The Hindu Business Line : Inclusive plan to reach goal

I am Rohit, aged 33, working with a financial company. My family consists of four members besides me – my dad, aged 55 and self-employed; my mother, housewife; my wife, aged 33 and working in a bank; and a two-and-a-half-year--year-old daughter.

Our annual income is Rs 16.4 lakh, expenses are Rs 12.6 lakh, net surplus is Rs 3.76 lakh and current investment portfolio is Rs 20 lakh (see tables).

I would like to have clarifications on certain things:

I want a plan for the next five years. I have life insurance cover for Rs 7 lakh. Do I need to enhance the cover?

This year I have opted out of employee provident fund schemes but my wife contributes Rs 4,000 a month towards employee provident fund while her employer’s contribution is about Rs 3,500.

I may require Rs 7 lakh for my daughter’s education in another 14 years and also about Rs 5 lakh (present value) for her marriage at the age of 24.

For my retirement needs I wish to have Rs 30,000 a month at today’s value. After adjusting my rental income from shop and flat, how much do I need to save if intend to retire in 27 years. I expect to live till 80.

All my investments are routed through mutual fund and are predominantly in tax saving funds. I am willing to assume higher risks for better returns. Kindly suggest changes. I don’t have any personal medical cover for family; I am covered under company’s group medical policy (this does not include my parents). Should I increase my portfolio value or increase in any component like mutual fund or government bond?

I am planning to buy a commercial flat for setting up a shop and the current cost of that is Rs 15 lakh. I also plan to buy a residential flat in a couple of years. This presently cost between Rs 25 lakh and Rs 30 lakh. How much do I need to accumulate for this purpose and is my income sufficient to raise a loan?

Name withheld on request

Solution

Asset allocation plays an important role in constructing a portfolio. A comprehensive plan for all goals is paramount rather than a plan for a shorter period.

In a comprehensive plan there can be short-term and long-term goals. We suggest that you construct a portfolio based on long-term financial goals with a risk cover matching in tandem to the goals rather than a planning for a five-year period.

Your risk appetite is not matching your current portfolio. Given your age, you can consider higher allocation to equity rather than gold and fixed deposits. Try to build your portfolio in the ratio of 50:20:10 in the order of equity, debt and gold.

As you already have good exposure to real estate it may be advisable to restrict the exposure to this asset class to 20 per cent (this is exclusive of your current residence).

Education and Marriage: For education the present value of Rs 7 lakh if inflated at 5.5 per cent for the next 14 years will be Rs 14.8 lakh. As you have sufficient time it is advisable to take higher exposure in the ratio of 70:30 in favour of equity (direct investment as well as mutual funds) and debt. If you accumulate Rs 3,425 for next 168 months you can reach the target provided you earn 15 per cent return from equity and 8 per cent from debt. To be on the safer side, tactically balance (sell equity investments at predetermined return at regular intervals) the portfolio to protect returns.

For marriage, the present value of Rs 5 lakh will be Rs 16.2 lakh if inflated at 5.5 per cent. To reach this target you need to invest a monthly sum of Rs 1,260 for the next 264 months (use the above ratio of equity and debt for investment).

Retirement: It may not be prudent to meet your entire retirement needs through rental income. Further, you don’t have any social security scheme with the employer. Any drastic change in the behaviour of one particular asset class will jeopardise you income stream.

For your pension requirement it is better to have different avenue of income. Your monthly expenses of Rs 30,000 (Rs 3.6 lakh) inflated at 5.5 per cent for next 27 years will be Rs 15.28 lakh.

Assessing the rental income after 27 years might be a difficult exercise. Assuming that the rental income will also grow at the rate of inflation 5.5 per cent per annum then this income might supplement close to 50 per cent of your pension.

For the balance of Rs 8 lakh you ought to have Rs 1.33 crore to support your family for next 20 years (from the age of 60after retirement provided it earns inflation adjusted return of 2 per cent).

To accumulate Rs 1.33 crore, for the next 324 months (27 years) you need to save a monthly a sum of Rs 5,460 returning12 per cent per annum.

For these financial goals you need Rs 10,150 a month. If you clear your car EMI and personal loan EMI, you would have this sum. If you don’t have benefit in interest rates it is better to close both these loans with your fixed deposits.

Insurance: To protect all your goals and secure your liability it is advisable to take diminishing term insurance especially for those goals and liability that have similar tenure. To support your family you need to take a term insurance for Rs 30 lakh (if the nominee receives this amount and deploys the same at 8 per cent it can cover your family expenses).

As the expenses are likely to go up every year, it is advisable to take an increasing term insurance for this purpose.

It is better to take health cover for your parents at the earliest. Medical expenses are growing at an alarming pace and it has the potential to dent your savings.

Loans for new properties: The total property loan would be Rs 40 lakh. If you borrow for a tenure of 20 years at 9.5 per cent interest, the monthly outgo will be Rs 37,280.After adjusting the premium for term you may not have surplus for both the properties.

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

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