I am 28 years old and my salary is Rs45,000 per month. I have a few life insurance policies with premiums of Rs15,000 (sum assured of Rs2 lakh), Rs17,000 (sum assured of Rs3 lakh) and Rs25,000. I put Rs25,000 every year in Public Provident Fund (PPF). I also have an Employees’ Provident Fund deduction of Rs6,500 from my salary. I invest Rs4,500 per month in mutual funds (MFs) such as Birla Sun Life Tax Relief 96, DSP BlackRock Tax Saver, Reliance Tax Saver, DSP BlackRock Microcap, HDFC Top 200, HDFC Prudence with a horizon of at least 10 years. I also have a term plan of Rs20 lakh. I want Rs2 lakh after three years for the admission of my child for which I am considering to invest in HDFC Short Term Plan as in I need capital protection. Am I on the right track? Are my savings sufficient enough to have a corpus of Rs5 crore at the time of retirement, excluding PPF?
—Karan Singh Bhardwaj
The way you have mentioned your life insurance policies along with other investments including term cover separately, it is presumed you are considering life insurance policies as investments unlike your pure term plan. This approach may not suit you well in the short term as liquidity in these policies will be a challenge. Also, in the long term, the income/bonuses earned from these may not be commensurate with the earning potential of other investment avenues.
Assuming you have surplus funds to create a corpus for your child’s admission, a short-term plan may not be the best option if the horizon is of three years. You should consider options such as fixed maturity plans (FMPs) with longer tenors, conservative to moderate MIP (monthly income plans) where equity exposure is 10-20%. Coming to your need for a retirement corpus, there are few assumptions which will go in determining the corpus you will have when you turn 58 years. Assuming your investments earn you an interest rate of 10%, then your investments (excluding PPF but including insurance premiums) will be able to generate a corpus of Rs4.26 crore. However, this interest rate appears difficult to generate despite the long horizon as insurance premiums constitute 30% of your savings. Hence, on a more realistic basis, assuming you are able to increase your savings by 7% year-on-year and the interest rate at 7% over the long term, you will be able to generate a corpus of Rs4.80 crore.You may even like to consider your insurance policies in respect of their benefits and weigh against other investment options.
Also, you have many tax-saving MFs. Having one tax-saving MF is good enough. The other three funds you have are good and you can consider increasing exposure in the same. However, you must be aware of the high risk mid-cap funds carry and consider them for the long term.
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