Mukul (40) works as a manager and has a monthly salary of Rs 1.19 lakh. He has a three-year-old daughter. Mukul's wife Shreya (36) is a biotechnologist and earns Rs 30,000 monthly.
Mukul pays a monthly rent of Rs 17,000. Though he has recently purchased a flat, he doesn't plan to live in it due to location issues. Instead he plans to rent it out in around six months. Besides this, Mukul has accumulated Rs 30.67 lakh in equities and about Rs 20 lakh in Public Provident Fund (PPF). He also has Rs 3.55 lakh in debt mutual funds.
Mukul wants to create a sufficient corpus for his retirement and daughter's education and wedding. Also, he would need a couple of lakhs in three months for the registration and interior work of his newly purchased flat.
An emergency fund should be able to take care of at least six months of your expenses. Mukul has an emergency corpus of Rs 1.47 lakh in an ultra-short-duration debt fund. His monthly expenditure is Rs 65,000. Hence, he should increase his emergency corpus to Rs 3.90 lakh. For this, he may use a part of his corpus in debt funds.
Mukul has wisely parked the emergency corpus in an ultra-short-duration debt fund. This will help him earn higher returns without compromising on liquidity. But he should remember that it takes around two days to receive the money after redemption from ultra-short-duration funds. The proceeds are not credited to your bank account instantly. Hence, he can park a part of his corpus in sweep-in fixed deposits and a savings bank account.
Action: Increase your contingency fund to Rs 3.90 lakh.
Mukul has a health cover of Rs 3 lakh, which also doubles as unit-linked insurance. Such hybrid products should be avoided as they fail to provide enough insurance and also have high costs. Unfortunately, his policy does not have a surrender option. So he can either continue the policy or just let the policy lapse and bear the loss.
Mukul should buy a pure health cover of at least Rs 3 lakh, covering himself, his wife and his daughter. It will cost him around Rs 11,000 per annum.
Action: Buy a pure health cover for your family.
Mukul has a term plan of Rs 1.84 crore. Besides this, he has also invested in multiple endowment plans that provide him a combined cover of Rs 5 lakh. As stated above, one should avoid investing in endowment plans or any other hybrid product which is a mix of insurance and investment. Mukul should consider surrendering these plans and investing the proceeds in equity funds for higher returns over the long term.
Further, he may consider increasing his term life cover by Rs 1 crore as the present cover may not be sufficient to take care of his family's living expenses, as well as his daughter's education and wedding in his absence.
Action: Consider surrendering your endowment plans and investing the proceeds in equity mutual funds.
Daughter's education and wedding
Mukul wants to spend Rs 30 lakh on his daughter's higher education and Rs 15 lakh on her wedding. At an inflation rate of 8 per cent, this amount would swell to Rs 95.17 lakh and Rs 81.55 lakh by the time it is required.
For this, he may set aside Rs 24.13 lakh from the accumulated corpus in equity. Assuming a conservative return of 12 per cent, it will be sufficient to achieve the required goal. Alternatively, he can start an SIP of Rs 16,000 in multi-cap funds and increase it every year by 10 per cent.
Further, Mukul should start transferring the required amount systematically to a debt fund 12-18 months before the goal falls due. This will protect his accumulated gains from a sudden market downturn.
Action: Set aside Rs 24.13 lakh in equities.
Considering Mukul's current lifestyle, a retirement corpus of Rs 9.29 crore will be required. Mukul's EPF contribution, increasing at 10 per cent annually, will fetch him Rs 1.81 crore when he retires at 60 (assuming an average rate of 8 per cent).
Mukul's investment in the PPF is due for maturity next year. It will fetch him Rs 23.4 lakh. He should spread this amount over a period of 18-24 months and invest it in equity funds. They will give far higher returns than the PPF in the long term. At an average return of 12 per cent, this amount will fetch him Rs 2.02 crore by the time he retires. For the balance, he should initiate an SIP of Rs 31,500. Also, he should increase the contribution by 10 per cent yearly.
Action: Start an SIP of Rs 31,500.
Mukul has accumulated a corpus of Rs 11.55 lakh in equity mutual funds and Rs 19.12 lakh in stocks. He should invest in stocks directly only if he can research companies and track them periodically. Otherwise, he should shift to equity funds.
Mukul is in the habit of depositing his monthly surplus in debt funds and then setting up weekly STPs to equity funds. There is no added advantage to this strategy and it may increase operational hassles and tax implications. The gains would be marginal. Instead, he should directly set up the SIP from his bank account.
All his goals are more than 15 years away. Multi-cap funds work best for such long durations as they are free to invest in companies of different sizes and sectors. His current mutual fund portfolio is approximately 50 per cent in value-oriented funds, 25 per cent in multi-cap and 25 per cent in large-cap funds. He should transfer his investment from large-cap to multi-cap funds. Given the time horizon, multi-cap funds are likely to give higher returns than large-cap funds. Value funds are like multi-cap funds, with a focus on value strategy.
Mukul may accumulate his monthly surplus for the next two-three months and combine it with the balance (Rs 1.12 lakh) in debt funds to pay for the registration cost of his newly purchased flat. Further, he should not get too ambitious with the interiors and should stick to the basics, especially since he intends to let out his house for now.
Action: Move your investment from the large-cap to a multi-cap fund.
Keep in mind
The emergency fund should be equal to six months of expenses.
Keep insurance and investment separate. Avoid hybrid products that offer insurance.
For life insurance, go for term plans.
Equity funds provide better return than the PPF over the long term.
Keep your SIPs simple.
Among equity funds, multi-cap funds are the best as they can invest in companies of all sizes.
Start transferring money to conservative funds 12-18 months before a long-term goal arrives.