Personal Finance

Financial Planning-Try and take more mileage out of your investment

Suresh Parthasarathy | Updated on January 17, 2011 Published on January 17, 2011

I am aged 50 years, my wife is a homemaker aged 43 and my son is in the final year of his graduation. I am self employed running medical business and my average monthly income is approximately Rs 1 lakh.My monthly expenses are Rs 20,000. Besides this, my monthly commitment towards 12 mutual fund schemes is Rs 28,000. In order to protect my family against any medical emergency i have taken a family floater health policy for a sum of Rs 3 lakh. I have taken term insurance for Rs 15 lakh. I have booked a flat for Rs 9 lakh and paid an advance of Rs 3 lakh. For the balance amount, I am planning to take a bank loan and my EMI would be Rs 10000. After keeping emergency funds for my business, premium towards all my insurance policies, I have an investable surplus of Rs 20,000 per month. I was working in a company till five years back. But due to the low salary there, my only savings was in PF.

I am planning to retire at 55 years and I need present value of Rs 20,000 per month as pension. How much do I need to have at the time of retirement to take care of my family expenses till I reach an age of 85 years.

Since my son is interested in doing business, I am planning to set up a shop for him, for which I need to keep a provision for Rs 2 lakh.

I am planning to buy a car and an house in the next 2-3 years. The total outgoes for both goals are Rs 28 lakh.

Go through my MF portfolio and suggest changes .


Solutions: Time and again through this column we have suggested to individuals to follow appropriate asset allocation based on their risk appetite. It’s generally observed that some individuals have an urge towards building multiple immovable asset classes in their portfolio. Since you are planning to retire at the age of 55, we strongly advise you do not buy a second house, that too within few years of the first purchase. Even in metros such as Chennai and Hyderabad, the current rental yields are 3.5-4 per cent. Going by the property prices at your home town, the rental yields are likely to be lower than metros and hence will not be a good retirement investment. Rather we suggest you build a debt portfolio when the interest rates are ruling high and construct your portfolio in a such way that the maturity proceeds are available for consumption in the succeeding financial year after your retirement. This would help you in better tax planning to reduce outgo. When the interest rates are peaking it may be prudent to start recurring deposits to enjoy higher returns.

Retirement: In 20 years of service, your retirement accumulation has not been significant . Now, being an entrepreneur you have the possibility of saving more towards this goal. Having said that, your accumulation period would be very short. You ought to extend your working years up to 60. Even your current savings of Rs 28,000 per month in mutual funds will cover only 70 per cent of your requirement and you need to increase your savings substantially to reach your goal. Since you are 50 plus, it may not be prudent to tilt all your investment towards equity to build a retirement corpus. Your desire to have Rs 20,000 per month post retirement appears very reasonable based on the current lifestyle and on account of abnormal inflation. Considering an average inflation of seven per cent, current annual requirement of Rs 2.4 lakh would be Rs 4.7 lakh in 10 years’ time. To have such a pension for the subsequent 25 years till the age of 85, you should have a retirement corpus of Rs 1.1 crore at the age of 60 and it should earn an inflation adjusted return of two per cent to last till 85 years. To meet this target you need to save another Rs 20,000 per month in debt funds and recurring deposits and you should ensure that you are generating compounded annualised return of 15 per cent from equity and nine per cent in debt instruments.

To start business and buying a car: To set up the business for your son, you can utilise the chit fund investments and the balance can be used to pay the advance towards buying the car. It may be prudent to buy a car by taking a loan and paying EMIs from your business income as it can help you to minimise tax outgo. Besides you can also enjoy depreciation benefits on your car and the same can be utilised to pay your car insurance.

Investment: It is admirable to see that you have picked the right schemes. But the only concern is that your portfolio contains 11 schemes and some of the schemes investment objectives are overlapping. We recommend that you continue your investment in large-cap funds such as HDFC Top 200 and DSPBR Top 100 and in mid- and small- cap space through IDFC Premier Equity and DSPBR Micro cap. Other SIP investments can be stopped and the same can be invested in the large cap schemes. Continue your investment in DSPBR World Gold Fund and HDFC Prudence.

Insurance: It’s heartening to see that you have taken a term insurance for Rs 15 lakh; even so your protection is far short of your requirement. Despite working for 20 years your current assets are too low. To reduce hardship we recommend you to take term insurance for another Rs 35 lakh, but considering the higher premium outgo and your current capability to save, it may be prudent to take a decreasing term insurance product. For your health insurance, it is better to increase the cover by another Rs 2 lakh .

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