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High On Insurance, Low On Investment

An increased allocation to equity is needed with long-term goals in mind & an absence of liabilities…

I am 36 years old, my wife is 33 and our son is 7. My wife and I each have an annual agricultural income of Rs 12 lakh. Our present household expenses are Rs 3 lakh per annum (Rs 25,000/month) and our son’s schooling expense is Rs 3 lakh per annum.
Nimbalkar Khardekar

The Khardekars have started investing fairly early, are currently earning well and have clear cut goals. If one looks at the basic inflow and outflow, as of now they have an inflow of Rs 24 lakh per annum and an outflow of Rs 11,39,142. The latter includes their monthly household expenses as well as premium payments towards various insurance policies and monthly investments. That leaves them with an investible surplus of Rs 12.60 lakh. While some of this money can be placed in a bank fixed deposit as an emergency fund, the chunk of it can be invested towards their goals. And by invested, we mean equity investments. While they have a bag full of insurance policies and a Public Provident Fund (PPF), they must ensure that equity forms a major component of their portfolio if they are to achieve wealth creation. The returns from equity far outweigh the returns that one would get from a fixed-return instrument. For that reason, equity is a must for virtually every portfolio, though the actual amount allocated to that asset would differ.

Here are some suggestions.
A health policy must be taken out in the son’s name. An accident, sickness or illness can deplete one’s bank balance rapidly. Health insurance is a must for every individual.
Despite having so many insurance policies, we would still recommend a term plan for each of the spouses since both are earning. The total value can be around Rs1.5 crore. The tenure can be for as long as possible since it will protect the remaining members against life risks.
If they discontinue with their insurance current plans, it would be a losing proposition. We recommend that they continue with all their insurance policies.
They should also continue to invest the maximum annual limit in PPF. This will continue even under the new tax regime of the Direct Tax Code (DTC).
Since time is on their side and they do not have major liabilities or debts, exposure to equity must increase. Specially if they are saving for their retirement and their son’s retirement too. They can start by just increasing the amounts of their Systematic Investment Plans (SIPs). As their income rises, they can proportionately increase the amount that is channelized towards their investments.
We recommend that investing in equity funds is always done systematically. This enables the investor to buy more units when the market is down and less when it is high. It is a good strategy to participate in the equity market. An annual review of the portfolio is recommended. No one must buy and sit tight. Every quarter, they must look at the performance of their funds via each fund’s benchmark and its peers. They can also keep a tab on the star rating of the fund that is assigned by Value Research. If a fund keeps falling in performance, then it can be replaced by another good performer in its respective category.
As they approach their goal, they can begin to lower the equity exposure and put the money in a bank fixed deposit or debt fund. They must not wait to sell all their equity investments at one go because that would put them at the mercy of the state of the market then, which is too much of a risk.
They must create a contingency fund which will help out during emergencies. The amount could be around four months of monthly expenses. This can be kept in a liquid fund or even a savings account or bank fixed deposit which is linked to a savings account and can be accessed instantly.
The Kharkekars have not only planned for their retirement but even their son’s, which is going one big step ahead. But if they stick to the plan, it is certainly achievable and definitely very commendable.