Starting off well | Value Research Dhananjay wants to plan for his retirement and daughter's education and marriage. He has chosen good funds but they are too many
The Plan

Starting off well

Dhananjay wants to plan for his retirement and daughter's education and marriage. He has chosen good funds but they are too many

Dhananjay (31) is married and has a one-year-old daughter. His wife (30) is a homemaker. Dhananjay lives in his own house, which has been purchased with a home loan. His monthly income is Rs 1.6 lakh. His investments are mostly in mutual funds and National Savings Certificates.

His aim is to create a sufficient corpus for his retirement and daughter's education and marriage.

Emergency corpus
Dhananjay has created an emergency fund of Rs 4 lakh. His monthly expenditure is Rs 1.06 lakh. This includes the home-loan EMI of Rs 26,000.

One should keep an emergency corpus equal to six months' expenditure. Hence, Dhananjay should increase his emergency corpus to Rs 6.5 lakh. This amount should be invested in a mix of sweep-in fixed deposits and short-term debt funds. Doing so will help him earn a higher return on this amount while also maintaining liquidity.

Dhananjay can find the top-rated debt funds on the Value Research website. Generally speaking, apart from the Value Research star rating, one should see the asset size and expense ratio in the case of debt funds. The larger the assets and the lower the expense ratio, the better a debt fund is.

Action: Increase the emergency corpus and invest it in sweep-in fixed deposits and short-term debt funds.

Life insurance
Dhananjay is the only bread-winner in his family. He has a term insurance of Rs 1 crore. His life cover should be sufficient to take care of the outstanding home loan after him and to provide for the living expenses of his family. It should also cover major non-negotiable goals like his daughter's education. Considering his monthly expenditure, along with the other factors, he should increase the cover gradually to at least Rs 2 crore.

He should also consider adding accidental-disability and critical-illness riders to his term-insurance plan. A disability rider will pay him a lump sum in the case of total/partial disability due to an accident. On the other hand, a critical-illness rider will pay him a lump sum on the diagnosis of any specified serious diseases like cancer, renal failure, etc. This amount is payable irrespective of the actual treatment cost. These riders are inexpensive to add and give you an even more comprehensive cover.

Action: Gradually increase the term cover to Rs 2 crore. Add accidental-disability and critical-illness riders to the term plan.

Health insurance
Dhananjay has health insurance of Rs 5 lakh, which also covers his wife and daughter. The health cover is sufficient for now but he should consider increasing it in the coming years with the increase in medical costs.

Action: Maintain the existing health cover and increase it with time.

Dhananjay is likely to retire in some 29 years. He will need Rs 23 crore to maintain the same lifestyle as now in his post-retirement years. He has recently started investing Rs 26,000 every month in equity mutual funds. This would be sufficient to accumulate his retirement corpus, provided he increases this amount by at least 10 per cent every year. He can easily ensure this with his annual increments.

Also, Dhananjay should move his investments to debt funds a couple of years before his retirement so that a sudden market fall doesn't diminish his corpus just when he needs it.

Action: Increase SIP contributions every year by at least 10 per cent.

Daughter's education and marriage
Dhananjay plans to spend Rs 25 lakh and Rs 40 lakh in today's value on his daughter's education and marriage, respectively. These goals are around 17 and 22 years away. An inflation-adjusted corpus can be easily created for these goals by investing an additional Rs 18,000 every month in equity mutual funds. But again, this contribution should be increased every year by at least 10 per cent. Dhananjay has sufficient monthly surplus to start the additional investment.

Action: Invest an additional Rs 18,000 per month. Increase this amount by at least 10 per cent yearly.

Dhananjay's ongoing SIPs of Rs 26,000 are spread across seven mutual fund schemes: ICICI Value Discovery, ICICI Balanced, Aditya Birla Sun Life Equity, L&T India Value, Mirae Asset Emerging Bluechip and Mirae Asset India Opportunities.

Although all his schemes are top-rated, they are too many and Dhananjay should try to reduce them. To put things in perspective, currently, he is invested in over 200 stocks through these schemes. That's over-diversification. Also, keeping a track of so many schemes could be tricky.

Dhananjay's portfolio is a mix of large-cap, multi-cap, mid-cap and equity-oriented hybrid schemes. Multi-cap funds can invest across companies of all sizes and hence are ideal for most investors. Those who can take extra risk for extra returns and have a horizon of 10 or more years can also invest in mid-cap and small-cap funds. Balanced funds reduce the volatility of equity as they invest about 35 per cent of their corpus in debt. They are good for those who are new to equity or for the long-term investment needs of retirees or for those who may have a specific need for them. Many of us already have enough exposure to debt in the forms of provident fund and fixed deposits that we don't need to invest in a balanced fund.

Dhananjay doesn't have a tax-saver fund. Investments in equity-linked savings schemes (ELSS) are eligible for tax deduction under Section 80C. ELSS is considered to be one of the most efficient tax-saving alternatives. Among other Section 80C avenues, it has the shortest lock-in period of three years. Its returns also tend to be far better than those from other 80C avenues, which are dominated by debt-based investments. Hence, there is case for investment in ELSS in spite of the latest long-term capital-gains tax on equity.

Dhananjay may choose to link any of his long-term goal to his investments in an ELSS. This will solve the dual purpose of saving taxes and saving for a long-term goal. ELSS mostly have a flexi-cap strategy and are a suitable choice to save for long-term goals. However, the portfolio of some ELSS may be tilted towards a particular market-capitalisation range. He may choose any one of the eight schemes picked by our analysts in the 'Fund Analyst's Choice' section of this magazine.

Action: Reduce the number of funds. Add a tax-saver fund to the portfolio.

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