SMART investing is still a damn good idea

S = specific, M = measurable, A = achievable, R = reasonable and T = time-bound

It is said that goals motivate us to work harder so as to achieve them in time.

So, have smart goals whereby, S = specific, M = measurable, A = achievable, R = reasonable and T = time-bound.

This is a very old definition, but is still true in today’s times.

Today, we will share views and ideas of the Patel family. Dhairya Patel (32), an NRI, is a marine engineer by profession. His wife (30) is a homemaker. The couple have a daughter, aged 1. Dhairya has three more dependants, his parents — both senior citizens — and a sister.

Being a marine engineer, Dhairya spends a lot of time travelling abroad, living away from his family. He hopes to find a shore-based job after five years so that he can spend quality time with his family.

His earnings are reasonably good, expenses are controlled and he has a good investment pattern. However, looking at his goals and objectives, he must save more to achieve all his dreams.

As far as his expenses are concerned, remember Dhairya is shouldering the responsibility of five people. Table 1 shows his cash flow and assets and liabilities. Note that his mutual fund investments are 75% in equity-diversified schemes and 25% in mid-cap funds. Dhairya has not invested in any index fund. Two new SIPs of Rs 5,000 each have started from October 2008 and will continue till October 2010.

Furthermore, from October 2008 onwards, Dhairya has started investing Rs 20,000 every month for his daughter through SIPs of equity funds and intends to do so for at least the next 10-15 years.

Table 2 shows Dhairya’s dreams and goals and their future value, keeping inflation @10%.

All these goals are very important. However, to fulfil all his dreams, Dhairya should plan in a way that he is able to achieve everything phase-wise, and in time as per his requirement.

First of all, he should understand the severe impact of inflation. So the cost of fulfilling his dreams will increase significantly by the time they are fulfilled. Moreover, there is no certainty that his income will increase either in the same proportion as inflation, or higher than it.

It seems Dhairya is fascinated with mutual fund investment, as more than half of his savings are invested there.

One investment rule followed across the world is that a person should invest in equity @ 100 - age, that is, 100 - 32 in case of Dhairya. Thus, approximately 68% of his investments should be in equity with a long-term perspective.

Here, there is a gap.

Also, there is a shortage of liquid money. It is advisable to keep at least 6 months’ expenses as contingency fund, which is not visible in Dhairya’s case.

The most important aspect of life is retirement planning, and Dhairya must be conscious of the same. He should understand that human longevity is increasing, as are medical expenses. He has to plan from now, and save approximately Rs 70,000-75,000 per month to generate a retirement corpus of Rs 8 crore when he hangs up his boots 25 years from now, in 2033.

That means, out of his current annual savings of approximately Rs 13 lakh, Dhairya has to put away approximately Rs 8.5-9 lakh into his retirement corpus.

Another investment proposition is for Dhairya to buy gold every month. This will ensure diversification of his investments, as bullion a performing-asset class and an ideal hedge against inflation. Moreover, he can use this gold at the time of their daughter’s wedding.

Dhairya is also ready to increase his life insurance cover further by Rs 50 lakh over his current sum assured of Rs 47 lakh, as he understands the contribution of his life and earning to his family.

Though his company has covered him with a sum assured of Rs 65 lakh, he knows that this cover will last only till he is with the company. Looking to his age and his earning capacity, his life cover should be raised to 10-15 times his annual income. The above recommendations, combined with fiscal prudence, would help Dhairya and his family maintain their standard of living even after retirement and achieve their objectives and goals.