Well-diversified portfolio across debt, equities and real estate. Substantial wealth at young age; financial investments worth nearly Rs 15 lakh. Inadequate life and medical insurance cover, no property insurance.
How can the Ramanis ensure a smooth ride to achieve their financial goals?
Ganesh Ramani and his wife Vidya lead a comfortable life in Mumbai. Both work and their earnings are more than sufficient to take care of present needs. But is their surplus enough to meet their future requirements? Yes. In fact, a very definite and unambiguous yes, provided the couple become more rational in assessing some of their financial needs.
Ganesh, a 31-year-old business analyst, earns Rs 70,000 a month while Vidya, a 27-year-old technical analyst earns Rs 30,000 a month. The young couple also have the luxury of owning an apartment in Mumbai, which is one of the costliest real estate markets in the world. “Currently we stay with my parents at my parental house. As of now, we have no plans to live separately either, so the flat is and will continue to serve as an investment,” says Ganesh. The fact that the apartment is being used as an investment is icing on the cake.
The rent from the flat adds another Rs 14,500 to their income every month, which amplifies the combined monthly income of the couple to Rs 1,14,500. Their household expenses are Rs 22,000 a month. And once the equated monthly instalments (EMI), the premiums for insurance and pension policies are deducted, the couple are left with a surplus of Rs 51,955. This surplus is more than sufficient to meet all their financial goals.
The couple’s financial plan include going for a vacation, buying a second home, funding their child’s higher education and also building a retirement reserve. Ganesh and Vidya have already built a substantial amount of wealth: Their present net worth is about Rs 54 lakh. And given their current income levels, the financial journey for the couple can’t get any smoother. All they need to do is to be realistic about their goals.
Ganesh and Vidya want to accumulate a corpus of Rs 10 crore for retirement, which is 29 years away. But given their current standard of living, this amount is highly overstated. The couple need to understand that the outflow of money for premiums and EMIs will stop much before the time they retire. Hence, they will only have to bear the household expenses after their retirement.
Assuming an inflation of 7%, the couple will not need more than Rs 4.45 crore for their old age. The corpus would be enough to meet the couple’s annual expenses, which will be Rs 15 lakh at the age of 60, and are expected to inflate at 5% per annum. Ganesh has already bought a pension plan with an annual premium of Rs 1 lakh. This plan, together with his Employee Provident Fund , will take care of 35% of their retirement needs. The balance Rs 3 crore can be built by a monthly investment of Rs 11,651 through systematic investment plans (SIPs).
This amount can be divided in three equal amounts and invested in Nifty BeEs exchange-traded funds (ETFs), Junior BeEs ETFs and two or three direct stocks from the top 100 list, suggests Greshma Wealth Advisors. The goal has a long-term perspective, hence investing in the benchmark indices is appropriate. In the long term, no investment approach can usually beat the benchmark index, which also does away with the need for active management.
The other long-term goal of the couple is to stock up for their child’s education. The couple want to accumulate Rs 50 lakh for this goal in 15 years. The corpus amount is not questionable in this case since it is the dream of all parents to give their child the best of education. But the time period in which Ganesh and Vidya want to achieve this goal needs to be given a thought.
The couple do not have a child and has no plans of having one for at least a year. “Maybe in January next year, we can think of having a baby,” Ganesh says. Hence, Ganesh and Vidya will not need this money before 19 years. Still to be safe, we suggest that they should look at a time frame of 17 years to achieve the goal. Assuming an inflation of 3% per annum, they would need Rs 82.64 lakh for their child’s education.
In order to achieve this, they need to invest Rs 14,088 every month from the surplus through SIPs. Greshma Wealth Advisors suggests that Rs 5,000 each should be invested in HDFC Top 200 and Reliance Growth Fund. The balance Rs 4,000 should be invested in ICICI Pru Dynamic Plan. All these are diversified equity funds and hence appropriate for long-term investments.Among the short-term goals, the first one is to go for a holiday in a year, which the couple believe will cost them Rs 6 lakh. This amount is rather substantial to be built in a year. And eating into the debt cushion to fulfil this goal is not advisable as it will have repercussions on the other short-term goal of buying a second home.
We suggest that Ganesh and Vidya can instead go on a vacation after two years. In two years, the holiday could cost them Rs 6.48 lakh. This amount can be built with a monthly investment of Rs 26,126 through SIPs. The amount can be divided in two equal amounts and invested in Birla Sunlife Dynamic Bond Fund and ICICI Pru Short Term Plan Fund, according to Greshma Wealth Advisors.
Before talking about the couple’s other short-term goal, it is important to have a detailed analysis of their insurance cover. This is because before they take on the liability of another home loan, they need to insure themselves adequately. Ganesh has an employee-sponsored term life cover of Rs 10 lakh.
The couple are servicing a loan of Rs 15 lakh (Rs 12 lakh for home loan and Rs 3 lakh for car loan). Given this loan amount and his present and future cash needs, the couple’s life cover is grossly inadequate and should be about Rs 78 lakh.
Hence we suggest that he should buy a pure term life insurance cover of at least Rs 50 lakh. The annual premium for such a policy should be around Rs 12,000.
Regarding their health insurance, the couple are already insured for up to Rs 3 lakh. However, the cover is not adequate and we suggest that they should buy a family floater health cover of Rs 5 lakh with an annual premium of about Rs 7,000.
The couple have also bought a traditional endowment plan and two Ulips. Financial experts say that insurance and investments should be kept separate. Hence, Greshma Wealth Advisors suggests that Ganesh and Vidya should terminate all these insurance policies. The surrender value of the endowment policy can contribute towards the down payment for buying the second home. The two Ulips can also be redeemed for the same. The premiums can be directed towards Public Provident Fund to ensure that tax saving continues.
Ganesh and Vidya must be among those rare young and earning couples who can envisage buying a second house as a short-term goal. But managing another house as an investment can also be tedious for service class people. “We want to buy a two-bedroom apartment in the suburbs of Mumbai in two years. The rate for a flat in the outskirts is expected to be about Rs 3,000-4,000 per sq ft,” Ganesh says.
Such a house will cost the couple at least Rs 57 lakh in two years. The couple’s mutual fund and equity portfolio, together with the cash value of their insurance policies are already worth Rs 15 lakh. These investments could grow to about Rs 17.5 lakh in two years and can be used as down payment.
The balance Rs 39.5 lakh can be serviced by a 20-year loan. The EMI for it will work out to be Rs 35,539 at the rate of 9% per annum. In two years, the goal of going for a vacation will be achieved, so the surplus of Rs 26,216 can be used to pay part of the EMI.
Salary increments should be able to take care of remaining Rs 9,323. Besides at present, the couple's monthly expenses also include an amount of about Rs 4,000, which they spend on their own education. “This is only for another two to three years as Vidya is doing her MBA,” says Ganesh. Once this expense ceases, the EMI burden will lighten up further.
Vidya and Ganesh deserve kudos for managing a stupendous start for their financial journey. But the couple need to be more careful of their insurance needs. They should increase their life cover after they take another home loan and also buy property insurance. As age progresses, they should buy a critical illness cover.Courtesy: ET Wealth.
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