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Knowing most of it

Dr Gaurav Mehta and his wife both work. He has a fairly good idea of investments. He wants us to assess his current portfolio and suggest improvements and additions

I am 28 years old and my wife is 25. We got married recently. Our combined monthly take-home income is ₹1.1 lakh. Apart from the salary, we are also eligible for an annual bonus of ₹1.25 lakh per annum. We live in Mumbai with my parents (dependent) and our monthly expenses are ₹55,000 approx. I have an emergency/contingency fund of about three months' expenses in sweep-in FDs.

I and my wife are adequately covered for a sum of ₹7 lakh by our respective employers' group health insurance. I have separate health insurance for my parents for ₹3 lakh and I plan to take it to ₹5 lakh on the next renewal. They are also covered by my current employer, though I won't consider that as their primary cover. I have life insurance cover of over ₹1 crore, of which about 80 per cent is through a pure term-insurance policy, and the rest 20% is from money-back policies of LIC. The LIC policies were bought long ago, and because most of the tenure has been completed, I plan to take them to conclusion. So far, I have started investing in EPF, PPF and Axis Long Term Equity mutual fund for tax-saving purposes. I plan to invest in Birla Sun Life Frontline Equity, Franklin India Flexi Cap, ICICI Prudential Value Discovery and DSP BlackRock Micro Cap funds.

I plan to get an exposure to all market caps through a combination of funds of different categories from different fund houses with a good track record.

Our goals for the purpose of investments are:

  • We don't plan to start a family any time soon, so the long-term goals of child education and marriage are 20+ years away.
  • We certainly want to have a house of our own but that would be once we both are in a job and in a city where we would want to spend a significant number of years. It would be safe to say that this goal is at least seven-eight years away and would partly be financed by sale of an existing property in a small town in Gujarat.
  • We are fond of travel and plan to do it as much as we can. While in the first few years, our trips would be within the country, we plan to make an overseas trip once every two-three years after that. This would largely be financed from our active income.
  • Retirement is an obvious goal, but as of now, I am not clear if I would want to retire early. In any case, it is easily 20+ years away

Please review my portfolio and suggest an appropriate course of action.
- Gaurav Mehta

What he has (Cash Flow)

  • Monthly income of ₹1,10,000. Annual bonus of ₹1,25,000.

What he wants (Goals)

  • Retirement
  • Child's education and marriage
  • Purchase of house

What he should do

Emergency fund: Dr Mehta has kept a sum equal to three-month expense in a sweep-in account. This fund is sufficient for now. However, he must raise the amount once he has kids.

Health insurance: Employer-provided health insurance should not form the primary health insurance cover as it will be discontinued when one changes jobs. Dr Mehta must buy a basic family-floater policy for himself and his wife. If he wishes to increase the amount of health insurance for his parents, he may go for a super top-up plan. A super top-up policy is activated once the total claim amount in a financial year exceeds the deductible amount. The deductible limit in his parents' case should be set equal to ₹3 lakh (the current health insurance cover). A super top-up plan will be much cheaper than increasing the sum insured under the existing basic policy.

Life insurance: Dr Mehta is adequately insured with a life cover worth ₹1 crore. He may continue with his money-back policies as they are nearing maturity. His total life cover will reduce after the maturity of his traditional policies. He must go for an additional term cover to maintain his total cover.

Investments: Dr Mehta is not able to specify some of his goals clearly. The purchase of a house will partially be funded by sale proceeds of his home in Gujarat. But, in order to start saving for this goal, he needs to know the target amount. He is also not clear about the age at which he wishes to retire. We have assumed that he would retire at the 60. We have taken his post-retirement expenses to be 50 per cent of his current expenses, taking the inflation rate as 8 per cent. We have assumed post-retirement returns to be 8 per cent per annum. His life expectancy is taken as 80 years. If he survives longer, he will need more money, so he should save and invest accordingly. His major goals of child's education and marriage and his own retirement are far away. His choice of funds is fine enough to start monthly investments. However, he should go for the small-cap fund only if he can tolerate high volatility. Otherwise, he may limit himself to the multi-cap category. He may continue with Axis Long Term Equity.