Shivanand Pandit is a 41-year-old living in Goa and working with a private organisation. His monthly income is Rs 57,000. Of this, Rs 26,667 goes towards household expenses, while Rs 4,442 goes towards insurance premiums and Rs 20,000 goes into investments. He is left with a surplus of Rs 5,892.
“I want recommendations on my existing investment portfolio and insurance policies” – Shivanand Pandit
Financial Goals
Shivanand’s goals include building a corpus for a down payment of a home that he plans to purchase within the next five years and creating a retirement fund. Financial advisor Pankaaj Maalde analyses his monthly cash flow, existing investments, insurance policies and future goals.
Analysing Life Insurance Portfolio
Shivanand has two traditional and three ULIP insurance plans. He pays annual premium of Rs 44,000 on these policies. Analysing his insurance portfolio, Pankaaj recommends continuing both the traditional plans as the debt portion in the portfolio and ULIP plans until his home purchase goal is achieved. There is no additional requirement of having term plan or life cover, since no one is financially dependent on him.
Health and Disability Insurance Planning
As for health insurance, Shivanand has bought a policy with a cover for Rs 5 lakh. Pankaaj advises him to buy a top-up health insurance plan for sum assured of Rs 15 lakh, with deductible of Rs 5 lakh. He even advises Shivanand to increase his critical illness cover from the existing Rs 5 lakh to Rs 25 lakh and accident disability insurance from Rs 12.5 lakh to Rs 25 lakh. This will incur cost of approx Rs 20,000 p.a., but ensures a cover for him in case of future misfortunes.
The Road Ahead
- Contingency Funding: Shivanand must set aside six months of expenses as a contingency fund, which amounts to Rs 1.92 lakh. For this, Pankaaj aligns existing saving bank balance of Rs 1.20 lakh and postal investment of Rs 1 lakh. He advises him to invest the amount in ultra-short-term funds.
For life’s major goals Pankaaj advises
- Buying home: Buying a house is top priority goal for Shivanand. He plans to buy a house having total cost of Rs 30 lakh in present value after five years. Out of this value, 65% will come from the bank in the form of a home loan, while the remaining 35% will have to be funded by self. Pankaaj worked out how Shivanand could buy a house as explained in the table (refer to table Working for ….).
To build a corpus for funding the 35% down payment required on the home, Pankaaj has aligned the three existing ULIP plans. This will give a corpus of Rs 8.62 lakh after five years. Assuming return of 11.5% after switching from equity to balanced category and with Shivanand continuing to pay the premium in these policies for next five years. Additionally, an investment of Rs 10,500 is required to meet the shortfall. For this, Paankaj advises Shivanand to invest in balanced funds for the first four years and from the fifth year, consider investing either in an arbitrage fund or a recurring deposit till goal is achieved.
For the balance amount (65%), Shivanand should opt for a home loan. Assuming rate of interest at 9.50%, the EMI would be Rs 32,700 (refer to table Working for…). To pay this monthly EMI, Shivanand can use the surplus ofRs 25,000 savings from rental expense and ULIP premiums which will stop by the time his home is purchased.
- Retirement funding: Shivanand is planning to retire at the age of 60 year. Pankaaj aligns his existing investments in direct equity, mutual fund and PPF, which promise a corpus of Rs 50.98 lakh, Rs 61.19 lakh and Rs 4.32 lakh, respectively (after 19 years) to attain the retirement corpus. Additionally, he should start monthly investment of Rs 14,500 through SIP in diversified equity mutual fund scheme to build the desired corpus for his retirement. Investing in an ELSS scheme will help him save on taxes if required. This execution will aid him in building his desired corpus for retirement, which is Rs 2.56 crore, and can be used up to 80 years of age after retiring at 60. The corpus required has been calculated assuming household expenses of Rs 27,000 per month in present value at 8% inflation.
Concluding remark
Shivanand should shift existing investments in direct equity and thematic (sector) funds to diversified equity mutual fund schemes, since it is not possible at an individual level to track the performance of stocks and various sectors while investing. Also, consolidation is required in the existing mutual fund portfolio which is over-diversified at this stage. Paankaj advises him to invest only in four to five good mutual fund schemes instead of investing in too many schemes. He must review the financial plan from time to time and take corrective action to increase sum assured in his health insurance policies.
Expert - Certified Financial Planner Pankaaj Maalde prepares a financial plan and gives his recommendation to the family.