MOHAMMED ASAD Way to Goal 7 achieve cost · Home 8 yrs 39.8 lakh Invested proceeds from 18,000+ surrendering endowment 1,500 for 6 policy yrs+ 4,699* Child’s education 19 yrs 15.1

Family FinancesThe Economic Times Wealth, January 3, 2011

My company issending me toSydney nextyear for twoyears. I will beearning a lotmore whichcan take careof mymarriage andemergencyneeds”HARISH PADIKAR

HarishPadikar withhis mother

* At present, Padikar’s investible surplus is not sufficient these investments, it is assumedthese can be made over time (through SIPs) as income increases; Inflation assumed to be 6 %per annum. Equity portfolio to grow at 12%, debt at 8% per annum

A comprehensive plan has been mailed to Padikar

Padikar’s asset allocation

Proposed asset allocation is only for the short term and it will change as Padikar wouldinvest towards his goals over time

Way to Goal

EXISTING PROPOSED

57%

Cash

86%Real estate

37%Equity

8%

Equity

6%

Debt

6%

Debt

Marriage 6 months 2.5 lakh Cash from sale of Nilproperty + cash in hand

Emergency fund 1 yr 1.5 lakh Cash from sale of property Nil

Car 5 yrs 5.4 lakh Invested proceeds from Nilsale of property+ SIP

Home 8 yrs 39.8 lakh Invested proceeds from 18,000+surrendering endowment 1,500 for 6 policy yrs+ 4,699*

Child’s education 19 yrs 15.1 lakh NA 1,746*

Retirement 30 yrs 5 crore PPF+EPF 11,888+9,080*

Goal Time to Future Resources Further investmentachieve cost (`) used required (`/pm)

7is the approximate

current net worth of Padikar

lakh

26

MOHAMMED ASAD

`

SHOBHANA CHADHA

Twenty-five-year-old HarishPadikar has many things on hisplate. Padikar, who works as asenior software engineer inBangalore, takes care of his

mother and younger brother Ashok, wantsto get married next year and also wants tobuild up funds for emergency needs. All thiswill cost money to this young man, whostarted working about three years back.Like others, buying a car, owning a houseand having a comfortable life afterretirement are all part of his plan. But willhe be able to fulfil these dreams with somany financial responsibilities on hisshoulders?

Yes. But only if Padikar makes a drasticchange to his financial plans. His monthlyincome is ̀ 42,000 and after his householdand other expenses are accounted for, he isleft with a surplus of ̀ 19,443. Padikar’simmediate financial needs includeaccumulating ̀ 2.5 lakh for his marriage and`1.5 lakh for meeting contingencies. He isalready servicing two loans that he hadtaken for buying a vehicle and awashing machine and takingfurther loans will put his futurefinancial needs in jeopardy. Wellthere is more to Padikar’sincome stream, which can beused to ease up his financialburden if used appropriately.Padikar owns a house in Sira, a town inKarnataka’s Tumkur district. The house hasbeen put on rent. “I don't think thatanybody from my family will ever go backthere to live,” he says. Hence we suggestthat Padikar should sell off that property tomeet his immediate financial goals offunding his marriage and emergency needs.While the idea of selling property to getmarried does sound foolish and archaic buta closer look at the dynamics of the situationwill force anyone to think otherwise.

Padikar gets rental income of only ̀ 1,000per month from that house. The currentvalue of the house is ̀ 6 lakh and the value

has not been appreciating more than 2-3%per annum. Even Padikar wants to get ridoff the house in his village but not before hebuys another property. The sentiment offeeling secure with the notion of owning atangible asset like a house is completely nor-mal. But Padikar needs to understand thatthe house is not being used by any of hisfamily members and even a regular savingsaccount can fetch him a return of 3.5% perannum. He has already saved ̀ 40,000 forhis marriage, the balance of ̀ 2.1 lakh andthe need for a corpus for emergencies canbe funded from the proceeds of theproperty sale. This money can be investedin liquid funds which will ensure thatreturns equivalent to inflation aregenerated.

Padikar is not convinced as he has reasonsto believe that selling the house may not bethe only solution. “My company is sendingme to Sydney next year for two years. I willbe earning a lot more which can take care ofmy marriage and emergency needs.Also, mybrother Ashok will become self-sufficient ina year,” reasons Padikar.

But what he forgets is that the requirementfor these funds is going to arise in the

very near future and hence it wouldbe advisable that he should not relyon anticipated income. Besides,Padikar’s current investible surplusis in any case falling short of the

investments that he needs to make tofulfil his aspirations. Even if we account

for the fact that the two loans, constraininghis investment capacity, will be paid off intwo years from now, there would still be adeficit of ̀ 15,525. While the annual increasesto his income will take care of this deficit to agreat extent but the burden would definitelylighten up for him if he would invest themoney he earns from his Sydneysecondment towards fulfilling his futurefinancial needs. Also, his financial planningwould need to be reviewed on the basis ofthe financial status of his prospective lifepartner.

The remaining balance of ̀ 2.4 lakh fromselling the property can be invested in DSP

Blackrock Equity Fund, Fidelity EquityFund, Canara Rebeco Equity Fund andReliance Growth Fund in equal amounts of`60,000 each, suggests SKP Securities.Padikar wants to own a car worth ̀ 5 lakh infive years from now and this amount cantake care of such medium-termrequirements.

The young man also wants to own a two-bedroom apartment in Bangalore in eightyears from now. A house of his choice wouldcost him about ̀ 40 lakh in eight years,hence to fulfil the goal Padikar would haveto invest ̀ 19,500 in mutual funds throughSIPs. Padikar has been investing in thematicfunds like Magnum Contra and such fundsmay not be ideal for a portfolio likePadikar’s since it has a long-termperspective. In such a time horizondiversified equity funds can be a muchbetter choice . Hence, SKP Securitiessuggests that he could stop all his presentSIP investments. And till 2011-12, he shouldinvest upto ̀ 8,500 of his monthly investiblesurplus in Fidelity Tax Advantage Fund.Thereafter, he can reduce this amount to`2,500 per month from 2012-13 onwards.The remaining balance of surplus can be

equally divided between HDFC Equity Fundand Reliance Growth Fund, says SKP Securi-ties. Even after making all theseinvestments, there would still be aninvestment gap ̀ 4,699 per month towardsmeeting this goal which can be bridgedthrough increments in his income.

While Padikar and his mother aresufficiently covered for health insurance byhis employers, his life insurance cover isinadequate. At present, Padikar has twofinancial dependents and his current policyassures him a cover of only ̀ 3 lakh, which isnot at all sufficient. Hence, he shouldsurrender his endowment policy once itacquires a surrender value after two yearsand take a 25 year pure term plan with sumassured of ̀ 25 lakh. The annual premiumfor such a policy should be ̀ 5,000 muchless than ̀ 20,000 which he is paying rightnow. Hence switching from an endowmentpolicy to a pure term policy will alsoimprove his investible surplus. Also, the ̀ 1lakh of the surrender value of theendowment policy that he would get in 2012should be invested in a diversified equitymutual fund. And it can contribute towardsbuying a house that Padikar wants to buy ineight years.

There are two more long-term goals,which might be tough to attain—theeducation of his child and his retirement.The primary education of his child shouldnot be a cause of concern for Padikar as itcan be funded out of his household savings.But as of now Padikar has no funds that hecan start investing for higher education ofhis child. Assuming an inflation of 6% perannum, he would need to accumulateabout ̀ 15.1 lakh for higher education of hischild in 19 years from now. To build this cor-pus, he would need to make a monthlyinvestment of ̀ 1,764 through SIPs.

Also, for his retirement, which is 30 yearsfrom now, Padikar would need a corpus of `5 crore to maintain his current standard ofliving. Once Padikar's loans are paid off by2013, he can direct the amount of ̀ 5,888,being used for his monthly installmentstowards public provident fund. Thisinvestment together with his monthlyemployee provident fund contribution of `6,000 would grow to about 37% of therequired amount in 30 years from now. Buthere again, there would be a deficit of `9,080 in his monthly investments.

However this should not disheartenPadikar because he is young and still has 30years of work and hence similar number ofyears of salaried life ahead of him. Hisincome would continue to grow throughincrements and he should be able toincrease his SIP commitments. SKPSecurities suggests that the increasedinvestements in SIPs should be donethrough diversified equity mutual funds soa balanced exposure is maintained betweenmid-capital and large-capital investments.

Padikar’s aspirations maybe similar to allmen of his age but his responsibilities arenot. The going has definitely been tough forthis young gentleman and as it seems it willcontinue to be. But he may not have to scaledown his desires if he continues to be adisciplined investor and is dedicatedenough to review his financial plans on ayearly basis.

Gearing up for along journey

The Economic Times Wealth, January 3, 2011

� Saves about 50% but invests only 11% of his income

� Expensive, inadequate life insurance cover for someone with two dependents

� Inadequate corpus to meet emergency needs

How can 25-year-old Harish Padikar balanceresponsibilities with goals?

27Family Finances

PADIKAR’S BEST MOVES…

Investment in mutual fundsthrough systematic investmentplans

Saving rate of about 45%

Realises the importance ofbuilding an emergency fund

…AND THE WORST

Traditional and expensiveinsurance plan with cover of only`3 lakh

About 77% of the investiblesurplus lying idle

Investments in thematic fundsnot ideal in long-term horizon

Not using his village property tothe best of his financial interests

Kumud Borkar, at 80, is busy

writing books andearning

Page 46

Need help with your family finances?

Write to us at [email protected]

Financial plan by Naresh Pachisia, managing director, SKP Securities

YOUNG EARNER

Family FinancesThe Economic Times Wealth, May 9-15, 2011

Buying gold jewellery 2 1.5 lakh NA 5,561

Gift for relative’s marriage 2 1 lakh NA 3,707

Buying a second house 6.5 20 lakh Cash in bank 16,400

Son’s education 13 21.3 lakh NA 5,730

Son’s marriage 21 60 lakh NA 4,523

Retirement 20 2 crore EPF+ FD+mutual 7,619

funds+stocks

Investible surplus needed 43,540

Surplus 833

22

Funds needed to achieve goalsGandhis’ cash flow

NET WORTH OFGANDHIS

Inflow

Outflow

BHARAT CHANDA

Inflation assumed to be 6% per annum. Equity portfolio assumed to grow at 12% and debt to grow at 8% per annum.

A comprehensiveplan has beenmailed to the

Gandhis.

Goal Years to Future Resources Furtherachieve cost (`) used investment

(`/month)

`30.38lakh

“I don’t invest in stocksdirectly as I don’t have

the time to managethem. I’ve primarily

invested in initial publicofferings (IPOs) in order

to gain a minimumexposure to stocks.”

GAURAV GANDHI

Gaurav Gandhi with his family in Mumbai

Asset Current value (in `)

Balance in EPF 5 lakhBank FDs 25,000Value of stocks 24,500Value of mutual funds 2.3 lakhValue of real estateinvestment 50 lakhValue of gold investments 8,000Cash in bank 50,000

Total assets 58.38 lakh

Approximate net worth

Gaurav

`46,000Sonal

`45,000

Household

expenses

`25,000

Home

loan EMI

`30,000

Insurance premium(average)

`667

Rental income

`9,000

Total monthlyincome

`1 lakh

Total monthlyexpenses

`55,667

Investiblesurplus available

`44,333

Liability Amount (in `)

Home loan 28 lakh

SHOBHANA CHADHA

Acombined monthly income of`1 lakh, a healthy net worth of`30.38 lakh and ample investi-ble surplus to meet all financialgoals. The Gandhis seem to be

geared up for their financial journey, but thereis always scope for improvement. A bit of rejig-ging in the investment pattern will result in animproved outcome and better returns.

Gaurav Gandhi, a 30-year-old software engi-neer, and his wife Sonal, a 29-year-old nuclearscientist, have only one financial dependent,their four-year-old son, Parth. They live inMumbai in a two-bedroom apartment, whichhas been provided by the government organi-sation that Sonal works for. Her employer willalso bear the expenses of Parth’s education tillClass XII. This explains the couple’s low levelof household expenses. They have also boughta two-bedroom apartment at Navi Mumbai,currently valued at ̀ 50 lakh, and earning arental income of ̀ 9,000, which adds to theircombined salaries of ̀ 91,000. “The main pur-pose of buying the house was asset creation.The home loan also helps save tax,” says Gau-rav. After all expenses are deducted, the cou-ple is left with an investible surplus of ̀ 44,333.

The Gandhis have two short-term goals. Intwo years, they want to buy jewellery worth`1.5 lakh and accumulate ̀ 1 lakh for a relative’swedding. The long-term goals are regular—building sufficient funds for their son’seducation and marriage, buying a secondhouse, and accumulating a retirement corpus.The investment needed for these canbe easily met with the surplus thatthe Gandhis are generating. Toachieve these goals, the coupleneeds to start investing ̀ 43,450 inequity funds through systematicinvestment plans (SIPs). Whileprudent investments from thesurplus will take care of the majorityof their needs, redeployment of the existing re-sources will be needed to accomplish all goals.

The present value of the couple’s mutualfund investment is ̀ 2.3 lakh and over 96% of itis invested in equity-linked tax-saving schemes(ELSS). “Earlier, I was investing a lot in suchschemes, but now do only what’s required,about ̀ 4,000 per month through SIPs,” saysGaurav. This is a sensible financial move. How-ever, their investments are still stuck in theseschemes. SKP Securities suggests they moveout of these as soon as the lock-in period ends.These plans are not a substitute for diversifiedequity funds. Investing in an ELSS compromi-ses liquidity and cannot be used for short-termneeds. Besides, portfolios of such schemes are

not as composite as that of the diversifiedfunds, making the latter generate better retur-ns, especially over the long term. For instance,the diversified equity funds have returned 11%on an average in the past five years comparedwith the 7% average returns by ELSS.

An overhaul is also required in stocks. Thecouple has invested around ̀ 25,000 in fivestocks—Adani Power, Coal India, MOIL,Satyam and Telco.

“I don’t invest in stocks directly as I don’thave the time to manage them. I haveprimarily invested in initial publicofferings (IPOs) to gain a minimumexposure to stocks,” says Gaurav.The Gandhis must understand thataccording to the financial planningrulebook, it is not mandatory toinvest directly in stocks. Hence, the

logic of maintaining a minimumexposure is flawed. If lack of time is the reasonto stay away from stocks, then IPOs are acompletely wrong choice. Investing in directequity through IPOs, instead of establishedstocks, requires a lot more research. Also,these are more risky as there is no past recordto judge the stock performance. The Gandhis’stock portfolio is disintegrated and is unlikelyto serve any purpose in the long run. Hence,SKP Securities suggests that they offload theseholdings and reinvest the proceeds inbalanced and well-performing diversifiedequity funds to add to their retirement pool.The couple will be able to meet all their goalsby the time they retire at 50. If their financialsituation or needs differ in the future, they can

reconsider their decision of early retirement.Some repositioning is needed in insurance

as well. The Gandhis have bought a term plan,providing a cover of ̀ 25 lakh, and are payingan annual premium of ̀ 8,000. While weappreciate that the couple has not binged ontraditional endowment plans, their termpolicy is relatively expensive and the cover isinadequate. SKP Securities suggests that theyexit the policy. Instead, they should go for a 30-year SBI term policy, providing them with acover of at least ̀ 1 crore. The annual cost willbe around ̀ 18,000. This can come from thesurplus that remains after investing for allfinancial goals. The Gandhis have been provid-ed adequate health insurance by Sonal’semployer. “These facilities will continue evenafter retirement,” says Gaurav.

To buy the second home, they should invest`25,000 in diversified equity funds from thecash lying in bank. This is besides the ̀ 16,400they should put in the same avenue to accumu-late the ̀ 20 lakh they need for the purpose.

The Gandhis are also expecting a 10% hike intheir salaries this year. The increments shouldbe used to augment the contingency fund andaccumulate funds for prepaying a part of thehome loan.

Switch investing tools

The Economic Times Wealth, May 9-15, 2011

While the Gandhis have been financially prudent and are generating enough surplus to meet all theirgoals, a minor shift in investment pattern will be needed to put them on a safe trajectory.

23Family Finances

GANDHIS’ GOOD MOVES…

Investing regularly throughSIPs.

Investing in real estate at ayoung age.

Saving over 44% of the totalmonthly income.

Maintaining a healthy net worth.

…AND THE BAD ONES

Not maintaining a well-diversified portfolio.

Not buying adequate life cover.

Over-exposure to ELSS.

Making uninformed stockinvestments.

SUB-OPTIMAL CHOICES

Proposed asset allocation to be achieved over time.

EXPERT ADVICE

EXPERT ADVICEEXISTING ASSET ALLOCATION

PROPOSED ASSET ALLOCATION

86%

Real estate4%

Equity

9%

Debt1%

Cash

5%

Debt

4%Gold

49%Real Estate

41%Equity

1%Cash

DIVERSIFIED EQUITY FUNDS

HDFC Top 200 Advice: Well-performing fund; continue investingthrough SIPs.

EQUITY-LINKED TAX-SAVING FUNDS

HDFC Tax Saver Birla Sun Life Tax Relief 96 SBI Magnum Tax GainSundaramm Tax SaverFidelity Tax AdvantageAdvice: Continue investing in HDFC Tax Saver andFidelity Tax Advantage through SIPs for tax saving.Shift lump-sum investments in other ELSS todiversified equity funds.

EXCHANGE-TRADED FUNDS

Kotak Gold ETFAdvice: Good investment option and hedge againstinflation; continue investing through SIPs.

ADDITIONAL FUND RECOMMENDATIONS:DSPBR Equity Fund, HDFC Equity, Fidelity Equity,Reliance Growth, IDFC Premier Equity Fund.

Get money for used gadgetsPage 37

Financial plan by Naresh Pachisia, Managing Director, SKP Securities



Family FinancesThe Economic Times Wealth, April 11, 2011

Child’s education 16 63.5 lakh Endowment plans+ 4,660

child plan

Child’s marriage 22 36 lakh Endowment plans 1,435

Business capital 20 10 lakh Savings deposit Nil

Retirement 20 1.21 crore EPF+bonds+FD+ 9,041

mutual fund

22

An easy goal path

EXISTING

28%

Equity

1%

Insurance

N NARASIMHA MURTHY

* Remaining amount to be paid by a loan to be served with EMIs

Average annual inflation assumed to be 6% per annum. Equity portfolio assumedto grow at 12%, debt at 8.5% and insurance at 5% per annum.

A comprehensive plan has been mailed to Upadhyays. * Proposed asset allocation to be achieved in a year. Insurance qualifies as an asset class as

endowment policies will contribute heavily towards realisation of goals. Once income level rises,

Aayush should build a contingency corpus by putting money in liquid funds.


(`/month)

45%

Debt

PROPOSED

30%

Debt

1%

Insurance

69%

Equity

Aayush Upadhyay with his wife and daughter at their Bangalore house.

3.81is the approximate net

worth of the Upadhyays.

Lakh

`

Nearly `1 lakh hasbeen lying idle in mybank account for thepast six months. Ihave been thinkingof investing this sumfor quite some timeand will be doing sosoon.”

AAYUSH UPADHYAY

26%

Cash

ASSET ALLOCATION

SHOBHANA CHADHA

Perhaps, it’s a good thing.Ignorance can, after all, bebliss. But as far as theUpadhyays are concerned, thebliss may not last very long.

Here’s why. This is a family with one earningmember and four financial dependants.They have a modest income level, have madepoor investment choices and, worse, thebreadwinner wants to opt for prematureretirement at the age of 50. These facts don’tnecessarily add up to a happy financialfuture. If the Upadhyays want to secure them-selves and ensure the fulfilment of theirfinancial goals, they will have to make seriousamends and alter their investingplan drastically.

Aayush, a 35–year-old software developer,lives with his family in a rented apartment inBangalore and earns a monthly salary of`54,000. He has the financial responsibilityof his 30–year–old wife, two–year–old daugh-ter and retired parents. The family’s monthlyexpenses are worth ̀ 25,000 and they arepaying a house rent of ̀ 7,500. The couple hasalso bought four insurance policies and achild plan. The average monthly premium forall these is ̀ 3,183. After deducting theseexpenses, the Upadhyays are left with aninvestible surplus of ̀ 18,317.

The surplus is adequate to provide for theessential goals—child’s education andmarriage, as well as the retirement corpus.However, the Upadhyays have other goals ontheir wish list. Aayush wants to buy a houseworth ̀ 30 lakh in three years andaccumulate a seed capital of ̀ 5 lakh in twoyears to start a business. Will it be possiblefor him to do so in the stipulated time? No,and here’s why.

The current value of his assets is only ̀ 3.81lakh. If we exclude the mandatory EmployeeProvident Fund (EPF) corpus, the value falls to`2.61 lakh. Aayush has failed to invest even aminuscule ̀ 2,500 per month in the last 10years, since he began working. “My startingsalary was only ̀ 4,000,” reasons Aayush. It istrue that he started with a low income base,but his current salary indicates that it rose byan average of about 30% annually. With such agenerous salary hike, Ayush should havesaved at least 20% of his monthly income.Doing this would have put the current value ofhis wealth at ̀ 5.3 lakh, more than double hispresent stockpile. Clearly, Aayush has investedpoorly. The resultant low level of accumu-lation is the main reason that he will not beable to fulfil all his aspirations within the time

he wants and will necessitate thepostponement of some of his goals.

This situation is not helped by Aayush’spoor investment choices. It’s a good thingthat he invests ̀ 3,000 every month in equityfunds through systematic investment plans(SIPs). However, all the SIPs are directedtowards equity-linked tax saving schemes(ELSS). Aayush has no logic for investing inthese funds. “My financial adviser suggestedonly these tax-saving funds, so I went aheadwith them. There is no specific reason forhaving done so,” says Aayush.

To begin with, Aayush needs to be lesscausal about his investment decisions. Hedoes not have to invest ̀ 36,000 every year insuch schemes as his annual insurance premi-um and EPF contribution are helping himsave tax to a great extent. Under Section 80C,one can save tax through life insurancepremium, EPF and ELSS contributions onlyup to a limit of ̀ 1 lakh. Aayush’s annual EPFcontribution and life insurance premiumamount to ̀ 89,121. Hence, we suggest that heshould stop investing in ELSS and redeploythe monthly SIPs to diversified equity funds.SKP Securities suggests that all his SIPs can bedirected towards HDFC Equity Fund, CanaraRobeco Diversified Equity Fund, DSP BREquity Fund, Fidelity EquityFund and Reliance GrowthFund. All these are best suit-ed for long–terminvestments.

There are other instancesthat reflect Aayush’s lack ofinvesting prowess and his in-

ability to utilise resources prudently. “Nearly`1 lakh has been lying idle in my bankaccount for the past six months. I have beenthinking of investing this money for sometime and will do so soon,” he says. In the pastsix years, Aayush’s savings deposit has grownat the rate of 3.5% per annum, while the aver-age inflation rate has been around 9%. Thenet return has been -5.5%, which means thathis deposit has been depleting in value. Wesuggest that he should immediately rectifythis mistake and invest the lump sum in anyof the two equity funds that have beenrecommended.

Aayush also wants to retire early. Quittingwork at the age of 50 will give him only 15more years to achieve all his goals. Given thathe is hard–pressed for resources, thisdecision will take away the benefit that thepower of compounding can provide him. Be-sides, Aayush will not be able to achieve evenhis basic goals in 15 years. “I want to retireearly to be able to start my own business, butI haven’t zeroed in on any idea as of now. Imay work on something related topharmaceuticals,” he says. It is evident thatAayush’s post-retirement business plan is rid-dled with uncertainty. It is not advisable torely on anticipated income to achieve crucialgoals. Hence, we suggest that Aayush pushback his plans of early retirement by at leastfive years. By the time he turns 55, thedeposit of ̀ 1 lakh, which he should invest inequities as suggested, will grow to ̀ 10 lakhand will serve as business capital.

For retirement, Aayush wants to build a cor-pus of ̀ 1.21 crore. This amount will besufficient for him and his family to maintainthe same standard of living that they arecurrently used to. To achieve this goal, Aayushneeds to redirect his investment of ̀ 55,000 inbonds and fixed deposit towards equities.These funds, along with their other equityinvestments, having a current value of ̀ 1.06lakh, will grow to over ̀ 15.5 lakh in 20 years.The EPF will add another ̀ 6.13 lakh to thesum. To fund the remaining 74% of the require-ment, Aayush needs to start investing `9,014per month in equity funds through SIPs.

It is important to analyse Aayush’s lifeinsurance portfolio before we chalk out thecourse for achieving other goals. This isbecause his policies will contribute greatlytowards their fulfilment. Aayush has boughtfour endowment policies, providing himwith a life cover of ̀ 7.05 lakh. Anendowment policy is a combination ofinsurance and investment. A certain part of

the premium is allocated to the cover andadministrative expenses, while a portion is

invested. Financial experts suggest that oneshould keep insurance and investments sepa-rate. However, Aayush’s purchases comprisethe best of endowment plans. All these have agood track record in terms of giving bonusand accruals, with some providing aguaranteed return of 8%. Hence, SKPSecurities suggests that Aayush shouldcontinue with these and utilise the maturityproceeds to fund their daughter’s educationand marriage. However, given his financialneeds, Aayush’s cover is inadequate. Besides,his life cover will end in the next 15 years,exposing him to life risks before he is throughwith his financial obligations. Hence, we sug-gest that Aayush buy a 30–year term planworth ̀ 50 lakh, which has an annualpremium of ̀ 15,000.

Despite having four financial dependants,Aayush has not bought a heath cover. Wesuggest that he buy a family floater plan worth`5 lakh, which will insure his wife and daugh-ter as well. The annual premium for the policywill be around ̀ 7,000. “I want to buy a healthcover of ̀ 10 lakh for my parents,” says Aayush.We appreciate that Aayush realises the import-ance of this need. However, currently he doesnot have the surplus that can be diverted tow-ards this requirement. SKP Securities suggeststhat this should be treated as a priority andthat he should buy the heath cover for hisparents as soon as he gets a salary hike.

Aayush wants to accumulate ̀ 63.5 lakh forhis daughter’s education in 16 years and ̀ 36lakh for her marriage in 22 years. By investingthe maturity proceeds of endowmentpolicies and the child plan in equities,Aayush will be able to fund 55% of the thetotal sum. To accumulate the balance, heneeds to start investing ̀ 4,660 and ̀ 1,435in equity funds through SIPs. As for thehouse, Aayush has no money to buy one atpresent. We can only suggest savings fromfuture salary hikes to be used to achievethe goal.

While discipline can help Aayush bridgethe wide financial gaps, some of the damageis irrevocable. He will now have to make themost of what he has by investing wisely andsticking to the new plan.

Need for a change of course

The Economic Times Wealth, April 11, 2011

� Excluding the mandatory EPF, the current value of assets is only ̀ 2.61 lakh.

� Equity exposure restricted to tax-saving schemes; ̀ 1 lakh cash eroding in value in savings account.

� Inadequate life cover; no health insurance.

Will Aayush Upadhyay meet his financial goals despite losing out onhis best investing years?

23Family Finances

UPADHYAYS’ GOOD MOVES…

Investing in some of the bestendowment plans.

Realising the importance of ahealth cover for his parents.

…AND THE BAD ONES

Not investing a reasonableamount of money regularly toaccumulate wealth.

Investing in tax-saving equityfunds without any rationale and need.

Wasting resources by keepingthem in savings account.

You can take a

loan to pay your

child’s school fee

Page 35

PPOOR PLANNER




Family FinancesThe Economic Times Wealth, December 13, 2010

“My fatherused to investin stocks. So I am not intimidated byequities.”BHAVESH KUMAR, EXPLAINING HIS HIGH-RISK APPETITE ANDCOMFORT WITH STOCKSAND MUTUAL FUNDS.

Bhavesh andSonia Kumar

with theirsons and

Bhavesh’smother

Inflation assumed to be 6% per annum; Ulip and mutual funds assumed to earn 12% bonds,FDs and PPF 8% and infrastructure funds 9% per annum

A comprehensive financial plan has been emailed to the Kumars

Kumars’ asset allocation An Easy Goal Path

EXISTING PROPOSED

7%Gold

3%Gold

23%Debt

38%Real estate

74%Equities

31%Debt

23%Equities

Car 1 4 lakh Bonds and FDs Nil

Education of son 4 18.9 lakh Direct equity Nil

Education of son 9 25.3 lakh Direct equity NilInfrastructure fundsEquity funds

Second house 15 1.44 crore Equity funds 18,500Current SIPs in fundsPPF

Retirement corpus 15 8.4 crore Equity fund SIPs 1.5 lakh PPF (staggered)Ulip, PPF (free of lock in), Gold ETF

Goal Years to Future Resources Further investmentachieve cost (`) used required (`/ pm)

78.5is the approximatecurrent net worth

of the Kumars

lakh

`

26

SHOME BASU

KAMYA JAISWAL

My wife is a banker but I ammore money savvy of thetwo,” jokes 44-year-oldBhavesh Kumar. A juniorspecialist in surgery with the

Delhi government, he is referring to his PPFcorpus which comes to ̀ 1.2 lakh. This is farsmaller than his wife, Sonia's bundle of ̀ 7.5lakh. The reason: He prefers high-returnequities to safe havens.

To judge which strategy is better is to enter athorny territory of couple-dom. Actually, theKumars must be complimented for a well-balanced financial plan with the right mix ofsafety and aggression. On one hand, Sonia'sfavourites—bonds, FDs, debt funds, MIPs andPPF—have built a debt cushion of close to ̀ 24lakh. On the other, Bhavesh's kitty of equity mu-tual funds and stocks accelerates the process ofwealth creation.

Not that Bhavesh has been a risk lover for along time. He began dabbling in equities only in2000. Until then, he too contributed to the debtcushion. “I am a late bloomer,” he explains,adding that there were practical reasons like alow disposable income for being a conservativeinvestor. It was only when his wife opted forvoluntary retirement from her previous jobthat the couple became cash-rich and startedfunnelling money into equities.

The decision came at a good time. In the past10 years, the Kumars' portfolio has grown at afast clip as they increased equity exposure withproportionate rise in income. As a result, their

collection of stocks and funds is enough for theeducation of their two sons, Kushagra andMoksh. The current SIPs, totalling ̀ 18,500 infour mutual funds, are enough to build acorpus for buying a second house as well. How-ever, it falls short of an important goal:retirement.

For this, they will have to further increase eq-uity exposure by about ̀ 1. 5 lakh. The figuresounds intimidating, but it may not be so, givenKumars’ commitment to wealth creation. Ofthis, ̀ 50,000 can be easily squeezed out of thecouple’s current income. Bhavesh and Soniabring home `1.4 lakh a month, of which`50,000 is skimmed off by expenses. From thesurplus of `90,000, existing investmentsincluding annual premiums of four insurancepolicies, SIPs and PPF contribution take awayanother ̀ 37,885. This means every month, thecouple has handy cash of ̀ 52,115, much ofwhich is collected in a sweep-in account. Thebalance ̀ 1 lakh can be saved over time as thecouple’s income rises. Bulk payments such asgratuity and PF also lower the investmentrequirement. We have not factored that inbecause this amount will depend on thecouple’s future career path.

SKP Securities recommends that the Kumarsinvest this money in funds such as HDFCEquity, DSPBR Equity, Reliance Growth, Fideli-ty Equity and Franklin Bluechip Fund. Theseare primarily equity diversified funds whichhave the lowest risk profile among all fund cate-gories but are among the best money spinnersin the long term.

In addition, the three MIPs and some of the

FDs in their portfolio can also be switched intoequity funds. At this stage, the couple do not re-quire additional sources of income. To furtheraccelerate wealth creation, Sonia can considerswitching to the growth option in her Ulip.

These changes will automatically reorientthe asset allocation of the couple's portfolio infavour of equities. However, to keep the debtcushion growing simultaneously, Bhavesh andSonia can continue with their current PPF con-tributions.

The Kumars must be lauded for diversifying

to almost text-book perfection. Not only dothey have a finger in debt, equities, realty andgold, they have also distributed investmentswithin each asset class.

One place where the financial plan isseverely lacking is life insurance. For a couple earning well and with multipleresponsibilities, the life cover of ̀ 14.5 lakh isabysmal. Bhavesh recognises the flaw: “My cov-er is inadequate. I have also bought very expen-sive plans. But can I afford a term plan now?”The answer is yes. Bhavesh and Sonia mustpick up term plans which collectively coverthem for ̀ 1.2 crore. This can be split in the ratioof their incomes. The total annual premiumwill be about ̀ 6,500.

The good news is they don't have to dig intotheir cash flow to pay the money. An easy way isto convert the existing money-back plans,Postal Life Insurance and endowment plan intopaid-up policies. By doing this, the couple willnot have to forego the past premiums and apart of their sum assured will also be retained.

The money freed up can be diverted to theterm plans. One caveat: A policy that is 1-3 yearsaway from maturity should not be converted asthe opportunity cost of completing the tenureis low.

Bhavesh is also doubtful about his healthinsurance. Though his employer’s plan coversthe entire family, it restricts treatment toempanelled hospitals. Bhavesh’s concern isvalid. It is always better to buy an additionalplan for protection when in between jobs or af-ter retirement. Even though Sonia is coveredfor ̀ 2.5 lakh by her employers, we suggest thecouple buy a ̀ 5-lakh family floater plan for theentire family.

The couple already own a 2-BHK apartmentbought in 1999 for which the loan has beenrepaid. Such a zero debt life is a luxury forpeople in their 40s. The jury is still out on theright time to buy property. But here is a perfectexample of how an early start boostsinvestment capacity in times of high expenses.This also ensures there is little chance of afinancial crisis in the Kumar family. However,life can dish out nasty surprises. To preventthem from destroying their plan, the couplemust salt away about ̀ 3 lakh in liquid funds.

With the help of SIPs and other tech tools,much of this plan can be automated. Thecouple must review their progress every sixmonths, but that is about all. This leavesenough time to bandy about whose financialacumen is better. Of course, we know that ittakes two to tango.

Road to completion

The Economic Times Wealth, December 13, 2010

� Well-diversified investments, the majority of goals easily achievable� Sorely inadequate life insurance cover in the mid-40s� High rate of savings though about 58% of surplus is not invested

Can the Kumars build a sizeable nest egg despite a late start?

DOUBLE-INCOME FAMILIES



27Family Finances

KUMARS’ BEST MOVES…

Buying a 2-BHK apartment earlyin their career

Increasing equity exposure in pro-portion to increase in salaries

Diversifying investments acrossall asset classes, and within eachinvestment category

Building a debt cushion

Complementing each other’sfinancial strategies

…AND THE WORST

Buying expensive traditionalinsurance plans

Inadequate life cover for bothBhavesh and Sonia

Not exploiting their high riskappetite

Under-utilising surplus by notinvesting it


Family FinancesThe Economic Times Wealth, March 21, 2011

Foreign tour 6 8.5 lakh Property sale proceeds Nil*

House 15 72 lakh Property sale proceeds Nil*

Child’s education 18 58 lakh Property sale proceeds Nil*

Retirement 30 3.5 crore EPF+ Equity investments 5,048

22

An easy goal path ASSET ALLOCATION

EXISTING

93%

Real estate

2%

Equity

I don’t have muchknowledge aboutequity mutual funds.My savings are incash, which getsused for lump-sumexpenses that keeppopping up.”

VIVEK JIWTODE

JAGATDEEP SINGH

* Except for retirement, all goals will be fully funded by sale of parental property

worth `35 lakh.

Inflation assumed to be 6% per annum. Equity and debt portfolio to correspondinglygrow at 12% and 8.5% per annum.

A comprehensive plan has been mailed to Jiwtodes.

Proposed asset allocation to be achieved over a period of one year.


(`/month)

5%

Debt

PROPOSED

94%

Equity

5%

Debt 1%

Cash

Vivek Jiwtode (left) with his family at their Navi Mumbai house.

8.14is the approximate networth of the Jiwtodes.

lakh`

SHOBHANA CHADHA

The Jiwtodes, Vivek and Yoge-shri, have a long wish list—aforeign tour for three people,bungalow, abundant funds for achild’s education and a comfort-

able retirement. However, there is no stock-pile of wealth to achieve these financial goals,and the couple’s income level is modest. So,their financial planning will require a stronginitial boost to make up for the lack of wealthaccumulation. The good news is that the cou-ple is young and in no hurry. This will enablethe power of compounding to come to theirrescue. Here’s how.

Vivek is a 30-year-old assistant manager ina bank, and his wife Yogeshri, 29, works as anexecutive in a corporate firm at Navi Mumbai.While Vivek earns ̀ 30,000 per month,Yogeshri’s salary adds ̀ 13,000 to theirmonthly kitty, bringing the total to ̀ 43,000.Their household expenses are ̀ 19,500. Apartfrom this, the couple is servicing two loans—a10-year car loan, with a monthly instalmentof ̀ 2,200, and a 20-year home loan, whichhas an EMI of ̀ 11,029. After deducting theseexpenses, the couple is left with an investiblesurplus of ̀ 10,271. This amount will besufficient to fulfill some of their needs, notall their grand aspirations.

The Jiwtodes’ financial plan suffers from aserious flaw—they are not active investors.Given their liabilities and income level, thecouple has a commendable saving rate ofalmost 24%. However, they don’t have anorganised or disciplined investing schedule.All the investments they have made sofar have either been mandatory or tosave tax. “The only reason I startedinvesting in the HDFC Tax Saver Fundthree years ago was because I had to savetax,” agrees Vivek.

Apart from the mandatory EmployeeProvident Fund (EPF) accounts, the onlyinvestment the couple has is ̀ 70,000 in anequity-linked scheme. The amount has beenbuilt over a period of three years through amonthly systematic investment plan (SIP) of`2,000. The couple’s monthly investmentends with this SIP; there is no plannedsaving structure for the remaining 81%of the investible surplus. “A portion ofthe money I had saved was used for mysister’s wedding,” says Vivek. Whilethe wedding expenses may haveeroded their savings, the balancecould have been accumulated

judiciously. “I don’t have much knowledgeabout equity mutual funds. I keep my savingsliquid, but the cash is used for lump-sumexpenses that keep popping up from time totime,” explains Vivek.

If the Jiwtodes want to fulfill their financialaspirations, it is time they pulled up theirsocks and became financially proactive. TheJiwtodes realise that they need morediscipline in their financial life—a goodstarting point.

The couple is lucky to have inherited a two-bedroom apartment in Nagpur, which iscurrently valued at ̀ 35 lakh. “The house is inmy name. Presently, my parents live there,but I don’t want them to stay alone in theirold age. So they will come and stay with us,an idea that my parents approve of,” saysVivek. Selling this house can remove all thehurdles that the Jiwtodes are likely to face inachieving their goals. It will be a wise

financial decision for the couple asit will provide the much-neededboost to their investible corpus,suggests SKP Securities. In fact,the Jiwtodes are quite keen onselling the house in Nagpur as

they don’t want to go through thetrouble of maintaining two real

estate properties. “What will I do with twohouses when I and my family are going to stayin one? However, I do want to buy abungalow as a holiday home when I am in a fi-nancially stronger position,” says Vivek.

A major part of the proceeds from the saleof this house can be used to fund three oftheir goals—foreign tour, bungalow and theirchild’s higher education. The couple wants toaccumulate ̀ 8.5 lakh in six years for theforeign tour, ̀ 72 lakh in 15 years for thebungalow, and ̀ 57 lakh in 18 years for theirchild’s higher studies. In order to achievethese, the couple can invest ̀ 29 lakh from thesale proceeds of the house in equity mutualfunds. Assuming a growth rate of 12% perannum, the amount will be sufficient to fundthese three goals. In fact, the Jiwtodes will beable to stock up more money (nearly 14%more) than they want to for the purchase oftheir bungalow and their kid’s higher studies.SKP Securities suggests that the amount beinvested in DSP BlackRock Equity Fund,HDFC Equity Fund, Fidelity Equity Fund,Canara Robeco Equity Fund and RelianceGrowth Fund. All these are diversified equityfunds, which have a low-risk profile and areappropriate for generating good returns inthe long term. Since almost all of Jiwtodes’financial goals have a long-term perspective,investing in these funds is the most suitablestrategy for them. Also, the stability of thesefunds makes them a good initiation point forinvesting tyros like Jiwtodes.

Regarding the goal of a comfortableretirement, which is 30 years away, a corpusof ̀ 3.5 crore will be adequate for the coupleto maintain their existing standard of living.The Jiwtodes are a double-income coupleand a large part of the retirement corpus canbe built through their EPF contributions. TheProvident Fund and the current mutual fundinvestments will help account for 29% oftheir old-age needs. To build the balance,the Jiwtodes need to make a lump-suminvestment of about ̀ 3 lakh from the sale ofthe Nagpur property. Also, they need tomake a regular investment of ̀ 5,048 permonth from their investible surplus in equityfunds through SIPs. All these investments canbe diverted to the same set of funds as havebeen suggested.

The Jiwtodes also need to take a closer lookat their loan portfolio. They have taken boththe loans—for car and home—on a floating in-terest rate. Under the loan arrangement, thefirst year carries an interest charge of 8%,which will rise to 9% in the second and third

years. However, after three years, the loanamount will be completely governed by themarket scenario. In such cases, it usuallymakes sense to prepay as much of the loanamount as is possible because the interestpaid on loans may exceed the average returnearned on various investments, suggests SKPSecurities. Currently, the interest rates in thecountry are witnessing a high volatility.Hence, it is advisable that the balance of ̀ 3lakh left from the sale of property be used toprepay the car loan. Regarding the homeloan, the couple can start building a corpusto partly prepay the amount. For this, theyneed to invest ̀ 5,000 per month throughSIPs in equity mutual funds. In 10 years,the Jiwtodes will be able to accumulate over`11.5 lakh, which can be used to prepay morethan half of their outstanding loan amount.The prepayment of loans will also allowthem to have an enhanced investiblesurplus, which can be used to augmentthe amount they want to accumulate fortheir financial goals.

“Both, I and my wife, have been providedmedical insurance by our employers. So, wehave not taken any life or medical insurancepolicy,” says Vivek. The Jiwtodes need tounderstand that life and medical cover servedifferent purposes and cannot be usedinterchangeably. An adequate life coverensures that all your liabilities and financialneeds are taken care of without any compro-mises in the case of an unfortunate death.Hence, we suggest that the couple, whohave a dependent child, immediately buya 25-year term plan worth `50 lakh. Theannual premium for such a policy will bearound ̀ 10,000.

Another area that they need to payimmediate attention to is an emergencyfund. It is important that they maintain sucha corpus as it can help them meet any urgent,one-time expense that may crop up. It willprevent the Jiwtodes from digging intothe stockpiles that are meant for theirfinancial goals. Now, discipline is all thatthe duo needs.

Good savers, bad investors

The Economic Times Wealth, March 21, 2011

� Accumulated wealth is worth only ̀ 70,000, excluding inherited property and EPF.

� Only 20% of the surplus is invested on a regular basis.

� No life insurance; inadequate health cover.

Can the Jiwtodes amass enough wealth to meet all theirfinancial goals?

23Family Finances

JIWTODES’ GOOD MOVES…

Saving almost a quarter of thetotal monthly income despitetwo loan liabilities .

Buying a house for self-use ata young age.

Realising that maintainingtwo properties can be atedious task.

…AND THE BAD ONES

Keeping the savings as cash.

Not investing in equity funds ona regular basis through SIPs.

Not buying a life cover.

Relying only on health coverprovided by the employer.

Not maintaining a contingencyfund.

How to choose

the right

mutual fund

Page 12

PPASSIVE INVESTORS




Family FinancesThe Economic Times Wealth, January 24, 2011

My credit carddebt hasgrown to agiganticamount. Ihave beenpaying theminimumamount onthis debt. But Iknow doingthis will onlyeat away myresources...”

Phani Raj Jaligama with wife and daughter at their Pune house.

* These investments will begin in July 2012 when the second chit fund commitment stops

Inflation assumed to be 6% per annum. Equity portfolio to grow at 15%. Debt to grow at 8.5%per annum.

A comprehensive plan has been mailed to the Jaligamas.

Asset allocation ...what they should do

PROPOSED

8%

Realestate

28%Equity

4%Debt

Car 4 11.9 lakh NA 26,400*

Home 4 54 lakh Cash from sale of 34,202*

Karimnagar house

Agriculture land 8 37.6 lakh NA 32,497*

Daughter's education 15 50 lakh NA 7,497

Daughter's marriage 20 80.2 lakh NA 5,355

Retirement 26 5 crore EPF 8,875

Goal Years to Future Resources Further investmentachieve cost (`) used required (`/pm)

What the Jaligamas wish...

Build cash in bank 2 10 lakh 7.6 lakh 35,986

Car 3 10 lakh 6.6 lakh 22,165

Home 2 50 lakh 37.8 lakh 1.8 lakh

Agriculture land 5 25 lakh 12.4 lakh 28,225

Daughter's education 15 1 crore 12.3 lakh 14,959

Daughter's marriage 20 1 crore 6.1 lakh 6,679

Retirement 26 5 crore 13.2 lakh 13,235

Goal Years to Current Further one-time Further regularachieve cost (`) Investment investment

needed (`) required (`/pm)

26

SADANAND GODSE

60%

Cash

Proposed asset allocation to beachieved over a period. After paying offdebt, not many assets will be left todefine current asset allocation.

PHANI RAJ JALIGAMA

38.7 is the approximate debt

burden of the Jaligamas

lakh

`

SHOBHANA CHADHA

Combined monthly income of`1.23 lakh. Total outstandingamount on a home loan, a carloan and two personal loans at`35.16 lakh. Credit card debt at

a whopping ̀ 3.5 lakh. This is the story of 34-year-old Phani Raj Jaligama, married to Srila-ta, who is also of the same age. The softwareprofessional couple live in Pune with theirsix-year daughter. Provided that both ofthem are bringing home an ample sum ofmoney every month, one would imaginethat fulfilling financial goals should be rathereasy for them. But there are two massiveglitches—a debt-junked balance sheet andtheir wishful thinking.

Phani Raj earns ̀ 58,000 a month and hiswife gets to take home ̀ 54,000. They get anannual bonus of ̀ 1 lakh, adding another`8,333 on an average to their monthly kitty.They have also bought a bungalow inKarimnagar near Hyderabad for which theyget a monthly rental of ̀ 3,000. “I bought it asan investment though the rental income isnot much,” says Phani Raj.Currently, the couple are stayingin an apartment, paying a month-ly rent of ̀ 9,000, bringing theirtotal monthly household expens-es to ̀ 40,000. After deductingthe insurance premium of`4,300 of the five endowmentpolicies that the couple havebought, they should be left with ampleinvestible surplus. However, that is not thecase because the couple are serving fourloans, which have a total monthly instalment(EMI) outgo of ̀ 42,692. And the debt trapdoes not end here. “My credit card debt hasgrown to a gigantic amount. I have beenpaying the minimum amount on this debt.But I know doing this will only eat away myresources and will not bring down myliability,” confesses Phani Raj. Getting rid offthis credit card debt should be a priority forthe Jaligamas as they are paying a hefty inter-est rate of 33% per annum. The couple havetheir own reasons for accumulating this mas-

sive debt. “I had started a business and facedmajor losses. So I had to take the two person-al loans. With their EMI burden, my monthlyexpenses outgrew my income and I resortedto credit card borrowing,” Phani Raj says.

The Jaligamas are definitely not updatedinvestors but they are at least regular and thisshould help them meet the need of the hour—getting a quick relief from the onerous part ofthe debt burden. They have monthly commit-ments of ̀ 11,500 and ̀ 30,000 in two chitfunds. “Investment in these funds yields me adividend of 10% on an average,” says PhaniRaj. But what he does not realise is that he ispaying an annual interest of 16% and 14.5% onhis personal loans. Hence, paying off theseloans made more sense than investing in chitfunds, which in any case is an archaic way ofinvesting. The first chit fund term ends inJune 2011. Till then, they have to continuemonthly investments as the couple havealready used up the prize money of the chitfund. This means that they have to live withlimited surplus. But the second chit fund,which will continue till July 2012, can be with-drawn prematurely to generate ̀ 7.5 lakh.

Also, three of their endowmentpolicies have completed five yearsand have acquired a surrender valueof ̀ 73,000. Together, this sum of`8.23 lakh can be used to pay off thecredit card debt and the three-yearpersonal loan, for which they arepaying 16% interest per annum. This

way, their debt burden will not lift butit will certainly drop to manageable levels.

Time for some good news. “We have gotour annual increments. From April onwards,my salary will grow by 20% and Srilata’ssalary will rise by 10%,” says Phani Raj. Withthe increased salary of ̀ 1.40 lakh and a muchcleaner balance sheet, are the Jaligamasready to start their journey of achieving theirgoals? Not really, because the couple’s wishlist is way beyond their means (see table‘What the Jaligamas wish’ ). As all theaccumulated assets will be exhausted payingthe mounting debt, they have neither thekind of wealth nor the surplus needed toachieve such ambitious goals. Hence, we sug-

gest they rationalise their wish list.Starting April, the Jaligamas will have an in-

vestible surplus of ̀ 25,840. This is enough tostart investing right away for all their priorityneeds—the daughter’s education andmarriage and their retirement—providedthey lower estimates to an affordable level.

The couple want to accumulate ̀ 1 croreeach for their daughter's education andmarriage in 15 years and 20 yearsrespectively. These amounts are practicallyimpossible to accumulate, given their limitedsurplus. The Jaligamas can feasibly build up acorpus of ̀ 21 lakh for their daughter’s educa-tion and ̀ 25 lakh for her marriage. Assumingan inflation of 6% per annum, they wouldneed ̀ 50 lakh for their kid’s education and`80.2 lakh for the marriage. These amountscan be accumulated by investing ̀ 7,497 and`5,355 per month in equity funds throughSIPs. SKP Securities suggests that all SIPs canbe diverted towards the top five diversifiedequity funds—Canara Robeco DiversifiedEquity Fund, DSP BR Equity Fund, Fidelity

Equity Fund, HDFC Equity Fund andReliance Growth Fund.

For retirement, which is 26 years away, theJaligamas want to stock ̀ 5 crore. Given theircurrent standard of living, this amount willbe sufficient to meet their requirements. Asboth of them are earning, their employeeprovident fund contribution is sizeable andwill fund 33% of their old-age needs. Thebalance can be funded by a monthlyinvestment of ̀ 8,875 through SIPs in thesame funds suggested above.

The Jaligamas’ wish list is fairly long. Apartfrom the already talked about long-termgoals, they also aspire to own a two-bedroomapartment worth ̀ 50 lakh in Pune in twoyears, a ̀ 10-lakh sedan in three years andagricultural land of about ̀ 25 lakh in fiveyears. However, presently, they don’t havethe surplus to start investing for any of thesegoals. Investment for these can begin onlyfrom July 2012 onwards, once their chit fundcommitments cease and salaries increase fur-ther. Even then, the dream of owning a sedanwill have to wait for another year. In fouryears, the car’s cost could escalate to ̀ 11.9lakh. To accumulate this amount, theJaligamas will have to invest ̀ 26,400 a monthfrom the increased surplus in equity funds.Also, their income does not allow purchase ofagricultural land before eight years and bythen, the value of the land could increase to`37.6 lakh. Stocking this corpus will need amonthly saving of ̀ 32,497. While the increasein surplus expected next year can supportpart of this saving, the full amount can onlybe generated as income rises further. Thedeficit, however, can be financed by thesurrender value of the remaining two endow-ment policies which will complete five yearsby 2013.

The goal of buying a flat in Pune also needsto be brought down by a couple of notches.The Jaligamas can afford a house of ̀ 40 lakhonly and that too in five years and not two. Infive years, the value could appreciate to ̀ 54lakh. This amount can be partly financed byselling the Karimnagar house, currentlyvalued at ̀ 30 lakh. “I have sentimentsattached to the bungalow but I can considerselling it if financial reasoning suggests so,”says Phani Raj. Assuming an annual growthof 8%, the value of the bungalow will grow to`44 lakh. The balance ̀ 10 lakh can beaccumulated by investing ̀ 34,202 per monthin equity funds from July next year.

The Jaligamas’ insurance cover is only`14.5 lakh, grossly inadequate given theirliabilities. The couple should buy a pure termplan as soon as their debt-struck financesperk up. They can buy an SBI Smart Shieldcover of ̀ 1 crore, with an annual premium of`25,084, suggests SKP Securities.

The Jaligamas may have had a sub-optimalstart but they can still fulfil their desires ifthey get more realistic. The couple want tobuild cash balance of ̀ 10 lakh. But with bothof them earning, they only need to stock anincome of three months for emergencies andinvest it in liquid funds. The amount can beeasily accumulated over the next 15 monthsas the Jaligamas will only start investing fortheir short-term goal from July next year. Soonce the first chit fund commitment ends thisJune, they will have ample surplus to buildthe contingency corpus.

Taming the debtmonster

The Economic Times Wealth, January 24, 2011

� Uses 35% of income to service loans; credit card debt has grown to ̀ 3.5 lakh

� More than 98% of wealth is invested in chit funds and traditional instruments

� Inadequate and expensive life cover

Can the Jaligamas get rid of the exhausting debt burden?

27Family Finances

JALIGAMAS’ GOOD MOVES…

Beginning to invest throughSIPs since the last quarter

Investing in real estate at anearly age

…AND THE BAD ONES

Relying on credit card tofinance household expenses

Not using surplus income topay off expensive personalloans

Investing in archaic savingavenues like chit funds

Buying several traditionalendowment policies

Not maintaining a welldiversified portfolio

Amar Kainthrecounts his first

year as an entrepreneur

Page 44

DEBT TRAP




Family FinancesThe Economic Times Wealth, May 30-June 5, 2011

House renovation 1 5 lakh Stocks+Mutual funds

Vacation to the US 2.5 5.8 lakh Surrender proceeds of HDFC

Young Star Plus

Son’s college 10 3.58 lakh Maturity proceeds of LIC

Jeevan Surabhi

Son’s post graduation 13 12.8 lakh Maturity proceeds of Kotak

Headstart Future Protect

Retirement 31 5 crore EPF+PPF+Maturity proceeds

of Kotak Headstart Future

Protect, LIC New Jeevan

Shree+Surrender proceeds of

Kotak Safe Investment Plan

22

Funds needed to achieve goalsChaubeys’ cash flow

NET WORTH OFCHAUBEYS

Inflow

Outflow

VARADAN

Annual inflation assumed to be 6%; equity, hybrid and debt portfolios are expected togrow at 12%, 10% and 8% per annum, respectively.


Chaubeys.

Goal Years to Future Resources usedachieve cost (`)

`21.39lakh

I have a sizeableamount of gold anddiamond jewellery,

currently worth around`15 lakh. I have set this

aside for my son’s marriage...”

POOJA CHAUBEY

Pooja and Arvind Chaubey, with their son, in Chennai

Asset Current value (in `)

EPF 4.09 lakh

PPF 2.25 lakh

Bank FDs Nil

Stocks 5.76 lakh

Mutual funds 14.39 lakh

Real estate Nil

Cash in bank 15,000

Total assets 26.64 lakh


Arvind

`91,000Pooja

`93,000

Household

expenses

`48,300

Car

loan EMI

`17,764

Insurance premium(average)

`27,500

Other income

`15,300

Total monthlyincome

`1,99,300


`93,564

Investiblesurplus available

`1,05,736

Liability Amount (in `)

Car loan 5.25 lakh (of thetotal loan of 8 lakh)

SHOBHANA CHADHA

The Chaubey household’s financesare robust: their net worth is high,the savings and surplus enough tofund their realistic goals, theinvestments desirable and on

schedule. So why are we reviewing this couple?Do they really need any advice? Yes. Much likeany other family, the Chaubey’s finances sufferfrom minor glitches: they have underestimatedthe future cost of their goals, they havedeployed some wrong tools to fund the goals,and their insurance portfolio requires arevamp. If they rectify these abberations, andgiven their investible surplus, they can, thenthe Chaubeys have little to worry.

The Chaubey’s finances are managed byPooja, a 33–year–old risk analyst, who hasdone a creditable job of keeping them ontrack. Her husband, 35–year–old Arvind, is asoftware professional and the couple lives inChennai with their eight–year–old son, Yash.“We don’t own any property except for thehouse in which we live. Its current value isabout ̀ 1.88 crore,” says Pooja. They have acombined monthly income, includingquarterly bonus and mutual fund dividends,of ̀ 1.99 lakh. After deducting all expenses, thecouple is left with a huge investible surplus of`1.05 lakh. On the face of it, the Chaubeysdon’t need a penny from their surplus to meettheir goals. They have already built a wealth ofover ̀ 26 lakh, which can grow in due courseto suffice their needs. Also, their elaborateinsurance portfolio provides them withsizeable investment benefits. Howev-er, a closer analysis reveals the gapsthat need to be bridged.

The couple’s short–term needsinclude renovating their houseand going for a vacation to the US.The long–term goals comprise stash-ing funds for their son’s education andfor their retirement. According to theestimates provided by the Chaubeys, thecouple wants to accumulate only ̀ 16.38 lakhfor their son’s college education andpost–graduation. This amount translates to acurrent value of not more than ̀ 8 lakh. TheChaubeys may be undervaluing the total costof this goal because good quality educationeasily costs around ̀ 16–18 lakh, even from agovernment institute. If one considers privateor overseas education, it is bound to costmuch more.

The Chaubeys have also not consideredaccumulating funds for Yash’s wedding as partof their goals. “I have a sizeable amount ofgold and diamond jewellery, currently worth

around ̀ 15 lakh. I have set that aside for myson’s marriage,” says Pooja. According to SKPSecurities, jewellery is a personal possession,which can be passed on as bequest, and advis-es against selling it for the event. Hence, wesuggest that the couple invest at least 70% oftheir surplus in mutual funds in a regularmanner. The additional investments willprovide for any shortfall that the Chaubeysmay face. The couple is already investing`45,000 per month through SIPs in HDFC Top

200, DSPBR Top 100, Reliance Growth,Fidelity Equity and IDFC Strategic

Sector (50:50). SKP Securitiessuggests that the couple can contin-ue investing in the diversifiedequity funds barring the last one.While all others are stable funds and

are performing well, the IDFC Strate-gic Sector (50:50) is a thematic fund,

which invests 50% of its corpus in blue chipsand the remaining in a particular sector. Suchfunds are good for lump–sum, short–terminvestments, not for regular investing with along-term horizon. The couple needs tostep–up their regular monthly investment by`28,500. They can splurge the balance`31,500 to suit their needs and wants.

As for insurance, the list of their purchasesis long, but the folder continues to be subopti-mal because it doesn’t serve the primarypurpose of providing adequate cover. Theportfolio comprises a money–back policy (LICJeevan Surabhi), an endowment policy (LICNew Jeevan Shree), a term plan (KotakPreferred Term Plan) and three Ulips (Kotak

Headstart Future Protect, HDFC Young StarPlus, Kotak Safe Investment Plan). The portfo-lio provides Arvind and Pooja with a coverof `58 lakh and ̀ 35.5 lakh, respectively,which is grossly inadequate. Given theirincome levels, they should have a life coverof at least ̀ 1 crore each.

Apart from the term plan, most policiesprimarily serve the purpose of investment,with some of them maturing in the next 15years, leaving the couple vulnerable in theirmiddle age. According to calculations by SKPSecurities, Arvind and Pooja should buy termplans by SBI Life Insurance worth ̀ 1 crore and`75 lakh, respectively. The total annual costwill be around ̀ 42,000. Most of their policieswill fetch good returns, and hence, can beutilised for achieving goals. However, theyshould stop paying the premium for HDFCYoung Star Plus and Kotak Safe InvestmentPlan and the surrender proceeds can beinvested in diversified equity funds.

The couple also has lump–sum investmentsin DSPBR Opportunities, DSPBR World Gold,Tata Infrastructure, Franklin India PrimaFund and HSBC India Opportunities Fund.While the first three funds are good, providingdiversification to the portfolio, the remainingtwo should be redeemed as they are notamong the best performers in the large- andmid-cap category. The couple can switch toIDFC Premier Equity Fund, advises SKP Secu-rities. Also, 43% of their portfolio isconcentrated in the Reliance Growth Fund, sotheir holding in the fund should be partiallyoffloaded to reduce its weightage.

The couple’s stock portfolio also needsrectification. They have invested in Axis Bank,HDFC Bank, Punjab National Bank, ITC, IDFC,L&T, Tata Steel, Coal India, Power Grid Corpo-ration of India, Wipro and Ranbaxy. The port-folio is overexposed to the banking sector andover 45% of it is focused on Wipro. SKP Securi-ties suggests that the Chaubeys divest theirholdings in Punjab National Bank andRanbaxy, and partly in Wipro. The redeemedfunds can be invested partially in monthlyincome plans to meet the goal of houserenovation and partly in liquid funds to dealwith contingencies.

Prudent planners, undervalued goals

The Economic Times Wealth, May 30-June 5, 2011

The Chaubeys have juggled their finances well, with robust savings and wise investments. However, theyneed to correctly evaluate the cost of their goals and rectify the flaws in their insurance and equity portfolio.

23Family Finances

CHAUBEYS’ GOOD MOVES…

Investing regularly through SIPs.

Saving over half the totalmonthly income.

Maintaining a healthy net worth.

…AND THE BAD ONES

Not buying adequate life cover.

Having high concentration inone fund in the mutual fundfolder.

Overexposure to the bankingsector and an individual scrip inthe stock portfolio.

Buying expensive Ulips.

FOCUSED INVESTORS

Proposed asset allocation to be achieved over a year.

EXPERT ADVICE

EXPERT ADVICE

EXISTING ASSET ALLOCATION


1%

Cash

84%

Equity

4%Cash

12%Debt

24%Debt

DIVERSIFIED EQUITY FUNDS

HDFC Top 200, DSPBR Top 100, Reliance GrowthFund, Fidelity EquityAdvice: These are well-performing funds. Continueinvesting through SIPs.

LARGE- AND MID-CAP FUNDS

DSPBR Opportunities, Franklin India Prima, HSBCIndia OpportunitiesAdvice: Redeem investments in Franklin Indiaand HSBC India as these have been consistentunderperformers over the past three years.

THEMATIC/SECTORAL FUNDS

DSPBR World Gold, Tata Infrastructure, IDFFCStrategic Sector (50:50)Advice: All the funds are good. Continue to holdlump-sum investments for diversification. Stopinvesting through SIPs in IDFC Strategic.

ADDITIONAL FUND RECOMMENDATION:DSPBR Equity Fund, HDFC Equity, IDFC PremierEquity, HDFC MMIP Long Term Plan, Reliance MIP

Why you should considerstocks ignored by the market

Page 15

Financial plan by Naresh Pachisia, CFPManaging Director, SKP Securities



75%

Equity

STOCK PORTFOLIO: Exposure to banking sectorand the Wipro scrip needs to be reduced.

Annual inflation assumed to be 6%. Equity portfolios are expected to grow at 12% a year.

* Premium for additional health insurance can be paid through the existing cash balance,while the goal of house construction will remain unachievable till their income rises.

Family FinancesThe Economic Times Wealth, April 16-22, 201220

Funds needed to achieve goalsSinghs’ cash flow

NET WORTH OF THE

SINGHs

Inflow

Outflow

BHARAT CHANDA


Singhs.


(`/month)

`1.65 lakh

I want to invest mycash balance, but Iam not sure whichwould be the right

instruments. As forequities, I don’t have

the time andknowledge to invest,

so I have stayedaway.”

SARVESH SINGH

Sarvesh Singh with wife Minakshi at their residence in Mumbai.

Asset Current value (`)

Cash in bank 65,000

Stocks 5,324

MF 8,000

PPF 70,708

Bank FD 10,000

Bank RD 5,550

Total 1.65 lakh


Minakshi

`15,000

Sarvesh

`35,000

Household

expenses

`7,000

InsurancePremium

`345

EducationCosts

`5,000

HouseRent

`5,000

Total monthlyincome

`50,000


`17,345

Net Savings

`32,655*

Liability Nil

Elder sister’s marriage 3 6 lakh Nil 13,812

Younger sister’s marriage 6 7.1 lakh Nil 6,773

Land for school 6 12.62 lakh Nil NA

Constructing a house 2 6.74 lakh Bank FD and RD, 18,645MF and stocks

Retirement 33 1.3 crore EPF, PPF Nil


Cost of additional insurance (average) 1,000*

Total 39,230

Surplus -6,575

SAKINA BABWANI

Banks are offering a higherinterest on savings accountbalances and there is now evenan exemption of ̀ 10,000 onbank interest. Even so, keeping a

large sum in the bank is not a clever move.Sarvesh Singh and his wife Minakshi havealmost 40% of their total portfolio idling incash. Another 52% is locked up in debt instru-ments while equities, the only asset class thathas the potential to beat inflation in the longterm, gets barely 8%. Fortunately, the Singhshave simple, realistic goals and a few changesin their portfolio will help them achieve theirgoals without much difficulty.

Sarvesh, 26, lives with his 24-year-old wifein Mumbai. He works with a bank and bringshome a monthly salary of ̀ 35,000, whileMinakshi, an HR executive, earns ̀ 15,000 amonth. After accounting for all theirexpenses, which include ̀ 5,000 for theeducation of Sarvesh’s brother and sisters,`7,000 for household expenses, ̀ 5,000 onhouse rent and an insurance premium of`345, they are left with a surplus of ̀ 32,655.The couple also have a number of dependentsin their native place in Uttar Pradesh—Sarvesh’s parents, two younger sisters and ayounger brother. Given this huge responsibili-ty, the couple must use the surplus wisely toensure that they achieve all their goals. But forthis to happen, the couple must invest moreactively. “I want to invest my cash balance,but I am not sure which would be the rightinstruments. As for equities, I don’t have thetime and knowledge to invest and hence havestayed away,” says Sarvesh.

Before the Singhs proceed to work on theirgoals, they need to protect themselves fromunforeseen calamities. Sarvesh has wiselybought a term plan, but a cover of ̀ 50 lakhmay prove insufficient as he has a largenumber of dependents. Moreover, Minakshidoes not have a cover at all. So, Sarvesh mustbuy an additional cover of ̀ 50 lakh. It will costhim around ̀ 4,000 a year. Minakshi shouldbuy a term plan of ̀ 25 lakh for 30 years,which will cost about ̀ 3,500 a year.

The Singhs also require health insuranceurgently because they don’t get any from theiremployers. “I didn’t think we would requirehealth insurance as both of us are quiteyoung,” says Sarvesh. This is a falseassumption and SKP Securities suggests thatthey buy a family floater of ̀ 3 lakh, which willcost them about ̀ 4,600 a year. The health andlife insurance premiums for the first year canbe funded from their cash balance of ̀ 65,000.From the next year onwards, a hike in salaryshould take care of the premiums.

Once they have the right protection, theSinghs can safely pursue the plan chalked out

for them to achieve their goals. They want tobuild a corpus to fund the marriages ofSarvesh’s sisters. For the elder sister, Jyoti,they need to start an SIP of ̀ 13,812 in mutualfunds which will help them build the desiredcorpus of ̀ 6 lakh in the next three years. Simi-larly, for the younger sister Kavita’s marriage,a fresh SIP of ̀ 6,773 should do the job of creat-ing a corpus of ̀ 7.1 lakh in six years.

Singh wants to build a school in UttarPradesh for which he needs to buy land worth`12.6 lakh in the next four years. However, hewill have to wait for another two years beforehe starts investing for this goal, whichrequires a monthly investment of ̀ 20,621 inSIPs, which the Singhs cannot affordcurrently. SKP Securities believes that after acouple of years, when their salary rises, theSinghs will be able to start investing towardsthis goal. After two years, when they start theSIP, they will be able to create a corpus of`12.6 lakh in another four years. The Singhsalso want to build a house in their home townin the next two years for which they require`6 lakh. For this, their bank FD of ̀ 11,881 willcome in handy. They have recently started a

recurring deposit of ̀ 5,500 for a year. Thiswill give them ̀ 1.45 lakh by the end of twoyears, which can be added to the corpus forbuilding the house. Their current mutual fundand stock investments of ̀ 13,324 would growto ̀ 16,713 in the next two years, assuming agrowth rate of 12%. Adding this, it wouldcreate a corpus of ̀ 5 lakh. They still fall shortof ̀ 1 lakh, for which they need to start an SIPof ̀ 18,645. After all these investments, theyfall short of ̀ 6,575 for this goal. SKP Securitiessuggests they rely on their cash balance tilltheir salary increases next year. The rest ofthe cash balance can be invested in short-termdebt funds to meet emergency requirements.

The Singhs also want to create a retirementcorpus of ̀ 1.3 crore in 33 years. To meet thisgoal, Sarvesh’s EPF and PPF investments aresufficient. Assuming his EPF investments willgrow at 8.5% a year, it will help him create acorpus of ̀ 1.14 crore in 33 years. His PPFinvestments, assumed to grow at 8% everyyear, will contribute the remaining ̀ 16.6 lakhto create the desired retirement corpus.

As Sarvesh expects a bonus of ̀ 30,000 inApril and ̀ 40,000 in November, SKPSecurities suggests that he add this money tothe SIPs for meeting future goals when theystart a family.

Increase allocation toequities to reach goals

The Economic Times Wealth, April 16-22, 2012 21Family Finances

RECOMMENDATIONS

MUTUAL FUNDS

Canara Robeco Equity Diversified, DSP

BlackRock Equity, Fidelity Equity, Franklin

India Bluechip.

Since the Singhs do not have the time to

understand the stock market, they can rely

on SIPs in mutual funds, which will help

them build the desired corpus to achieve

their goals.

INSURANCE

Aviva i-term plan

The Singhs need to secure their family from

unforeseen circumstances for which both,

Sarvesh and Minakshi, must buy adequate

life insurance.

Being averse to equity and favouring too many debt investments is not going to help the Singhs. They mustcombine the right investments with adequate protection to lay the foundation for a strong financial future.

Proposed asset allocation to be achievedover time.



8%Equity

52%Debt

40%Cash

SINGHS’ GOOD MOVES ...

Being disciplined investors.

Maintaining a good rate ofsavings.

… AND THE BAD ONES

Inadequate health and lifeinsurance.

Low exposure to equities.

Holding too much idle cash.

76%Equity

14%

Debt

10%Cash

Financial plan by Sonia ChadhaAVP, Private Clients, SKP Securities



Family FinancesThe Economic Times Wealth, May 14-20, 201220

Funds needed to achieve goalsBhandarkars’ cash flow

NET WORTH OF THE

BHANDARKARs

Inflow

Outflow

N NARASIMHA MURTHY

A comprehensiveplan has beenmailed to theBhandarkars.


(`/month)

`49.4lakh

“I have givenconservative

estimates of howmuch I require for

my retirement, but Iwould be happy if I

could save morethan the target.”

VINAYAKA BHANDARKAR

Vinayaka Bhandarkar, with his wife Neeta, at their residence in Bangalore.

Asset Current value (`)

Real estate 42 lakh

PPF 6 lakh

Gold 5 lakh

MF 4.5 lakh

Cash 2 lakh

KVP 1.5 lakh

Equities 40,000

Total 61.4 lakh


Vinayaka`90,000

Rent`10,000

Householdexpenses

`13,000

Insurancepremium

`4,667

EMI

`17,000

Total monthlyincome

`1 lakh


`34,667

Net savings

`65,333

Liability (`)

Home loan 12 lakh

Foreign trip 5 5.35 lakh Nil 6,554

Down payment for home 5 13.38 lakh Nil 16,386

Education gift 10 14.32 lakh Nil 6,228

Retirement corpus 10 1.8 crore Real estate, 16,667insurance, KVP


Cost of additional insurance (average) 1,376

Total 47,211

Surplus 18,122

Annual inflation assumed to be 6%. Equity portfolio is expected to grow at 12% a year.* The insurance premium can be paid from the existing cash balance for one year, and afterthat, from the rise in salary.

AMIT KUMAR

The Bhandarkars are clutter-free.It’s a rarity with families whoapproach financial planners. Intheir early 40s, the Bhandarkarsreflect a balanced approach to

financial planning and have charted a straight-forward route to a comfortable financial life.Since more than half of their assets are in debt,it is safe to assume that they have a mediumrisk appetite. However, since they have alsoinvested about 30% of their portfolio in equitythrough well-performing mutual funds, itshows that they have not underestimated thepower of the markets. Of course, much likeother family finance cases, they need to tweaktheir investment patterns a bit, but our advicemirrors their uncomplicated approach toplanning. All it will take is minor adjustmentsto ensure a smooth ride into and afterretirement.

Vinayaka Bhandarkar, 42, lives with his wifeNeeta, 39, and his parents, in their own housein Bangalore. He works as a senior officer in anon-banking financial company and makes anaverage of ̀ 1 lakh per month. This includes arental income of ̀ 10,000, which he gets fromanother property in Bangalore. Besides these,he has two small properties in the city, whichhe bought for ̀ 30 lakh and their current valueis ̀ 42 lakh. After accounting for his monthlyoutgo, which includes household expenses, anEMI of ̀ 17,000 for a home loan, and healthand life insurance premiums, he is left with ahandsome surplus of ̀ 65,333. This is asizeable amount of saving and lays theperfect foundation for the couple to achieveall their goals. They are also helped by thesimplicity of their goals—taking a foreigntrip, buying a car, gifting an educationcorpus to Vinayaka’s siblings’ kids, andtheir retirement—but in order to achievethem, they have to be a little more proactivein managing their finances.

The Bhandarkars need to tweak theirinsurance portfolio before they beginpreparing for their goals. They have been slowat understanding the importance of healthcover, but have made up for it by buying twofamily floater policies—a ̀ 7.5 lakh cover fromApollo Munich Health Insurance, and a ̀ 2 lakhcover from National Insurance—for which theypay an annual premium of ̀ 18,000. “I boughta cover last year after I realised that lack ofhealth insurance could endanger all my invest-ments,” says Vinayaka. His parents, aged 75and 67, also have a cover of ̀ 2 lakh each, forwhich the premium is paid by Vinayaka’sbrother. Apart from this, they have ̀ 5 lakh inbank for any medical emergency, so they neednot buy any additional cover.

However, the Bhandarkars have been

caught short when it comes to life insurance.Their cover is inadequate and comes for a highannual premium—`38,000 per year for a coverof ̀ 33 lakh. They are advised to opt for a coverof ̀ 1 crore, taken for 10 years, through anonline term plan, which will cost them about`16,517 per year. Since Vinayaka plans to retirein the next 10 years, it is not advisable to buy acover for a longer duration. The recomm-ended changes will increase his monthly insur-ance premium by `1,376 to ̀ 6,000, but sincecash is not a constraint, they can easily meetthe target. Moreover, this will ensure that ifsomething were to happen to Vinayaka, thegoals will not be jeopardised.

Like most families, the Bhandarkars have alist of goals, but all these are to be achievedwithin the next 10 years. The first goal is toplan a foreign trip in five years, which will costthem about ̀ 5.35 lakh. For this, SKP Securitiessuggests that they start a fresh SIP in an equitymutual fund worth ̀ 6,554 per month. If it isassumed to grow at 12% per annum, it will helpthem achieve the goal with ease.

The couple also wants to buy a car worth`13.38 lakh in the next five years, for whichthey are advised to start an SIP of ̀ 16,386 permonth, again in an equity mutual fund.

The Bhandarkars don’t have any kids oftheir own, so they wish to gift the children ofVinayaka’s brother and sister a corpus for theireducation. They want to accumulate a sum of`14.32 lakh in 10 years, for which they areadvised to invest ̀ 6,228 per month in equitymutual funds.

The last important financial goal for theBhandarkars is building a corpus of ̀ 1.8 crorefor their retirement kitty in the next 10 years.“I have never been sure how much I wouldrequire for my retirement, but I would like tohave a little more than the amount I have men-tioned,” says Vinayaka. It is here that all hisexisting investments will come into action. HisPPF corpus, insurance policies, Kisan VIkasPatra and the proceeds from the sale ofproperties worth ̀ 42 lakh will help him build a

corpus that is almost one-fourth more than hisplanned target. For this, the couple needs toensure that they invest the ̀ 3 lakh proceedsfrom KVP in 2014 in equity mutual funds, andthat they increase their PPF contribution to`16,667 per month. Also, the above-mentio-ned route to accumulating ̀ 1.8 crore assumesthat the real estate investments grow at 15%per annum. If the Bhandarkars consider this tobe unrealistic, they can invest the surplus inSIPs of ̀ 15,000 as a back-up, which will helpthem build a much bigger corpus than theircurrent target. “I have a corpus of ̀ 4.5 lakh inmutual funds, which was built through SIPs,and I have been thinking of restarting them,”says Vinayaka.

The Bhandarkars need to ensure that theydon’t have any idle cash in their bank account.Considering that they have a sizeable surplusafter their investments, they should invest thecash in a short-term debt fund for betterreturns. This, again, can be used to add to afuture goal as and when needed. However,they must ensure that they always have ̀ 1 lakhas a contingency fund.

The Bhandarkars have done well so far andare on their way to a comfortable life afterretirement. They may not have taken the bestpath, but thanks to their high income, ahandsome monthly surplus and adequateprotection, they will not suffer.

Balanced investmentsmake for a smooth ride

The Economic Times Wealth, May 14-20, 2012 21Family Finances

RECOMMENDATIONS

MUTUAL FUNDS

HDFC 200, HDFC Equity, DSP BlackRock

Equity, DSP BlackRock 100, Reliance Oppor-

tunity, Birla Frontline Equity, Birla MidCap,

IDFC Premium Equity.

Advice: The Bhandarkars stopped the SIPs

in these funds in January 2012 but want to

restart the systematic investment. They can

invest in the same funds since all of these,

except for Birla MidCap, have a good track

record and performance history. Instead

of Birla MidCap, they can consider HDFC

Mid-Cap Opportunities. They should also

look at including a balanced fund like

HDFC Prudence.

A high income, good savings rate and investment in a mix of asset classes translate into easy achievementof goals for the Bhandarkars. However, they need to enhance their life cover to secure their portfolio.

Proposed asset allocation to be achievedover time.



32%Equity

54%Debt

14%Cash

BHANDARKARS’ GOOD MOVES ...

Having a high rate of savings.

Investing across various assetclasses, including equity.

Having sufficient healthinsurance.

… AND THE BAD ONES

Buying inadequate andexpensive life insurance.

Not earmarking funds forspecific goals.

46%Equity

43%

Debt

11%Cash

Financial plan by Sonia ChadhaAVP, Private Clients, SKP Securities



started investing at 19

because...

I want to be financially independent bythe time I’m 40. Besides, I want mypassive income to be double of my regu-lar income at the time. I wish I had start-ed investing earlier considering that theworld’s most successful investor,Warren Buffett, started doing so at 11and regreted it as being too late!

I get a pocket money of...

`2,000 from my father. I also takeprivate tuitions, which help me earn`1,000 a month. I earn about ̀ 2,000every month from my investments,which I reinvest in stocks.

My first financial step was...

When I started investing in 2010, Iborrowed ̀ 20,000 from my father sothat I could invest in stocks. I managedto return the entire amount within 13-16months in instalments of ̀ 1,500-2,000.This was possible because I was aregular trader at that time and was ableto make a decent profit.

I invest in...

Equities: I have only invested inequities so far because, in the long run,equity investment can help in wealthcreation and is possibly the only avenue

that can beat inflation. Also, as along-term investment, no other

asset class can generate higherreturns. I have invested inundervalued mid- and small-cap stocks with a huge growthpotential. My portfolio consists

of YES Bank, City Union Bank,Petronet LNG, Marico, Pratibha

Industries, Nakoda Textile, ArvindRemedies, among others. I don’t investin large-cap stocks since I think they areonly for people above 30.

My investing strategy...

I will not diversify my portfolio withmore than 10-12 stocks. I want to investin companies before they go public andalso intend to improve my research andstock-picking skills. My focus will be onsmall- and midcap stocks since theyyield high returns.

How I keep myself updated...

I follow several financial websites andbusiness newspapers regularly. I havealso read several books about theinvestment styles of some of the world’sgreatest investors.

I have been helped by...

My father, who introduced me to the

stock market when I was 19, has been abig help. However, after studying thestock market for a few months, readingthrough e-books and tracking severalbusiness websites, I became addicted tothe market and realised that I couldmake money here.

Where I’ve gone wrong...

I started intra-day trading withoutadequate knowledge and suffered ahuge loss by taking deliveries; the valueof my entire portfolio reduced by 30-40%. I couldn’t use the stop-lossarrangement and the losses keptincreasing. After this experience, Inever indulged in trading and onlyfocused on investing.

What I’ve done right...

My decision to overcome by aggressionin day trading. I have also made correctdecisions and invested in the rightavenues at the right time. For instance,my investment in the YES Bank stockhelped me earn a profit of 30-40%within two to three months.

Advice to young investors...

Investing is not rocket science. So youmust research extensively and try tolearn from your own mistakes. Also,make sure you don’t follow ‘hot tips’from any source blindly.

(As told to Milan Sharma)

What Prasenjitshould do...◗ The fact that he is investing instocks with a long-term objective,backed by fundamental research,augurs well for wealth creation. How-ever, he should invest in equity fundsfor diversification.

◗ We suggest that he sell PratibhaIndustries, Nakoda Textile and ArvindRemedies and, instead, add TubeInvestments, Agro Tech, GujaratPipavav, HSIL, Bajaj Electricals, PTCFinancial Services, Zee Learn, Pidiliteand Akzo Nobel. He can also look ataccumulating Petronet LNG. He canhold on to stocks like YES Bank, CityUnion Bank and Marico.

◗ To achieve his objectives, he shouldhave goal-based investments. So hecan ascertain an amount that will givehim financial freedom and then alignhis investments accordingly.

—Suggested by Sonia Chadha,

SKP Securities

Young InvestorThe Economic Times Wealth, May 14-20, 201222

Please send your feedback [email protected]

Prasenjit PaulI’m a 21-year-old student

from Kolkata.

I

I started investing when I

was 19 years old.

I want to build a portfolio of

`1.5 lakh in a year.

“Learn from mistakes and

don’t follow hot tips blindly”

I am

“I want to invest instocks of companiesbefore they go publicand also improve myresearch and stock-picking skills.”

SUBHAJIT PAL

Poorperformance by corporates

continuesPage 13

Documents

MOHAMMED ASAD Way to Goal 7 achieve cost · Home 8 yrs 39.8 lakh Invested proceeds from 18,000+ surrendering endowment 1,500 for 6 policy yrs+ 4,699* Child’s education 19 yrs 15.1