I am 34, married with a 4-year old daughter. My monthly salary is Rs 60,000, post tax and deductions. After meeting all my expenses, I have a surplus of Rs 5,000, which I plan to invest for wealth accumulation. I am servicing two loans and would like to close my home loan by the time I retire. The home loan EMI is Rs 10,000, which I have to pay for next 15 years. The personal loan EMI is Rs 3,000. I have a few long-term goals concerning my retirement and daughter's wedding.
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My top fund holdings include HDFC Taxsaver, HDFC LT Advantage, Magnum Tax Gain, Franklin India Bluechip, Franklin India Taxshield and Franklin India Prima.
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-Vaibhav Risbud
Life Insurance
A term insurance policy of Rs 15 lakh till the age of 60.
Medical Insurance
Provided by the employer up to Rs 2 lakh.
Goals
Retirement
Rs 1 crore
11 years
Daughter's wedding
Rs 7.50 lakh
20 years
Gold for the wedding
250 gms
20 years
Investments
The Problem
Equity allocation is insufficient
The Solution
Since your goals are far off, increase your equity allocation from the current 70 per cent to 80 per cent. As you near the goals, gradually lower it and increase debt allocation.
The Problem
Exposure to fixed return instruments is too high
The Solution
There is a constant contribution to the EPF. So don't concern yourself with recurring deposits. Instead, focus on equity. For the debt exposure, consider a debt fund. Your ongoing investments in debt (EPF, recurring deposits) account for 85 per cent of total monthly investments. A low equity exposure reduces the overall returns on your portfolio. Do not renew your 1-year deposit. Exit your 5-year deposit too if there is no cost involved or it is not too high.
The Problem
Tax allocation is overdone
The Solution
Since Section 80C has a limit of Rs 1 lakh, consider a tax saving fund only if you have not reached that amount after you pay your insurance premium, home loan EMI and contribution to EPF.
The Problem
Stock exposure with a significant mid cap tilt could backfire
The Solution
Your exposure to stocks is approximately 50 per cent of your equity portfolio. Investing in stocks requires adequate knowledge to buy as well as the capability to track individual companies and industries to decide when to sell them. Also, your focus is more on mid caps, which will result in a volatile portfolio. If you are capable of making such decisions, then increase exposure to large caps. If not, stick to mutual funds.
Goals
The Problem
The task of wealth accumulation is all the more difficult since you plan to retire by the time you are 45. You have just 11 years in hand and a daughter's wedding post retirement. If we assume an inflation rate of 6.5 per cent per annum, Rs 1 crore today, which is your retirement target, will be valued at about Rs 2 crore in 11 years.
Daughter's Wedding
As for the wedding, you have put that target amount as Rs 7.5 lakh, at today's prices. But 20 years down the road, it will amount to around Rs 26.42 lakh.
Post retirement, you will not be availing of a monthly salary and no fresh investments will be made. Hence, you need to accumulate the money required for the wedding by the time you retire. If you can accumulate Rs 16 lakh in 11 years, it will grow to around 26 lakh in the balance 9 years.
Loan repayment
You have not stated the tenure of the personal loan but we assume that it should close quickly. However, you aim to repay your loan amount three years prior to the scheduled 2021. Do check with your home loan provider if the EMI can be increased. But going by your current expenses/investments, it does not appear that you have the capacity to service a higher monthly installment, especially since you need to up your savings to achieve the other two goals mentioned above.
The Solution
Looking at your current investment portfolio, you contribute Rs 17,000/month towards your investments. To fulfill the retirement and marriage goal of Rs 2.16 crore by the time you retire, you need to hike that to around Rs 28,700 and keep increasing it at a rate of 15 per cent every year. For this we have assumed that your EPF contribution grows at the rate of 10 per cent per annum, earning an average return of 7.5 per cent per annum.
If you cannot manage that, here are some alternatives.
1. Mellow down your retirement corpus to Rs 75 lakh, which will be equivalent to about Rs 1.5 crore 11 years down the road. You can reach this target by investing approx Rs 19,800/month and keep increasing it by 15 per cent every year.
2. Alternately, stay with your targeted amount but extend the retirement age by another 5 years and keep investing on the same lines till then.
The Fund Portfolio
Redirect your ongoing SIP in HDFC Taxsaver and HDFC LT Advantage to other diversified equity funds, such as HDFC Top 200, DSPBR Equity, Magnum Contra or BSL Frontline Equity. You have not invested in any of the fixed income schemes. Consider Fortis Flexi Debt or Canara Robeco Income. This will give some balance to your portfolio and help in rebalancing it annually.
Term insurance
A cover of Rs 15 lakh is insufficient, keeping in view your future needs. The cover should be bought for an amount that is sufficient to cover outstanding loans, provide for the future goals and the regular need for expenses of your dependents. Increase your coverage.
Medical Insurance
Does the medical insurance cover your wife and daughter too? If you leave your job for another, during that transition phase you will not be covered. Or, if you retire by the time you are 45, you will have no cover and have to take a fresh policy then.
Emergency Planning
Don't forget to create a contingency fund to meet immediate cash requirements in case of an emergency. You may use the amount lying in your savings bank account if any need arises in the future as it gives you accessibility 24x7.
Purchasing Gold
You can keep purchasing small amounts of gold as and when you have surplus money. Alternatively, you could periodically buy units of a Gold Exchange Traded Fund (Gold ETF). These are funds that invest in physical gold but investors need to buy units which are sold on the stock exchange. Each unit represents a certain quantity of physical gold, usually 1 gm. As you approach the wedding, you can sell these units and with that money buy physical gold.
The returns are based on the assumption that the equity investments will earn 10% p.a.