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Build Growth Assets To Reach Your Goals

Equity investments should be the staple of the Ghosh family's portfolio instead of relatively illiquid real estate assets, says Financial Planner Pankaaj Maalde

Build Growth Assets To Reach Your Goals

Tushar Kanti Ghosh, a 45-year-old professional working for a multinational engineering firm, and his homemaker wife Tanusri, 35, live in Delhi with their 13-year-old daughter Anushka, seven-year-old son Arin and Ghosh's mother Chhabi, aged 73. Ghosh has a monthly take-home salary of Rs1.7 lakh. But the family has a significant outflow of about Rs1.57 lakh, spending Rs73,333 for household expenses, Rs25,000 for children's education, Rs47,000 for loan EMIs (two home loans and a personal loan) and Rs5,000 as a contribution to Ghosh's dependent mother. In addition, he has three life insurance policies with a combined life cover of Rs45 lakh and a total monthly premium of Rs4,903. Ghosh has also bought a Rs6 lakh health insurance plan for the entire family for a monthly premium of Rs1,392, and a separate accident insurance policy for himself (Rs7 lakh sum assured) for an annual premium of Rs700. Due to the huge outflow, he can only save Rs13,372 per month (see table Inflow-Outflow). On the other hand, he is yet to get a critical illness cover and accident disability insurance.

As for investments, Ghosh has higher exposure to real estate - 58 per cent of the total investments - as he has bought three properties and paying home loan EMIs for the second and the third one. He, however, lacks a corresponding exposure to equities and has not invested in growth assets to meet long-term goals. His financial goals are very focussed though, as he wants to build a retirement corpus and build funds for children's education and daughter's marriage. Here is how he should plan for short-term and long-term goals. The plan is presented based on the details provided by Ghosh. He is also advised to review it and rebalance his portfolio periodically, preferably every year.

Short-term Measures

Contingency fund: Ghosh must maintain an emergency fund that will initially cover three months' expenses. The current balance of Rs50,000 in his savings bank account, debt mutual fund investment of Rs50,000, Rs1.8 lakh in post office savings schemes and a fixed deposit of Rs1.25 lakh have been allocated for this purpose. The money should be invested in an ultra short-term fund to ensure easy liquidity. He should also raise this corpus to cover six months' expenses when his income increases. The money earmarked for the contingency fund should not be used for any other purpose.

Life insurance: He has already purchased a traditional plan and two term plans for which he is paying a total premium of Rs59,000 every year. However, the term plans worth Rs40 lakh have been bought offline, which usually cost 30-40 per cent more than online plans. According to need-based theory, Ghosh will require an additional life cover of Rs2 crore. So, he should buy an online term plan for 15 years, which will cost him around Rs45,000 per annum, and surrender the earlier term plans. After considering present surrender value, future premiums payable and expected maturity value based on current bonus rates, the IRR (internal rate of return) of the traditional LIC plan is likely to beat inflation. Hence, he should continue the plan as his debt portfolio.

While buying fresh policies, one should disclose all relevant details, including health history, habits (if any) and existing insurance plans. These investments will also earn tax exemptions u/s Section 80C of the Income Tax Act.

Health and disability covers: He should increase the health cover from Rs6 lakh sum assured to Rs10 lakh by the next renewal. It will cost him around Rs30,000 a year. He should also buy critical illness insurance worth Rs25 lakh and a Rs50 lakh accident disability insurance. It will cost him around Rs16,000 per annum. The premium paid up to Rs25,000 for self and family and an additional Rs30,000 paid for parents will be deducted from his total income u/s 80D of the Income Tax Act. Once again, disclose all information required.

Loan planning: Ghosh is paying a high rate of interest on his personal loan of Rs2.38 lakh. He is also servicing a small home loan of Rs1 lakh. He should take out Rs3.5 lakh from his PPF and repay both as it will free up Rs32,000 he is paying by way of EMI. This amount can be used to build the desired corpus for future goals. The second home loan of Rs10 lakh should be continued as it is, but he should get the interest rate reduced to 8.5 per cent from the same lender or switch to another lender. It will reduce his total EMI to Rs12,400.

Planning For The Long Term

As mentioned earlier, Ghosh's investment in real estate (see table Assets, Liabilities and Networth) is too high and not desirable as these are relatively illiquid assets and the market is often volatile. Moreover, returns from fixed deposits and postal schemes are subject to normal taxation as per one's individual tax slab and reduce overall returns. Directly investing in stock markets requires in-depth research and analysis, and it may not be possible for individuals to devote so much time and effort. Instead of direct equity investment, Ghosh should sell most of its real estate assets and invest in diversified equity mutual funds (see table Asset Allocation).

Retirement: It is the most crucial goal of one's life. Ghosh is planning to retire at 60 and will require Rs3.20 crore for his retirement fund, assuming household expenses to be Rs50,000 per month in present term, including 7 per cent inflation, and the life expectancy of the couple to be 80 years. To build the desired corpus, he should sell the second home worth Rs30 lakh and invest the money in diversified equity MFs. He should also start a monthly investment of Rs11,000 via SIP in diversified equity MFs, shift his direct equity investments to those funds and contribute Rs5,000 towards National Pension System (see table Retirement Funding).

Education: Ghosh must build an education fund of Rs35 lakh in present term (future value will be Rs49 lakh) for his 13-year-old daughter in another five years. His existing PPF balance of Rs15.5 lakh and the third home worth Rs16 lakh have been allocated for this purpose (see table Daughter's Education). To build a similar corpus for his seven-year-old son (future value will be Rs73.5 lakh when he turns 18), he has to start a monthly SIP of Rs27,000 in equity MF schemes. No allocation has been made towards this goal considering his current cash flow, but Ghosh should start investing as soon as his income permits it.

Marriage: Daughter's marriage is another important goal and Ghosh has to accumulate Rs25 lakh in today's value (future value will be Rs56 lakh when she turns 25). To build this fund, he should start another monthly SIP of Rs20,000 in equities. As there is no surplus available at present, he should start the investment after a rise in income.

As told to Naveen Kumar

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