Financial Planning. Arriving at the right asset allocation

A couple — Amit, 42, and Neeraja, 37 had queries with respect to their personal finance. Though they had investments, they were not sure whether those would fetch the expected returns and help achieve their goals. The table shows a simple representation of their current financial position based on the data provided by the couple.

Amit had a ₹1-crore life cover by way of a term insurance product and has fortunately not loaded himself with many insurance policies, which is the case with many. They were expecting a lump sum of ₹11.5 lakh as maturity proceeds from an insurance policy in the next four years.

As Amit is 42, his priority was towards retirement. They have twins, a girl and a boy, aged 11.

Based on risk-profiling and subsequent assessment, we clarified to them that they would need to opt for medium risk — not exceeding an exposure of 50 per cent of their overall assets in equity-oriented investments.

We understood their goals and came up with the following needs:

This seems to be a simple and straightforward case without much complications if you look at only the numbers.

But during the discussion, it was identified that they have many questions such as whether they were overspending, were they saving enough, was it too late to start funding for their goals, what was to be expected from risky investments and so on and so forth.

The entire family had been covered for health through an employer-provided group insurance and Amit’s parents were covered for an additional sum insured of ₹3 lakh through the group health cover provided by his employer.

After an analysis, we recommended the following:

Neeraja would be required to buy a term plan for a sum assured of ₹1 crore.

A ₹5-lakh family floater will be needed in addition to the employer’s health insurance.

Debt in most cases is bad and it would be prudent to immediately close the personal loan by foreclosing the fixed deposit of ₹3.5 lakh.

This will enable an annual surplus of around ₹9.8 lakh, taking into account a provision of ₹3 lakh towards vacation year on year.

The housing loan ends in November 2019 and hence no action is needed in that front. We suggested them to invest ₹25,000 per month for each kid towards their education for the next seven years in a mid-cap-focussed fund.

We recommended to map the vested RSU (restricted stock unit) towards the retirement goal and to diversify at a later point of time.

In addition to this, we asked them to invest ₹20,600 towards retirement on a monthly basis. Once free from the housing EMI, it would be best to increase the quantum of investments so that other goals, too, would get funded.

Asset allocation

Excluding the self-occupied house, the couple’s investment portfolio has a current allocation of 34 per cent to equity and 66 per cent to fixed-income investments.

With the recommended strategy, the equity contribution will increase to 37 per cent next year. The debt allocation will automatically go up by way of PF contribution. By the time the EMI towards the housing loan ceases, the equity weightage will go up substantially and the desired or recommended allocation of 50:50 equity to debt will be reached.

We recommend them to increase their contribution to equity over a period of time and not immediately so that the volatility associated with such instruments is understood better. We also clarified to them that they can expect 12-15 per cent CAGR post tax-over a period of 10-plus years from the equity portfolio and 7.5-8.5 per cent per annum returns post-tax from their debt portfolio.

The writer is an investment adviser registered with SEBI

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