Financial Planning :: Business Line

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I am 46 years old and my wife is 39. My son is 14 and my daughter is 7 years old.

My home and two-wheeler loans will be repaid in 2013 and 2015 respectively.

Currently, I am sitting on a loss of 35 per cent on my equity portfolio, which is five years old. I meet my annual premium and vacation expenses with my annual bonus.

To provide higher education for my son, I need Rs 15 lakh and for my daughter I need Rs 20 lakh (all in present value).

I need Rs 40,000 a month after retirement.

Also, I plan to buy second house in 2015.

— I. R. K. Raj

While going through your portfolio of stocks, it becomes apparent that some of the shares have fallen more than 70 per cent. Yet you continue to hold them. Such a strategy will always erase your overall portfolio returns.

If you wish to meet all your aspirations, you do need to clean up your portfolio.

For your son’s higher education earmark your equity portfolio and it should earn a return of 15 per cent.

With your portfolio being skewed towards mid- and small-cap stocks, your portfolio would become volatile. Increase the proportion of large-cap stocks in your portfolio.

EDUCATION

If inflation averages at 7 per cent (same figure taken for all goals), the present cost of Rs 20 lakh for your daughter’s education will be Rs 42 lakh. If you save a sum of Rs 15,500 for the next 132 months and if your portfolio earns a return of 10.5 per cent, you can reach the target.

Being a long term goal, have an asset allocation in the ratio 60:30:10 in equity (preferably through mutual funds), debt and gold, respectively.

MARRIAGE

After 16 years, the present cost of your requirement will be Rs 73 lakh. If you construct a portfolio with allocation of 70:20:10 with expected returns of 10.8 per cent, you can reach the goal.

RETIREMENT

The current annual expense will be Rs 10.8 lakh at 58. To receive such an income for an estimated 22 years post retirement you should have a corpus of Rs 2.12 crore and it should earn inflation adjusted return of one per cent.

If your current balance and future contribution in EPF continues to grow at 8.5 per cent and your PPF investments too deliver the same return, you can accumulate Rs 1.08 crore. Your insurance policies will have a maturity value of Rs 42 lakh.

To meet the shortfall you need to save a sum of Rs 19,200 for next 144 months.

With your current surplus it may be difficult to allocate for all the goals. With just a few years left for closure of your home loan, the principal component will be far higher than the interest.

Since your contribution to PPF itself takes care of tax deductions under section 80C, it may be prudent to repay your home as well as two wheeler loan from the balance you have in your saving bank account. This will increase your monthly surplus by Rs 29,000.

Increase your risk cover by another Rs 50 lakh.

Given the priority that needs to be given to other goals, it’s not prudent to buy another house.

(The author is CEO, myassetsconsolidation.com)