|Age: 33 years|
|Monthly income: Rs 37,000 (post-tax)|
|Financial dependents: Two|
|Click to see Anand's Portfolio|
But was there nothing he could save? Even a measly Rs 1,000 invested in an equity fund through systematic investment plans (SIPs) would have grown to Rs 1 lakh by now (assuming 20% annualised return for five years). Paladhi admits being negligent.
“I did not realise the importance of a timely start,” he says. Marriage changed all that. And after becoming a father recently, the sense of responsibility has only heightened. His investment approach has now become very aggressive: “I am ready to take 100% equity exposure to maximise the earning potential of my savings,” he says. We’ll help him do just that.
But first let’s assess his current financial condition. Paladhi earns Rs 37,000 a month (post-tax). Routine expenses gobble up nearly half his pay cheque. True to his bold stance, all incremental investments are in equities through SIPs of Rs 5,000 and Rs 4,000 in two mutual funds. That leaves Rs 10,500 as surplus. Though anxious to accelerate returns, Paladhi has carefully chosen funds with a good track record.
ULIPs v/s Mutual Funds
We advised Paladhi to invest a major chunk of his savings in a Ulip instead of mutual funds to kickstart his retirement planning. Here’s a quick comparison between the two:
Most plans offer more than three, free fund switches every year
Switching is costly. Exit and entry loads and can be as high as 3-4%
No tax implication when switching between funds
Profits from equity funds taxed at 10%, debt profits added to income
Top-ups come with 1% charge
Top-ups carry 2.25% charge
Good only for long-term investing because of high initial charges
Good for short-term to mediumterm investing time frame
Regular contributions required for the long term
Investor not under any compulsion to invest every year
Paladhi doesn’t plan to invest in any fixedincome instrument apart from his monthly provident fund contribution. But property is high on his wish list. In another 10 years he wants to buy a flat approximately worth Rs 35 lakh (current cost). Paladhi’s insurance cover of Rs 2 lakh is woefully inadequate.
Annual premium is Rs 6,700. He admits picking up the endowment policy to help a friend. “I know it was a foolish decision and want to surrender the policy. But I don’t know when to exit,” he says. We’ll explain that later in the analysis. In terms of investment strategy, Paladhi is bang on target. He has a high risk appetite and the equity overdrive should ensure he puts it to best use.
As advised earlier, he should continue investing in the two ELSS funds. For adding more muscle to his portfolio, the Rs 10,500 surplus should also be ploughed into equities. But here’s the twist. Instead of mutual funds, we suggest Paladhi invest in a Ulip with asset management charges (AMC) under 1%.
For such a Ulip with insurance cover of Rs 40 lakh, Paladhi will have to shell out about Rs 8,000 every month. In the long run, this will be more cost effective than mutual funds which have higher AMC of 2-2.5% of total assets under management. This means that as a fund grows, it becomes more expensive for investors.
Though the upfront charges for this Ulip will be high, by the time Paladhi retires after 27 years, it will prove to be a significantly cheaper route for equity exposure as compared to mutual funds. Once his wife starts earning, the couple can increase investments in the Ulip.
This should help them build Rs 5.5 crore—the retirement corpus required for generating monthly income of Rs 30,000 (current costs) after retirement. The remaining Rs 2,500 of the surplus should be invested in a good balanced fund. Value Research recommends HDFC Prudence. In three years, he can use the money for his child’s admission.
As for the apartment Paladhi plans to buy, his two ELSS investments should generate the down payment. In addition, Paladhi is expecting to receive Rs 4-5 lakh in the next couple of years from the sale of his parents’ apartment. This money should be invested in good large-cap funds like HDFC Equity and Reliance Vision.
The investment can be used to fatten the home loan down payment cheque. But Paladhi should not invest the amount in lump sums. Staggering investment over a few months will reduce risk. Much of his insurance snafu will be automatically corrected by the Ulip investment. But Rs 40 lakh is still inadequate cover for Paladhi.
He should buy an additional term plan with sum assured of Rs 25 lakh. He can exit the current endowment policy after three years when it attains a surrender value. Paladhi wants a health insurance that covers his parents too. We suggest he buy a family floater health plan with an annual cover of Rs 5-6 lakh. This is far more efficient than buying separate policies for every member of his family.