|Name: Kapil and Garima Oberoi|
Age: 33 and 32 Years
Monthly Income: RS 70,000 (post tax)
Financial dependants: Two (daughter and Garima’s mother)
SAY YES TO STOCKS IF...The doctor cautions most patients against buying stocks. This is true for the Oberois too. Find out if you qualify.
|1. Do you know why you bought each share?||Yes||No|
|2. Do you have a time frame for keeping the stocks?||Yes||No|
|3. Do you know whether a particular stock is for investment or for trading purposes?||Yes||No|
|4. Do you know what to do if the stock falls/rises by 50%?||Yes||No|
|5. Do you understand portfolio construction?||Yes||No|
|6. Do you have a reliable source for consultation?||Yes||No|
|7. Do you know the average return from your portfolio on an annual basis?||Yes||No|
|8. Do you compare the returns of your stock portfolio with a benchmark index?||Yes||No|
|9. Are you comfortable with doing a fundamental analysis of the stocks in your portfolio?||Yes||No|
|If your answer is YES to at least six of the above listed questions, then you may consider investing in direct equity.|
His choice of funds is also inappropriate. Iris has suggested exiting both the funds that he has chosen for systematic investment plans (SIPs)—DSPML India T.I.G.E.R and DWS Investment Opportunity. Of the two other funds in his collection, HDFC Taxsaver and SBI Magnum Balanced, he is advised to retain only the former.
We shall explain the reasons for this overhaul later, but by now it should be clear that Kapil must refine his choice of financial products. The good news is that if he does so, he can reach all his goals (see ‘Go Get It’). Before we tell you how, let’s take a look at the current resources at his disposal.
Kapil earns Rs 30,000 a month after tax. His wife, Garima, 32, is a consultant with an IT company and brings home Rs 40,000 a month. The Oberois’ routine expenses are about Rs 15,000—21.4% of their combined income. Another Rs 18,000 is skimmed off as an EMI for their apartment in Gurgaon that was booked in 2003. This amount is for two home loans—Rs 16 lakh at 7.75% interest rate for 20 years and Rs 5 lakh at a floating rate of interest for 17 years. The apartment cost the couple Rs 28 lakh. Today, it is valued at about Rs 60 lakh—a whopping 53.3% jump in four years.
After subtracting the two SIPs of Rs 1,000 each, the Oberois are left with Rs 35,000 as monthly surplus. We suggest that they funnel the entire amount in equities as the couple has an average risk appetite. They have already built a reasonable debt cushion of about Rs 2 lakh through contributions to their provident fund and the Public Provident Fund. Garima owns gold jewellery worth about Rs 2 lakh, which adds to the security quotient.
Kapil has life insurance of Rs 15 lakh, courtesy the Army Group insurance. The premium is Rs 1,500 a month. In addition, he has picked up an endowment policy, a money-back policy and a pension plan for himself, which add Rs 5 lakh to his life cover. The total premium for these policies is Rs 42,300 per annum. Garima is covered for Rs 2 lakh through a money-back policy, which costs Rs 12,600 annually. All premiums are deducted from the couple’s provident fund contributions.
Despite a collection of four policies, Kapil is under-insured. We suggest that he buy a term plan of about Rs 65 lakh for 20 years. The annual premium should be Rs 21,000 approximately.
Of the current policies, Iris suggests that the couple surrender the money-back policy in Garima’s name as it is very expensive. Moreover, it is over three years old and should have a reasonable surrender value now. They can retain Jeevan Anand as a debt investment.
If Jeevan Surabhi does not offer a guaranteed bonus, they should convert it into a fully paid-up policy. When we shared this action plan with Kapil, he was not convinced.
|GO GET IT|
At first glance, the Oberois seem to have unattainable goals. But some rejigging later, they are within easy reach.
|Goal ||Time horizon (years)||Future cost (Rs)||Monthly investment (Rs)|
|Overseas holiday ||5||2.6 lakh||3,190|
|This goal is achievable but in case the Oberois fall short of money, it is dispensable.|
|Assuming that Kapil and Garima make the minimum down payment of 20% of the cost, they will have to shell out Rs 9 lakh only and can take a loan for the balance amount. In 10 years, they should be able to build this corpus.|
|Daughter’s education||20||48 lakh||4,245|
|Daughter’s marriage||25||51 lakh||2,292|
|These two goals can be easily met by investing in the recommended equity diversified funds. But the couple must avoid withdrawing funds from this kitty to meet any other need.|
|Kapil expects a post-retirement pension of about Rs 40,000. Given their current income to expense ratio, this amount should be enough to meet the couple’s daily expenses after retirement. However, the couple must earmark some equity investments towards any unforeseen expenditure after retirement.|
|*This is the minimum number of years for retirement and may increase if Kapil attains a higher rank in the army.|
His logic—the premiums come back to his provident fund after some time. We were stumped by this explanation. No insurer reimburses the premiums. After some discussion, we realised that Kapil was referring to the returns that are given to the policyholder of a money-back policy. This misconception is yet another outcome of mis-selling of insurance policies.
Kapil admits that he bought most of them because an agent pitched them as one-of-their-kind life covers. We hope that he now knows better.
The equity-to-debt ratio of Kapil’s pension plan is 80:20. Iris suggests that he should convert it to 100% equity and turn the policy into a fully paid-up plan after five years. This will ensure that he has built a sizeable corpus before quitting.
Regarding equities, Iris emphatically recommends that the Oberois stay away from stocks. Kapil should sell the two stocks in his portfolio and reinvest the money in equity diversified funds.
The premium for his house loan should take care of the tax-saving investments for Kapil. Garima should take an SIP in HDFC Taxsaver to avail of tax benefits.
Iris has suggested exiting the DWS Investment Opportunities fund because the invested amount is very small. Moreover, why should the Oberois take a risk with a small fund house when they don’t have other A-listers in their collection?
DSPML T.I.G.E.R has also been shown the way out because a very small amount is invested in it. SBI Magnum Balanced has not performed as well as some of its counterparts like DSPML Balanced which makes the cut in our recommendations.
The couple can build a mutual fund portfolio, comprising DSPML Balanced, HDFC Top 200, HDFC Equity and the Templeton Pension Plan using the monthly surplus of Rs 35,000. This mix of balanced and equity diversified funds fits into the couple’s average risk appetite. As for the debt component of their portfolio, the contribution to the couple’s provident fund and the premium for the endowment policy are sufficient for the next few years.
This plan should set right the highly skewed asset allocation of the Oberois’ portfolio. Over time, they can go slow on equities and bet more heavily on safer debt products. But before that, an equity boost is indispensable for reaching their goals.
REVISITING PAST PATIENTS
We do a quick check-up to monitor the health of our past patients’ portfolios
Goutam Bhattacharyya, 44
Financial dependants: Three
Old asset allocation
What we diagnosed
» Very low savings rate.
» Investments concentrated in debt instruments. No mutual fund investments.
» Low insurance cover.
What we prescribed
» Invest in mutual funds via SIPs.
» Buy a term cover of Rs 30 lakh for 15 years. It would cost Rs 18,000.
» Buy a term plan of Rs 10 lakh.
» Exit low-yield endowment and money-back policies.
What he did
» Surrendered all endowment and money-back policies.
» Started investing in two mutual funds, SBI Magnum Taxgain and HDFC Long-Term Advantage via SIPs.
What he didn’t
» Buy a term insurance.
» Increase savings as his expenses are at the minimum possible level.
Bhattacharyya waited for the sixth Pay Commission revision to implement the plan fully. It wasn’t the best decision, but he should not delay any longer despite the recent market downturn.
"I follow the doctor’s advice given to those whose financial situation is similar to mine."