I am 34 years old, married, and have a one-and-a-half year old son. I have tried to be diligent while investing and controlling expenses.I have four traditional life insurance policies from LIC, which give me a sum assured of Rs 6 lakh. I also plan to buy additional life cover for Rs 1 crore through a term plan, the estimated premium worth which will be Rs 12,500.
I invest my savings in mutual funds via systematic investment plans (SIPs). My fund holdings include:
(1) HDFC Top 200; (2) DSPBR Top 100; (3) IDFC Premier Equity; (4) Fortis Flexi Debt; (5) JM Money Manger Super; and (6) Canara Robeco Equity Taxsaver.
My company provides medical insurance for me, my wife and parents (Rs 2 lakh each). Recently, I have taken a Rs 38 lakh home loan. Now that I plan to take on term insurance too, shall I discontinue my current LIC policies?
I am expecting additional income of Rs 10,000 per month from house rent in future. Should I use this amount (Rs 1.2 lakh per annum) for pre-payment of my home loan to reduce the burden, or should I invest anywhere else to improve returns? Considering 10 per cent increment in salary every year, can I achieve my goals with these investments?
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-Sachin
A look at your current investment portfolio makes it evidently clear that it is high on debt exposure, around 53 per cent, mostly by way of NSC and EPF contributions. But you must pay attention to the fact that these debt investments are all in instruments that have long lock-in periods. Any withdrawals, required in an emergency, would be difficult.
Since you are young and time is on your side, equity must be the preferred investment option as over the longer term it tends to generate superior returns. Ideally, you should have 80 per cent allocated to equity mutual funds and 20 per cent to debt. You may reduce allocation to debt by transferring the amount in NSC to equity funds in future as these papers mature.
Currently, your equity exposure includes 87 per cent investment in stocks and the rest in mutual funds. Invest in stocks only if you have sufficient knowledge, expertise and time to research, unveil and manage various worthy companies.
Further, your investment in Tata Infrastructure Fund seems to be a risky proposition. It is a thematic fund and such funds should not form the core of your portfolio. For long-term purposes, one should have maximum exposure to plain-vanilla diversified equity funds and minimal exposure to sector or theme-based, funds.
Also, investment in gold should be viewed just as an additional diversification. So, try to limit it to around 5 per cent.
Goals
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Assuming an inflation rate of 6.50 per cent, Rs 30,000 will be equivalent to Rs 1.36 lakh by the time you retire. Accumulating a corpus of Rs 2.94 crore will help you derive the required monthly income which will counter the rising cost of living.
To achieve all your goals comfortably (including need for travel and son's education), you will have to invest around Rs 6,300 per month while increasing this monthly investment amount at the rate of 10 per cent every year. For calculation we are assuming compounded annual rate of return of 10 per cent.
Future Investment
Your mutual fund selection is impressive. The funds that you have invested in have been well-rated by Value Research Fund Ratings. But choose to invest in only four funds. You should however, first decide your debt-equity ratio and then choose funds accordingly. Invest in tax saving funds for that express purpose.
As you have a long-term horizon, it is essential to review your portfolio at least once a year. For this you can use the Value Research Online Portfolio available free of cost. You can find other tools there too, which will help you track and analyse your investments in a more efficient way.
Life Insurance
For your existing LIC policies, the coverage amount of Rs 6 lakh seems to be insufficient. You may go ahead with your plan to take a term plan with an insurance coverage of Rs 1 crore (This would cover your need for your future goals including home loan insurance)
The policies you already have through LIC can be retained as debt investments. Any gains that accrue from these policies will be an added income for you.Alternatively, you may surrender them if that they do attract high penalties.
Home Loan Prepayment
Early payment of loans will definitely lower your burden, both mentally and financially (because of the lower interest outgo). You may use the expected income in the form of house rent to prepay your home loan if the bank does not charge any major penalty cost for it.
Medical Insurance
Your health insurance is taken care of by your employer, but do get your own medical policy too, as any switch between jobs would leave you uninsured for that brief period.