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I am 35, and the sole earning member of the family. My spouse is a homemaker. We have a son aged two. After meeting our household expenses of Rs 40,000 a month I have kept about two months' salary in bank fixed deposit as reserve. Apart from this, I do not have any other debt investments. I live in my own house without any liability.
I manage a surplus of Rs 40,000, which I use for investments in MF schemes. All the investments started a year ago and my corpus is less than my investment.
I invest every month in DSPBR Top 100 (Rs 2,000), DSPBR Equity (Rs 5,000), HDFC Top 200 (Rs 2,000), HDFC Equity (Rs 5,000), Franklin India Bluechip (Rs 5,000), Birla Sun Life Dividend Yield Plus (Rs 5,000), Birla Sun Life Frontline Equity (Rs 5,000), IDFC Premier Equity (Rs 5,000).
After these investments I have a monthly surplus of Rs 5,000 that I can invest for other goals. I recently bought a term plan for Rs 1 crore to protect my family.
For my son's education I have taken an insurance plan with a sum insured of Rs 15 lakh and my annual premium is Rs 27,000. I have taken a whole-life plan for Rs 5 lakh and the annual premium is Rs 10,000. For health protection, my family is covered by group health policy for Rs 5 lakh.
My Financial goals are: I am planning to enrol my son in an international school for which I need to have Rs 1 lakh per annum.
How much do I need to save monthly to meet my son's higher education requirement, assuming current cost of Rs 10 lakh? Based on my current expenses, how much do I need for my retired life, assuming that I plan to retire by 50? Considering the appreciation in real estate, should I look for real estate investments instead of SIPs?
Going by my family history, I may live up to 80 years.
— Anant Kumar
Solutions: There appears to be a disconnect between your surplus and savings. As you have not disclosed from when your surpluses have increased, we presume that it is from last year.
With enough time being available , reaching financial goals will be easier due to the compounding factor. But you wish to retire early, so your time horizon to save is far lesser than your life expectancy. Hence, you need to save more towards the goal.
As you want to earmark Rs 1 lakh towards your son's education from next year, you may not be left with a larger surplus to meet your retirement goals. To achieve the goal within your time horizon, you need to take bigger bets on risky asset classes such as equity.
Education: Even considering inflation at 7 per cent, your present anticipated higher education cost of Rs 10 lakh will be Rs 26 lakh in 14 years. Even if the current savings in your insurance grow at 5 per cent, you can comfortably meet the cost of education. However, considering the time duration of the goal, it may be prudent to shift your savings from traditional insurance to equity, or into a combination of debt and equity as a cushion for escalation of cost.
Check the surrender value of your policy and the impact cost before shifting your savings.
Retirement: It is important to note that for an early retirement you need to build a corpus that can take care of you and your spouse for the rest of the life, failing which longevity will be a financial ordeal.
For instance, your current monthly expenses of Rs 40,000 inflated at 7 per cent would at the start of your retirement at 50 require that you have a monthly pension of Rs 1,14,000. For such a monthly income at retirement you should have a retirement nest of Rs 3 crore and it should earn an interest of 2 per cent over and above the prevailing inflation.
To build such a corpus you should save Rs 60,000 a month for the next 180 months and it should earn a return of 12 per cent. Given your current surplus, it will be a tall order. Alternatively, if you wish to retire at 55, your monthly savings requirement towards retirement will come down to Rs 45,000.
Investments: Diversification is an important aspect of portfolio building. But just spreading yourself thin within the same asset class and with similar investment styles may not deliver the goods.
For instance, you have eight schemes and several of them focus on large-cap stocks. Despite diversification, if large-cap stocks underperform for quite some time, it will impact your portfolio return. Hence it is better to restrict your exposure to two to three large-cap funds such as HDFC Top 200, Birla Sun Life Dividend Yield Plus and Franklin India Bluechip Fund. In the midcap space, you can continue your investment in IDFC Premier Equity Fund.
As for your question on investing in real estate instead of equity: That does not seem like a right strategy. It is ideal to construct a portfolio based on the risk appetite rather than taking a returns based approach.
Insurance: Your term insurance of Rs 1 crore will cover 60 per cent of risk. It is prudent to increase your cover by another Rs 60 lakh and the premium outgo for the same will Rs 7,300