Publication: DNA, Mumbai; Date: August 27, 2007; Section: Personal Finance; Page: 6
That is the prescription forDNA Money readers Raj & Seema
Financial plan? Who wants one when the markets are booming, gold is rocketing and real estate is zooming? The average working man or woman in India decides where to put his or her money depending on the immediate needs — educate the kids, buy a house, a car, take a holiday and of course, invest to save on tax.
The Sharmas (Raj & Seema), in their mid-thirties, are one such couple that equates financial planning with tax planning. The result: They have no clue as to when Raj would retire or whether he can quit the job to start his own business as he has been contemplating for the last couple of years, etc. They have ended up accumulating a hodgepodge of products (endowment insurance, Ulips, pension plans, real estate, PPF, mutual funds and direct equity).
So caught up were the Sharmas with their hectic lifestyle, jobs and other daily activities that planning for the future always got sidelined. They had dreams, but never so much as put these down in writing. And now, the possibility of any of these dreams being realised seemed very remote — whether it was about buying that dream farmhouse, a Mercedes Benz or taking a world trip.
The first thing we did with the Sharmas was to help them sit back and think • What money meant to them, • What their goals and dreams were, and• What they wanted to achieve in this lifetime.
Financial goals• Post-tax retirement income of Rs 1 lakh per month in todays rupee terms starting 2036 • Corpus of Rs 20 lakh each per child in 2016 (the couple has twins, Anil and Amrita)• Corpus of Rs 10 lakh for Amritas marriage in 2021• Coverage of Rs 30 lakh for medical expenses for the family in 2020• Corpus of Rs 75 lakh for an entrepreneurial venture by age of 45 in 2014.• A holiday once a year to anywhere in the world for the family costing Rs 1-2 lakh• Contribution of 5% of their income annually to charity.
Just writing down what the couple wanted to achieve in their lifespan started giving them a sense of purpose and ignited a dormant passion in them.
Evaluation of current situation
The next step was to assess where the Sharmas were today. A detailed assessment of their current cashflow and networth statements revealed the following:• They had excellent cash flows, but savings were not channeled appropriately into investments• Most of the accumulation that had happened was invested in an ad hoc manner• They had sufficient cash reserves and good liquidity• Though they had a lot of life insurance policies, the life insurance cover was insufficient • They had no critical illness cover • Medical cover was around Rs 1 lakh for the couple and Rs 75,000 for the children• They had no home or property cover — they hadnt bought one even though their home was flooded once • The investments are heavily skewed towards real estate — over 60% of their investment is in real estate, 5% in equity and 26% in debt instruments, while 9% is being held in cash.
Risk management
The following steps are suggested to make life more secure for the Sharmas:• Scale up medical insurance cover to at least Rs 4 lakh for each member of the family • Buy a term plan for Rs 50 lakh for Raj, covering their home liability with disability and critical illness riders of Rs 10 lakh each • Take a homeowners all-risk policy for the current home and the Pune property• Take a single-premium cancer insurance policy from Cancer Patients Aid Association for Raj and Seema (particularly since they have a history of early cancer in the family)
Investment strategy
The Sharmas need a post-tax return of 10% to achieve their goals. Their risk profile is aggressive, which means they have the capacity and the tolerance to go for high-risk investments. Investments are currently concentrated in real estate and some in debt and cash. There is very little exposure to equity and most of the equity exposure is through Ulips and mutual fund NFOs (to quote Seema, “I always thought an NAV of Rs.10 was better than Rs 100.” No wonder they have a collection of 20 funds in their portfolio).
We rebalanced the portfolio taking into consideration the costs, tax implications and decided on an incremental asset allocation.
Debt component could be added through PPF and voluntary contributions to EPF. Equity component was scaled up by going for SIPs in funds with good fund managers, lower costs, lower volatility, etc. Large-cap funds needed to be at the core of the portfolio, with mid-caps as toppings. Additionally, we developed a direct equity portfolio, amounting to 20% of the entire equity investment, and ensured that they have a healthy mix of businesses in their portfolio.
Investment in gold was advised as it can come in handy for their daughters marriage and also act as a hedge, albeit small.
We feel the Sharmas would be able to achieve most of their goals by following the course advised. But, merely having a plan in place will not help, unless it is implemented in spirit. On our part, we prepared a schedule to implement the action plan mutually agreed upon and advised the couple to stick to it.
The writer is a practising certified financial planner. Views expressed are those of theauthor and not necessarily of FPSB India. This case study is only an illustration of thefinancial planning process. For a customisedfinancial plan, contact a CFP. Feedback maybe mailed to myplan@fpsbindia.org.
If you would like to be featured and need a financial plan made by a qualified planner, mail to:
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