Ranveer is 27 years old and is an IT professional. His in-hand salary is about Rs 1 lakh. He lives with his homemaker wife and a baby girl in his own house. Their monthly expenditure is up to Rs 50,000. A home loan with an EMI worth Rs 25,000 is a part of this monthly expenditure.
He has an accumulated corpus of around Rs 14 lakh. He has distributed this amount as National Savings Certificates (NSC), Employees Provident fund (EPF), and equity Mutual Funds. Ranveer requires financial planning.
- Emergency Fund:
Ranveer does not possess an emergency fund. He needs an adequate emergency corpus. This corpus should be equivalent to suppose, six months’ expenditure. It should also include EMIs (if any). In case of any unforeseen emergency, this emergency corpus will help you out.
If we study the case of Ranveer, the emergency corpus stands around Rs 3 lakh. There should be a combination of short duration funds and sweep in deposits. This will enable him to earn better without compromising on liquidity. For this purpose, Ranveer should set aside some amount each month from his monthly salary.
Action: Ranveer needs to create an emergency corpus of Rs 3 lakh.
- Life insurance:
Ranveer does not have any life insurance policy. It is essential to buy a life cover for anyone who has any financial dependents. Ranveer’s daughter and wife are financially dependent on him. Also, he has a home loan worth Rs 20 lakh. Therefore he should buy a term plan worth Rs 1 crore to take care of the family’s expenses and home loan in his absence. For a pure term plan of Rs 1 crore, he needs to pay around Rs 8000 to Rs 9000 every year.
Action: Ranveer needs to buy a term plan worth Rs 1 crore.
- Health insurance:
Ranveer is in possession of a family floater plan of Rs 4 lakh. This also covers his wife’s plan. As his f=daughter gets 91 years old, the term will also cover her. Hence, a health cover worth Rs 4 lakh will be enough for his family. But there is a need for revision after every 2-3 years. This ensures remaining updated with rising medical costs and inflation.
Action: Ranveer needs to maintain his existing health cover.
- Daughter’s higher education:
For his daughter’s higher education, Ranveer needs a corpus of around Rs 50 lakh. This amount will be needed in approximately 18 years. If we assume a modest return of 12% per annum, along with a 6% inflation rate, a SIP of Rs 11,200 in a pure equity fund will enable him to accumulate the target amount. But each year, he will have to increase his contribution by 10%. He can arrange this conveniently from his annual appraisals.
Ranveer has current SIPs worth Rs 32000 across several schemes of mutual funds. He may be able to earmark Rs 11200 from the same.
Action: Ranveer needs to earmark a SIP worth Rs 11200 in pure equity funds. This will finance his daughter’s education. He needs to increase it by 10% every year.
If we have a look at Ranveer’s current expenditure, then he will need a retirement corpus of around Rs 4.14 crore to be able to maintain the same lifestyle even after retirement. The EPF he has will fetch him probably an amount of Rs 1.55 Crores. Again we need to assume that the average return rate will be 8 percent. If the return will be around 12%, then this would alone meet the deficit. He needs to stay invested all through his working life of 33 long years.
Action: Ranveer needs to earmark his EPF contribution and present equity investments for retirement.
- Other goals:
Ranveer has a few more goals in his bucket list – renovation of the house, a foreign trip, and a new car. Ranveer wishes to create a sufficient corpus for his brand new car. He plans to buy this car after eight years. According to his estimations, the cost of the car will be around Rs 8 lakh.
If inflation is taken into consideration, Ranveer will need Rs 12.75 lakh after eight years. He will get much help from a SIP of Rs 6400 in an equity fund. Here we are assuming a return of around 12% per annum. But here also he needs to increase his contribution by ten percent each year.
After 15 years, he wishes to renovate his house. The expenditure will be around Rs 15 lakh. He will be able to arrange the required funds if he invests in a SIP of Rs 4700 in an equity fund.
His dream to go on a foreign trip will also cost him around Rs 10 lakh. Most probably, he will be left with just Rs 25000 after we deduct all the SIPs mentioned above and expenses.
He must use this first of all to create the required emergency corpus and later on invest in his much wanted foreign trip. Afterward, he can invest in a multi-cap fund for long term creation of wealth.
Action: Ranveer needs to earmark a SIP of Rs 11,100 in multi-cap funds.
Ranveer need not bring any drastic change in his mutual fund portfolio. He also holds a value fund in his financial portfolio. It is a good idea to invest 20-30% of the multi-cap portfolio in a value fund.
Action: Ranveer need not add any new fund in his portfolio.
Things to keep in mind:
- An emergency fund of up to six months is essential because it will take care of the unforeseen financial situations.
- Term insurance will offer the best coverage that, too, at a reasonable cost in case of life insurance.
- In case you have any financial dependents, buying life insurance is necessary.
- It is always a good idea to incorporate a value fund in your portfolio.