In our last issue [Issue 3] of Yours, Personally – The Financial Planning newsletter, dated 19 October 2010, we received a number of queries asking for financial planning advice. We have chosen queries at random, and provided mini solutions here. Personal details of the people who write in to us are kept strictly confidential and hence have not been given below.

 

1. Dear sir,
   My age is 32. I have 1 baby (3 months old).  My future requirements are child's education, her marriage and my retirement planning. Investment horizon is 15 or 20 years. For that, my present portfolio is as follows:
    
   1. SBI Contra Fund 1,000/- per month
   2. HDFC Top 200 Fund 1000/- per month
   3. Reliance Regular Savings 1000/- (Growth)
   4. HDFC Equity Fund 1000/- per month
   5. Reliance Growth Fund 1000/- per month
   
   I also want to invest Rs. 5 lakhs in the above portfolio in next 1 year.
   
   SOLUTION:
   
   Dear sir,
   
   First, congratulations on the birth of your child!
   
   As detailed above, you wish to plan for the financial goals of your daughter's education (college expenses) and her marriage, as well as your retirement. The great thing is that you are starting early – hence you have the benefit of a long investment horizon of 20 years.
   
   Your first step should be to quantify your goals i.e. how much do you imagine spending on each goal if the goal was happening today?
   
   Using this as a base figure, you can calculate how much you will require at the time of the goal, taking inflation into account. (For your retirement, please feel free to use our Retirement Calculator)
   
   Since the goals are more than 10 years away, you can invest more into equity and less into debt and gold. Remember to keep an emergency fund aside of 6 months of your living expenses including EMIs if any.
   
   You can follow an asset allocation of 75% in equity, 10% in debt and 15% exposure in gold ETFs. As the goals come closer and the time horizon reduces, you can invest more into debt and less into equity. When the goal is less than 3 years away, do remember to remove the goal corpus from equity and shift it completely into fixed income debt products. However remember, these are broad recommendations and are not specifically personalized based on your risk appetite and risk tolerance. A full financial plan would be personalized with these details and would also consider your cash flows for each year till your retirement and your insurance needs.
   
   The investment recommendations are the last piece of your plan when you are planning for a family's financial goal. For your equity exposure you can consider diversified equity funds having a good track record, such as the ones you have chosen.
   
   Wishing you and your family a very happy Diwali!
   
   Happy Planning!
    
2. Dear sir,
   
   I am from Bangalore. Wanted to have your assistance if I am investing enough for my future and if need to diversify little for better return.
   
   I am 33 year old with monthly net income of Rs. 54000/- and my wife gets around Rs. 30000/- pm. However I do not have any family obligation but I am regularly paying for my home loan and car loan.
   
   Home Loan EMI (Total Loan Rs. 25 lakh): Rs. 25000/- (Started in 2009 June with 20 yrs tenure)
   Car Loan EMI: Rs. 11000/- (Total Loan Rs. 3.3 lakh)- (Started in Aug 2010 with 3 yrs tenure).
   Currently my wife and my investments are mostly on tax saving and we have taken some LIC policy. Details are given below.
   
   HDFC Tax Saver - Monthly 1500/- since 2008
   SBI Magnum Tax Gain - Monthly 2000/- since 2008
   Birla Sun Life Tax Relief 96- Monthly 1500/- since 2008
   PPF - 35k per annum (Started in 2009)
   
   We do save around Rs. 8000 - Rs. 10000 month in our company provident fund and our current balance would be around Rs. 4 - 5 lakhs.
   
   Insurance Cover
    
   1. Investment in LIC Bima Gold with annual investment of Rs. 32000 and it have sum assured amount of Rs. 10 lakh. This is set to expire in 2026.
   2. I have taken term plan from Birla dream plan of Rs. 6000 for 25yrs last year with Rs. 15 lakh as life coverage.
   3. One more term plan from Aegon Religare with Rs. 15 lakh coverage for 25yrs
   
   Health Insurance
   
   On health insurance, I have Rs. 4 lakh coverage from company including my parents.
   Wife has similar coverage of Rs. 1 - 2 lakh from company as well. Last month I have taken health insurance for myself and wife from Appolo Munich (Rs. 3 lakhs) with critical illness coverge of Rs. 1.5 lakhs
   
   I do not invest in any other things. During Mar-Apr we do have a bonus pay out system from company which I am using for last 1-2 years (approximately Rs. 2 - 2.5 lakhs I am paying as prepayment amount).
   This will ensure reduced tenure of my home loan. I do not have any family obligation and need to build corpus for future. Monthly I do save around Rs. 20000 - 25000 . This I am using for liquidity building and for rainy days. Currently I have cash balance of Rs. 3 lakh in our joint account. Do you think we are on right track?
   
   If we need to diversify into equity, then list of funds suggested.
   
   Regards
   
   SOLUTION:
   
   Dear sir,
   
   As depicted in your mail to us, you are looking to build wealth for your future. Based on your information, here are some points which would be useful for you:
   
   Firstly, you need to have a contingency fund of at least 6 months worth of living expenses (including EMIs). You currently have Rs 3 lakh in a joint savings account. You can add to this until you reach the required contingency figure, and then can continue with making your investments.
   
   The second point is that it is very important to separate your insurance from your investments. The best life insurance to have is a pure term plan. You should also take insurance only to the extent that you have financial dependants. You have indicated that your wife is also earning and that you have two loans. You need to take insurance to the extent that in any unfortunate circumstance, the loans do not devolve onto your wife, and also such that in your absence, she is able to maintain her life. Also, when taking life insurance – opt for a straightforward term plan. It is not advisable to opt for endowments plans or money back policies. If these plans have already been taken, they can be stopped or converted into paid up policies. Try and avoid making further premium payments into these plans.
   
   How much critical illness insurance and mediclaim you need to take is largely dependent on your family health history.
   
   Thirdly, to build for your future you would need to quantify what your financial goals are. You may want to start by planning for your retirement. Since this is a long term goal, do not get swayed by market movements. You can start SIPs into a portfolio of well diversified equity mutual funds to help you reach your goal. To find out how much you need for your retirement, please feel free to use our Retirement Calculator available Here.
   
   Lastly, for your equity exposure remember to go for long term investments and invest in a regular and disciplined manner, preferably via an SIP. Remember SIPs do best in falling markets as they help you to average your costs, so in case of market dips or corrections – it is always better to continue your SIPs.
   
   Additionally, you have mentioned that you are using your annual bonus to prepay your home loan in parts. You can also consider that if you invest this money into equity for the long term (more than 3 to 5 years) then you could earn a compounded return of approximately 15% per annum on your equity investment. If instead you use the annual bonus to prepay your home loan, you are reducing the future interest payments on your home loan which would be approximately 11% to 12% p.a. You can compare which one is a more profitable option for you. Please see our recent article titled: Home Loan DILEMMA: To Prepay Or Not To Prepay. 
   
   For further assistance, please do contact us.
   
   Wish you and your family a very happy Diwali!
   
   Happy Planning!
    

   Disclaimer:
   Answers to the queries are based on facts provided and PersonalFN would have not responsibility for the consequences of the outcome based on these solutions.
   For a detailed analysis of your financial situation, please consult a financial planner.

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