Express Clinic

Profession: A technician in a manufacturing co,Sarita works as an assistant

Net annual income

(R 2.88 lakh)

Status & goals

Pradeep works as a technician in a manufacturing company in Mumbai,Sarita works as an administrative assistant in a private firm in Mumbai. They have a two year old daughter Sanika.The family consists of Pradeep,Sarita and Sanika and Pradeep’s mother,65. They want to purchase a house in next few years and wish to plan for their only child’s education and marriage and their own retirement. They will plan for other goals,like car,only after they are able to buy a house

Needed

A plan that will let them save smartly for their goal of buying a house and creating a corpus for Sanika’s secure future

Life Insurance coverage:

Husband: R 2.5 lakh

Total premium paid: R 1,000 pm

Health insurance:

Employer provided cover

for the entire family R 1.5 lakh

Findings

Emergency fund: They have built a corpus of R 2.75 lakh in the form of bank fixed deposits (FDs). There is excess liquidity available.

Health insurance: Pradeep’s employer provides health cover for the family to the tune of R 1.5 lakh. His mother is a retired government employee,so she is covered by the government’s health scheme—CGHS. The cover available to the family might prove to be insufficient in case of a major health problem.

Insurance: Pradeep has a low risk cover of R 2.5 lakh through an endowment plan. Sarita has no life insurance. There is a big gap in the risk coverage of the main income earner. This can create problems for the family in case of an eventuality.

Investments: They have been mostly investing in postal schemes. The matured value as on date is R 2.75 lakh which is lying in the form of bank FD earning around 8-8.5 per cent. Pradeep has an EPF balance of R 2.40 lakh.

Retirement: There has been no focussed effort towards retirement planning.

Recommendations

Emergency Fund: They need an emergency fund of R 40,000 equal to nearly 3 months’ expenses. The FDs in the bank are more than enough for this purpose.

Express tip: Emergency fund is extremely important,but too much funds allocated here can eat away into requirements for other goals.

Health Insurance: They should take a family floater policy of R 5 lakh. This should cost them about R 8,000 pa.

Express tip: Employer provided health cover may sometimes not suffice in the case of major illnesses.

Life Insurance: Pradeep needs to take a term plan of R 25 lakh to cover his goals. This should cost him about R 6,000 per year. Sarita’s life cover requirement is minimal at R 1 lakh,hence can be kept at a lower priority.

Express tip: Every person,whose family depends on their income,needs to look at term plans.

Buying a house: They are looking at a property worth R 15 lakh currently. Assuming that they will need to provide 20 per cent of the value of the house,they should look at accumulating R 4.5 lakh in the next five years. They should break their FDs,earning a lower rate of return,and reinvest them at the current high rates. R 2 lakh FD should be earmarked for the house. At a rate of 9 per cent,it will fetch R 3 lakh in 5 years. The balance can be built up by starting a recurring deposit in the bank for R 2,000 per month.

Child Goals: Sanika’s education will need an investment of R 2,000 per month and her marriage goal will need R 1,000 per month. Since these goals are more then 10 years away,equity mutual funds would be the preferred investments through the SIP mode. Though the Gurav’s have never looked at equity investments,to build a large corpus over a longer period of time,equities are the best option available.

Express tip: Planning for a child’s education and marriage started at a young age will reduce the regular investment requirement.

Retirement: They would need to accumulate R 2.45 crore to finance their retirement till the age of 80. This can be achieved by a combination of investments in EPF,PPF and equity. Pradeep’s EPF will provide about R 49 lakh. They should start one PPF account. An annual contribution of R 25,000 till retirement can give about R 26 lakh at 8 per cent. Currently there might be a deficit situation; hence contributions to PPF will have to be made out of their annual bonuses. Once the salary increases,they can start contributing on a regular basis. They should immediately start an SIP of R 3,000 pm in a MF to complete the gap.

Express tip: All long term products should be aligned to retirement goal.

Conclusion

The Gurav’s need to save in the right direction to meet their goals. They need to look at upcoming expense of their daugh-ter’s schooling which will start next year,as they wish to send her to a good school and that will reduce their rate of savings. This plan has considered the said expense