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Your personal finance queries answered

| 5/23/2011 3:59 PM Monday

Q. I am a 30-year-old working for an airline as a cabin crew in Mumbai with gross income of approximately Rs 65,000 per month. This purely depends on the amount of flying in a month. It includes a basic salary of Rs 20,000 + allowances. My wife (26) has started working for a software company with a monthly salary of Rs 15,000. We don’t have any kids now but are planning for the same after two years. I have a home loan on my name for ten years with an EMI of Rs 27,000 per month (8.5 per cent floating rate of interest from SBI, which may increase to 10 per cent after two years). My investments are as follows:

1) Land of 2,500 sq ft near Mumbai worth Rs 9 lakh. 
2) A SIP of Rs 2,000 per month in two funds each in operation from the last six months. 
• ICICI Pru Focussed Equity Fund – Growth 
• Reliance Infrastructure Fund – Growth 
3) Shares worth Rs 30,000 in three companies (IDFC, Reliance Infra and Karuturi Global).
4) LIC policy with premium of Rs 20,000 yearly till 58 years of age which insures me for Rs 15 lakh and that will increase as the time passes by.

What should I do to secure my future in the responsibilities which will come later like kids’ education, etc. Please advise me how to do the financial planning for my future so that I have a decent amount of money after my retirement at 58 years.
- Sunil Kumar 

A.
 Sunil, if more people would plan for their future liabilities as well, we would definitely have a more satisfied and happy society! Yes, it is a good idea to plan for children and their future needs as early as you are doing. For their regular expenses such as fees, books, clothes, etc, your regular income should be doing the funding. But you must plan for one-time large outflows that happen for events like funding graduate education and marriage. For instance, a professional education that costs Rs 10 lakhs now could cost about Rs 62 lakhs 19 years hence! So I would like you to plan in such a way that your investments fetch you Rs 62 lakhs when required at that point of time considering that your child would enter graduation at the age of 17 years. A SIP of Rs 7,500 per month in mutual funds with a 60 per cent equity and 40 per cent bond portfolio should do the trick, if you start saving now. That’s not too difficult, is it?

Retirement is a little more difficult. If I were to assume that you need Rs 30,000 per month now for your normal living expenses, the same would cost you about Rs 1.5 lakhs per month 28 years hence, when you would retire. And all this due to inflation! As you spend the rest of your retirement, inflation would continue and your cost of living would keep increasing all along. So it is better that you factor in this continuing inflation. Generally such planning requires a fair bit of detailed work on expenses but as an approximation a target of Rs 4 crore to be accumulated by the time you retire should be alright.

This can be achieved with a monthly savings plan of Rs 15,000 in a 60 per cent equity and 40 per cent bond mutual fund portfolio. As you gain more experience with your investments, you could, if you wish, increase the equity mix in the port-folio. Interestingly, if your plot of land grows in value even at the rate of 15 per cent per annum for 28 years, the value of that land alone could fund most of your retirement. However, you must not get complacent with this and defer your investment plans. One never knows the risks that could befall land. You will need to increase your life cover, preferably through a term insurance plan. Increase your cover to at least Rs 1 crore. Take cover for your wife too for about Rs 25 lakhs. Another aspect to look out for is increase in your EMI with interest rates increasing. Be prepared to shell out more.

I am asking you to continue with the Focussed Bluechip Fund which has exhibited good performance over the last three years. It finishes three years in May 2011 and has deliv-ered 17.7 per cent pa till date. As for Reliance Infrastructure, I leave the choice to you as I consider it to be a higher risk fund, largely due to the industry sector in which it invests. At the moment there are a number of uncertainties in this sector that are impeding progress but I expect it to resume after a year or so. You may continue your SIP there with the knowledge that performance may come over a longer period of time than the other funds, and may possibly be worth the wait.

 

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