Have safer avenues to meet short-term goals

I am 32 and work in the IT industry. My take-home salary is Rs 62,000 and I expect my salary to grow at 7-10 per cent annually. Apart from my salary, I earn by way of consultancy Rs 20,000 a month. I have two dependents, my wife is a homemaker and we have a girl aged 4. My current monthly expense is Rs 25,000, including car maintenance. Besides that I pay housing loan EMI of Rs 26,000 and a car loan EMI of Rs 3,729. After meeting all monthly commitments I have surplus of Rs 25,000.

Liabilities: I availed a home loan in November 2010 and the current outstanding is Rs 27 lakh. Car loan outstanding is Rs 1.2 lakh and it's likely to be over in the next 2.5 years.

Assets: My current flat is worth Rs 60 lakh (less home loan). We own 100 sovereigns of gold. We own few ancestral properties, 2.5 acres of agricultural land with rubber plantation and its current market value is Rs 60 lakh (rubber plantation likely to yield net revenue of Rs 20,000 from 2013 for next 25 years at current market price). We also have a house with 40 cents, and its current market value of Rs 80 lakh.

I have invested Rs 1.2 lakh in RNRL in 2008 and its current market value is Rs 40,000. After 2008, I am investing in debt and I have fixed deposits of Rs 5 lakh.

Investments: I pay monthly premium of Rs 1,500 in ICICI Life Time ULIP, Rs 2,000 a month in Birla Sun Life ULIP, Rs 32,000 annually in Bajaj Allianz Invest Gain and Cash Gain insurance and Rs 4,500 annual premium in LIC. My combined risk cover is Rs 10 lakh. My current PF balance is Rs 1.5 lakh after withdrawing for buying house.

How much corpus would I need when I retire at 58, if my life expectancy is 80 years? Should I change my investments?

For my retirement, I contribute Rs 3,200 a month from my salary towards EPF and my employer contributes an equal amount. For my daughter's education at today's value I may require Rs 7 lakh and for her marriage Rs 8 lakh. For the next 6 years I would like to spend around Rs 1 lakh every 2 years on foreign tour provided I have enough surpluses after savings. I wish to take moderate risk for all my savings. I am covered by group medical insurance for Rs 4 lakh. Is this sufficient?

— Praveen Kumar

Solutions: If risk is not properly evaluated before investing in risky asset class such as equity, loss will be imminent . None of us want to lose money in any of our investments. So, if you are not comfortable taking risks, please stay away from such investment . It is best to route your equity investments through mutual funds.

Although you have stated that you have a moderate risk appetite towards your investments, your action fails to justify it. For instance, your investment in RNRL (now merged with Reliance Power) eroded to one-third its purchase value. Yet, you are holding the stock, which implies that you are either a high-risk investor or fear booking losses. For long-term wealth creation, exiting from investments at an available opportunity with pre-set target levels is critical.

Home loan: The post-tax return on your fixed deposits will be lower than your home loan interest. Hence, it makes sense to close your fixed deposits to prepay your home loan.

Before repaying, do set aside three months monthly expenses as emergency fund.

Education: The present value of Rs 7 lakh, if inflated at 7 per cent for the next 13 years, would mean that the corpus required to complete the higher education would be Rs 16.9 lakh. To reach the target you should save monthly Rs 4,500 and it should earn a return of 12 per cent.

Marriage: If the present value is inflated at 7 per cent for next 20 years, the corpus required for marriage expenses would be Rs 31 lakh. To reach the goal in next 240 months, you should save Rs 3,130 and it should earn 12 per cent.

Retirement: Based on your annual living expenses and at 7 per cent inflation, at retirement you should have a corpus of Rs 3.18 crore and it should earn an inflation adjusted return of 2 per cent to meet your living expenses till 80 years.

Assuming your annual PF contribution is growing at the rate of 5 per cent at the prevailing rate of interest, at retirement your accumulation will be Rs 82 lakh. To meet the shortfall of Rs 2.36 crore, you should save monthly Rs 11,080 for the next 312 months and it should earn 12 per cent.

Investment: Going by your risk profile it may be ideal to have asset allocation in equity, debt and gold in the ratio of 50:40:10. As you are unwilling to take loss, do build a mutual fund portfolio with a few large cap or index funds.

Do ensure that if there is any abnormal return in your funds profits are promptly booked and the proceeds shifted to debt. For your foreign tour, as it is a short-term goal, it may be prudent to invest in debt instruments. Do earmark the rubber plantation income for this.

Insurance: To meet present value of all the goals, your liability and living expenses it may be advisable to take term insurance for Rs 1.5 crore and the premium outgo for the same will be Rs 18,000. If you are planning to shift jobs at some interval it may be prudent to take medical insurance for Rs 5 lakh.

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