ATM :: Risk coverage, high saving rate is good investment, but don’t discount equity

Sakina Babwani, ET Bureau Mar 3, 2014, 01.00PM IST | Economic Times

While youngsters are typically regarded as prolific risk-takers, when it comes to financial planning, the Indian youth would rather be the exception. So, even though their age allows them to invest voraciously in the high-risk, high-return equity, they happily invest in debt and illiquid real estate.

The Desais are not so different. For a couple in its early thirties, they have invested 78 per cent of their portfolio in debt, while equity investments make up for just 12 per cent, and the balance is held as cash. “I am willing to increase the equity exposure, but only after taking professional advice. Given the market volatility, I do not want to take unnecessary risks by investing directly in equity,” says Rajiv Desai, a 33-year-old IT professional.

While their portfolio needs to be rebalanced, the Desais have little to worry. A good income and ample time will ensure a smooth financial sailing for them. The long investment horizon for their goals also means that they need not take a lot of risks. Rajiv lives with his 31-year-old wife, Kinjal, and his 59-year-old mother, Kokila, in Mumbai.

Rajiv is an IT professional and takes home a monthly salary of Rs 90,000, while Kinjal is a homemaker. The couple spends Rs 42,000 on household expenses and Rs 8,805 per month on insurance. This leaves them with a high surplus of Rs 39,195, which is nearly 44 per cent of their monthly income.

At this stage in life, the Desais have just three goals: planning for their future child’s graduation and post graduation, and their own retirement. However, before they start investing for their goals, the couple must make sure they have secured their finances. The Desais have done an excellent job in this regard even though they have not taken the most effective route. Currently, Rajiv has one online term plan of Rs 1 crore, an offline term plan of Rs 50 lakh, and 12 endowment plans, which give him a combined cover of Rs 8 lakh.

Sumeet Vaid of Ffreedom Financial Planners suggests that the Desais continue with these plans as they were bought nearly a decade ago and are not very expensive. Besides, they will come in handy for their retirement goal. The good thing is that they don’t need any more life insurance as the combined cover of about Rs 1.6 crore should meet their requirement. However, Rajiv should consider taking an online term plan instead of the existing offline cover of Rs 50 lakh. While he pays Rs 1,725 per month for the latter, an online plan for the same cover will cost just Rs 450 per month.

Rajiv has also done an excellent job when it comes to buying health insurance. He has two individual plans of Rs 3 lakh each for his wife and himself, as well as an individual cover of Rs 5 lakh, and a top-up plan of Rs 10 lakh for his mother. Apart from this, he has a Rs 10 lakh top-up plan and a personal accident cover of Rs 20 lakh for himself. Therefore, Vaid is of the opinion that till they have a child, they need not purchase more health insurance.

As far as building a contingency fund is concerned, the Desais will require about Rs 1.5 lakh in cash as corpus for three months’ expenses. Currently, Rajiv has Rs 3 lakh in his savings account. He is advised to keep only Rs 50,000 in the account, while the remaining Rs 2.5 lakh can be invested in a short-term debt fund or a sweep-in fixed deposit account for better returns. The reason for maintaining the additional Rs 1 lakh is that Rajiv’s mother is a senior citizen and it is advisable to keep cash handy for her medical needs.

The first priority for the Desais is to amass a corpus of Rs 28 lakh for their future child’s graduation, which is expected to begin after 18 years. Of their four fixed deposits, three are currently worth Rs 2.5 lakh, Rs 2.5 lakh and Rs 60,000, respectively, and will mature in 2015. After maturity, these should be invested in equity, debt and gold in a ratio of 70:20:10. Assuming a 9 per cent annual growth rate, these investments are likely to take care of Rajiv’s future child’s education.

For the child’s post graduation, Rajiv estimates that he will need Rs 1.5 crore after 21 years. To achieve this goal, he must start an SIP of Rs 16,633 in equity, debt and gold funds in the ratio of 70:20:10. Assuming a 12 per cent growth rate for equity, 10 per cent for debt and 10 per cent for gold, the invested amount is likely to generate the desired corpus in the given time frame.

Finally, the Desais need to plan for their retirement, which is expected to take place after 21 years. The couple believes that to continue with their current lifestyle, they will require a corpus of Rs 10 crore. However, since the Desais will not be able to generate such a high corpus, they should prune the goal amount to Rs 5.2 crore. Though this is short of the target, Vaid believes that this will ensure a smooth life for the couple after retirement.

To achieve this goal, their PPF investments will play an important role by contributing Rs 1.4 crore. A fixed deposit of Rs 1.4 lakh is likely to grow to Rs 10 lakh after 21 years and can be added to the retirement kitty. Besides, Rajiv’s current mutual fund investment of Rs 10 lakh is expected to fetch about Rs 90 lakh in 21 years. Rajiv’s insurance policies can also be allocated to the retirement corpus. All the policies combinedly are likely to fetch Rs 22 lakh.

Apart from this, Rajiv can start an SIP of Rs 23,000 in equity mutual funds, which will grow to Rs 2.6 crore in the given time period. While this will add up to Rs 5.2 crore, the Desais can increase their SIP investment for retirement as and when their income increases. If Rajiv’s job offers a yearly bonus, this should also be redirected towards this goal.

(Financial plan by Sumeet Vaid, CEO, Ffreedom Financial Planners)

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