A large portion of my gains were wiped out in the recent stock market crash. I was also out of a job for a short period towards the end of 2008, as a result of which I had to redeem some of my mutual fund investments.
In which investment product should my emergency fund reside? Can it be in a savings account? Problem: Your resources are limited, but needs are urgent. First, it calls for a disciplined approach to achieve the family's goals. Since the major source of income, your job, was lost last year, attention must be lavished on retaining the new one. And that brings us to addressing your concerns about an emergency fund.
EMERGENCY FUND
An emergency fund adequate to meet all kinds of crises comes in handy to meet sudden financial needs, medical emergencies and even a loss of income. Setting this fund's limits will depend upon factors such as your family's medical profile, medical insurance and adequacy of life cover.
Since transferring the emergency fund into cash is of prime importance, you can keep it in a savings bank account. However, some part of it can be moved to a liquid plus mutual fund to earn better returns.
INVESTING ADDITIONAL SAVINGS
Of the Rs 6,000 you plan to invest each month, put Rs 1,000 in a debt fund. After this, exhaust the exemption limit of Rs 1 lakh under Section 80C. Once this limit is exhausted, invest in a rated diversified large cap fund like BSL Frontline Equity, HDFC Top 200 and DSPBR Equity.
Proceeds from your life insurance policy should be enough to take care of your family and their financial needs and aspirations in case of any eventuality. Your present cover of Rs 29 lakh should be raised to Rs 60 lakh. Stick to term plans. As your investments accumulate, the need for this sum assured will reduce.
SHUN ULIPS
Ulips are a combination of two components-insurance and investments. But they are not the best of both worlds. While the cost component in the premium remains the same as in term plans, the investment component is subject to high charges by insurers.
MEDICAL
The health cover you have is dependent upon your being with the present employer. Any transition period will leave you uninsured. You should also get a medical insurance on your own that will adequately cover some basic risks.
ACHIEVING GOALS
Assuming an inflation rate of 6.50 per cent, you will need a sum of Rs 82,150 when you retire after 27 years, which is equivalent to Rs 15,000 today. If your investments earn a return of 10 per cent per annum, then to meet all your goals, you need to increase your present contribution of Rs 6,000 per month by 10 to 12 per cent each year. Your retirement corpus will also enable you to increase your expenditure in conjunction with increasing prices.
To conlcude, you have suffered from the loss of a job, as well as booked losses on the markets and therefore are looking to guarantee an adequate amount of income from other, less risky, sources. That is commendable, shows positive intent and promises a disciplined approach that will ensure you are able to follow the path charted for you by us.
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