I am 33 years old and work in an IT company. My wife and two-year-old daughter are dependents. We are expecting another baby in 2013. My net monthly earning is Rs 86, 000 and expenses are Rs 35,000. I keep the surplus in a SB account and invest it once in two months. I get an annual bonus of Rs 2 lakh which I invest in deposits in my family members’ names. I have a liability free bungalow in Bangalore and an apartment in Mangalore which is rented out for Rs 7,500. I have Rs 29 lakh deployed in direct equity, Rs 14 lakh in PPF, Rs 8 lakh in EPF and Rs 2 lakh in mutual funds. I have FDs for Rs 15 lakh. I have a family medical policy for Rs 20 lakh of which Rs 10 lakh is from my employer. I have taken a term policy for Rs 20 lakh. For effective tax planning purpose I invest in FDs in my family members’ name.
For emergency needs I hold 3 months’ expenses in SB account.
For my children’s education and their marriage, I would need to create a corpus Rs 50 lakh each at the appropriate time. I also need to plan for my retirement. Based on our family’s health record, I may live beyond 70 years. How best can I plan for the future?
— Deepak Sastry
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Keeping entire rental income in a savings bank account is unwarranted.
It is good to have an emergency fund for 3-6 months. But at the same time it should not be idle. By parking effectively in flexi recurring deposits or investing in liquid-plus funds where you have the option to withdraw easily. This can be done by swiping the card that comes along with such an investment and will enhance your post-tax returns.
CHILDREN’S EDUCATION
You can easily reach the target corpus for both of your children’s needs. What you need to do is to earmark the funds for the goals, which will help you nourish the portfolio.
For instance, PPF which is already 5 years old can be extended for another 15 years. If it earns 8 per cent returns on an average, the maturity value will be Rs. 44 lakh.
After meeting the education needs, if you invest the surplus, it will take care of your daughter’s marriage expenses.
For the other child, earmark the FD and if it earns post tax return of 6 per cent, the maturity value will be Rs 40 lakh.
For the short fall, earmark your mutual fund investment. If the funds deliver 10 per cent a year, it will bridge the shortfall.
RETIREMENT
If you maintain the same standard of living, at 58 your annual living cost will be Rs 22.8 lakh, considering an inflation of 7 per cent. To generate such an annual income at retirement, you should have a corpus of Rs 4.5 crore and it should earn inflation adjusted return of one per cent. This corpus will help you till you turn 80. If your equity portfolio delivers returns of 10 per cent annually, you will have Rs 4.9 crore at retirement.
Even if you encounter any shortfall, your EPF balance will fill the gap.
If you systematically deploy Rs 50,000 a month for the next 17 years and if it earns 12 per cent return, at 50 you will have a corpus of Rs 3.3 crore.
INVESTMENT STRATEGY
Since you have sufficient debt and real estate investments, you can consider an asset allocation strategy of 70:20:10 in equity, debt and gold in that order. If you don’t have enough time to monitor your portfolio, opt for mutual fund investments. Gold needs to be accumulated, at least to meet your daughter’s marriage needs.
INSURANCE
It is good to have health insurance over and above the employer benefits. At the same time it should be cost effective. We suggest you to take health cover for Rs 5 lakh and buy a top-up plan for the required sum insured. Also take a term insurance cover of Rs 1 crore.
(The author is CEO, SPP Wealth and Financial Planners. He can be reached at suresh@myassetsconsolidation.com)
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