Mukesh is 48 years old. He has an 18-year-old son, who is pursuing his B.Sc. His wife, who is a homemaker, is 44 years old. His 68-year-old mother lives with him and is financially dependent on him.
Mukesh has a monthly take home salary of Rs 52,000. He lives in his own house. He has investments in various mutual funds, endowment policies, ULIPs and the EPF. Besides these, he owns a plot of land worth about Rs 5 lakh.
A financial plan should start with planning for emergencies. Typically, an emergency corpus should be equal to six months' expenses. Mukesh's monthly expenditure is Rs 20,000, excluding the insurance premiums. For him, the emergency corpus amount would add up to Rs 1.2 lakh. Currently, he holds only Rs 30,000 as his emergency fund, so he should raise it by Rs 90,000.
The emergency corpus should be kept in a combination of sweep-in fixed deposits and liquid funds. These instruments will enable him to earn a higher return without compromising on liquidity.
Action: Maintain an emergency corpus of Rs 1.2 lakh.
Mukesh has bought seven life insurance (endowment and unit-linked) policies, which provide him a collective life cover of around Rs 15.25 lakh. For this, he is paying yearly premiums of about Rs 1.65 lakh. This amount of insurance cover is grossly inadequate in relation to both the premium paid and the cover he needs as the only earning member of the family.
Mukesh should surrender his endowment life-insurance policies once they acquire a surrender value. Typically, endowment plans can be surrendered after three years (although this period may differ from policy to policy). He should also stop investing in his unit-linked insurance policies right away. However, the money already invested in them will remain locked in for a period of five years from the date of investment. Such policies have high costs and they lack transparency. Their return history is not inspiring either.
For life insurance, Mukesh should consider buying a term insurance cover of Rs 50 lakh. It will cost him somewhere around Rs 13,000 per annum.
As a general principle, one should not mix insurance and investments. Insurance policies that double as investment products fail on both counts - they neither provide sufficient insurance, nor do they generate good returns.
Action: Stop investing in traditional insurance policies. Invest the amounts obtained from their redemption in mutual funds through SIPs. Buy term insurance.
Mukesh has a health cover of Rs 3 lakh, provided by his employer, which covers his whole family. However, employer provided medical insurance stays in force only as long as one is employed with the company. Hence, Mukesh should supplement this health cover with a personal health cover of Rs 3 lakh. The annual premium should be around Rs 18,000 to Rs 20,000. Also, he should look for a senior citizen health insurance plan for his mother.
Action: Buy a personal health cover.
Mukesh would need around Rs 1.10 crore to meet his current lifestyle expenses during his post retirement years. He has an accumulated corpus of around Rs 4.79 lakh in equity mutual funds and the EPF. This amount would grow to approximately Rs 15 lakh in 12 years when Mukesh retires. His ongoing investments (increased by 10 percent per annum) in mutual funds via SIPs and EPF will not be sufficient to create the required corpus. However, as he shifts more of his surplus from insurance premiums to mutual fund SIPs, this gap will be progressively bridged.
Mukesh also owns a plot of land, which he has bought as an investment. He plans to construct another house on it. We don't recommend land or property as investments. This is because the returns and yields on them dwarf in comparison to those from equity. Also, property investments lack transparency. Mukesh should sell his plot of land and then systematically invest the proceeds in equity funds over a period of time. Staggering the investment will preclude the risk of investing the entire corpus at a market peak.
Action: Increase your SIPs every year by 10 per cent. Liquidate investment in land and move the money to equity funds over a period of time.
The missing goal
Mukesh hasn't considered his son's education and marriage as his goals. An expenditure left unplanned can disrupt his overall planning. Mukesh should take his son's education and marriage into account and set aside an adequate sum for them.
Action: Account for your son's education and marriage and allocate investments towards them.
Mukesh invests Rs 17,500 every month via SIPs in 14 mutual funds. He should reduce this number to only four or five. Too many schemes clutter your portfolio and make monitoring cumbersome, they don't provide any additional diversification either. Often, different schemes in the same category invest in the same stocks and hence there could be considerable overlap in their holdings.
His portfolio should consist of two-three multicap funds, a tax saver and a small-cap fund. He will need a tax saving fund when he has exited all his current insurance policies. On the other, investing a small portion in an aggressive small-cap fund will help him earn higher returns over a long period of time. This will help him reduce the deficit for his goals. However, he should note that small-cap funds can be extremely volatile and risky over a short period of time.
Action: Reduce the number of mutual fund schemes in the portfolio. Buy a tax-saving fund