The Hindu Business Line : Clear liability before retirement

I am a 38-year-old NRI. My wife is 35. We have two daughters — the eldest is aged 4 and the younger one is 10 months old. I would like to lead my retired life in India from next year. I invested Rs 60 lakh in plots a few years ago. Its market value will be Rs 2 crore. A few years ago, I purchased mutual funds SBI Global, SBI Multicap, ICICI Pru Infrastructure, Franklin Equity, Reliance Equity, IDFC Enterprise Equity. All of them are above my investment value.

When Sensex was at 16,000 I invested about Rs 4 lakh in Reliance Diversified Power, Reliance Natural Resource, Reliance Banking, Sundaram Energy Opportunities, JM Small and Midcap, Sundaram BNP Paribas Capex, Birla Infrastructure, Tata Infrastructure, ICICI Fusion Fund III. Can I continue to hold these funds or do I need to rejig the portfolio? Suggest a suitable portfolio for another 3 to 5 years.

Insurance Investments

For my elder daughter’s higher education, I have invested Rs 1 lakh in a ULIP Children Plan and wish to continue the same for two years (maturity at the age of 16). I have invested Rs 50,000 in the same plan for my younger daughter and will continue it for 2 years.

For retirement benefit, I have invested Rs 5 lakh in a single premium pension policy maturing in 12 years.

I have traditional policies with a sum insured of Rs 20 lakh for which I am paying a premium of Rs 1.3 lakh per annum. These policies are likely to mature in 10 years.

Other investments

I have invested Rs 5 lakh through a portfolio management service about 2 years ago. I am holding 800 units of gold ETF. I have investible surplus of Rs 20 lakh and I am planning to invest it in ULIP or MFs to meet any shortfall in education corpus and for my retirement. I also have a health insurance for Rs 3 lakh (floater).

Goals

For my children’s education and marriage I may require Rs 25 lakh (elder) and Rs 15 lakh when they turn 16 and 22, respectively.

I wish to have Rs 30,000 as my monthly pension from next year till the age of 75. My monthly expenses will be Rs 12,000 a month from next year and the balance can be utilised to pay my insurance premium. For all my investments I am willing to assume moderate risk.

In a year, when I quit my present employment, I will have Rs 80 lakh. When I return to India next year I plan to construct a house (at a cost of Rs 20 lakh) in one of the plots with an aim to generate revenue for my retirement benefits. I intend to let out the house for Rs 20,000. Alternatively I am planning to take a loan for Rs 42 lakh and build a bigger house. Please suggest me an investment where I can earn fixed monthly income.

Name withheld on request

ANSWER

One needs to evaluate the return and expenses involved when it comes to investing in a product such as ULIP. A higher expense will indirectly affect your overall return. Since you have opted for a limited premium payment in your ULIP, you could have chosen the single premium option. The expenses of the ULIP in the first few years will be higher for a regular premium. Had you opted for single premium for the three years you could have increased the yield on the investment. Investment in equity market requires diversification and depends on risk appetite. When you opt for sector funds it is better to fix a target value and book profit once you reach the target.

Assume you expect say 15 per cent annual returns from your investment in Reliance Banking Fund for a goal that is five years away. Due to favourable markets condition if you can reach the target in two years it would be prudent to shift the money in debt and earn moderate returns over the next three years.

You can shrink your portfolio to five funds and exit holdings in SBI Global, SBI Multicap, Franklin Equity, Reliance Equity, Reliance Natural Resource and JM Small and Midcap. Exit your infrastructure funds other than ICICI Pru Infrastructure. Continue to hold ICICI Pru Infrastructure and accumulate only after a rally begins. Since large cap stocks currently offer attractive entry points, consider exposure to DSPML Top 100, Sundaram Select Focus and HDFC Top 200 in a staggered manner.

Children’s Education

The ULIPs will have maturity values of Rs 9 lakh and Rs 6 lakh if they can generate a compounded annualised return of 12 per cent. For your elder daughter you should save Rs 5,740 a month for 144 months to reach Rs 16 lakh. Such investment should earn a return of 10 per cent per annum. For the younger daughter’s education, Rs 4,550 has to be saved for 180 months at the same return to meet the target after adjusting your current investment.

Marriage

Assuming 5 per cent inflation, if you require Rs 15 lakh in 18 years for the elder daughter, at the same inflation, for your younger daughter’s marriage, you should target Rs 18 lakh.

To reach these targets you have 216 months (elder daughter) and 252 months (younger daughter) and should save every month Rs 2,480 and Rs 2,100, respectively, and it should earn interest of 10 per cent.

Retirement

Out of your Rs 80 lakh if you have spent Rs 20 lakh towards construction, you can consider investing in a fixed deposit at 10 per cent and earn interest of Rs 50,000 a month. After adjusting the money required for the insurance the rest can be used to invest in a systematic investment plan in mutual funds. The monthly rental of Rs 20,000 can be used to maintain the monthly expenses and rest can be routed to retirement kitty.

Other savings

The investment in portfolio management, mutual fund, real estate and insurance traditional plan can be used as a buffer and left as estate for your children. Current floater medical insurance of Rs 3 lakh has to be increased to at least Rs 10 lakh to meet any untoward eventuality. As the investment in gold is less than five per cent of overall assets, you can retain it.

Conclusion

Spending Rs 20 lakh to construct a house appears more viable than borrowing Rs 42 lakh to construct a bigger residence. Given that you may not take up any employment after returning to India, any liability will mount pressure on you.

If you still prefer to build a bigger house, you can consider selling one of your plots and raise money.

Financial queries can be sent to financialplanning@thehindu.co.in

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