Power of Two | Value Research Reach your financial goals by jointly managing your family finances
The Plan

Power of Two

Reach your financial goals by jointly managing your family finances

I am 42 and earn Rs 1 lakh a month and my wife earns Rs 50,000 a month. Our monthly household expenditure is Rs 35,000. Currently we have a home loan which will come to an end in 2016 for which we pay Rs 25,000 EMI and are living in that flat. We have a son who is 10 years old and is our only financial dependent.

Because of market fluctuations, I am thinking of increasing my PPF contribution to Rs 70,000 a year from the current Rs 30,000. I am also considering a post office recurring deposit of Rs 5,000 a month for the next eight years to save for my son's education. I may also consider early retirement and get into farming. I have farm land which is not well utilised currently. I have two Ulips that cost Rs 35,000 a year in premium for a sum assured of Rs 15 lakh. From my salary, I can invest Rs 25,000 a month, which I can increase once the home loan ends. Can I achieve my goals?
- Ratnakar Reddy

It is heartening to note you are considering an early retirement to get into farming. With a few changes and planning, you can achieve what you have set out without much difficulty. First, you need to pool the income that you and your wife earn, unless there are other financial commitments that she takes care of.

At Value Research, we believe that you should have adequate life insurance, which should not be mixed with investments. You have two unit-linked insurance policy (Ulip) for which you are paying an annual premium of Rs 35,000. If you are already into this for a few years, evaluate the paid up value of the policy before considering terminating it.

The Rs 14 lakh sum assured on your life is inadequate by any measure. Ideally, life insurance is meant to replace lost income so that in case of an eventuality, one's family can maintain the same standard of living. There are many thumb rules doing the rounds; you should have insurance worth at least 10 times your annual income. Make sure that you take a similar cover for your wife. Pure term covers are the cheapest form of life covers that do not have any investment component. Look for the one that works the best at your age.

It is also a good time for you to consider health insurance irrespective of your employer offering it or not.

This is a matter of concern. Your investments seem to follow an erratic path and are not regular. You also do not seem to be tracking your investment for timely changes. You should invest regularly and with a clear plan to achieve your financial goals. This way, you will be detached from market movements and average your acquisition irrespective of market cycles.

Some of your fund investments are in NFOs. Remember, there is a huge uncertainty with these investments as they do not have any track record or past performance.

There are 11 funds in your portfolio with several overlaps. Having too many funds is not the best of ways to diversify and only reduces your chance of superior performance. There is of course the difficulty to manage such a wide array of funds.

Overall, knowingly or otherwise you seem to have a preference to debt, this is not the best way to build wealth and achieve your financial goals. Time is on your side and equity must be the preferred investment option as over a longer term they tend to generate superior returns. Stay away from the temptation of investing in fixed return instruments like the post office recurring deposit that you have in mind. This will not help you achieve the corpus that you are planning for your son's education.

Ideally you should have 80 per cent allocated to equity mutual funds and 20 per cent to debt. But, considering the moderate risk that you wish to take, you can remain with 70 per cent allocation to equity as suggested recommended in the portfolio.

Retain the tax saving funds and HDFC Top 200 from your existing selection of funds and initiate systematic withdrawal from the rest to invest in the new funds. Have equal SIPs across the five suggested funds.

Current Portfolio
Fund Scheme  Category  Star Rating  3-year return (%)  5-year return (%)
Magnum Taxgain Tax Planning *** -2.13 14.24
Fidelity Tax Adv Tax Planning ***** 6.97 -
HDFC Top 200 Large & Mid Cap ***** 9.7 21.51
Reliance Equity  Large & Mid Cap * -5.75 -
Birla Sun Life MIP Hybrid: Debt-oriented Conservative *** 6.01 8.41
Birla Sun Life Index Large Cap *** -0.82 14.56
Sundaram Select Focus  Large Cap * -2.34 17.34
HSBC Dynamic Large & Mid Cap  -4.35 -
JM Equity  Multi Cap ** -10.66 6.64
Taurus Starshare Multi Cap ** -8.76 15.32
JM Balanced  Hybrid: Equity-oriented * -10.32 6.29
Data as on January 18, 2011

Recommended Portfolio
Fund Scheme  Category  Star Rating  3-year return (%)  5-year return (%)  
BSL 95-G Hybrid: Equity-oriented **** 6.09 18.01 
FT India Dynamic PE Ratio FoF-G Hybrid: Asset Allocation Not Rated 7.86 16.25 
HDFC Balanced-G Hybird: Equity-Oriented  **** 10.55 16.13 
Reliance Regular Savings Balanced-G Hybird: Equity-Oriented  ***** 11.11 17.15 
Data as on January 18, 2011

Road Map
Your financial goals are all achievable with little discipline and effort. By being regular with your investments you should be able to achieve all the goals with little difficulty and even consider early retirement for farming. The combined income that you, along with your wife get is Rs 1.5 lakh, of which your monthly expenses of Rs 35,000 and Rs 25,000 EMI leaves you both with a surplus of Rs 90,000. To achieve your financial goals you need only Rs 37,500 a month if the portfolio earns a conservative 12 per cent. This investment is without taking into account your existing investments that are valued at Rs 6.7 lakh. Any additional returns on your portfolio will only account for greater savings. Alternately, by making additional investments, you can achieve your goals early or you can think of accumulating a bigger corpus than what you are looking for your retirement currently. Mutual fund investing is not a one time exercise; to get the most out of your investments, do track them and evaluate the fund's performance at least once a year. This way you can evaluate your portfolio's progress and its journey towards achieving your financial goal. This exercise also gives you the flexibility to make changes to your portfolio by exiting non performers and investing in better faring funds.

Financial Goals
  Amount (Rs)  Years to go  Monthly investment earning  
   12% 15%
Son's Education  15,00,000  8 9300 8100
Second Car 500,000 2 18400 17800
Retirement  75,00,000  18 9800 6800

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