In the earlier articles we spoke about the typical financial goals that an individual may have. We discussed about assessing the current financial situation in the form of income-expenditure statement and a net worth statement. In this issue, we will understand how to identify the gaps or deficiencies in an investor’s portfolio. This crucial step in personal finance (gap analysis) will help us take corrective measures to attune our investment portfolio in line with our goals.
To understand this better, we take the case of Abhishek Singh who 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.
Let us quickly run through his major financial goals and understand his current financial position.
His major goals are
Immediate Goals – safety and liquidity
- Adequate life insurance cover
- Adequate health cover
- Insurance policies to cover his major assets
Medium Term Goal
- Upgrade car to a sedan in three years – current cost – Rs.10 lakh
Long Term Goals
- Provide for child’s education after six years – current cost – Rs.10 lakh
- Provide for child’s marriage after 15 years – current cost – Rs.15 lakh
We are aware of the current cost that needs to be incurred for achieving these goals. However, fulfillment of these goals is still a few years away and the cost of these goals will increase due to inflation. Thus, taking into consideration the duration for these goals and assuming the inflation factor to be at 7 per cent we estimate the cost as follows:
Analysing his current financial position, we understand that he has the following investments which were made for specific goals:
- He has a life insurance of Rs.10 lakh
- He does not have any health insurance or insurance covering any of his assets
The next step is to match the current investments with the estimated cost of each goal to arrive at the surplus or deficit in the investments. Let us tackle each investment:
- The amount of Rs.12 lakh in the bank account is for emergency purposes. It is ideal to have three or four months of monthly salary as reserve funds in liquid form.
- The fixed deposit for three years can be earmarked for purchasing the sedan. It provides an interest of 8.5 per cent. The post tax yield is 5.87 per cent and it would yield an amount of Rs.11,27,000.
- The proceeds of investment in NSC can be set aside for his daughter’s marriage. NSC provides 8 per cent return with half yearly compounding. The maturity amount from this investment would be Rs.16, 01,000.
- Assuming he holds the investment in equity mutual funds till his daughter’s marriage, Rs.5, 00,000 will grow to (at an assumed rate of 12 per cent) Rs.27, 36,000.
By analysing the aforementioned facts we arrive at the following conclusions:
- His current life cover is inadequate and he needs to enhance the same.
- His employer provides him with a health cover, however; it is advisable that he takes up a family floater health plan which will cover him and his family. He also needs to take up policies for insuring his assets.
- It is sufficient if he has Rs.3-5 lakh as liquid money in a savings bank account. Thus, the surplus funds in his bank account can be channelised for further investments.
For achieving his other financial goals, his financial situation is as follows:
As can be seen, his investment in NSC is sufficient for his child’s education. However, his investments will fall short for purchasing a sedan (deficit of Rs.1 lakh) and for his child’s marriage (deficit of over Rs.14 lakh).
Thus, a comprehensive analysis like this helps understand the lacunae in investments and serves as a guide for future investments. In the next issue, we will continue with this case. and advise Abhishek Singh on the corrective measures to be taken on future investments which will help him in achieving his financial goals.