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ShareAggressive investments today help reduce borrowings tomorrow
Meet the family, Harkrishnan (39), his wife Sindhu (34) a homemaker, and their son Sethuraman (9). They stay in Pune.Harkrishnan is presently drawing salary of Rs 23.50 lakh per annum. He has a progressive outlook to life, and hopes to make optimum use of his funds to achieve financial goals.
His objectives:
- Family security
- To buy a new car by this year
- Education planning
- Retirement planning
- Buy/construct a new house
He has a fixed deposit of Rs 5 lakh. A liquidity margin of 3-6 months should be maintained by any family. Taking his present day expenses he has a liquidity margin of 8 months and need not provide for more.
Insurance needs (Rs lakh. p.a.)
Currentexpenses (after providing for his child's security)9.30
Rate of tax free return 7%
years to retire 21 years
Basic amount of insurance needed 107.82
Add :
Liabilities
Home loan11
Car loan 2.5
Insurance needed 121.32
Less existing insurance 2.5
Enhanced cover 118.82
Life insurance: He is the sole earning member of the family, in case of any contingency the family needs to have a regular stream of income. Assuming he would also like to secure his child's higher education a provision for a sum of Rs 1,92,000 has been provided for the same. A life insurance cover of Rs 1.21 crore is recommended to provide the much needed security. At present he has a cover of Rs 2.5 lakh. He should take a term insurance cover for the balance amount. The cost of the term policy will be between Rs 70,000 and Rs 78,000 per annum.
Medical insurance: He has a medical insurance from his company, assumed to the extent of Rs 2 lakh. The benefit of the medical cover from the company can be availed of by Harkrishnan during the tenure he is employed with the company or till his retirement. The cover ceases on retirement.
Family security comes first, and he should take a family floater policy for Rs 5 lakh, which may cost him around Rs 10,000 p.a. We recommend he take the maximum available cover for he is at the threshold of age 40 and presently enjoying good health. Along with a medical cover he will also get the benefit u/s 80 D of the Income Tax Act.In addition to the above mediclaim policy, we also recommend that he take a health insurance cover.
Health insurance: The cost of any major surgery, today, would be anywhere in region of Rs 8-10 lakh. The mediclaim cover is not sufficient to meet the above cost. A cover of Rs 8 lakh for him and his wife would cost him up to Rs 15,000 p.a.
New car: He would like to buy a new car before the end of this year. He has an existing car loan of Rs 2.5 lakh, for which he is paying Rs 8,000 as EMI. He should pay off his existing loan from the sale proceeds of the old car. We assume that the new car costs around Rs 8 lakh and the present interest rate of 14.5% p.a is applicable. He should use the amount lying in his savings account to part finance and avail Rs 5 lakh as loan. His new EMI would be Rs 12,000. This will increase his net outflow by Rs 4,000 p.m. for the next 3 years. His FDs will mature after 3 years. Out of the maturity proceeds, Rs 2.25 lakh, the balance amount, should be paid off.
Child education plan: His son's routine education expenses are being met from the regular income. For his higher education, Harkrishnan should take an exposure to the equity mutual funds. He may invest Rs 16,000 p.m. A sustained investment over a period of 8 years at the 12% return rate shall generate a fund of Rs 25 lakh for him.
Retirement plan:Planning for retirement is the very crucial decision that one must not overlook. When planning for retirement we need to consider the employer extended benefits like PF, gratuity along with the years to retire. A precise calculation can be achieved once the figures are clear. For Harkrishnan, assuming his age of retirement to be 60 years and life expectancy of 75 years, considering his present standard of living and his present day expenses at an inflation of 7% he will need around Rs 30.52 lakh p.a. Thus he needs to generate a retirement fund of Rs 4.60 crore. This can be from his public provident fund, where Rs 70,000 invested p.a. will become Rs 35.39 lakh in 21 years, and equity MFs, where Rs 37,670 invested p.m. will become Rs 424.70 lakh.
To buy/construct a second house: Harkrishnan has good cash inflow and should consider prepaying his existing home loan gradually. He wishes to buy/construct another property by the year 2010, for which he would take a fresh exposure to the home debt. He should invest Rs 3 lakh p.a. in the debt funds and liquidate them at the time of seeking a fresh loan. He should use the balance proceeds of the FD to bring down his borrowings. At the present borrowing rates and a slowdown in the real estate sector, a fresh look two years down the line is a good contemplation.
Harkrishnan still has an investible surplus of about Rs 3.92 lakh p.a. His aggressive
investments today should help him to reduce his borrowings tomorrow.
Contents of this document are based on figures & information provided by FPSB (India) for DNA reader Harkrishnan. The data provided is insufficient to produce a detailed financial plan. However, an outline has been prepared, with the help of the available data and on various assumptions laid down. Assumptions and information are likely to change over a period of time. Hence it is recommended to review the plan regularly for better performance.
Information provided in this document should not be construed as legal, accounting and/or tax advice. Please consult your respective advisor in case of any query or issues.
The cost of medical aid is on the rise and is likely to go up with every passing day. It is far easier to get medical and critical insurance at the present age of Harkrishnan than it would at his age of retirement.
