I am 35-years old and recently had an addition to my family after the birth of our first child. My monthly income is Rs 60,000 and I am repaying a home loan through a monthly EMI of Rs 15,000. I have an LIC moneyback policy and a Jeevan Saral policy that I also bought for my wife. I have invested in PPF, NSC and have recurring deposits in the post office and with my bank. I have made a one-time investment in HDFC Top 200 and have started SIPs for Rs 12,000 across three other funds recently. I know I am late in investing in mutual funds and currently my debt investments are more than equity. My goal is to build a kitty for my child's education and marriage besides my own retirement. I also plan to take a family vacation every four years. Please assess my portfolio and suggest changes.
— A Joshi
Your current annual income is Rs 7.2 lakh and after deducting your household expenses, home loan repayment, insurance premium payments, recurring deposits and investments into mutual funds, you are left with no surplus. In fact your cash flows are in the negative, which could be because you may have overstated your expenses and investments.
But by and large, you do not seem to be in a very healthy financial situation. You need to be more meticulous in listing down inflows and outflows. Only then will you get a clear fix on where the money is going and how much can be invested and saved.
Your funds are good performers and well diversified across fund houses and categories. Collectively, the equity allocation totals 92 per cent with a large-cap bent. While we suggest you keep on investing systematically, we recommend a slight tweaking.
Let the core funds account for 70-80 per cent of the portfolio. These are funds that should fall in the ‘Equity: Large Cap’ and ‘Equity: Large & Mid Cap’ space. The remaining can be mid- and small-cap, thematic, sector or gold funds. This way your portfolio will weather market volatility and also incorporate the potential of higher returns.
While you have articulated your goals well, you need to align your portfolio to achieve them. Since your investment tenure is long, the focus must be on wealth creation. So equity, as an asset class, must dominate. It’s not too late and you must hike your equity exposure.
Breaking down your financial goals to match monthly investments, we assess that Rs 21,100 every month in a portfolio earning an annualised 12 per cent return will achieve your goals. If you hike the expected rate of return to 15 per cent per annum, your investment amount drops to Rs 33,140/month. While this is not a humongous amount, it is more than the current Rs 12,000 that you have been investing in funds.
We normally recommend around three to six months’ of household expenses as a buffer, which we call the contingency fund. Instead of keeping this money in a savings account, you currently have Rs 1 lakh there, we suggest that you consider a liquid fund or even a fixed deposit with the option of breaking it whenever you need the money and for whatever amount you need it. Banks refer to this as a flexi-deposit.
Remember, the contingency fund is only for emergencies and in no way should be used to fulfil other financial goals such as a holiday or any big-ticket purchases impulsively. With increase in financial commitments of a child, especially with regular monthly expenses, you should reconsider this sum once a year.
Life insurance is one of the least understood financial instruments and like many other policyholders; you also seem to have taken a policy to save taxes. For a 35-year old, earning Rs 7.2 lakh annually with two dependents and other liabilities in the form of a home loan; your current life cover of Rs 8.5 lakh is insufficient. Moreover, the policy that you have taken for your wife and yourself (Jeevan Saral) is oriented towards savings and investments rather than a life cover. We suggest you both get a pure life insurance policy for Rs 25 lakh each for the next 20 years to start with which should cost you less than Rs 15,000.
As the LIC Endowment Moneyback Plan is seven more years to maturity; you should continue the policy to maturity. However, in Jeevan Saral you have locked into yet another endowment plan that compromises on the life cover in comparison to the premiums you pay and turns out to be an investment plan instead. Ideally you should consider surrendering this policy on completion of three premium paying years. Cut down on your losses and instead invest the sum in better investment products.
In the current scenario, with your existing investments and savings, achieving your financial goals is difficult. Here are some issues to consider.
Rescale your goals by reducing the sum that you have planned to accumulate or postpone the goals by a few years. The only goal that you can postpone is your child’s marriage as your retirement and child’s education need to follow specific timelines. It will still be a good idea to temper your plans for an annual vacation every four years. The other way is to start surrendering the Jeevan Saral policies that you have to free Rs 1,10,244 that goes annually towards premium for a policy that is a mix of investment and protection.
You need to consider increasing your equity exposure and lower the debt tilt in your portfolio. You need investments that will beat inflation and result in wealth creation.
Where insurance is concerned, consider a term plan for yourself and your wife. It is the cheapest and purest form of life insurance.
Do look at health insurance. Does your employer give a cover? Even then, take out a plan for you and your family. We suggest you go for family floater plan which covers you, your wife and child.
Remember, purchasing life insurance and health insurance is not a one-time exercise; you need to periodically review your insurance needs and increase the cover depending on your needs and life circumstances. We suggest you review your life insurance needs every time you have a significant increase in income or liability and likewise consider increasing health insurance as you get older.
Any bonus that you get, or maturity of fixed deposits or NSC, should be considered towards pre-paying your home loan.
By smartly planning your insurance and increasing your equity investments, you should put yourself in a much better financial position.