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This is an archive article published on June 27, 2011

Express Clinic: Dhruvs financial plan

Dhruv,35,is a state government employee for the last 10 years. His wife is a homemaker and they have a son,4 years and a daughter,2 years.

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Dhruv,35,is a state government employee for the last 10 years. His wife is a homemaker and they have a son,4 years and a daughter,2 years. Being a government servant,he is entitled to a defined pension after retirement along with benefits like EPF and gratuity. He believes that his retired life is well planned. With low household expenses,he has diverted most of his savings towards life insurance policies and unit linked insurance plans (ULIPs). Other savings are invested in PPF and the National Savings Scheme. With no loan liabilities,he has started taking some risk by trading in direct equities to realise quick gains but has mostly ended on the losing side so far.

Being a state government employee,Dhruv has not given much thought to his retirement planning. This might prove to be risky if his expenses rise in later years. His family’s health insurance needs are covered very well by the employer but only at very limited hospitals. The biggest concern in his case is planning other life goals through insurance and fixed return schemes,which is not advised. He is highly underinsured which poses a high risk for his family. The biggest drawback of his investment planning is using equities for short term gains. He will have to incur expenses on children’s education and marriage,and not using the right asset class can be dangerous.

Findings
Emergency Fund

* R 1,75,000 maintained in savings bank account and fixed deposits

Health Insurance

* Covered by the government for any amount,but only at limited hospitals

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* Additionally covered through standalone individual mediclaim policy of R 1 lakh

Life Insurance

* Existing Insurance cover of R 10,00,000

* Insurance requirement by human life method – Rs 68 lakh

Existing Investments

* No goal alignment with any existing investments

* LIC traditional products,especially childrens policies,are costly and do not yield desired results

* Relying heavily on ULIPs for equity exposure in long term

* Short term trading in equities is speculation,where the probability of loss is highest

Recommendation
Emergency Fund

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* Maintain R 25,000 in savings accounts and invest the rest in liquid mutual funds

Express Tip: The objective behind Emergency Funds is to meet your expenses during any emergency. It should include not only household expenses but also any running loan liabilities and investments payout.

Childrens Education & Marriage

* Investment to be allocated in systematic investment plans (SIPs) in addition to existing mutual fund (MF) investment,for children’s education is R 1,82,856 per anum

* Investment to be allocated in SIPs,in addition to existing equity investment,for children’s marriage is R 71,004 per anum

* Return assumed 12 per cent per anum

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Express tip: Children’s education cost takes away the maximum chunk of your savings. If not provided for,it can hurt your other goals very badly.

Health Insurance

* Increase in health insurance to R 2 lakh for each family member is recommended

Express tip: In buying health insurance priority should be to cover your maximum needs and not the lowest premium. Hence,always match your requirements with benefits provided.

Life Insurance

* Additional term cover of R 68 lakh is recommended from any life insurance company offering low premium rates

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Express tip: Term insurance is bought as financial protection for your family in case the unexpected happens, and this should be the first priority of your financial goals.

Retirement Planning

* He will meet his retirement goal through EPF,gratuity and pension from government comfortably.

Express tip: Inflation eats into your earnings gradually. It is necessary to take it into consideration while planning your retirement.

Existing Investments

* Allocate existing direct equity and MF investments while planning for your childrens future.

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* Discontinue some of your ULIPs and allocate the savings in diversified equity mutual funds.

* Make your traditional policies paid up as it is not yielding desired return.

* The savings from above strategy will provide for other goal requirements.

Express tip: Asset Allocation is the key to achieving your financial goals. Investing in a single asset class does not yield the right risk-reward ratio.

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Plan Constructed by: Jitendra Solanki,Certified Financial Planner
Member of The Financial PlannersGuild,India (www.fpgindia.org)

Conclusion: Even government employees have to take into account the effects of inflation. Provision for childrens education,has to be made today. With defined benefits scheme being replaced by defined contribution scheme,the coming days will be tough if adequate planning is not done.