I am 28 and single and my monthly income is Rs 26,000. My average monthly expenses, including rent that I pay to my parents, are Rs 14,000. Over the past one year I have started investing. I want to accumulate Rs 20 lakh in the next 7-10 years. After a year, I want to purchase a car costing Rs 3-4 lakh with a 3-year tenure loan. Please advise if I am on the right track or if there is some change and addition required.
— S Mukherjee
Mukherjee is single with a great aptitude to save and is doing a good job about it. However, there a lot of changes that he can incorporate - the very first being an increased exposure to equity. Not only is it advisable since he is young but also because he would need to if he wanted to achieve his financial goals.
His first goal is accumulating Rs 20 lakh within 10 years. This would require a monthly investment of Rs 8,650 earning an annualised return of 12 per cent or Rs 7,200 earning 15 per cent. If that be the case, then his investments in equity fall woefully short. Right now he is only investing Rs 3,000/month. We suggest he increase this as well as lower his exposure to the Public Provident Fund and channelise more savings into equity schemes.
The two funds he currently invests in are Franklin India Bluechip (Equity: Large Cap) and HDFC Equity (Equity: Multi Cap). Both are 5-star rated funds. But as recommended, he should consider adding two more funds to his portfolio so that he has a systematic investment plan (SIP) in four schemes. IDFC Premier Equity (Equity: Mid & Small Cap) is a good addition along with Canara Robeco Equity Diversified (Equity: Large & Mid Cap). This portfolio of four funds displays ample diversification in terms of category of funds as well as schemes from different asset management companies (AMCs). If he has to opt for a tax planning fund, then it would be best if he substitutes the Large & Mid Cap fund with an equity linked savings scheme (ELSS), or in other words, a tax planning fund. He can stick to HDFC Taxsaver and can stop investments in Sundaram Taxsaver. In fact, his recent investment in the latter is a surprise since there are so many better options in that category.
After a year he plans to buy a car with the help of a loan. Let's assume he gets a salary raise that will enable him to pay the equated monthly instalment so that his regular investments in equity funds continue. Or else, he will have to delay one of his goals. He can look at accumulating Rs 20 lakh after 10 years or postpone the purchase of the car.
Mukherjee should take a close look at his tax planning. Before deciding how much he needs to invest under Section 80C to save tax, he must see if there is any contribution being made to an Employees Provident Fund (EPF). We also question the need to invest Rs 32,000 in PPF at such a young age. Where his equity linked savings schemes (ELSS) are concerned, a one-time investment is not smart, he should systematically invest even in these schemes. However, from next financial year, if the Direct Tax Code (DTC) comes into play, this avenue will no longer be available. Till then, it makes sense to invest in such funds and minimise the investment in PPF.
ICICI Pru Protect: Rs 25 Lakh
Oriental: Rs 2.5 Lakh
It is very encouraging to come across someone who has a term insurance plan and not one that combines insurance and investment. However, it is surprising since Mukherjee does not have dependents by way of a spouse or children. So one is assuming here that his parents are dependent on him. Should he get married and have children, he will have to think of increasing that cover and naming his spouse and children as beneficiaries too. What Mukherjee can do is consider increasing his health coverage. We have no idea if his parents have a health insurance cover but once he gets a family of his own, he can consider a family cover.
Inflows & Outflows
Let’s take a look at Mukherjee’s earnings and outgoings. He does live well within his means and is not in debt. In fact, it is commendable that someone so young does a fair amount of saving and has even opened a Public Provident Fund (PFF) account.
If one takes a look at his monthly earnings and expenses, there is ample scope to increase his investing capacity. He currently invests Rs 3,000 per month in mutual funds. He can definitely consider increasing that since at his age with no liabilities, he can afford to take on a fair amount of risk by upping his equity exposure. He must look at lowering his annual investment in PPF which is quite high at Rs 32,000. At this stage of his life, he should look at growth which will come via investments in equity.