 Satish Chandnani with family |
Name: Satish Chandnani (centre) |
The investment details he has shared with us don't seem to be accurate. How can we be sure? Because the numbers in his cash flow simply do not add up.
Chandnani earns a handsome amount of Rs 1.25 lakh a month (post-tax). To this, his wife Varsha, a businesswoman, adds another Rs 50,000 (post-tax). Routine monthly expenses are Rs 30,000 — a reasonable 17% of the couple's combined income. Average monthly expenditure on premiums of eight insurance policies is Rs 20,000. A systematic investment plan (SIP) of Rs 1,000 and a monthly recurring deposit of Rs 1,000 are his only incremental investments.
The grey area is his loans. Chandnani has taken a housing loan of Rs 45 lakh for 15 years. But he claims the EMI is only Rs 20,000. Thus, total outgo in the loan period is only Rs 36 lakh — much lower than what the amount should be. He has also taken a Rs 25-lakh loan against a separate property for three years (which closes in April 2009). The EMI for the loan is Rs 25,000. If this is true, he will pay Rs 9 lakh in three years — just 36% of the principal amount.
Clearly, the numbers don't add up. The question is, to what extent does it affect his financial plan? Consider this: according to Chandnani's version, the couple's cash flow generates a surplus of Rs 78,000 a month. However, if the loan amounts and tenures are correct, the total EMI should be about Rs 1.3 lakh. So the investible surplus ought to be nil. Alternatively, if the EMIs remain the same, his loan tenure should be more than double of what it is now.
One simply cannot afford to be unclear about such fundamentals. Since our repeated attempts to get the numbers to add up failed, we suggest that Chandnani re-look at his banking records. If our version of his EMI outgo is correct, it may be better to consider at least a part pre-payment of his loans.
| EXITING INSURANCE POLICIES |
| Like Chandnani, if you want to exit an insurance plan, here are three options to choose from: |
| LET IT LAPSE • Stop paying the premium within three years of purchase of policy • Policy lapses and premium is forfeited • Life cover ends, you lose income tax benefits claimed on past premiums |
| SURRENDER • Surrender any time after three years of purchase • Contract ends. Life cover terminated • Surrender value is at least 30% of premiums paid (less the first year's premium) |
| TURN PAID-UP • Possible any time after three years of purchase • Premiums stop but life cover stays with lower sum assured. Policy value used to pay for cover • Holder gets bonuses and benefits accrued till policy is converted to paid-up |
Meanwhile, we've built a financial plan assuming a surplus of Rs 78,000. In case the actual amount is lower, Chandnani can still invest in the recommended products. To get started, let's quickly assess his current corpus.
Chandnani is an ultra-conservative investor. In 18 years of his career, he has invested only Rs 25,000 in mutual funds through the single SIP in Reliance Equity. The solitary stock in his kitty — Punjab National Bank (PNB) — was bought on a friend's insistence. He has built a debt cushion of Rs 6 lakh through investments in National Savings Certificates (NSCs), Public Provident Fund, bonds and fixed deposits. Real estate accounts for the biggest chunk of his portfolio. The current value of two apartments and a shop is approximately Rs 90 lakh. Jewellery worth about Rs 7 lakh forms the near cash component of his investments.
His insurance basket has three Ulips, four money-back and one endowment policy. Together, they provide him a cover of Rs 41 lakh. Total annual premium outgo is a whopping Rs 2.65 lakh a year. The endowment and money-back policies are very expensive and constitute about 75% of total premiums.
Despite earning and saving well, Chandnani's portfolio is rather bland. The missing ingredient — equities. It is one asset class that cannot be ignored for wealth creation. "I know equity investments are very rewarding. But I do not understand market dynamics and hence have kept out of it," he says.
However, if Chandnani has to achieve all his financial goals, the status quo cannot continue. In another 10 years he requires Rs 46 lakh for his son's education and marriage. For retirement, he wants to build a corpus of Rs 3.25 crore. (Given his present monthly expenses, we think this amount may be inadequate). To meet all these goals on time, he must invest Rs 42,000 a month in equities, assuming they earn 15% a year. Fortunately, he claims to save nearly double this amount every month.
The catch is that he is very uncertain about the markets. For such novices, the safest route to enter equities is through SIPs in mutual funds. They ensure discipline in investments and further reduce vulnerability to risk.
Chandnani should distribute investments in a basket of four to five equity diversified funds and equity-linked savings schemes (ELSS) with good track records. Among equity funds, Value Research suggests he choose from HDFC Equity, Reliance Vision and Birla Frontline Equity. For tax benefits, he can invest in schemes like HDFC Taxsaver, SBI Magnum Taxgain or Sundaram Taxsaver.
As for his PNB stocks, it will be best to sell them and re-invest the redeemed amount in the recommended funds. Regarding insurance, we suggest Chandnani continue with the Ulips and endowment policy. Two Ulips are pension plans, which will be beneficial after retirement. But all four money-back policies should be made fully paid-up. The corpus accumulated till now will pay for the insurance cover, which will reduce slightly.
Once this is done, the Rs 50,000 paid as premiums for the moneyback policies can be used to buy a term insurance plan of Rs 1 crore for 25 years. Such a high life cover is essential for someone who has taken loans worth Rs 80 lakh.
