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Heavy on Debt, Low on Equity

In the long run, equity is the asset class that not only beats inflation but also helps you build wealth…

I am 33; work in a private company with monthly take-home salary of Rs 75,000, with my wife, four-year-old son and mother as financial dependents. Currently, we are staying in our own family house with no liabilities. Our monthly expenses are Rs 30,000 and we plan to have another child in two years. I have Rs 5 lakh in my savings account, Rs 1 lakh in fixed deposit and Rs 2.5 lakh in the PPF account which I opened in 2010 to save tax. I also have three LIC policies. My goals are to have adequate life and medical cover, buy a new house in next four years, and plan my child’s future besides my own retirement. I have been investing through SIPs in Reliance Regular Savings Equity, HDFC Equity, Kotak Opportunities, Sundaram Select Midcap, Kotak Bond Regular and SBI Magnum Tax Gain. I also have 200 shares in GTL. I want to buy good insurance and also want to know about investment opportunities as I find stock trading unpredictable. Gold and property look like best investments to me along with company deposits. What is your opinion about my investment choices and the goals that I have set?
— C B Mehta

Focusing on savings is a good habit and will help you assess your financial needs in a better way and plan accordingly. However, the impact of inflation is a reality, which will not only eat into your savings, but also impact your financial goals. Take, for instance, if you were to retire at 60 and put away all your money into a safe, fixed return instrument like a bank deposit. If the return from this deposit was to underperform inflation even by just two per cent a year, your money will be worth almost 47 per cent less by the time you are 90.

So, it is necessary to invest in inflation-beating financial instruments like equity to meet your financial goals. With age on your side, it is still not too late to increase overall equity exposure to benefit from the power of compounding and long-term benefits of equity investing.

You have a positive cash flow that leaves you with surplus to invest for your goals as well as claim tax benefits. You also have adequate reserves in your savings account that can meet any emergency, but you can still utilise some part of your savings in a better way than what a savings bank account pays out as interest.
• You have policies that are oriented towards savings and investments with little protection. As you are the sole breadwinner, you should immediately take a term plan for as long a tenure as possible
• Term plans are easy to compare because all you need to look for is a policy that costs less and is from an insurer with a good track record, especially when it comes to claims settlements. Start with ten times your current annual income as sum assured; to be reviewed once every few years
• Take a Rs 3-5 lakh health policy (also covering critical illness) that can cover your family of four, including your mother. Look for an insurer who has a good track record with claims settlement and wide tie-up with hospitals for easy facilitation of cashless settlements

Your portfolio of six funds, including shares in GTL, has a 79 per cent equity exposure, which is a bit less-aggressive. It follows a large-cap orientation with a blend of growth and value, with investments across 155 stocks.
• Stock selection has not worked for you. You should stick to investing in mutual funds because it provides diversification and mitigates investment risks. Some of the funds to exit include Kotak Bond, Kotak Opportunities and SBI Magnum Taxgain, if it has completed its mandatory 3-year lock-in
• Continue investing in other funds and also add funds from the large- and large- and mid-cap category. You can select funds with a proven track record, high rating and performance history from the Fund Select feature of our website

Financial goals
You need to be specific while defining your financial goals than just stating the plan to have adequate savings to meet your future needs. Your plan to build a corpus of Rs 1 crore for your retirement 27 years from now does not fully take into account your post-retirement needs.
• You should consider staying in your existing house than buying a new one. If you still plan for a new house, do so by selling your existing house, with as minimal loan as possible to bridge the gap, if any
• You can see what it will take to achieve your retirement plans as well as savings for your 4-year-old son. You can moderate the desired sum, once your second child is born