Getting Methodical

It doesn’t take very long to form an opinion about Prasad Borwankar: a complete family man, living with his parents and working wife, Vaidehi, and a doting father to his 2-year-old daughter. He chose to get a plan made because he wanted to get his finances in order, as he had been investing randomly over the past eight years without linking his investments to any goals. Though investments were regular, they were not channelised to offer a financially healthy future.

The mandatory risk analysis of the couple puts them under the aggressive investor category, based on which his existing finances were looked into. As per his income, expenses and other savings, he has been recommended to increase his equity holdings from 27 to 35 per cent and reduce his debt allocation from 28 to 18 per cent. The allocation towards real estate has been marginally increased from 40 to 43 per cent for he wishes to buy one more property to eventually live in after selling his Malad house where he lives, to be left with one house as an investment.

It was encouraging to note that the 34-year-old has taken adequate life insurance for himself and his wife. Likewise, he has taken appropriate health insurance, which also covers his ageing parents. Despite coming across as an aggressive investor, he had parked money in bank FDs instead of considering liquid funds as an alternative.

Changing tact

The surprising part of his finances is that he has made several investments in mutual funds and equities. Although it is good to note a significant

allocation to equities, the procedure adopted for investment lacks planning. Predictably, he has several overlaps in his investments, which means it is diversification only in numbers.

The recommendation for him is to exit direct equity investments and concentrate on a manageable portfolio of mutual funds. As an extension, he should invest systematically in equity investments earmarked for each financial goal and shift these investments systematically to debt about 36 months before the goal date.

Prasad’s existing outstanding loan is Rs.23 lakh on which he pays Rs.26, 000 EMI at 10.5 per cent interest. This should be transferred to SBI’s Maxgain Scheme at prevailing interest rate of 9.9 per cent. In doing so, he will not incur any pre-payment charges in the future and will also save Rs.800 on EMI.

The Borwankars lead a frugal lifestyle, which leaves them with sufficient savings and investible surplus every month. While they wish to stop working when they turn 50, it is too early to debate on that. However, the way their finances are placed currently, every provision has been made to ensure that they achieve their retirement goal. Thus by bringing orders to their investments, the Borwankers are much closer to meeting their goals.                     

A plan to act on

Contingency corpus

■ Your current monthly expenses are Rs.1.3 lakh and it is recommended that you maintain three months of this reserve, that is Rs.3.9 lakh, as an emergency fund

■ Invest the money from the savings bank account in ICICI Pru Money Market Regular Fund

■ Transfer this amount to the linked account under SBI Home Loan Max Gain scheme when it is opened

Investments

■ You have investments in 25 instruments including stocks and mutual funds (MFs), which is extremely time consuming to track and maintain

■ Direct investment in equity is not advised, as it requires in-depth research and analysis

■ Invest money in good MF schemes

■ Sell your equity investments and reinvest in recommended MF schemes under the growth option

■ Instead of investing in sectoral or thematic funds opt for well diversified funds, which invest in stocks of various companies in different sectors

■ All existing investments should be allocated towards your major goals

■ You should periodically review your portfolio and rebalance it as per your asset allocation

Retirement plan

■ You have indicated that you need your retirement corpus when you turn 50 and wish to maintain the current lifestyle

■ The balance in your PPF and EPF should be allocated to this goal

■ Existing balance in equity MFs amounting to Rs.14.25 lakh should be earmarked towards this goal

■ Investments in direct equity amounting to Rs.5.07 lakh should be allocated towards this goal with the redeemed sum put into recommended MF schemes

■ You are advised to shift your equity investment systematically to debt, about 36 months before retirement age, including any new investments during this period

Daughter’s education

■ You would like to plan for your daughter’s education after 15 years and would like to provide Rs.20 lakh in present value for this goal

■ Investments in direct equity amounting to Rs.15 lakh should be allocated towards this goal, by directing it to mutual funds

Daughter’s marriage

■ You would like to plan for your daughter’s marriage when she turns 22 and provide Rs.7.50 lakh in present value for this goal

■ Start investments in a monthly SIP of Rs.4, 700 to meet this goal

■ Invest Rs.4,200 in ICICI Pru Top 100 Fund (G) and Rs.6,000 per annum in Sukanya Samriddhi Yojana

■ You are advised to shift your equity investment systematically to debt about 48 months before marriage

Vacation

■ You would like to go for a dream vacation after three years, which will cost you Rs.2 lakh today

■ Half of your existing fixed deposits should be allocated for fulfilling this goal of taking a vacation

■ Redeem the FDs and invest the proceeds in HDFC Cash Management Fund and transfer the amount systematically to HDFC Balanced Fund over a period of 24 months

■ Withdraw the required amount after three years for this goal and continue to hold the balance investments in the same fund.  

Life insurance

■ Adequate life insurance is a must to make sure your family’s lifestyle is not affected if you die early

■ Considering your existing assets and your respective incomes, you have taken adequate life insurance for yourself and your spouse  

■ Continue your existing policies

Current health insurance

■ You must port your existing health insurance at least one month before, if you quit your job. The situation needs to be reviewed at least once every year for changes in regulation and coverage by the insurance companies.  

■ Disability insurance pays a lump sum in the event of suffering from a debilitating disease such as cancer, stroke, organ failure or disability arising from an accident.

■ You should take accident insurance, including disability cover (Bajaj Allianz Premium Personal Guard or Apollo Munich Individual Personal Accident Plan) for Rs.50 lakh and a critical illness policy (Aviva Health Secure) for Rs.50 lakh for yourself. Both these policies will cost you around Rs.38, 700 per year in premiums. Considering your existing assets and your income, your spouse does not need disability insurance.  

olmdesk@outlookindia.com