Taking forward the case of Mr. Abhishek Singh, let us quickly recap his goals and the gaps in his financial planning which we had covered in our previous issue.

Abhishek Singh is a 33-year-old information technology consultant and has a monthly income of Rs.1, 00,000. He is married, his wife is a homemaker and he has a 12-year-old daughter.

The future values of his various goals are as follows:

After analysing his current investments, we identify the following factors which require his immediate attention:

• His current life cover is inadequate and he needs to enhance the same
• He has no health insurance on his personal capacity. He does not have any insurance against other assets as well
• His savings account balance stands at Rs.12 lakh

For specific goals, his position stands as follows:

Our reccomendations

The first and foremost step is to enhance his life cover:

His current life cover stands at Rs.10 lakh which is grossly inadequate. There are quite a few methodologies to calculate the required life cover for an individual, for example: human life value method, need based method etc. The thumb rule, however, is to have a life cover equal to 10 times one’s annual income.

Thus, Singh should have a cover of at least Rs.1.2 crore. With regard to life insurance, it is best to go in for a term cover. Term cover plans do not provide any return and function like a car insurance plan. However, they are the cheapest form of insurance as compared to an endowment or unit linked plans. The balance amount that you save can be used to park in alternate investments.

Health insurance and other assets insurance:

He has a health insurance provided by his employer; however, he should have a cover on his personal capacity as well. This provides the much needed health cover in case of job loss or when switching jobs. Ideally, he should go in for a family floater plan which will cover him, his wife and daughter under the same plan. An ideal amount of cover for him would be Rs.5 lakh.

He also needs to take up insurance cover for his assets such as home insurance, jewellery insurance etc.

Balance in savings bank account:

He currently has a balance of Rs.12 lakh in his savings bank account. It is imperative to hold adequate funds in a savings account for emergency. Nevertheless, by holding large amounts in his savings account, Singh will lose the additional return that can be earned by alternative investments.

It is ideal to hold 3-6 months salary as emergency that is, it is sufficient if Singh has only 3-6 lakh as emergency funds. The balance amount of 6 lakh can be used for alternative investments (assuming he sets aside Rs.6 lakh as emergency funds).

Further, it is beneficial to hold this amount in liquid funds over a savings account as they provide tax effective returns. Liquid funds invest in money market securities; they offer safety, stability in returns and liquidity. Funds lying in a liquid fund can be withdrawn in a day’s time.

Purchase of a sedan:

Since the deficit to purchase a sedan is only Rs.1 lakh and the time to goal is also only 3 years, an amount of Rs.80, 000 can be parked in an income fund. The above calculation has been done at an assumed rate of 8 per cent.

Child’s education:

The amount generated from this investment is more than sufficient to meet the goal. Thus, there are no changes to be made to this investment.

Child’s marriage:

In this case, there is a deficit of almost Rs.14 lakh. We suggest Singh start a systematic investment plan for the same.

An amount of Rs.3, 000 for a period of 15 years at an assumed rate of 12 per cent will fetch him Rs.15 lakh at the end of the tenure.

After taking care of his goals, he still has Rs.5 lakh at his disposal which can be channelised towards other investments. We suggest he splits his investments between equity and debt in a 3:2 ratio.

Equity Investment – Rs.3 lakh

We recommend that Singh invests this money in a liquid fund and then start a Systematic Transfer Plan (STP) into an equity scheme. That is, he can invest Rs.3 lakh in a liquid fund and then start an STP of Rs.25, 000 per month into equity schemes for one year. Since he is a first time investor of mutual funds, we suggest that he should go in for large cap and flexi cap funds.

Debt Investment – Rs.2 lakh

He can park this money in a Fixed Maturity Plan for tenure of one year and take advantage of the current rising interest rate scenario.

To conclude, he needs to do the following

Finally, all the efforts will be futile if there is no effective mechanism to monitor the current investments. Our financial world is extremely dynamic and a constant follow up is essential to ensure the investments are in line with the defined goals. You need to sit down with your financial planner and decide on an ideal frequency over which your investments will be monitored. Remember, financial planning is a complex exercise and it always pays to have a professional financial planner who will guide you through this important journey.

Focus Area:   Plan of Action

Insurance Cover:    He should enhance his cover to an amount of Rs.1.2 Crore

Health Cover:    Supplement health cover with a family floater plan with a cover of Rs. 5 Lakh

Emergency Funds:    He should maintain six month’s income as emergency funds; parked in liquid mutual funds

Purchase of Sedan:    Invest an amount of Rs.80, 000 in an income fund

Child’s Marriage:    Start an SIP of Rs.3,000 for a period of 15 years

Fresh Investments:    Surplus funds of Rs.5 Lakhs – investments in equity mutual funds via STP (Rs.3 Lakh) & 1 year FMP (Rs.2 Lakh)