Your risk appetite should be reflected in your investment

I am 43-year-old and am employed in a private organisation and my wife is a home maker, aged 40. We have a daughter aged 14. My take home salary is Rs 1 lakh a month and our expenses is Rs 30,000. For paying our life insurance premium of Rs 2 lakh I have an RD of Rs 8,500, and in addition through mutual fund SIPs, we invest Rs 20,000 a month. After meeting other expenses, we save Rs 25,000 a month in fixed deposits. My family is covered under the employer's group medical insurance. Our current investments are:

Post Office Monthly Income Scheme for Rs 5 lakh and the monthly interest is ploughed into postal RD. The current value is Rs 2 lakh.

When I moved job recently, I closed my PF account and received a sum of Rs 12 lakh and it is currently in my SB account. I have life insurance cover for Rs 26 lakh and both the policies mature in 2024.

My investment in stocks and bonds is Rs 3.5 lakh. My current investments in mutual funds is Rs 5.5 lakh. I have a fixed deposit for Rs 9 lakh. I have a plot worth Rs 6 lakh which I have earmarked it for my daughter's marriage.

Goals:

Next year, I plan to buy a flat for Rs 55-60 lakh. I am accumulating Rs 25,000 in RD to meet down payment of 20 per cent. I expect a salary hike of Rs 20,000 which would allow me to pay an EMI of up to Rs 40,000. I may rent out the new flat for Rs 10,000 a month. Do I take a loan for 80 per cent of the value or shall I use my PF proceeds?

For my daughter's education, I may need Rs 8 lakh at today's value in 2015 and Rs 10 lakh for post-graduation in 2019. For marriage, I have already made provisions. For our investment i wish to take high risk.

My other short term goal is to buy a car for Rs 5 lakh in 2013.

I wish to retire in 2024 and my life expectancy is 80 years. Based on my current monthly expenses, suggest me how much corpus I need to build for a comfortable life. We wish to use our life insurance maturity proceeds for our retired life.

— RJ Chennai.

Solutions: Your current investments do not reflect your risk appetite. You want high returns, but you are investing in post office monthly income scheme, postal RD and traditional insurance.

Achieving a portfolio return of 15-20 per cent year-on-year is a tough task. Having said that, a portfolio, constructed with 70-80 per cent exposure to equity (with the rest devoted to debt), can help you achieve a return of 12 per cent.

It is very important that you re-evaluate your portfolio once every six months to meet your financial goals.

Education: Your current savings needs a top-up of Rs 5,300 to achieve a future value of Rs 10 lakh. To reach the target, you need to save a sum of Rs 15,330 for the next 48 months, and it should earn a return of 12 per cent. Since it is a short-term goal, it may be prudent to invest 60 per cent in equity and the rest in debt. For post-graduation, to reach a target of Rs 17 lakh, you need to save Rs 8,800 for the next 108 months and the portfolio should earn a return of 12 per cent. For all calculations, we have assumed an inflation of 7 per cent.

Buying a car: Although it is a short-term goal, you need not tone down your equity exposure. If the equity market condition is not favourable in 2013, you can dilute your debt portion in other goals and use the same to buy the car. To accumulate Rs 2.3 lakh in the next 24 months, you need to save a sum of Rs 8,500 and for the shortfall use the postal RD accumulation.

Home loan: Since you are going to rent out your house, maximize permissible loan and enjoy the tax benefit for the entire interest paid. This will also help you to bring down your cost of borrowing. For instance, if you avail a loan of Rs 48 lakh for a 12-year period, the total interest outgo works out to Rs 5 lakh. If you avail 48 lakh loans at 10.5 per cent your EMI works out to Rs 58770.

Retirement: With too many goals, your current surplus may not be sufficient to meet retirement needs. Although your current monthly expenses may be Rs 30,000, you will require only 70-80 per cent of the same post retirement. So, your monthly expenses of Rs 25,000, when inflated at seven per cent, would at 55 become Rs 56,000.

To get this pension at 55, you should have a corpus of Rs 2.1 crore and it should earn a return of at least two per cent over and above the inflation. If you continue to hold MFs and direct equity exposure till retirement, you can reach a target of Rs 40 lakh. Your PF balance (if allowed to grow at 12 per cent) and the maturity proceeds of life insurance will not suffice and would still leave a short fall of Rs 1 crore. With your current surplus, you will find it difficult to save beyond Rs 15,000. If you save this for the next 144 months and if it earns 12 per cent, you can reach a target of Rs 48 lakh.

Once your education and car targets are achieved, you can save for the retirement and the short fall can be met comfortably. If you still have a shortfall in your retirement corpus, your current savings in POMIS, current monthly saving in EPF and Gratuity will come handy.

However, you need to protect your liability with life cover. Any death of close family members before 55 due to critical illnesses has to be kept in mind, and adequate health insurance taken for you and your spouse. It is advisable to take a term insurance for Rs 1.6 crore to protect all your goals.



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