Investments. Till now I have largely been confined to mutual funds, on which I have been spending Rs 4,000 per month. This amount flows mostly to Fidelity Tax Advantage, but half of that amount I plan to redirect to Franklin India Taxshield. Also, I plan to increase my emergency fund to Rs 72,000 from Rs 25,000 by adding Rs 2,000 per month and contribute Rs 4,000 per month towards equity-linked savings schemes (ELSS). I intend to add a sum of Rs 2,000 per month to my savings.
Insurance. My coverage for a life plan (term plan) is (Rs 20 lakh and I have invested in a unit-linked insurance policy (ULIP) with a life cover of Rs 5 lakh. Additionally, I subscribe to a pension plan from Max New York Life. I am paying an annual premium of Rs 37,000 for a total life cover of Rs 29 lakh. I also have medical insurance of Rs 5 lakh through my employer.
Setbacks. A large portion of my gains were wiped out in the recent stock market crash. I was also out of a job for a short period towards the end of 2008 as a result of which I had to redeem some of my mutual fund investments.
Age: 31 Years
Dependents: Wife & Child (3-year old)
Income: Rs 3.6 lakh p.a.
Your resources are limited, but needs are urgent and therefore, first and foremost it calls for a disciplined approach to achieve the family's goals. Since the major source of income, your job, was lost last year, attention must be lavished on retaining the new one. And that brings us to addressing your concerns about an emergency fund.
Creating an Emergency Fund
An emergency fund that is adequate to meet all kinds of crises comes in handy to meet sudden financial needs, medical emergencies and even a loss of income. Setting this fund's limits will depend upon factors such as your family's medical profile, medical insurance and adequacy of life cover.
Since transferring the emergency fund into cash is of prime importance, you can keep it in a savings bank account. However, some part of it can be moved to a liquid plus mutual fund to earn better returns.
Correcting Portfolio Mistakes
Your fund selection has been good, but there are some mistakes that have been made, which you will have to rectify:
Your goals are far enough away in time to enable you to commit a large portion of your total investments to equities. Although you can comfortably keep 70-to-80 per cent of investments in equities, you should decide an ideal allocation for yourself depending on risk appetite. Adequate debt allocation provides a cushion to your portfolio and prevents it from extreme market losses/changes. Also, higher the debt, lesser will be the portfolio's volatility.
Since the debt in your portfolio is by way of NSC and PPF, rebalancing won’t be easy. Use a debt fund to rebalance regularly — book gains when markets rally and invest more when equities turn cheap. Two good funds are Kotak Flexi Debt and Canara Robeco Income. As you near your goals, gradually move money allocated to equity into debt.
All your investments in mutual funds are in tax-planning funds. Although, you have been investing in funds for quite a long time now and a part of your investment would already have completed its lock-in period, be mindful of portfolio liquidity as investing in tax-planning funds means that you will not be able to withdraw this money for 3 years.
Investing Additional Savings
Of the Rs 6,000 that you plan to invest each month, put Rs 1,000 in a debt fund. After this, exhaust the exemption limit of Rs 1 lakh under Section 80C. Once this limit is exhausted, invest in a rated diversified large cap fund like BSL Frontline Equity, HDFC Top 200 and DSPBR Equity.
Adequacy of Insurance
Proceeds from your life insurance policy should be enough to take care of your family and their financial needs and aspirations in case of any eventuality. Your present cover of Rs 29 lakh should be raised to Rs 60 lakh. Stick to term plans. As your investments accumulate, need for this sum assured will reduce.
ULIPs are a combination of 2 components — insurance and investments. But they are not the best of both worlds. While the cost component in the premium remains the same as in term plans, the investment component is subject to high charges by insurers. Much flexibility of choice of funds within the same asset class is also not available. Discontinue it once the surrender charges become zero and redirect any surplus towards your goals.
The health cover that you have is dependent upon your being with the present employer. Any transition period will leave you uninsured. You should also get a medical insurance on your own that will adequately cover some basic risks.
You have suffered from the loss of a job as well as booked losses on the markets and therefore are looking to guarantee an adequate amount of income from other, less risky, sources. That is commendable and show positive intent and promises a disciplined approach that will ensure that you are able to follow the path charted for you by Wealth Insight.