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For medium- to long-term goals, invest mostly in equity assets

For medium- to long-term goals, invest mostly in equity assets
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First Published: Thu, May 19 2011. 09 54 PM IST
Updated: Thu, May 19 2011. 09 54 PM IST
I am 29 years old and my monthly salary is Rs 41,000 (excluding Employees’ Provident Fund of Rs 3,000). My husband is 30 years old and earns Rs 43,000 per month. Our mutual funds (MF) investment through systematic investment plan (SIP) are as follows—Birla Sun Life Tax Relief ’96 Fund (Dividend), DSP BlackRock Top 100 Equity Fund (Growth), HDFC Tax Saver (G), ICICI Prudential—Focused Bluechip Equity Retail, Tax Plan Growth, Infrastructure Growth, SBI Magnum Tax Gain scheme (G), Sundaram Mutual Fund—Select Midcap Appreciation, Tax Saver-Open Ended Funds and Financial Services Opp Regular (G). The current value of investments is at around Rs 9 lakh. Apart from this, we have life insurance cover of around Rs 20 lakh and we have a health cover from our respective employers. We have a one-year-old daughter. Our goals are buying a house in the next three-five years (current cost is Rs 50 lakh), daughter’s education and marriage. If we plan to retire at the age of 55, what should be our retirement corpus? My in-laws are dependant on us. How much additional life cover should we take and for what tenor? Do we need any change in our equity portfolio? What should be our monthly saving to reach our targets? What about investment in gold exchange-traded funds?
-Sony
We first need to define your financial needs. You have mentioned your plan to buy a house. We have considered the value as Rs 45 lakh and the same is proposed to be purchased in five years from now. Your daughter’s higher education is considered when she turns 21. We have considered Rs 5 lakh per annum for four years at current value which will be equivalent to Rs 85.90 lakh inflated value. Further, her marriage expenses have been provided as Rs 10 lakh when she turns 25 and with inflation the same comes to Rs 50.72 lakh. Lastly, the retirement need, you have not mentioned how much your current household expenses are which can be considered for your retirement need. However, we have assumed the same as Rs 30,000 per month and your retirement age has been taken as 55 years. The inflated value translates to Rs 22.36 lakh in the first year post retirement, which means at the age of 56 years. There are few assumptions we have taken which are critical in attaining the above.
We have assumed your savings will grow by 8% year-on-year. Inflation has been taken at 7% as an average over longer period. Interest rate (earnings rate) has been taken as 10%. We have also considered your existing savings of Rs 9 lakh, which is the total savings in mutual funds.
Your housing need inflated value has been considered at Rs 59 lakh, where you will pay 20% as down payment and the balance through a housing loan.
The rate of interest has been taken as 10% and the tenor 20 years. The real challenge lies in how you will you service the loan as well as continue saving for other goals. One option could be that as we have considered only your MF portfolio the other financial assets you have can go in contributing for the new house which will help reduce your equated monthly instalment.
Your net worth when you turn 55 years is targeted at Rs 3.26 crore. This corpus is after meeting all the expenses which will happen during your life cycle, including buying a house, daughter’s education and marriage and hence is a true retirement corpus. This corpus will sustain till you are 79 years.
You reach the break-even point at 61 years; at this age the gap between your interest earnings and your expenses are minimal. Subsequently, your expense becomes higher than earnings and you start dipping into your corpus. If you continue working till 58 years, the corpus lasts till 86 years and the break-even year gets pushed to 74 years.
Investment strategy: As all your needs are medium to long term, you should park most of your money in equity assets. You are already doing monthly investments in equity funds. However, you have too many funds. You need to reduce your funds size to half. Pick five funds from the equity basket—diversified, large-cap, mid-cap, hybrid and tax-saving. To start with, you have five tax-saving funds. This is way too many. Instead have just one, such as HDFC Tax Saver. The other tax-saving funds can be redeemed once the mandatory lock-in period is over. Also, you should not take exposure to sectoral funds. They are very high on risk and are not recommended in your case.
Further, look at opening a Public Provident Fund account. You can contribute a maximum of Rs70, 000 annually. Gold ETFs are a good hedge against inflation and your exposure to equity. However, any exposure to gold should be limited to 5-10% of your portfolio. However, do not expect gold to deliver the same returns in the future.
Also, your life cover is inadequate. It is also not very clear whether you have a term plan or other insurance products. However, it is recommended that both of you increase your life cover and preferably should have a term plan of close to four times your total income. This cover can be taken till the time you are working or in your specific case till 58 years. Also a word of caution, your housing loan (whenever you take it) should be protected and hence you can consider increasing the insurance at that time. You should have a health cover for your dependant parent-in-laws.
Queries and views at mintmoney@livemint.com
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First Published: Thu, May 19 2011. 09 54 PM IST
More Topics: Financial Planning | MF | EPF | Edcation | Marriage |