,000.

Direct investment in equity — Rs 30 lakh in which mid and small-cap stocks accounted for 25 per cent.

Her present monthly expense is Rs 2 lakh, and she expects her expenses to come down by 50 per cent in another 10 years, once her film career comes to an end. She would like to enjoy a pension of sorts from the age of 50 and expects her life expectancy to be 80 years (She would prefer to maintain the same standard of living, but would like to have her pension adjusted to inflation).

Her goals

As her film and modelling career may not extend beyond another 5-10 years, she would like to put in place a holistic plan that would enable her to lead a comfortable life on retiring. She has no dependents, but would like to have an insurance policy with risk cover to meet the donations to an orphanage even after her time.

She would like to accumulate Rs 50 lakh over a 10-year-time-frame for building an orphanage for which she is prepared to invest through SIP (systematic investment plan), anticipating a return of 6 per cent over inflation. She wishes to know how much she has to accumulate every month.

She has been considering a deferred annuity plan for 20 years by contributing a sum of Rs 50,000 per annum, which will be unit linked. The premium allocation charges are 80 per cent in the first year, 90 per cent in second year, 95 per cent in the third year and 100 per cent of the premium invested from fourth year onwards. The scheme proposes a return of 15 per cent. She would like to know the monthly pension she will get from her policy.

She wants to invest in mutual funds: 25 per cent in debt anticipating a 9 per cent return and 75 per cent in equity. She would like to accumulate Rs 3 crore in five years to start a beauty salon in Chennai and Bangalore. She would like to know how much she has to invest in debt and equity at the start of every month.

The solution

Financial planning is prioritising the needs, wants and dreams of an individual. If one is able to identify his/her goals and then plan out the ways and means, it will make it easy to attain those goals. Here’s what we suggest in this case.

Insurance: The advantage of insurance is that one can achieve the target on day one. In Neetu’s case, since she has the ability to invest sufficiently to achieve the target, she needs to budget mainly for unforeseen situations. Under these circumstances, the best option available to her is to go for term insurance. Since her profession requires a lot of travelling, it has been advised that along with a term assurance policy, she opt for riders such as accident cover and critical illness cover. Opting for critical illness riders along with a policy means that if she is struck with any one of the major ailments covered, the entire sum insured is paid and the critical cover will cease to be in force. Hence, she is advised to add a health insurance plan too, to take care of future health requirements.

Accumulation towards charity: For her donation to the orphanage, Neetu expects to accumulate Rs 50 lakh, with a return expectation of 11 per cent (rate of 6 per cent plus inflation, which has averaged 5 per cent over the long term). We advise an equity fund with a large cap orientation, where the volatility in returns may be low in comparison to theme or other funds.

If favourable stock market conditions allow her to accumulate Rs 50 lakh ahead of time, we would suggest she move a sizeable portion of her investment from equity to debt to protect the corpus. She would need a monthly investment of Rs 22,830 in SIP for a 10-year period to meet this goal.

Towards pension: Being an actor by profession, Neetu may target higher living expenses than people from ordinary walks of life.

We suggest that she accumulate Rs 50,000 per annum for the next 20 years and re-invests the proceeds then, to buy a deferred annuity from an insurance company at the age of 50.

We assume an annual interest of 6 per cent per annum; the monthly pension will then be Rs 47,500. Instead of locking into a higher premium, she can opt for a top-up facility on her annuity plan to increase the annual contribution. By doing so, she can save on expenses and charges, for the first three years.

Going by her present standard of living, her requirement at the age of 50 will be Rs 2,65,000.Hence it has been advised to step up her savings once her other goals are attained.

Own business: Her expectation from debt investments appears to be on the higher side and she may have to tone this down to more realistic levels. Going by her goals, she has to invest Rs 86,500 monthly in debt to reach a target of Rs 65,75,000 in five years.

A return of 15 per cent per annum from equity appears to be moderate based on the long-term performance of our markets. The monthly contribution towards equity has to be about Rs 2,56,000 to attain a target of Rs 2.35 crore.

Since she is self-employed, her income may be variable. Before she begins her investments in these funds, she should put aside and at all times maintain, enough balance in a liquid fund, to meet all her cash payments for at least three months.

Based on her investment pattern, it appears that her asset allocation pattern is not appropriate; she needs to step up the debt portion in her portfolio. Since she has a clear idea of her requirements and goals, she should go for a wealth check-up once every six months.

Queries can be sent to financialplanning@thehindu.co.in

More Stories on : Investments | Young Investor

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page