Srinivas, 38, an IT professional, has a family consisting of a working spouse and a six-year-old daughter. They are looking to ensure a steady source of income for their post-retirement years.
They can save a sum of Rs 75,000 per month which should go towards realising their goals. This includes contributions towards Employees Provident Fund (EPF).
However, there is a proviso to be worked into the equation. By the time Srinivas is 48, he and his wife, intend to quit their present jobs and work for a non-government organisation (NGO) for about 10 years. During this period they do not intend to save much, but will earn enough to meet ongoing expenses.
Ultimately, they wish to secure a post-retirement income of Rs 30,000 per month at today’s cost, through their investments. But they want to leave their corpus intact by not withdrawing from it for expenses.
Their first priority, at the moment is to sell-off their flat and another plot that they own, plus take out a loan, to buy a new house.
Here are the goals they wish to achieve:
Goals Years Due Present Cost Expected Cost
New House 1 Rs 1 crore Rs 1 crore
Daughter's Education 10 Rs 20 lakh Rs 38 lakh
Post-retirement Income 20 Rs 30,000 per month Rs 1.06 lakh per month (corpus required: Rs 3.4 crore)
This is how they sought to implement their plan:
Outstanding loans worth Rs 9.6 lakh are pending, which were sourced to buy their flat and plot. The EMI that they are paying is Rs 20,250 per month. They had received these loans at a pretty low interest rate of 8.50 per cent (fixed) and do not intend to prepay. They have been claiming income tax rebates against repayment of these loans.
Present Investments Investment Value (Rs) Real Estate (Flat) 2,000,000 Real Estate (Plot) 2,300,000 ULIPs 72,000 Equity Mutual Funds 3,115,000 Bank Fixed Deposits 400,000 Company FDs 200,000 NSC / Bonds 100,000 PPF 300,000 EPF / Gratuity 700,000 Total (excluding Real Estates) 4,887,000 Mutual Funds Portfolio Fund Allocation Amount (Rs) HDFC Top 200 24.36 758,814 DSPBR Equity 20.83 648,855 DSP BR Top 100 11.79 367,259 Magnum Contra 18.46 575,029 Reliance Growth 13.70 426,755 HDFC Tax saver 4.92 153,258 HDFC LT Advantage 4.40 137,060 Franklin India Tax shield 1.37 42,676 ICICI PruTax Plan 0.17 5,296 Total 100.00 3,115,000
Working Towards Goals
Assuming a return of 10 per cent per annum on your investments, your monthly contributions need to be increased by about 2-4 per cent every year to meet all your goals and accumulate a corpus for your retirement. This contribution will include the repayment of loans. Whatever the surplus, it is to be invested towards achieving your goals.
At an inflation rate of 6.50 per cent, the income required after your retirement will be Rs 1.06 lakh. Getting an annual income without taking out the corpus will mean that you will have to live on a constant interest income throughout the term. But, as prices keep on increasing, the need for a larger income will also rise.
We suggest that you keep investing to accumulate a corpus big enough to enable you to leave a meaningful legacy. A corpus of Rs 3.4 crore will enable you to secure the required income for another 60 years
Your investments in the endowment policies from the LIC can be taken as debt investments. For calculations, however, we have not taken them into consideration and the proceeds from them will further increase your retirement income or help fulfill other goals.
If you want to sell the mortgaged property, you need to repay the loan that is outstanding. Be warned that the bank, or the housing finance company, might charge a penalty for prepayment of the same.
Considering that you will have to pay Rs 10 lakh in all to discharge the outstanding loans, you will be able to finance the new house to the extent of about Rs 33 lakh only. The rest will have to be arranged by way of another loan. In this case, your existing EMIs will also be redirected towards this loan. For a loan of Rs 67 lakh at an interest rate of 11.50 per cent to be repaid in 10 years, the installment works out to Rs 93,300 per month.
Mutual Funds Portfolio
Your fund selection is good. In your portfolio, 5 funds account for almost 90 per cent of your portfolio. The other 4, which are also tax-planning funds, account for the remaining. These 9 funds are already providing you the necessary diversification and you need to take care while adding new funds to your portfolio.
Majority of the funds that you own are large cap diversified funds which makes your portfolio look complete in itself, except for absence of a debt fund. Here we think that you need a fix.
A Fix for Debt
Despite having debt by way of EPF, PPF, NSC, and bank FDs, you should include a debt fund in your portfolio. Rebalancing or maintaining an adequate debt-equity allocation is important in any portfolio, for which a debt fund comes in handy. Your investments in PPF, NSC and others are either locked-in or not easy to redeem. Switching from a debt fund to equity and vice versa is very convenient as compared to other debt investments.
Currently, debt accounts for 35 per cent of your portfolio. You can leave this allocation intact for now. As you near your goals, gradually shift the money allocated for them to debt.
Exemption on Loan Repayment
Of the loan repayment amount, the principal repayment is exempt under Section 80C, but only up to Rs 1 lakh for each of you. The principal component of this repayment will already exceed the exemption limit of Rs 1 lakh and you need not invest in any tax-planning mutual funds. You can also claim exemption up to Rs 1.5 lakh for the interest payment under Section 24(b).
There are three factors that govern the need for life cover: dependents, future goals and present investments. We do not need to emphasize that term plans are the best way to get adequate life cover – you have already done that. The need for life cover will come down as your investments accumulate over the years.
Given your present investments and the life cover of about Rs 33 lakh by way of different policies, you should not need additional insurance. Also, since your wife is also earning, she is not dependent on you and the need for life cover on your life gets reduced.
But you need to increase the medical cover. Although the group insurance policy that you have courtesy your employer currently fills the need, you will be left underinsured once you leave your job.
Holding on to ULIPs?
Apart from the heavy charges in the initial years, ULIPs compare very poorly with mutual funds in areas of transparency and low costs of investing as well. Although the costs come down in later years, the problems of transparency and flexibility continue to affect their appeal. A big negative is that you do not have options within one asset class and if one diversified equity fund does poor, you will not have another rushing to your rescue.
Since no surrender charge applies in your case, you may consider surrendering it.