Abhishek Jaju, 30, works as a business development manager in a power equipment firm. He was born in Indore and raised in Mumbai. He is an engineer and has a business management degree. He has been with the firm he currently works for the past five years. His wife Radhika, 27, is a homemaker taking care of their two-year-old son Hrushikesh. Radhika was working with an interior design company before taking the maternity break.
INVESTMENTS
Abhishek’s monthly income averages about Rs 75,000 which includes his fixed and variable component based on performance. His family monthly expense on an average in last three months was Rs 50,000 to 60,000 and monthly savings is between Rs 10,000 to 15,000. He is a moderate risk taker and has allocated his savings into stocks, recurring deposits (RD), metals (gold and silver), public provident fund (PPF) and bank fixed deposits (FD). The current investments in bank recurring deposits amount to Rs 3 lakh;
Rs 1.5 lakh in PPF deposits, Rs 25,000 in stocks and a similar amount in bank deposits. He prefers to invest in gold and silver at regular intervals in the form of coins and jewellery.
Abhishek says, he follows an aggressive investment approach while investing in stocks. He keeps an eye on profitable offers based on valuation from few selected stocks he tracks. He prefers to invest the surplus in few stocks for four to five months then sell off with short term profit in this transaction. He then reinvests this amount into tax saving instruments after profit booking in stocks. He expects returns of 12% to 15% per annum from his overall portfolio.
He has aligned savings in bank recurring deposits to contingency fund which is equivalent to six months of his family expenses. Health insurance coverage for his family is of Rs 5 lakh through the family floater policy (excluding parents). He has endowment and money back insurance policies to cover his life with total sum assured of Rs 6 lakh. His short term (five to seven years) financial goal is to build a corpus of Rs 75 lakh in current value as down payment to purchase a new home. His long term financial goals are to build a corpus of Rs 1 crore at current value for his child education at the age of 18 years and even build a retirement corpus of Rs 1 crore. He plans to retire at the age 65.
EXPERT TAKE
"Budgeting has only one rule: Do not go over the budget", goes a famous quote. Before doing any analysis of the finances of Abhishek, we would like to appreciate his interest in building a strong foundation for his as well as his family’s future at an early age of 30. No matter how his financial life stands now, he holds the magic wand called ‘Age’ in his hand to make it perfect.
The first thing that strikes us when we look at his profile is the Life Insurance amount of Rs 6 lakh in endowment and money back policies. Two areas of concern in this are lack of adequate life insurance and investments going into insurance policies which breaks the golden rule of not mixing insurance and investment. In order to secure his family for the next 30 years in case of any unforeseen events, he urgently needs to opt for an online insurance of Rs 1.75 crore. This would cost him about Rs 1,500-2,000 every month which can easily done from the monthly surplus of Rs 15,000. In terms of having a contingency fund, he has done his bit to have up to 6 months of expenses in recurring deposits. However, he can shift half of it to a liquid fund or a flexi deposit to have better liquidity. He is servicing an education loan EMI, which is not much of a worry as it provides him tax benefits on interest paid. In terms of health insurance, he already has protection up to Rs 5 lakh. He can opt for a top-up plan in order to protect against the rising medical expenses. He can also go for individual plans for his parents, who are not a part of this plan.
Coming to investments, he has started investing in a variety of products, most of them being conservative such as PPF, RD and FD. PPF is an excellent investment product due to its marvelous tax benefits as well as decent returns. However, products like RD and FD do not suit his profile as he is in the 20% tax bracket. The more he invests in such products, greater will be the difficulty to get closer to his goals. Also, he has been making short term investments randomly in stocks, which will attract a tax of 15% flat. Moreover, investments need to be long term i.e. at least 5-7 years to achieve good returns. He has listed down three financial goals. He intends to accumulate a retirement corpus of Rs 7.5 crore (future value) after 35 years. Assuming he contributes to PF on a regular basis, he needs to invest about Rs 2,500 or Rs 7,500 per month assuming returns at 15% p.a or 12% p.a respectively. It can be done through an SIP in a large cap fund. For the second goal of Rs 2.5 crore (future value) for child’s education after 16 years, he needs to invest Rs 42,000 or Rs 32,000 at 15% p.a or 12% p.a respectively. Present investments have been considered for this goal. For this, he can choose one large cap and one multi cap funds.
However, he currently lacks sufficient surplus for this goal. He can now start off with Rs 12,000 per month in the above said categories of funds and then increase the investment every year as and when he gets hike in his salary. He can achieve the goal if he steps up his SIP amount by 15% every year. The third goal looks unachievable with the current financial state. He needs to have a relook at the down payment amount and probably go for a higher loan with lesser down payment.
Concluding Remark
Discipline is the key to success. This rule is perfect in the field of personal finance. With consistent money management skills, distant goals look very near. The most important thing is not to get carried away and to stick to the strategy of long term investment. Equity is the only instrument which can help you reach your long term goals. So, Get-Set-Go!