Srinivasan is a 36-year-old NRI. His spouse is a home maker, aged 31. He has two daughters, aged 8 and 7 years.

He has been investing in mutual funds since 2004 and his investments amount to Rs 27 lakh. He wants to continue investing Rs 70,000 per month via SIP for the next 14 years to achieve his future goals.

Current Holdings

He has invested in the following schemes: Franklin Blue Chip, Franklin Prima Plus, HDFC Equity, HDFC TOP 200, Reliance Growth, Reliance Vision, Magnum Contra, Sundaram Select Midcap. His recent SIPs include: DSPML Opportunities, Quantum LT Equity and Principal Global Opportunity.

He plans to add more funds that would provide some debt exposure and earn better returns than fixed deposits. He is planning to invest Rs 20,000 per month in each of these funds via STP in these funds: HDFC Prudence, DSPML Balanced, HDFC LT MIP, DSP Savings Plus Aggressive (MIP). He manages his portfolio through internet.

He has Rs 20 lakh in fixed deposits, which earns an interest of 8 per cent. He bought two life insurance policies — Endowment Policy for a sum assured $50,000 (Rs 21 lakh) and Whole Life Policy for sum assured Rs 8 Lakh.

Premium paying term is 16 years. He recently took a term insurance for a sum insured of Rs 1.2 crore. He wishes to take an insurance cover for income replacement to meet unfortunate death. The maturity proceed of both the policies are required to be left as estate for his children.

He now intends to buy gold ETF on a monthly basis to allocate 5 per cent of portfolio to gold.

He owns a house (purchased at a value of Rs 50 lakh) in India, which fetches Rs 21,000 as rent per month. He has recently invested Rs 1 lakh each in ten large cap stocks.

Education and marriage of children.

Retirement corpus (assuming life expectancy of 80 and 75 years for male and female respectively)

He also seeks to know the tax liability of the income generated in India. He also wants to know his tax liability, if shares are sold within a year and how he can repatriate the money back to Gulf (he would like to know the conversion in US dollar).

The targeted goals should be comfortably achieved with the current earnings of Rs 30 lakh and other income of Rs 3.4 lakh per annum, if the portfolio is meticulously planned. While the target is planned based on an assumed return rate, there should be a periodic review, say at least once-in-six months to ensure that the assumptions are valid. If any short fall is foreseen, it is better to increase accumulation based on the revised projection.

Education

For the higher education of both the children, he needs to accumulate a monthly sum of Rs 49,520 for the next 96 months to reach a target of Rs 40 lakh each. He has to ensure that the savings earn a return of 12 per cent per annum during the entire term. Out of the Rs 70,000 saving in mutual funds, he can earmark Rs 49,520 towards education.

To earn 12 per cent, he has to plan asset allocation pattern between debt and equity. He is advised to shift savings from equity to debt, when he is close to his goals.

Marriage

The marriage expense expected (as indicated by him) after 14 years, when the child turns 22, is Rs 60 lakh each for both the children. He has another 168 months to reach the target. If he can save monthly a sum of Rs 27,500 at 12 per cent, he can reach this target ahead of time.

Retirement

If an inflation of 6 per cent is considered for the next 14 years, then the current annual expenses of Rs 12 lakh would inflate to Rs 27 lakh. We expect his monthly expenses to decline by 30 per cent post retirement.

He would then need 18.9 lakh for the next 30 years based on life expectancy. The corpus required at the start of age 50 is Rs 4.38 crore, provided it earns interest of 1.88 per cent over and above inflation (assumed at 6 per cent). To reach a sum of Rs 4.38 crore, he should have a monthly saving of Rs 1 lakh at a rate of 12 per cent.

Income tax

The income earned through fixed deposit and the rental income would be subject to tax in India.

Out of the total insurance premium of Rs 93,433, deduction will be allowed to the extent, it is paid out of the income earned in India.

Since for the other policy, the premium is paid by the NRE account, it will not be eligible for deduction.

After adjusting standard deduction, net rental value fixed deposit income together account for Rs 2.96 lakh. After deducting insurance premium, the total taxable income will be Rs 2.02 lakh.

Short term capital gain (STCG)

Convert the rupee purchase and sale value into dollar terms. For this, consider the average rate of USD at the time of purchase and sale of shares. For instance, the average rate at the time of buying the shares would be the average of USD spot buying and spot selling rate prevailing on that date.

Consider a similar calculation for the selling of shares. Arrive at the dollar capital gain based of the figures calculated using the above-average USD rates. This dollar gain should be converted into Indian rupee by considering the ‘spot buy price’ of the USD on the date of sale. The capital gain so arrived is short term in nature and would be taxed at 15 per cent.

Conclusion

Apart from the insurance proceeds, current accumulation in mutual funds and fixed deposit can be also left as estate and used for any shortfall in returns. Based on his current earnings, he has surplus of Rs 24,000 out of which he can utilise 50 per cent for the investment in Gold ETF. Any increase in the earnings can be diverted for short fall in this investment.

If he plans to have an income replacement insurance to meet all his goals, he should have a risk cover for Rs 7 crore.

After deducting the existing insurance, he has to insure for Rs 5.5 crore and the one-time premium will cost him Rs 16,95,000; if regular premium is paid, then he would require Rs 1,71,000 per annum.

He can accumulate the surplus and marginally cut the current expenses to take a regular premium paying policy.

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