A middle-aged couple, Anantharaman and Vijayalakshmi, wanted to understand their financial standing.

Anantharaman, aged 47 and Vijayalakshmi, 45, work in the IT industry. They have a son and daughter, twins aged 16. Both will be taking undergraduate courses in the next two years. The immediate goal is to set aside funds for their education.

The family follows a moderate lifestyle and are great savers. They had invested in real estate and had good experience. They bought 17 conventional insurance policies and seven unit linked insurance policies in the last 15 years. Their investment ranges from EPF with voluntary contributions, mutual funds, stocks, fixed deposits, PPF, NPS, Superannuation from the employer, to company deposits and lands.

Excluding their self-occupied house, their investment-assets allocation is skewed towards fixed income. Their risk profile suggests that they are comfortable investing in equity asset class for the long term.

Review and recommendations

Based on their assets and investments, they were guided towards an action plan, as detailed below:

1.   The basics of life insurance and health insurance needed to protect the family were well-covered with the right products.

2.   They were apprehensive about increasing their allocation to equity asset class and wanted to know if it was essential. They have already invested almost one-third of their investment assets in equity through mutual funds, NPS and unit linked insurance plans. It was suggested to rebalance the portfolio, with maximum allocation to be limited to 40 per cent of their investments in equity.

3.   They have not used their fixed income allocation such as PPF, NPS and other products by investing to the maximum extent. This was corrected with scheduled investments.

4.   A minimum investment limit was suggested to reduce the number of products and for ease of management based on their financial status. It was also advised not to fall prey to multiple agents’ sales calls to get into any products not suitable for their financial position.

5.   Cash in hand, fixed deposits, company deposits were realigned to suit their requirements such as emergency fund, medical fund, and the upcoming expense of the twins’ college education.

6.   If they maintain the same lifestyle at ₹50,000 per month, they may need ₹94,000 as monthly expenses when Anantharaman retires at age 60, at an inflation of 5 per cent. They need ₹3.16 crore at the beginning of his retirement, for 40 years in retirement.

7.   With the regular annual contribution of ₹3.36 lakh into EPF and ₹75,000 into NPS, they can comfortably reach their targeted corpus.

8.   They can also afford to fund the marriage expenses for their daughter at the current cost of ₹25 lakh. Their current financial position also helps them to provide higher education for the kids, if they prefer.

9.   The discussion on the above points highlighted that unless they want to grow their wealth to substantial amount, they do not need to increase their allocation to equity.

10. The discussion further led them to explore what they wanted to achieve with their income and assets. At present, they are financially secure with investments, savings habits, and a modest lifestyle. This also ensures they can start preparing for any uncertainties such as health issues, employment challenges, economic challenges to their investments as there are a lot more assumptions in the planning process.

Some eye-openers

The whole exercise ended up for the couple with a few thought-provoking realisations. 

a)   They could have put their money to better use by opting for investments to suit their risk appetite

b)   They were in a position to create wealth that may help the next generation to enjoy more freedom financially

c)   They can afford to spend more than what they are doing at the moment. This gives them a chance to think of travelling or any such activities of interest to them

By living well within their means and avoiding getting trapped in liabilities, they have given themselves a huge chance of compounding their savings. This, in a way, helps them to address any kind of uncertainties pertaining to their employment while giving them the luxury of retiring earlier when needed. 

The author is a SEBI-Registered Investment Adviser (www.financialplanners.co.in)