Kartik, 37 recently sold a small family business that he inherited because he wants to take up writing full-time. However he wants to be sure that his inheritance will take care of him for the rest of his life, should his writing career fail to take off.
What He Has:
- Assets: Rs 50 lakh in FDs; Rs 50 lakh in liquid Funds; A 2 BHK flat in Jaipur city center
- Monthly Expenses: Rs 20,000.
What He Wants:
- Household expenses
- Travel
What He Should Do:
- Emergency fund: Maintain an emergency fund of Rs 1,20,000 to meet at least 6 months monthly expenses. For this he should opt for savings account with sweep in facility.
- Health insurance: It is wise to buy a health insurance policy and a critical illness cover at the pink of one's health. Kartik should consider buying an individual mediclaim policy worth at least Rs 3 lakh and a critical illness cover worth Rs 10 lakh. He will incur annual premiums of approximately Rs 5,500 and Rs 10,000 respectively for these covers. Read more in our article How to buy health insurance.
- Life insurance: Since Kartik is single and has no financial dependents, he doesn't need any life cover.
- Investment portfolio: Notwithstanding any income he may earn from his writing venture, Kartik needs to meet his living expenses solely from his accumulated net worth. In addition, he should also provide for traveling once every year. Here are some basic numbers - Taking together his current monthly expenses, health insurance premium and providing for travel costs of Rs 1 lakh, he would need Rs 3,55,500 in the first year. Assuming this keeps growing by 6% per year (inflation) and his life span of 85 years, here's how he should invest Rs 1 crore of his inheritance.
- Near term: Keep the money he would need in the next 5 years in a couple of short term debt funds and create a monthly systematic withdrawal plan (SWP) to meet his monthly expenses. This works out to Rs 20 lakh, including the money already earmarked as emergency fund.
- Long term: Invest the remaining Rs 80 lakh in 3-4 good equity multi-cap funds by creating monthly SIPs spread over the next one year. After 3 years, every year he should redeem an amount equal to one year's expenses and move it into short term debt funds. This way, he would always maintain the next three year's worth of expenses in debt funds. Even if his equity investments deliver a very achievable return of 11% per annum, he would be able to provide comfortably for his expenses till the age of 85 years without any other source of income.
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