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A Farming Future

To reach goals comfortably we have taken the investments of both you and your wife together

I am 37 and my salary is Rs 90,000 per month and that of my wife is Rs 40,000 per month. Our monthly expenditure is around Rs 30,000. I am thinking of increasing my investments in Public Provident Fund (PPF) to Rs 70,000 per year and also open a recurring deposit in a Post Office of Rs 5,000 per month for 5 years and then shift it to National Savings Certificate (NSC).

I plan to retire at 55 and take up farming. Currently, I have a home loan of Rs 23.5 lakh, which I’d like to close by pre-paying in 7 years’ time. I have taken a home loan protection insurance plan. Also, I have two ULIPs with a total premium of Rs 35,000 per annum and a sum assured of Rs 14 lakh. For the achievement of my goals, I can invest up to Rs 25,000 per month and increase it by 10 per cent every year.

- Ashok MS

New Car
Time    :    1 year
Target Amount    :    Rs 8 lakh

Farming Equipment
Time    :    8 years
Target Amount    :    Rs 5 lakh

Child’s Education
Time    :    18 years
Target Amount    :    Rs 20 lakh

Flat (Optional)
Time    :    10 years
Target Amount    :    Rs 30 lakh

Retirement
Time    :    18 years
Income required (at today’s prices) is Rs 1 lakh per month. Rs 75,000 to come from investments, rest from farming activities.



Existing Portfolio (Top 5 Funds)
Name of the Funds  Per cent
Magnum Taxgain 19.97
Fidelity Tax Adv 16.84
Franklin India Taxshield 12.56
Principal MIP Plus 10.5
Tata Balanced 8.84

First up, congratulations Ashok on actively working towards an early retirement! As far as achieving your life’s investment goals are concerned, you have quite some way to go and to make your task easier, we have taken the investments of both you and your wife together.

Insurance
At Value Research, we believe that insurance is a serious affair and shouldn’t be mixed with investment. You have already insured your home loan which is a very prudent thing to do as the insurance cover will take care of the outstanding loan amount if anything unfortunate befalls you. Apart from this, you have 2  unit-linked insurance policy (ULIPs) for which you are paying an annual premium of Rs 35,000. ULIPs are a costly form of life insurance and should be avoided. Do not fall prey to mixed insurance-investment products. Rather, opt for term insurance which is the simplest and cheapest form of insurance.

However, the total sum assured of about Rs 14 lakh on your life is inadequate. Life insurance is intended to replace lost income so that in case of any eventuality, one’s family is able to maintain the same standard of living. As a thumb rule, the total sum assured should be around 10 times your annual household expenditure plus investment/savings plus the value of any outstanding liabilities. Having already insured your home loan, you need to increase your sum assured by Rs 52 lakh to Rs 66 lakh.

Investment
A lot of your investments have been made through the most recommended route — the systematic investment plan (SIP) method, which, has reduced the impact of market volatility on your portfolio. However, you have made lump sum investments at irregular intervals which is not the right way to go.  Instead, investing small amounts regularly will help you stay detached from market movements and also allow you to average out the cost of acquisition. 

You have also bought into five new funds (NFOs). There is a high degree of uncertainty involved in NFOs as they do not have a past performance record. In fact, four of these have been the worst performers over the past one year. So the lesson here is — Avoid NFOs.

There are 16 funds in your portfolio. Having too many funds is not a smart way of diversifying. Instead, it leads to over-diversification. It not only reduces the chances of superior performance, but also poses the manageability issue. You need to keep track of all funds, which is an unnecessary burden. Add to it the load or charges incurred for investing in so many funds.

Your portfolio has a 33 per cent allocation to debt mostly by way of PPF and NSCs. Since time is on your side, equity must be the preferred investment option as over a longer term they tend to generate superior returns. Ideally you should have 80 per cent allocated to equity mutual funds and 20 per cent to debt. 

Your debt investments are all in locked-in instruments. Hence, withdrawal in an emergency would be a concern. Moreover if you increase investment in PPF and open a recurring account, you will only be making your debt portfolio more illiquid.
 Rebalancing your portfolio will also be a problem if most of your investments are locked-in. When equity is not performing well, you will not be able to shift proceeds from debt to equity. A debt fund will be able to give you the desired liquidity along with adding stability to your portfolio. You must rebalance your portfolio once in six months to maintain your asset allocation.

However, when you are nearing your goals, gradually start moving your money into debt, two to three years beforehand so that your returns are protected against a sudden collapse of the equity markets.

Taxation
You have overdone your tax saving exercise. Life insurance premiums that you pay are eligible for tax deduction under Section 80C. Besides, you are paying off your home loan and its principal repayment is eligible for exemption too! Plus, your investment in other tax-saving instruments like PPF and NSC are again eligible for deduction. These investments have a lock-in period and cause your portfolio to become illiquid. You might be unable to withdraw money in case of an emergency. You should avoid investing into these instruments if you are able to achieve the exemption limit of Rs 1 lakh individually for you and your wife from insurance premium and principal repayment of home loan. In case either you or your wife is falling short of the tax saving limit then opt for ELSS funds as they have the least lock-in period.

Road Map
Required Corpus:

You need Rs 8 lakh to buy a car in one year’s time. Redeeming your current investments for the purpose of buying a car will not be a wise thing to do. You may consider taking a car loan.

At an inflation rate of 4 per cent per annum, you will need Rs 1.51 lakh per month when you retire after 18 years. In order to get this income  plus  meet all the in between goals, a total corpus of Rs 2.95 crore will be required at the end of 18 years. For your child’s education you will require another Rs 20 lakh at the end of 18 years. So a total of Rs 3.15 crore is needed.

Achievable Corpus:
Your current value of investment stands close to Rs 7 lakh. With that acting as the foundation, a monthly investment of Rs 25,000 increasing by 10 per cent every year, and at a rate of return 10 per cent, you would be able to meet all your goals. This includes a withdrawal of Rs 5 lakh at the end of 8 years for the purchase of farming equipment and meeting the expenses of your child’s education.

Optional Goal:
Your goal of buying a flat worth Rs 30 lakh in Bangalore after 10 years cannot be achieved with your current investment plan. It will require you to start with a total monthly investment of Rs 30,770 now, while increasing this in 10 per cent every year. So that by 10 years time you can withdraw Rs 30 lakh for buying an apartment.



Suggested Portfolio
Funds  Amount
DSPBR Equity (20%) 5,000
DWS Investment Opp. (12%) 3,000
HDFC Top 200 (24%) 6,000
Kotak Flexi Debt Regular (20%) 5,000
Magnum Contra (24%) 6,000