Invest in Equity to Meet Goals

Zero exposure to growth assets is the biggest issue that the Roys face, but small and steady investments in equity funds will help create wealth for long-term goals, says Financial Planner

By Teena Jain Kaushal  
Monday, April 2, 2018

Aloke Roy, a 43-year-old professional working for an MNC, and his homemaker wife Mahua, 37, live in Delhi with their 11-year-old daughter Anulekha. They have a house in Kolkata for which they have an outstanding home loan of Rs16 lakh and the EMI amounts to Rs18,000. Roy is also servicing a personal loan of Rs1 lakh with an EMI of Rs3,154, which will run for the next 34 months. Roy has a term insurance cover of Rs40 lakh (split into three policies out of which the premium of one policy cover worth Rs20 lakh is paid by his employer) plus a few assets, including his EPF deposits and the family's fixed deposits worth Rs3.3 lakh. Mahua also co-owns a property with her sister. However, they do not have any equity investment at the moment. Their goals are simple, though. The family wants to buy a car in 2018 and another house in a few years' time besides building an adequate fund for the daughter's education and marriage. They also go on a vacation every year and Roy wants to retire in 2036. His monthly take-home salary is Rs1.2 lakh, and he manages to save Rs33,000 after paying all household expenses (including house rent for the Delhi residence), vacation cost and loan EMIs. If he buys a car this year, the EMI will be around Rs12,000 and his monthly savings will go down to Rs21,000.

What They Need To Do

Build an emergency fund: Roy must maintain a corpus in a liquid fund/bank account that will cover three to six months' expenses. The current balance of Rs60,000 in his savings bank account and the FDs will meet this requirement and will also help him with the down payment when he buys a car.

Increase life and health covers: He should immediately increase his life insurance cover to Rs1.5 crore so that his family can maintain the same lifestyle and protect some of their future goals. Roy is advised to buy a term plan of Rs1.3 crore, which will cost him around Rs45,000 per annum. The company-provided cover is not considered here as it may not remain functional if he changes his job. As of now, the entire family gets a health insurance cover of Rs4.5 lakh, provided by Roy's company. But he should also get a separate health cover and start with a family floater plan of Rs5 lakh that will cost around Rs15,000 a year. These investments will also earn him tax exemptions u/s Section 80C and 80D, respectively.

Change the asset mix: The biggest issue with Roy's current portfolio is that he has not invested in growth assets such as equities and should start it as soon as possible. All his current investments are in debt, hindering him from getting good returns on savings. Even in this segment, the biggest chunk is in statutory saving - the Employees' Provident Fund. He should change this asset mix and include more equity investments. To meet his financial goals, Roy must earn 10 per cent post-tax returns on his overall portfolio, which can be achieved if his equity investments deliver a return of 12 per cent on a long-term basis. In fact, an ideal asset mix should be 40 per cent in debt and 60 per cent in equities. But instead of doing all that at one go, he should do it gradually by diverting his regular savings into equities. After four-five years, he can review and rebalance his portfolio as per the desired asset mix requirement at the time.

Invest more in equity for long-term goals: Long-term goals such as child's education and marriage and Roy's retirement will require a great deal of money. Therefore, he must invest small amounts in equities for 15-20 years, which will earn him good returns post-inflation and post-tax. A SIP of Rs4,000 per month in any ELSS scheme can kick-start his investment in equity mutual funds and earn him tax exemption. Thirty-four months down the line (when his personal loan is paid off), he can divert the same EMI towards another equity mutual fund via SIP. In addition, he should invest Rs8,000 a month in a balanced fund. These will help him meet the medium-term goal of his daughter's education.

Keeping the daughter's marriage and his retirement in focus, Roy should also start a regular monthly investment of Rs16,000 in equities, putting Rs8,000 each in two suitable funds for the long term. Plus, he should increase his savings as his income grows and invest the surplus mostly in equity mutual funds. All these, together with his debt investments, should be able to meet his long-term goals.

A retirement corpus of Rs1.7 crore has been planned, but it will not be enough by the time Roy retires, especially as the life expectancy of the couple is estimated to be 85. The family will require Rs5.33 crore, assuming household expenses to be Rs30,000 per month in present term, including 6 per cent inflation. The retirement goal can be met with Roy's EPF, the savings invested every year (as income grows, savings should grow) and sale of both properties owned by Roy and his spouse.

Considering his current cash flow and most essential future goals, Roy may have to put off the plan of purchasing another house. It is also recommended that he postpones buying the car for another year so that he can focus more on saving and investing. He should buy a car only after his next salary hike.

As told to Teena Jain Kaushal

If you need help on how to manage your money and want expert advice, write to moneytoday@intoday.com.

@Teena_Kaushal

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