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Ushamrita should get rid of loans first: Lovaii Navlakhi

The good news is that she has started saving. But too much surplus is going to pay for LIC policy and personal and credit card loans.

Ushamrita Choudhury, 29, works as a Marketing Manager with Axis Bank. Her mother, Shukla Chowdhury, 61, is dependent on her. Ushamrita's annual income is Rs 8,70,000, while her annual household expenses are Rs 5,60,000.

One positive is she has started investing some surplus. This can be seen in her recently-acquired shares and recurring deposits. Except for these, she has a bank balance of Rs?50,000. She has some liabilities in the form of personal and credit card loans. Both carry a high rate of interest. It is important that she pays off these loans as soon as possible.

She has a Jeevan Anand policy for which she pays Rs 1,65,000 annually for a Rs 30 lakh cover; this means she is using 56 per cent her savings for this. Jeevan Anand is a life insurance-cum-savings plan that offers low returns.

It's advisable not to link insurance with investments and to take care of these requirements independently. Assuming Ushamrita is in good health and will be able to buy a term plan, it is recommended that she stop paying premium for the LIC policy and make it paid-up.

The required insurance can be bought at a cheaper cost and the amount freed up can be directed towards investments for building a corpus to meet other goals. But we recommend that she buy a term plan before making the LIC policy a paid-up one. It is important to plan investments with the end goal in mind, that is, identify the proportion of funds that may be required in short term (for emergencies), medium term and long term. The investment strategy must be in step with the changing requirements and purposes. There is another important element that cannot be ignored - risk tolerance.

RISK PROFILE

Risk profiling is an important element of investment planning. As stated earlier, the purpose of saving and the duration of investment are just one side of the coin, while the willingness to be exposed to riskier assets is another. It's important to strike the right balance between these to arrive at an appropriate investment strategy and asset allocation.

At present, the asset allocation being discussed considers only one aspect of her financial plan, that is, the required allocations. It's important to note that this allocation may vary according to her risk tolerance.

Recommendations

  • It is important that she pays off her credit card loan immediately. Also, she is paying EMIs for a personal loan that will end in November 2016. She needs to make sure that she uses the surplus to pay off these two loans. Also, going forward, it is advisable that she builds an emergency fund so that she does not have to take more high interest loans.
  • After converting the LIC policy to paid-up & buying a term plan, she can start saving on a regular basis.
  • Once she pays off these two loans, she should invest her surplus in liquid funds/fixed deposits to create an emergency corpus of around Rs 1.5 lakh, equal to her three-month expenses. This will ensure that she doesn't have to take any personal or credit card loan in case of an emergency.
  • Since she has not accumulated any major assets, her cash flow situation will be tight for the next few years. Due to this, we suggest her to postpone the dream vacation to 2021 & reduce the goal amount to Rs 13.5 lakh, besides postponing the purchase of a vehicle by two years to 2023.
  • Also, she will have to reduce the home purchase amount to Rs 2 crore and fund 30 per cent of this through a home loan. Alternatively, she can consider postponing the purchase.
  • All the above assumes income growth of 20 per cent per annum. She still has 31 years for retirement and for such a long period this assumption seems to be aggressive. So, we suggest that she review the situation from time to time.
  • Any maturity proceeds from LIC's Jeevan Anand would be an additional buffer. Also, only the asset details mentioned have been considered. Any other asset like EPF/PPF would also be a buffer.


Savings Recommendation

  • With dates for her various goals falling in the next few years, it will be difficult to earmark a fixed amount to be saved for each. Based on current assets, goal timelines & surplus being generated in the short term, she will find it difficult to start saving for all her goals starting today. The surplus invested each year will be utilised for short-term goals to start with and then, as and when required, for the various other goals.
  • To begin with, we recommend her to start a monthly investment of Rs 27,000 from November 2016, that is, once the personal loan has been paid off.
  • Till November 2016, she should use the surplus to pay off the credit card loan and create the emergency fund.
  • See the previous page for the monthly investments she needs to make in the next few years. From 2021, she should increase the investments by 23 per annum, which would be in line with her income growth. The savings need to be closely monitored on a yearly basis to ensure they are aligned to the income growth.
  • In case income growth is not sustained for a few years, it's advisable to revisit the goals considering that the realisation of the goals is largely dependent on future income.


INSURANCE REQUIREMENT

  • She requires a higher insurance of Rs 1 crore to Rs 1.5 crore. This has been computed assuming the child would no longer be dependent on her post 2031. It's important to review this on regularly.
  • Personal accident cover of Rs 30-40 lakh is recommended. This will pay sum assured in case of permanent disability due to an accident.
  • Critical illness cover of Rs 20 lakh will be a help if she were to acquire any critical illness
  • Though she has health insurance from the employer, she should consider buying a personal health cover of Rs 5 lakh to start with and keep increasing it over a period. This will provide the required cover while switching jobs and even after retirement.
  • If the employer-provided health policy is a family floater, it can be used to cover her mother, who may otherwise face difficulty in getting an individual cover.


PLAN ASSUMPTIONS

  • The calculations and projections provided in the plan are based on the following assumptions:
  • Inflation is considered at 6 per cent oEducation goals have been inflated at 10 per cent a year
  • Return of 7 per cent per annum considered after retirement
  • Real estate price growth is considered at 10 per cent
  • Life expectancy is assumed to be 85 years for her
  • The required retirement corpus has been calculated to privide for the expenses from 2046; all expenses after 2046 are assumed to be provided for from this corpus
  • All values taken as income, expenses & assets are current values
  • It is assumed that home loan rate will be 10.25 per cent in 2031
  • Recurring deposit is assumed to mature in three years
  • It is assumed that she has a moderate risk-taking ability for which we suggest that 50 per cent of the portfolio is in growth assets and 50 per cent in stable assets
  • Savings refers to funds accumulated through investments; this includes monthly net savings, assumed to be earn post-tax returns of 9.5 per cent per annum
  • Income growth rate is assumed to be 20 per cent, which is important to meet the stated goals
  • Returns assumed for the below stated assets are: a. Recurring deposit: 6 per cent; and b. Equity shares: portfolio rate.


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