Tag: financial plan

How a youngster can build a balanced portfolio for life needs

Personal Finance

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Arun is 27 years old. He started working about four years back.

His parents do well financially and are not dependent on him. Both are in government sector and have pensionable jobs.

He wants to contribute ₹5 lakh towards his sister’s wedding that is scheduled after six months. Additionally, he wants to set aside ₹5 lakh for own wedding that he expects to happen in the next 3-5 years. Any excess can go towards retirement.

Arun has bought life cover for ₹1 crore and a private health insurance plan of ₹10 lakh. His parents and sister are covered under separate plans.

His only savings are ₹8 lakh in EPF and ₹15 lakhs in bank fixed deposits. Of this, he has set aside ₹10 lakh towards emergency corpus. This can cover 12-15 months of his expenses.

Further, every month, ₹20,000 goes towards EPF. He can invest another ₹80,000 per month.

He knows he can invest aggressively given his age and income profile, but he is not clear about whether he will be comfortable with portfolio ups and downs.

Recommendations

Arun has got his insurance covered. He must, however, revisit the insurance portfolio once he gets married or assumes a financial liability such as loan. The emergency fund of ₹10 lakhs is robust too.

For his sister’s wedding, he can set aside ₹5 lakh from his fixed deposits. The wedding is too soon to take any investment risk.

For his wedding, he has just given a ballpark. Additionally, the timing is also not very certain. Assuming we have four years to save for his wedding, he will need to invest about ₹11,500 per month to accumulate his wedding fund. He can put this money in a bank recurring deposit or a debt mutual fund.

The rest of the amount (around ₹68,000) can go towards his long-term goals, including retirement. He is already contributing to EPF. Given his age, he must consider allocating money to growth assets such as equities.

At this life stage, it is important not to get bogged down with retirement planning calculations. Many life milestones are yet to come, and the best earning years are ahead of him. His time and energy are better spent on enhancing career and income prospects. From an investment perspective, he just needs to continue investing regularly.

He is new to risky investments and is unsure about his risk appetite. There are a few things that you can learn only through experience. Risk appetite is one such thing. While his age ensures this risk-taking ability is high,behavioural DNA defines his risk appetite otherwise. He wouldn’t know his true risk appetite unless he experiences market ups and downs first-hand.

Two approaches

There are two approaches he can take.

1. Not take any risk. Stick with EPF, PPF and bank fixed deposits. Given his age, such a conservative portfolio is not warranted. Moreover, he would never discover his risk appetite.

2. Take risk but reduce portfolio volatility. This is a better approach.

He can work with an asset allocation approach. From the incremental investments, he can route 50 per cent of the money towards equity and the remaining towards fixed income. He can start with a small allocation and inch up to 50-60 per cent in the equity investments.

After saving for his marriage expenses he can invest another ₹88,500 for long-term savings, out of which ₹20,000 already goes towards EPF. Assuming he wants to go with 50:50 allocation, ₹44,000 from his monthly savings can be in equity products.

For equity investments, he can

1. Start with a large-cap or a multi-cap fund. A simple large-cap index fund will do. Or

2. Pick a dynamic asset allocation fund or a balanced advantage fund. Or

3. Pick a single asset allocation fund that invests in domestic stocks, international stocks, and gold. Or

4. Pick a large-cap index fund, an international stock fund and a gold ETF/mutual funds. This replicates the third approach but is cumbersome to invest for a new investor.

The first approach is simple since picking up an index fund is an easy decision. For the second and third approach, he will have to pick up an actively managed fund and choosing one can be tricky. However, the second and third approaches are likely to be less volatile and easy to stick with. This is just the initial choice. As he gets more comfortable with equity investments, he can add different types of funds in the portfolio.

In the fixed income portfolio, he is already contributing to EPF. He can also invest in PPF. Beyond these two products, he can consider bank fixed deposits or a good credit quality and low duration debt mutual fund. For his income profile, debt MFs will be more tax efficient than bank FDs. However, debt funds carry higher risk than bank FDs.

The writer is a SEBI-registered investment advisor and founder of www.PersonalFinancePlan.in

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How a retired professional can provide for his family and also give back to society

Personal Finance

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Chandrasekar (65) retired three years back. He wanted to review his financial position because of his changed needs and new priorities. He was also considering transfer of wealth to the next generation.

He and his wife Rama (61) live in Chennai. As a finance professional, he has good understanding of various products and the risks associated with such products. As with many of us, the Covid-19 pandemic has spurred him to be sensitive to unforeseen challenges.

His assets comprised financial assets and real estate. His total net worth was estimated to be ₹15 crore excluding self-occupied house in Chennai. He is physically active and reasonably healthy. His wife is ageing and is on regular medication for a long-term ailment.

Defined financial goals

Basis his changed priorities of increasing liquidity, seeking regular income and wishing to bequeath assets to his son and daughter, we helped him define his financial goals as below:

1. Set up a emergency fund to cover 12 months of living expenses in fixed deposits

2. A medical fund for a sum of ₹50 lakh with enough liquidity through staggered fixed deposits and liquid funds

3. Automate his charity needs with an endowment fund of ₹1 crore. Income earned from this endowment fund will be spent on the education needs of deserving students and families. This was made possible with a trust structure.

4. He was advised to use different structures to transfer his wealth over a period and prepare a will accordingly.

5. Towards ensuring a regular income from his assets for the family expenses, we advised him to segregate his expenses into 2-3 buckets. First one to cover his living costs, which also included support staff and emergency care expenses. He estimated the amount to be ₹75,000 per month. Second was to spend for his luxury needs (travel and appliance purchases), estimated at ₹5 lakh per annum. Third one would cover social needs such as meeting and gifting friends and family. He estimated this to be at ₹3 lakh.

He preferred a conservative approach for his own needs and requirements but wanted to allocate reasonable growth assets for his other needs such as charity, and transfer of wealth to children. . For self, he favoured fixed deposits and safe investment avenues though he might be paying higher taxes, with safety and liquidity being top criteria for choosing an investment avenue.

Review and recommendations

1. We advised Chandrasekar to reserve ₹9 lakh in FDs with auto renewal option in the bank closest to his residence, towards his Emergency Fund.

2. To create a medical fund of ₹25 lakh each for him and his wife, again in FDs in a staggered way.

3. His retirement living expenses were at ₹75,000 per month. Estimated inflation would be around 7 per cent and life expectancy for him and his wife was taken as 100. Post tax return from investment products was estimated at 6.5 per cent per annum. Though he was aware of the burden of taxes and the impact on returns, he wanted to ensure he had enough funds to manage his expenses in the safest possible way.

He was advised to reserve ₹3.84 crore and the basket of products were selected from Government Bonds to annuity plans. The product basket ensured that it required minimal management from him or his spouse.

4. To cover his living expenses fund, we advised him to retain approximately 50 per cent of the corpus to wealth fund for his needs. This was invested in a balanced portfolio with 50 per cent in index funds and 50 per cent in fixed income securities.

5. He wanted to withdraw ₹8 lakh every year for the next 20 years and the corpus needed for the same was ₹1.6 crore.

Any income received from this corpus could be used as per inflationary additions towards his needs or he had the option of transferring the excess to charity.

6. Charitable trust was created with identified beneficiaries and the charity automated with minimal human intervention.

7. Recommended a combination of will and private trust and other alternate options to transfer wealth to his children in case of any unfortunate event. Enough care has been taken to protect his wife’s interest in managing her lifestyle and expenses for her life time.

The pandemic has induced fear in senior citizens about handling money, health needs and wealth transfer.

This gentleman, with hands-on experience in various financial products, opened many doors with much clarity.

Here was one who went the extra mile to ensure personal stability, and well-being of those around him. Also, seeking the help of professionals adds value to what you want to accomplish.

The writer, founder of Chamomile Investment Consultants in Chennai, is an investment advisor registered with SEBI

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Planning for son’s education, own retirement

Personal Finance

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Nishant is 36 and works with an IT company in Pune. He has a 5-year-old son. Until now, he has focussed his energies on repaying the home loan, which he repaid completely 2 months back. Thus, he does not have many investments. In addition to this house, he has Rs ₹ 5 lakh in fixed deposits and ₹13 lakh in employees’ provident fund.

His net take-home monthly salary is ₹80,000. He can invest about ₹35,000 per month. Besides, his monthly contribution to EPF account, including employer contribution, is ₹11,500.

He wants to invest for his son’s higher education, for which he thinks he will need about ₹20 lakh (present cost) after 12 years. Besides, he wants to save for this retirement. He has not bought any insurance plan yet.

Buying insurance

Insurance is the first pillar of financial planning. In his case, getting insurance portfolio right is even more critical since he is the sole earning member in the family. There are three broad types of insurance plans that every earning member must buy: Life, Health and Accidental Disability Insurance.

While there are many ways to calculate life insurance cover requirement, a simple thumb rule is to buy a cover for 10-15 times the annual income. With his level of income, he can go for a life cover of ₹ 1.25-1.5 crore.

A term insurance plan is the best way to purchase a life insurance. This will cost him about ₹18,000-20,000 per annum. He can choose to pay annual premium in monthly installments too.

He has a health cover of ₹3 lakh from his employer. The coverage is clearly not sufficient for a family of three. He must buy a family floater health insurance plan of ₹10 lakh. That will cost him about ₹15,000 per annum.

He can buy accidental disability cover as a rider with a term plan or as a standalone plan. A rider with the term plan is cheaper because the scope of coverage is limited to total and permanent disability.

A standalone plan is more expensive, but it covers both partial and total permanent disability, temporary disability, and accidental death.

These insurance plans (life, health and accidental cover) will cost about ₹5,000 per month or Rs 60,000 per annum.

He has a fixed deposit of ₹5 lakh that can be considered towards medical and emergency fund.

Son’s education

For son’s education, he needs ₹20 lakh (present cost) in 12 years. At the inflation rate of 6 per cent per annum, the target nominal corpus will be ₹40 lakh in 12 years.

Assuming a return of 10 per cent on the portfolio over 12 years, he needs to invest ₹15,000 per month.

He can put this money into a hybrid fund or a multicap fund by way of SIP. He must gradually shift this money to debt as he moves closer to the goal.

For his retirement, he mentions that only 2/3rd of his current expenses will continue into retirement.

His current expense is ₹45,000 per month but that includes conveyance and school and tuition fee for his son.

His expected expenses during retirement will be ~ ₹30,000 per month (cost). Assuming a post retirement life of 30 years, inflation of 6 per cent per annum and that he can earn inflation matching returns during retirement, he needs to accumulate ₹4.3 crore in 24 years.

His current EPF corpus will grow to ₹80 lakh in 24 years . At assumed pre-retirement return of 10 per cent per annum, he needs to invest ₹32,000 per month.

He is already putting ₹11,500 per month by way of EPF. After accounting for regular expenses, insurance payments and investment for son’s education, he can invest an additional ₹15,000 per month (35,000 – 5,000 – 15,000).

His retirement portfolio is already debt heavy. He can split this amount between a largecap fund and a midcap fund, with heavier allocation to the former. He is investing less than he should. He must invest more when his cashflows permit. This should not be a problem since his best earning years are ahead of him.

He must understand all the goal calculations above are based on heavy assumptions about inflation and expected returns.

He must keep revisiting these assumptions and portfolio growth and make adjustments accordingly.

The writer is a SEBI-registered investment advisor and founder of personal financeplan.in

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How to retire early without spoiling family’s dreams

Personal Finance

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Raghavan, aged 49, and Saraswathi, aged 42, wanted to draft their retirement readiness plan. Raghavan, after a busy corporate life, felt it was time to quit and spend time with family. His daughter Anu (18) had just joined college and son Venkat (16) was in ninth standard.

The accompanying table (Assets) shows his net worth.

His investment assets are ₹5.53 crore. Also, he holds 75 sovereigns of physical gold. Raghavan has been a balanced risk taker over the years. He understands the volatility of equity investments and stayed put over the years to generate reasonable returns from his investment portfolio. He has now exited all his direct equity investments and stuck to mutual funds over the years. He has a sound investment portfolio built over the years, with regular investing.

Family history suggested that the life expectancy number for him and his wife would be 100 years. His family has maintained a modest lifestyle with monthly expense of ₹45,000 per month excluding children’s education expenses.

Goals

Firstly, he needs to maintain one-year expenses as emergency fund in fixed deposits.

Secondly, Anu needs ₹6 lakh towards her college education for the next two years, which is to be maintained as fixed deposits/liquid funds. Also, Anu’s PG needs funding.

Anu’s marriage expenses are estimated to be ₹35 lakh. Anu’s gold gift needs will be met from Raghvan’s current holding of physical gold.

Similar planning for Venkat is also required.

The family needs ₹2.7 crore to manage expenses of ₹50,000 per month for a period of 58 years, till Saraswathi attains 100 years of age.Expected return assumed to be at 8 per cent CAGR.

We suggested they add ₹5,000 per month towards any medical need as additional retirement fund. This may be needed to support any prescription costs, medical helper costs over the years.

It was also suggested that Raghavan keep some corpus towards his property maintenance. His independent house may need reconstruction/renovation as the years pass by.

All his goals are seen in the accompanying table.

Final thoughts

Raghavan is very well positioned to opt for immediate retirement with his modest lifestyle. With the current allocation of 49:51 in equity:debt, he can fund most of his goals without any compromise.

We arrived at a total cost of all his goals to be Rs 6.52 crore. His financial assets are worth Rs 5.53 crore. With long-term equity exposure to goals such as retirement health fund, post retirement vacation fund and property maintenance fund, this corpus is sufficient for him to retire immediately.

Mathematically, for a financial planner, saying ‘yes’ to retirement-ready status to a client is easier.

But there are other behavioural aspects to a peaceful and comfortable retirement. Having worked for more than 25 years with dedication, he was prudent and disciplined while saving for retirement. But he never really bothered to spend time with family or enjoy vacations which have become more important for him now.

This is likely to increase spending in the initial years of his retired life. So, it was advised to look out for regular earning opportunity.

This is basically to protect oneself against unexpected change in financial assumptions such as interest rate, inflation and other surprises such as health needs and lifestyle expenses.

When it comes to retirement readiness, it is always better to exceed the planned corpus by substituting with regular income or allocating additional corpus called ‘retirement fall back fund’.

Hence it was advised that Raghvan take logically sound decisions on spending in the first five years post retirement.

The writer, Co-founder of Chamomile Investment Consultants in Chennai, is an investment advisor registered with SEBI

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Three smart money moves you can make this financial year

Personal Finance

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A new financial year is upon us. Yet, 2021-22 gives that deja vu feeling. The Covid pandemic refuses to go, financial markets remain volatile, and hopes remain high that the good ol’ times will be back. The new fiscal requires you to be smart and have a handle on savings, investment, taxes, expenses and much more. Here is a blue-print on the key moves you need to take so that money matters are always under control.

Be investment wise

A new financial year requires a fresh assessment to check whether your investments are on track to meet your long-term goals. You must check if there is a need to change or rebalance the asset-allocation mix for optimal results, in the light of developments on the personal front.

Also, a new financial year is a good time to do a check on the health of your portfolio. Financial markets, especially stocks, have done very well in the last one year or so. If even in this situation, some market-linked investments have not well, find out for reasons. If you find a pattern of continued poor performance, weed out under-performers.

Be a regular: If you are in the old tax regime and among those who struggle to meet the deadline for tax-saving investments every financial year, now is the time to get smart. Instead of doing tax-saving investments at the end of February/March 2022, start them from April 2021 for ELSS, NPS, PPF, etc.

Just like your EMIs, you have the option to spread out your investments regularly over the next 12 months in most of these products. This will work well if sometimes, you don’t have enough funds to do the investments at one go.

Besides, delaying the investment process to the end of the year will make you prone to mistakes in the form of choosing the wrong products. Also, if you do equity-linked investments through SIPs, you can average your costs better and avoid risk of timing your investment.

Use tactical opportunities: Instead of frittering away the annual bonus , ex gratia or other one time payments that some employers give during this time, this new financial year offers you the chance to stock up on small-saving schemes and voluntary provident fund. If the circular on the new small savings rates issued on March 31 (withdrawn later) is any indication, interest rates may go down further, before moving up.

Hence, for conservative investors to whom the sovereign guarantee offered by the small-saving schemes is important, schemes such as NSC is a good bet (offers 6.8 per cent) compared to similar tenure bank deposits.

As per the new PF rules, interest on cumulative annual employee contributions above ₹2.5 lakh shall attract income tax at the applicable tax slab, wherever employer is also contributing. Nevertheless, despite the tax, the returns on the VPF continue to be attractive when compared to the interest rates being offered on other debt instruments and it will be a smart move to use this window to your advantage in the new financial year.

Contributions to both the NSC as well as the VPF is eligible for deduction up to to ₹1.5 lakh under Section 80C.

Prep for taxes

The end of FY2020-21 and the start of FY2021-22 have different implications from tax filing point of view.

To do tax return filing for the previous fiscal, you will be required to collect all the necessary documents including details of any foreign asset/income.

Though one may argue the tax filing deadline is some months away, it will not hurt to check Form 26AS online to check whether tax deductions for FY2021 are properly credited. Remember to cross check the Form 16 that will be sent by your employer soon. Start collecting capital gains statements for investments and account statements for bank accounts. Dividends are taxable so keep a note on them too.

For the new financial year, there is a tax-related task you can do right away.

Submit a pragmatic investment declaration, basis on which your employer will deduct taxes each month. Avoid a casual approach towards submission of investment declaration such as mentioning maximum contribution for Section 80C, Section 80D when you very well know you can’t invest so much.

While it may lead to a higher take-home salary now due to lower tax deduction, what matters is actually doing those investments at the end of year. Failure to submit investment proofs to your employer could lead to substantial tax outgo in the last 2-3 months of the year and pinch your disposable cash.

Rainy day plans

A new financial year is also a good time to do a check on your emergency funds and insurance cover.

The Covid pandemic has shown the need to have a contingency fund. With salaries cut and expenses rising, many had to break their piggybank to survive last year. This underlines the need to stash away money in the savings pool so that 6-12 months of zero/low income does not impact household finances.

Also, take a re-look at life as well as health insurance needs at the beginning of the financial year. Over time, the needs and lifestyle of your family change. Hence, your insurance cover should also change accordingly. Significant life-changing events such as marriage, the birth of a child, home loans, income change etc. increase your responsibilities. Raise your life coverage amount when renewal comes up this fiscal.

Similarly, medical costs for elderly parents, newborn children and hospitalisation can pinch your pocket. To tide over inflation in medical costs, widen your health cover if necessary.

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