Ask Mint Money | It is not advisable to withdraw money from provident fund

Ask Mint Money | It is not advisable to withdraw money from provident fund

I am 32 and my net salary per month is around 80,000. I have invested 8.5 lakh in mutual funds and underperforming unit-linked insurance plans (Ulip). Will it be good to surrender these since they have completed five years? Should I invest this money in instruments that can give around 5,000 per month to pay my son’s school fee or should I invest 4.5 lakh in equities to generate long-term returns? I also have a home loan outstanding of 11.3 lakh. I have around 12-13 lakh in my Employees’ Provident Fund (EPF) account. Is it a good idea to withdraw my PF to clear my home loan so that I can redirect my EMI to a systematic investment plan (SIP) of an equity fund? I would like to build a corpus of 20 lakh for my son when he turns 20. I started SIPs in Reliance Growth Fund and Reliance Regular Savings Equity for 2,000 each about 15 months back (the fund value is about 75,000 as on date). I have an insurance cover of about 70 lakh through term plans and medical insurance for my family and myself of 3 lakh each. Is it sufficient? I plan to retire at 55 and need to build a corpus for my retirement that would give me at least 25,000 per month at today’s cost levels.

—Sanket Majumdar

Financial needs: There are a few regular payouts like EMIs and school fees. Then, you need to build a corpus of 20 lakh; we have taken this at present value. Also, you plan to retire at 55 with expected inflow of 25,000 per month. The last two needs classify under “trust capital", where the emphasis is more on safety, followed by returns; liquidity is the last consideration.

Assumptions: Growth rate is taken at 8%, the rate at which the annual saving will increase, Inflation and interest (earnings) has been taken at 7% and 9%, respectively. These are considered as an average rate over the long term. Further, the savings will not be utilised for any other goals other than the ones specified above. We have also considered that you will save 20,000 in addition to the two existing SIPs and the annual insurance premium.

However, we have not considered your PF contribution and the surplus funds you will have once your EMIs get over.

Financial planning: The total annual savings (including existing savings) is 3.18 lakh and this savings along with the opening net worth of 21.50 lakh (your existing PF, mutual funds and Ulips) will make your corpus accumulate to 4.54 crore at the time of retirement (when you turn 55).

The interest amount in this accumulated amount stands at 3.46 crore. From this total corpus, a sum of 63 lakh is the present value of your son’s corpus.

At the end of 55 years you will have a corpus of 3.63 crore to provide for your retirement. You will have a breakeven point at the age of 74 years when your expenses will be higher than your income; from this year you start depleting your principal.

It will take an annualised return of 10.5% for you to have a corpus of 20 lakh with an annual saving of 30, 000 when your son turns 20.

Investment planning: As all the financial needs come under the category of trust capital, we need to ensure safety. However, with both your financial targets having a long-term horizon and by having a debt portfolio in the form of PF and insurance, you are in a position to take some long-term exposure to equity. Your current SIPs of 2,000 each are in good funds and can be continued. Further exposure to equity can be taken through more SIPs. We can create a pool of 3-4 funds in total. The funds can be picked from the diversified and hybrid equity category. In addition to the above, funds such as HDFC Equity, Birla Frontline Equity and DSP BlackRock Top 100 in the equity category and HDFC Prudence and Reliance RSF Balanced in the hybrid category can be considered.

We also need to create some liquidity and emergency corpus that can be done through a combination of debt funds (dynamic debt), liquid funds and sweep-in accounts are options that can be considered.

Insurance: You are adequately covered for life. However, on medical insurance, it is advisable that you increase the sum insured for yourself (the idea is to have more protection for the earning member of the family).

You can surrender your current Ulip. Make sure there are no surrender charges (there could be some charges even if you have completed five years). The redeemed amount can then be reinvested. Part of the same can form part of the emergency corpus and the balance can be invested in the above mentioned schemes through a systematic transfer plan.

Things to consider: You should continue with your existing housing loan.

As your house is self-occupied, you are also eligible for getting income-tax exemption on the interest part of your loan and hence your rate of interest becomes tax adjusted. It is also not advisable to break your PF at this stage when you can manage your financials within your means.

Similarly, you should pay your son’s school fees from your existing monthly surplus and not depend on the income accruing from various financial assets and let those assets be in the nature of growth rather than payouts.

To read the full answer, go to www.livemint.com/invest.htm

Surya Bhatia is a certified financial planner and principal consultant, Asset Managers

Queries and views at mintmoney@livemint.com

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