Prioritise and reconsider

Deepak (36) is married and has two sons, aged seven and 10. He works as a marketing manager and takes home an amount of Rs 85,000 every month. His monthly expenses, including EMIs, amount to Rs 50,000, leaving an investible surplus of Rs 35,000 with him. He has a small home loan outstanding. Deepak also has some money in the EPF, PPF, NPS and also a small amount in stocks. He wants to accumulate a corpus for his retirement and pay for his children's education and marriage. He also wants to know whether he has sufficient life insurance.

Emergency corpus
At the moment, Deepak has Rs 1 lakh in his savings bank account. He should maintain an emergency corpus of Rs 3 lakh (equal to six month's expenses) in a sweep-in fixed deposit and liquid funds. This will help him earn a higher rate of interest without compromising on liquidity.

Action: Build an emergency corpus and place it in a sweep-in fixed deposit and liquid funds.

Life insurance
Deepak has purchased a term life cover of Rs 1.50 crore in addition to the Rs 12.5 lakh life insurance provided by his employer. This takes his total life cover to Rs 1.63 crore. This is sufficient for his needs and proportionate to his income.

For life-insurance needs, one should go for term plans. Term plans provide comparatively larger insurance cover as compared to traditional endowment plans and are economical, too.

As a general principle, one should keep one's investments and insurance separate. Financial products that combine both insurance and investment tend to fail on both fronts; they don't provide good returns and the insurance cover is inadequate most of the time.

Action: Maintain the existing life insurance cover.

Health insurance
Deepak has a medical insurance policy with a cover of Rs 5 lakh in addition to a Rs 2 lakh cover provided by his employer. Both the policies cover his family members. Deepak has also purchased a critical illness cover of Rs 10 lakh each for himself and his wife.

Critical-illness policies pay you a lump sum on the diagnosis of certain specified diseases like cancer, kidney failure, heart attack, etc. Such diseases entail high expenditure and hence can seriously dent one's financial state.

Deepak's employer provides a personal accidental cover of Rs 25 lakh. Deepak is further planning to buy an additional disability cover of approximately the same amount in a few months. Personal accident policies provide money in case of an accident or partial/total loss of an organ, which can inhibit a person's working ability. It is indeed prudent to get critical illness and personal accidental policies. However, he should ensure that the plan chosen covers both partial and total disability.

Action: Ensure that the disability cover you choose covers both partial and total disability.

Retirement
Deepak spends Rs 35,000 every month and would need approximately Rs 4.84 crore to meet his post retirement expenses. He wants to retire at the age of 60.

His employer contributes 10 per cent of Deepak's salary to his NPS account. In addition, Deepak voluntarily invests Rs 50,000 each year in the NPS to avail the deduction under Section 80CCD(1B). He invests 50 per cent of his NPS corpus in equity, 30 per cent in corporate bonds and 20 per cent in government securities.

Based on his allocation, and assuming his employer contributions grow at 10 per cent per annum, Deepak will accumulate Rs 2.65 crore in 24 years. In addition, he has an accumulated balance of Rs 12.25 lakh collectively in the EPF, PPF and NPS. This amount will grow to Rs 82.34 lakh by the time he retires.

All these investments will give him a sum of about 3.5 crore, which unfortunately falls short of the retirement corpus he needs (Rs 4.84 crore). Some of this gap will be filled when Deepak pays off his home loan in about 10 years and uses his EMI money to invest in SIPs. He should also consider shifting his NPS investments to an active portfolio where he can invest up to 75 per cent in equity.

Action: Shift NPS investments to active investment choice for investing a higher amount in equities.

Children's education and weddings
Deepak is planning to save Rs 1 crore for the education and weddings of his children. Even though these goals need to be fulfilled in a time span ranging from six to 17 years, Deepak's SIPs of Rs 30,000 a month (increasing at 10 per cent per annum) will not be able to cover this amount. He should look at prioritising his goals on one hand while reducing his budgeted amounts.

Action: Prioritise goals and reduce the estimated goal amounts. Ensure that SIPs are increasing more than 10 per cent every year.

Funds
Deepak has recently started investing in mutual funds. He has SIPs of Rs 5,000 each in a flexicap and tax-saver fund. In addition he also invests Rs 10,000 every month in a large-, mid-cap-, and an aggressive hybrid fund. His funds are well-chosen and do not need changes at this point. However, he should start shifting his money to short duration debt funds about two to three years before the completion of each goal through systematic withdrawal plans (SWPs).

Deepak also has some stocks in his portfolio. He should invest in equities directly only if he understands how to analyse businesses. Direct equity investing requires one to constantly track one's investments. If he doesn't have the time or skills to do so, he should limit himself to equity mutual funds.

Action: Move to short duration debt funds as goals come closer. Rethink stock investments.