Financial Plan - 1

Name: Prabhudas Mohanty,35

Resides in: Gurgaon

Profession: Planning Manager with a private firm

Net annual income (Rs 8.64 lakh)

Other details: His wife is a home maker and they are expecting their first child

Status & goals

His key goals are planning for the future of his yet to be born child, and adequate income after retirement

Needed

A financial plan that will ensure adequate funds for maintaining financial well-being and also providing for his goals

Net monthly surplus Rs 30,200

Retirement planning (2036)

Adequate monthly income after retirement

Current Investments

Life insurance cash value: Rs 6.11 lakh, Cover: Rs 59.41 lakh

EPF:           Rs 50,000

Real estate: Rs 10 lakh

Cash:          Rs 50,000

Observations

A review of his investment portfolio reveals that Prabhudas has been misguided by insurance agents. He has a heavy insurance portfolio and high property investment through purchase of land. Apart from this he has not made any other investment. His high monthly surplus is not being utilised effectively. His current financial situation is creating the risk of not meeting his life goals.

Findings

Emergency fund:         Rs 50000 maintained in savings bank account.

Health Insurance:        Rs 2 lakh from employer covering the family.

Life Insurance:            Rs 59.7 lakh

Existing Insurance:      Rs 59.7 lakh

Requirement by Human Life Method Rs 1.31 cr

Existing Investments:

Most insurance policies held are not providing adequate returns. Real estate exposure in three lands is more than required. Investments are ad hoc and hence not meeting life goals.

Recommendations

Emergency Fund: Increase emergency funds up to Rs 2.5 lakh which will cover six months expenses in any adverse situation. Invest Rs 2 lakh in money market mutual funds and keep rest in saving accounts or FD. Dispose one of your land investments to achieve this.

Express Tip: An emergency fund is created to meet uncertain expenses arising in future. It is necessary that you have adequate liquid surplus to avoid dipping into your long term savings.

Child’s education and marriage: Invest Rs 9,000 per month in SIPs for education and Rs 5,000 per month for marriage. The real estate holdings too can be utilised towards this goal. Return assumed 12 per cent p.a.

Express Tip: There are extra costs associated with child education apart from school fees, which also tend to increase. While budgeting for their expenses do take these into consideration.

Health Insurance: Buy standalone health insurance coverage to R5 lakh for the family.

Express Tip: Employer health insurance benefits are being reduced and they ceases with job change. Relying upon it completely can be risky, especially, at a higher age.

Life Insurance: A term insurance of Rs 80 lakh is recommended from any life insurance company with low premium rates and good claim settlement.

Express Tip: Life insurance is an investment, for family protection and not for capital growth. Know the right coverage required and buy the right product.

Retirement Planning: As per expense replacement method he will need a corpus of Rs 3.7 crore, to maintain his current lifestyle, post retirement. EPF can meet this goal partially if the contribution continues to grow at a good rate. To meet the remaining corpus, an investment of Rs 11,000 per month will be required assuming return of 12 per cent per anum.

Express Tip: EPF is an effective tool for retirement. To maximise it, continue your contributions till your retirement and do not withdraw funds in between.

Existing Investments: Planning your life goals through insurance is the biggest mistake. Traditional plans do not yield high returns and ULIPS have their own drawbacks. Review your insurance policies and exit ones which will not generate desired return on maturity. The savings on premium will help in buying protection cover for life insurance and health insurance, along with investments for your other goals. Real estate is a highly illiquid instrument. Dispose some of your property and utilise the proceeds for your goals through investment in other liquid instruments.

Express Tip: Asset allocation is the right approach for investments. It helps you in maintaining the right exposure to any asset class and protecting the downside during bear markets.

Conclusion

Goal based planning is the correct approach for managing your financial well-being. Identifying your goals is very important. Make provisions for emergencies first and then align your savings towards your life goals. A good asset allocation strategy will help in selecting the right instruments towards reaching financial goals.

Source – Indian Express