Express Clinic

Profession operations head in a Private company annual income

R12 lakh

Status amp; goals

Somdatt 40 is working as Operations Head with a financial services company in Delhi. He is married to Mudita 40 and has a daughter,Manisha 8 and son Braham 5. He draws a handsome salary and has a great career. But with so many liabilities on his shoulder and being the only earning member,his confidence has started shaking with the news of companys poor performance. He has invested a lot in real estate and so has not planned on any kind of asset allocation for his investments. Inspite of working in a financial services company,Somdatt has given a miss to asset classes in his approach.

Now,he wants to draw a roadmap for himself and the family.

Needed

A financial plan to guide his childrens future,family protection and his retirement needs.

monthly Income post tax

Rs 1,00,000

Monthly expenses

Rs 82,000

Net monthly surplus R18,000

Goals in order of priority

Daughters Education 2023

inflation 10

Current Value R10 lakh

Future value R26 lakh

Daughters Marriage 2029

inflation 7

Current Value R8 lakh

Future value R26 lakh

Sons Education 2026

inflation 10

Current Value R10 lakh

Future value R35 lakh

Sons Marriage 2035

inflation 10

Current Value

Rs5 lakh

Future value Rs22 lakh

Retirement Planning: 2033

Pre-Retirement Inflation at 7,Life expectancy 83 years

current expenses Rs32,000

Future value Rs1.24 lakh

Cor pus required Rs2.80 crore

Loan Liabilities

Two housing loans on two residential houses bought few years ago. One is self-occupied while other is not.

Current Investments

Equity-MF:Rs 2,25,000

PPF:Rs 7,00,000

EPF:Rs 6,54,000

Cash:Rs 3,00,000

Insurance Surrender Value: Rs 5,45,000

Real Estate:Rs 60,00,000

FINDINGS

Emergency fund: Somdatt maintains

Rs 3,00,000 in savings account

Health Insurance: Family is covered through Group Insurance of Rs 4 lakh. They are also covered through a standalone policy of Rs 6 lakh

Life Insurance: Covered for Rs 15 lakh through three traditional plans and 1 ULIP paying a premium of Rs 65,000 p.a.

Existing Investments:

He takes all financial decision with help of his friends.

Liabilities: Outstanding home loan of Rs 40 lakh on two houses with an EMI of Rs 35,000.

Recommendations

Emergency Fund: He has funds to meet four months of his expenses. But he should consider diverting Rs 2 lakh to money market mutual funds for tax efficiency.

Daughters College Education: He should allocate PPF to this goal which will fetch him approx. Rs 21 lakh. For balance requirement,he will need a monthly investment of Rs 1,500 in balanced mutual fund scheme.

Return assumed: 12 p.a.

Express Tip: With EEE status and reasonable returns,PPF still holds a valuable investment for meeting long term goals.

Daughters Marriage: This goal can be met by allocating a monthly investment of Rs 4,500 in Diversified large cap MF schemes.

Returns assumed: 12 p.a.

Sons Education: To meet this goal,he will need a monthly investment of Rs 6,000 in diversified equity large cap mutual funds scheme and Rs 4,000 in mid cap mutual funds scheme. Alternatively,in case of shortage of funds,education loan can be considered.

Return assumed: 12 p.a.

Express Tip: Education loan is a good means of meeting the higher cost of education considering the tax benefit and provision of child sharing the responsibility once he starts earning.

Sons Marriage: This goal can be met by making a monthly investment of Rs 2,000 in balanced mutual funds scheme

Returns assumed: 12 p.a.

Express Tip: The disadvantage of real estate is the low liquidity because you may not be able to sell it when you desire and there is no possibility of selling it partially like in equities

Life Insurance: Somdutts insurance needs is Rs 54 lakh. He should buy this through a term insurance which will cost him approx. Rs 10,000 annually.

Express Tip: Although large accumulation of real estate reduces the need of life insurance,they can deprive the family from financial support in situation like family litigations.

Health Insurance: The family has adequate health insurance and so no enhancement is recommended.

Express Tip: Group insurance has its own disadvantages and so one should avail standalone policies to reap the benefits in later years of life

Repaying Housing Loan: Considering the concern on his career and some of his goal requirement beyond his retirement,Somdutt should reduce his loan liabilities. He can consider exiting from one real estate investment and utilise the balance from the proceeds for meeting his life goals.

Express Tip: Although housing loan gives relief in reducing tax liability,its a long-term commitment which should be planned wisely to avoid any default.

Retirement Planning: His EPF accumulation will give him approx. Rs 1.5 crore. By allocating existing equity investment and making traditional insurance paid up he will be able to generate additionally approx. Rs 30 lakh. For the shortfall,he will need a monthly investment of Rs 7,000 in diversified equity large cap mutual funds schemes and Rs 4,000 in mid cap mutual fund schemes.

Return assumed: 12 p.a.

Express Tips: Retirement is a longevity risk which can pose difficulties if not planned ahead. A wise selection of asset classes helps in meeting the goal by utilising your resources efficiently.

Conclusion

Asset allocation is a key element of financial planning. It not only identifies the risk associated with an investment but also helps in optimising resources. Its important to make yourself aware about the kind of investments you are making and what objective you want to achieve.

Plan By Jitendra P.S.Solanki

Certified Financial Planner,

Member of the Financial Planners Guild,India

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