DSIJ Mindshare

Financial Guidance

I am 29 yrs old, married and have a take-home salary Rs 50000. My monthly household expenses amount to Rs 22000, medical and life insurance premiums are Rs 6000 and Rs 15000 go towards as bank savings. I would like to invest the balance Rs 7000 in a monthly MF SIP. 

I'd like to build corpus of Rs 2.5 crore for my retirement, considering our son's education and daughter' wedding (we presently have no children). Considering my age, I believe that the asset allocation could be 60:30:10 in equity, debt and gold/ETF respectively.

The life and medical insurance policies we presently have are:

  1. Jeevan Anand, for a sum assured of Rs 1 lakh, with an annual premium of Rs 7892
  2. Jeevan Saral, for a sum assured of Rs 2.5 lakh, with an annual premium of Rs 12252
  3. Amulya Jeevan, for a sum assured of Rs 50 lakh, with an annual premium of Rs 12852
  4. Limited Endowment Assurance Policy, for a sum assured of Rs 6.5 lakh, with a yearly premium of Rs 25600
  5. Mediclaim Policies worth Rs 1.5 lakh each for my wife, my mother and me

Please suggest how I can build a corpus by investing in MFs (considering asset allocation) or direct equity. Also, please tell me by when I need to revise my asset allocation

- Kaushik

Answer -

It is very heartening to see that you are starting to save from a young age and are planning for your and your unborn children’s future well in advance. This is a rare quality – who can defeat the prepared? I have taken the liberty of suggesting graduation and wedding expense plans for two children, instead of one graduation plan and one wedding plan.

Keeping in mind your age and the fact that your children are yet to be born, you have quite a long time frame for your investments. Hence, you can afford to be a little more aggressive than the plan that you had suggested in the accumulation stage of your investments.

Age is not always the only criterion for deciding the asset allocation. There are thumb rules which suggest that one may deduct the investor’s age from 100 and the result can be the suitable equity allocation – in your case the resultant equity allocation would be 71 per cent. However, I am not in favour of such thumb rules, as allocation depends more on one’s risk profile and attitude. For example, an old and wealthy gentleman may prefer a lot of equity, and this may be right for his profile!

A graduation degree in a technical field should cost roughly Rs 1000000 in today’s terms. The inflated cost in 18 years should be around Rs 5500000 each for your children. Your daughter’s wedding should cost you another Rs 500000 in today’s terms. In 23 years, that would work out to approximately 19 lakh. Thus, the future value of your children’s goals adds up to Rs 148 lakh, apart from the goal of saving Rs 250 lakh for your retirement.

 Equity (Rs)Debt (Rs)Total SIP (Rs)
Education 4700 2000  6700 
Wedding 750  320  1070 
Retirement 2850  1220  4070 
  Rs 8300 Rs 3540 Rs 11840
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To plan for your retirement corpus of Rs 2.5 crore and the education and wedding expenses of both your children, I suggest that you have an aggressive asset allocation of 70 per cent equity and 30 per cent debt. This is based on your suggestion of 60E:30D:10 Gold – though I have replaced one volatile asset, gold, with another volatile asset, equity. There is a separate plan for gold accumulation. My suggestion is that you buy gold based on need – the need to gift to children on the occasion of their wedding. Hence, you are advised to buy gold on a need basis and not as a part of your investment portfolio.

Since I have added a couple of extra goals, the contribution to the SIP would be higher than your suggestion of Rs 7000 per month, and goes up to Rs 11840 per month. But this comes with a caveat – you have to increase your SIP by 10 per cent every year. If I were to calculate based on a constant SIP, the sum would be much larger than your surplus would allow, and hence this solution. In any case, you would be earning a little more every year due to increments, which you can dedicate to your savings.

The funds recommended in the following table are as per the 70E:30D allocation, have an expected weighted average return of about 13 per cent and should help you reach your goals.

Scheme Name  Amount (Rs) % Allocation 
ICICI Pru Focused/Franklin Bluechip Equity Fund 4150 35
HDFC Equity Fund 4150 35
Birla Sun Life Dynamic Bond Fund 3540 30
Total 11840 100

Other than the Mediclaim policy, you have four other insurance policies, which seem to be too many. Especially when they are not simple term plans, insurance policies are very inefficient. You would be better off creating your own mix of insurance cover and investment, which would be more cost effective and usually provides better returns.

Hence I suggest that you do away with the plans mentioned in the following table. Instead, you could increase your life insurance cover to Rs 1.5 crore from the present Rs 50 lakh, since your family would definitely need that amount for living expenses and to achieve the desired goals.

Insurance Plans To Exit FromSum Assured (Rs)Premium (Rs) 
Jeevan Anand   100000 7892
Jeevan Saral   250000 12252
Limited Endowment Assurance Policy65000025600

You can use the Rs 25600 premium that you are currently paying for the Limited Endowment plan to pay for the additional life insurance cover in a term plan. The recommended term plan would be for a duration of 30 years, since by the time of retirement you would have accumulated the money your family needs.

The premium amount of the other two policies that is saved by exiting from them (Rs 1600 per month) should instead be directed to the Goldman Sachs Gold Exchange Traded Fund. Investing Rs 1600 per month in this fund for the next 20 years should help you accumulate between 250-300 grams of gold for your daughter’s wedding.

With these changes, you can alter the profile of your savings and make them more efficient. At the moment, your savings is 44 per cent of your income, which you can increase to 47 per cent by optimising your insurance payments. If you already do not already own a home, you can look at accumulation for a down payment for a home, since you are still left with a reasonable savings surplus.

The following table provides the scheme performance of the recommended schemes:

FundReturns (Annualised)
1 Month3 Months6 Months1 Year
Short Term Funds
Birla SL Dynamic Bond-Ret(G) 10.44 12.78 9.52 10.31

FundReturns (Absolute)CAGR 
13613510Since Inception 
MonthsYears 
Diversified Equity Funds
ICICI Pru Focused Blue Chip Equity (G) 12.47 8.29 9.91 6.64 33.23 0 0 15
HDFC Equity(G) 14.64 12.42 4.88 -0.37 36.87 11.86 28.9 21.16

You can change your asset allocation to 30 per cent equity and 70 per cent debt at the time of retirement, since you would want to reduce risk at that time and have a more predictable portfolio.

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