Having too many insurance policies does nothing to make the portfolio grow. The focus should be on systematic investment in mutual funds.
We are a working couple, with a combined monthly take home of Rs1,13,000 after all deductions. We have two daughters: the elder is 5 years old and the younger 5 months old. My parents have retired and live in a house of their own in our native place. They are not financially dependent on us except for critical healthcare needs, if required in the future. Is my portfolio good enough to create sufficient corpus for our retirement and to pay for our daughters' education?
-Lokesh Bhargava
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You have done a lot of things right and you have sufficient income and time on your side. You have stated two goals: your retirement and your daughters' education. However, you have not quantified them. You need to say, for instance, that you will need Rs20 lakh for your children's education in 12 years and Rs1 crore for retirement in 30 years. This way you have a tangible goal that can be worked towards. Next, follow an asset allocation wherein you have 80 per cent exposure to equity and 20 per cent to debt. We have suggested a model portfolio for you. Reduce your equity exposure as you reach closer to your goals.
Life Insurance
• A home loan protection policy for both (equivalent to the loan amount)
• 13 policies including endowment and ULIPs for around Rs12.5 lakh each
• Accident insurance provided for husband (Rs5 lakh) and wife (Rs18 lakh) by respective employers
• Husband has a separate insurance cover of Rs5 lakh
Insurance dominates your portfolio. This is a mistake. Life insurance is not an investment avenue and will not help you achieve your financial goals. Having 13 insurance policies, each of them for around Rs12.5 lakh, indicates that you pay heavily in premiums, especially since some of them are unit linked insurance plans (ULIPs). This has reduced the amount available for investing in mutual funds, which will help you create wealth.
The only form of life insurance you need is a term insurance plan, which is the purest form of life insurance available, and is also inexpensive. Purchasing a home loan protection policy is a smart move. Take a fresh look at your ULIPs. Consult your insurance agent to see if you have to continue paying the premium on all of them or can discontinue some at no cost. If opting for a term insurance, take into account your annual household expenses, how much you would need for your daughters' education, and also take into account annual inflation.
Health Insurance
• Family floater policy by Apollo DKV for Rs3 lakh
• Super top up policy by United India for Rs7 lakh
• Wife has a health insurance policy covering the entire family, including the parents, for Rs5.45 lakh
• Husband has a policy covering wife and two children for Rs2 lakh
Buying your own health insurance policy in addition to the one provided by your employer is a good move. In the event of any one of you resigning or losing your job, the family will still be adequately insured. But frankly the amount of health coverage is huge. A family floater that covers all of you for around Rs7-10 lakh would suffice.
Liabilities
• A home loan (for a 3-bedroom apartment in Mumbai) of Rs33,75,504 in 2006. The current outstanding amount is Rs26 lakh.
• The equated monthly instalment (EMI) amounts to Rs29,000. However, we are prepaying Rs40,000/month on the loan.
• The monthly household expenses amount to Rs30,000.
It's good that you are prepaying your home loan. Interest rates are slated to rise, so your EMI would also go up. Also, in the case of a home loan, it makes sense to prepay during the initial years because the interest component forms the bulk of the EMI at that time. So the more of the principal that is repaid initially, the lesser the interest burden.
Investments
• Public Provident Fund (PPF): Rs500 per annum
• Mutual funds: Rs15,000/month
• Company fixed deposits
• Gold Exchange Traded Funds (Gold ETFs)
• Non-convertible debentures (NCDs)
• Total portfolio = Rs18 lakh
Though you have chosen good funds, you have way too many of them and have been investing irregularly in them. Having too many funds does not indicate diversification; having few funds, which achieve your financial goal within the risk that you can stomach, is what is desired. Once you narrow down your fund selection, invest regularly in them via SIPs. When offloading the units of the other schemes, ensure that you do so after holding them for at least a year so that you pay zero capital gains tax.
Contingency Fund
• An amount equivalent to the home loan EMIs, investments and home budget as a separate FD
• There is a separate fund for an annual holiday
It is a good idea to create a contingency fund especially when there are dependants. Instead of getting taxed on the money in a fixed deposit, consider a liquid fund which is more tax efficient. Park money worth three months of expenses in a liquid fund.
Tax Saving
You have not mentioned your tax-saving avenues. If one takes all the life insurance premiums into account, daughters' education fees, servicing of the home loan and contribution to the employee provident fund (EPF), all of which are eligible for deduction under Section 80C, you both could well be touching the limit under this section. Is that the reason why there is no equity linked savings scheme (ELSS) in your fund portfolio?
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This article was originally published on March 09, 2011.
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