'Debt knell' for future | Value Research Devoting all your money towards debt instruments is like inviting a disaster. Bring in a healthy dose of equity
The Plan

'Debt knell' for future

Devoting all your money towards debt instruments is like inviting a disaster. Bring in a healthy dose of equity

I am 34 and live with my wife, daughter, and an expected child. I earn Rs 2 lakh each month and we live in our own house. I have some savings in PPF, Fixed Deposit and Savings Account. We need Rs 65,000 each month for household expenses. I am insured under life insurance provided by employer, a personal HDFC Savings Assurance Plan and a money back policy from LIC. I have to repay loans against car and property. I want to save for my retirement, children's education and marriage. Please suggest a portfolio and investment plan to achieve my goals on time.

Overview
Only savings will not help you build up the desired corpus to reach your goals. Investments are necessary to make your otherwise idle savings grow to the desired corpus. You have a long time to achieve your goals. If planned properly, you will be able to realise your goals in time. Going by your current expenses, if you retire at 65 and assuming your life expectancy to be 85 years, you will need Rs 18.50 crore to maintain the current standard of living during your old age. After deducting expenses out of your income, you are left with a surplus of Rs 79,000 each month. In total, you need to invest Rs 75,000 monthly (if your investment grows at 12 per cent p.a.) to reach the desired goals. Though your expenses will rise after the birth of second child.

Do's

  • Keep an amount equal to 3 to 6 months' expenses in your savings bank account to meet any emergency
  • Try partly prepaying the home loan. Penalty on pre-payment of home loan has been waived. This will reduce your outstanding principal home loan amount
  • Equity has generated highest return as an asset class in long term of 15 to 20 years. However, it is risky to invest directly if you are not a professional. Go for mutual funds. Invest systematically on a monthly basis into the recommended portfolio
  • Your goals are non-negotiable hence we recommend you invest in large and mid cap funds. While large caps invest in stable and well established companies, a small component of mid caps will give an extra boost to returns
  • HDFC Click2Protect is a decent online pure term life insurance plan. It allows policy renewal till 65 years of age. Select a term till someone else in the family replaces you as bread winner. Keeping in mind your current liabilities, expenses and future responsibilities, you must buy a cover worth Rs 1.25 crore. Diversify the amount into two policies
  • Buy a family floater health insurance to cover your wife and daughter. Go to the insurance section on our website and select a policy as per the scope of cover required. Also buy a standalone personal accident policy as it will cover both death and disability. While selecting a critical illness policy go for the one covering higher number of diseases
  • Don'ts

  • Do not depend solely on debt instruments as it may not help you accumulate the desired corpus in time
  • It is a must to have a life insurance policy apart from the one provided by your employer as the employer's policy will lapse once you switch jobs which is a great risk
  • Do not mix insurance and investment
  • HDFC Savings Assurance is a traditional policy in category of 'with profits' savings plans, while LIC Moneyback is an endowment policy. These policies do not disclose charges. Such policies neither generate good returns nor offer an adequate life cover. Reversionary Bonus rate declared by HDFC Savings Assurance for the year ending March 31, 2013, stands at 3.25 per cent which is lesser than what savings bank account offers you. Talk to your insurer and surrender these policies



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