Never before have we told a patient that some financial goals cannot be fulfilled because he doesn’t have the money or won’t be able to earn enough. With Anand Dangwal, 53, we came very close. To generate a monthly income of Rs 35,000 after retirement, he requires a corpus of nearly Rs 2 crore.
But Dangwal has only 10 working years left. And with hardly anything to show on his balance sheet, this seemed nearly impossible. Not that he isn’t earning well.
As country head of a company that manufactures cranes, he earns a neat packet of Rs 75,000 a month (post–tax). There is also a small pension of Rs 3,750 from his 15-year stint with the Air Force. The problem is that Dangwal has hardly invested all these years. “There wasn’t enough surplus. Whatever was saved went into the purchase of my house,” he explains.
Which only underscores the importance of expense planning. To spend everything you earn is financial hara-kiri. Whatever the income level, you must save. This means limiting your expenditure, even at the cost of your lifestyle.
|Name: Anand Dangwal|
|Age: 53 years|
|Monthly income: Rs 75,000 (post-tax)|
|Financial dependent: One|
|Click here to see his portfolio analysis|
The consequence of living from one pay cheque to the next is visible in Dangwal’s skinny portfolio. He started investing just two years ago. His contribution to the Provident Fund and Public Provident Fund and investments in National Savings Certificate totalling Rs 4.2 lakh are his only debt investments. For equity exposure, he has invested about Rs 55,000 in eight mutual funds and about Rs 67,000 in 10 stocks across six sectors. Some big names in his collection are Tata Motors, Raymond and NIIT.
Jewellery worth Rs 1 lakh forms the near-cash component of his portfolio. The only sizeable investment is his house in Faridabad, currently valued at about Rs 30 lakh. About a year ago, Dangwal purchased a plot costing Rs 10 lakh in Nainital. The entire amount was financed through a loan against his Faridabad apartment. So it’s asset value is negligible now but will increase as he repays the loan and as the value of the plot increases.
In fact, Dangwal is heavily mortgaged. About 27.5% of his income is eaten away by EMIs for a car and housing loan. He will need to pre-pay a loan as explained later. Worse, he is woefully underinsured and through the wrong insurance plans. Four money-back policies and a Ulip cover him for only Rs 10 lakh. But annual premium is a hefty Rs 77,682. The one good thing is his sizeable health insurance.
It provides him and his wife with a cover of Rs 6 lakh each. This should be enough to cover most of their medical expenses. Clearly, Dangwal’s finances are in a mess. The Rs 2 crore question: can we build a retirement corpus for him? It requires major reshuffling of his portfolio and financial discipline on his part, but yes, we can.
Damage control starts with rejigging his monthly cash flow. Currently, Dangwal spends about 30% of his income every month. This leaves Rs 34,550 as investible surplus. There are no incremental investments in equities which means that Dangwal continues to ignore the earning potential of what he saves. We suggest he cut back monthly expenses to Rs 17,500 or 23% of his salary.
Also, he should use the Provident Fund investment (about Rs 3 lakh) to pre-pay his car loan. If your investments are earning an 8% return and you are paying 14% interest on loans, it is better to liquidate those low-yield investments and pre-pay the high-cost loan. The pre-payment of the housing loan would reduce Dangwal’s monthly EMI outgo to Rs 13,400 and swell the monthly investible surplus to Rs 47,850—or 61% of his income.
The next step is investing the enhanced surplus. Dangwal has a low-risk appetite. But if he wants to build a sizeable nest egg in 10 years, he cannot afford to bypass equities. We recommend investing the entire surplus in a couple of balanced mutual funds like HDFC Prudence or ICICI Prudential Balanced. HDFC Prudence has been an exceptional performer and outstripped many equity funds while protecting investors’ capital during downtrends. If left untouched, these monthly investments could grow to Rs 1.16 crore by the time Dangwal retires.
Dangwal plans to sell the Nainital plot. But he shouldn’t do it right away. If the holding period is less than three years, any profit from sale of property is treated as short-term capital gains. Since there is no pressing need for money, Dangwal should ideally hold the property till retirement.
At a conservative estimate, in 10 years the plot should fetch him Rs 30 lakh. That would take the retirement corpus to Rs 1.46 crore. But there are some other niggling worries for Dangwal. In three years, he plans to spend about Rs 15 lakh on his children’s marriage (assuming his children, who are employed, bear half the expenses) If this amount is withdrawn from his retirement corpus, it will reduce to Rs 1.31 crore.
Some additional padding will be provided by his current investments in equities. Dangwal has chosen good funds but investment is concentrated in small- and mid-cap stocks (combining fund investments and direct equity). This is a risky strategy. We suggest that he exit Reliance Growth and Birla Mid-Cap and invest the amount in a good large-cap fund like Franklin India Bluechip.
It is best if he steers clear of further investment in direct equities. If his stocks perform well, Dangwal can hold on to them for some time. If not, he should book profits and reinvest in the recommended balanced funds.
Now to tackle the insurance blunder. Dangwal should exit all money-back insurance policies that are not close to maturity and are less than five years old. More importantly, they do not give him adequate cover and returns are a meagre 6-7%.
The Rs 27,682 he pays as premium can then be used to buy a term insurance plan of about Rs 25 lakh for 12 years. Adding the cover from his Ulip, his total insurance will increase to Rs 32 lakh.
HOW INFLATION AFFECTS YOUR CORPUS
Inflation has a great impact on your retirement plan. And we aren’t talking about the inflation figures released in newspapers. The inflation rate applicable to your portfolio depends on your consumption basket. If your investment earns 15% a year, here’s how much you need to save every month to build a corpus of Rs 1 crore in 30 years (assuming different rates of inflation).
|Inflation (%)||Monthly investment (Rs)|
A 6% INFLATION REDUCES RS 1 LAKH TO RS 31,180 IN 20 YEARS