I am 34 and have a 4-year old daughter and my wife is not employed. I invest regularly and even have a term insurance policy of Rs 1 crore. My company provides me and my family with medical insurance of up to Rs 2 lakh. I am also servicing a home loan towards which I pay Rs 20,000 every single month. My PPF balance is Rs 4 lakh. Can you please review my portfolio and let me know if I am on track to achieve my goals? Please suggest modifications if required. I have a good level of risk taking capacity and would like my portfolio to be aggressive.
In a lot of ways, Ramanathan is on track and has made the right moves. We have looked into the various aspects of his investments keeping in mind his goals. Given the scenario, he can meet his goals. However, we do have concern if he has put the right figure to the relevant goal. If he ups that estimate, then he would need to increase his savings. If possible, we would recommend that he cut down on his monthly expenses, increase his exposure to equity and consider working for a longer period time instead of planning a retirement at 54 years of age. If he succeeds in lowering expenses, then he can consider repaying his loan faster than the current tenure of 18 years. That will give him plenty more time to plan for retirement.
What we like about his mutual fund portfolio is the limited number of schemes it has. We generally find that investors tend to go overboard with the number of schemes they invest in. In this case, all the schemes are from a different category as well as from different fund houses. The outcome is a well diversified portfolio with a large-cap blend.
Ramanathan clearly does not have much left in his hand once he is done with his expenses and investments. This could be a cause for concern. What if there is an emergency and he has no way of funding it? He must create an emergency fund of at least three months’ expenses, and this must include his EMI too.
The fact that he is invested in a Public Provident Fund (PPF) and is servicing a home loan as well as paying a premium towards a pension plan, we are assuming that he is availing of the entire deduction under Section 80C. If not, we would suggest a tax planning fund - an equity linked savings scheme (ELSS). This will not only give him a tax benefit under Section 80C but even increase his equity exposure a bit. While Canara Robeco Equity Tax Saver or Fidelity Tax Advantage are both good investments, this route may not be feasible as Ramanathan does not have surplus cash to make an investment here.
The term insurance is a very smart move since he is the only bread winner in his family. Moreover, he has picked up the purest and cheapest form of life insurance. However, we do have an issue with his medical insurance cover. The cover is not at all high and what will happen if he resigns and moves to another company? In the interim period he will not be covered medically. Or what if he takes a job as a consultant or worse still, loses his job? We recommend his own personal medical coverage. He can consider a floater health insurance plan for the entire family. Towards his ICICI Prudential Lifetime Super Pension plan, he has been paying an annual premium of Rs 50,000 for the past five years and it is currently valued at just Rs 2.65 lakh. We do not favour unit linked insurance plans (ULIPs) as we do not like the concept of combining insurance with investments and the high costs such a product entails. Since five years have been completed, Ramanathan must check with his insurance agent as to the penalties if he continues to hold on to his policy but refrain from paying fresh premiums. What is not desirable is that he has a significant commitment in ICICI Prudential Lifetime Super Pension for which he pays quite a hefty premium of Rs 50,000 every year. Unfortunately, yet after five years, the value of the investments is only at a meagre Rs 2.65 lakh.
Ramanathan’s goals are achievable with his current monthly investment of Rs 15,000. However, he needs to clearly realise the impact of inflation 20 years down the road. The value of Rs 100, with 5 per cent inflation after 20 years, will be Rs 265. This must be kept in mind when setting goals. Today he is making the assumption that he can live with household expenses of Rs 25,000 when he retires when currently the expenses are Rs 35,000. Maybe this figure needs re-thinking.
Inflows & Outflows
Ramanathan is planning to retire 20 years from now, which he should reconsider extending that deadline. His financial goal towards his daughter ends 20 years from now and his current home loan outstanding is for another 18 years, making it very close for all goals to come to fruition.
Having realised the impact of inflation and rising costs, he should save more towards his retirement and also understand that with increasing longevity he may be living in retirement for 20-30 years and face different expenses that one is unable to visualise now. For instance, if he needs medication it will add to his costs. Likewise if his daughter is based in another city, he will incur expenses in travel that needs to be factored.
It would do Ramanathan a world of good if he could once again revisit his goals and the corresponding tenure of each.