Save more to meet financial goals

I have been investing in mutual funds since December 2007. When I started, my goal was saving tax. But I now understand it is as important to focus on wealth creation, too. I have a total life cover of Rs 16.6 lakh, for which I pay an annual premium of Rs 67,000. Of this, I have a Rs 1.6 lakh unit-linked insurance plan (ULIP). The annual premium is Rs 32,000. Review my portfolio and suggest suitable changes as per my goals. I also want to invest an additional Rs 2,000 every month in a good debt fund for a period of over five years. -Jagadish

We have looked at your goals and the amount you need to save to achieve these. We have assumed an annual rate of return of 10 per cent on your investments.

Goal: Construction of house
Amount: Rs 25 lakh
Period: 7 years
Monthly saving: To save Rs 25 lakh, a saving of Rs 20,850 per month is required.

Goal: Child's education
Amount: Rs 20 lakh
Period: 20 years
Monthly saving: To save Rs 20 lakh, you need to save of Rs 2,760 per month.

Goal: Retirement
Amount: Rs 20,000 per month (as of today)
Period: 22 years
Monthly saving: If you want to retire in 22 years, then Rs 20,000 per month would be valued at Rs 47,400 month, assuming an average annual inflation rate of 4 per cent. This means, you need to have a corpus of Rs 91.2 lakh in 22 years. You need to save Rs 10,150 per month for the retirement corpus.

But do note, we have not taken into account the payments you may get from your insurance policies.

THE PROPOSITION
As you can see, the amount of money you are saving every month is not sufficient to meet your goals. Here are some solutions:

 

Lower the amount you would need for construction of your home to Rs 10 lakh. You could take a loan to finance the balance amount when you plan to start construction. 
 

Lower the amount you will need to save for your child's education to Rs 15 lakh. Here, too, you can consider taking an education loan. 
 

We do not think you should compromise on your retirement kitty. But if you could add a few more years to that deadline, it would help. If instead of 22 years, you push it to 25, then you would need a corpus of Rs 1.03 crore to enable you to get a monthly income of Rs 53,300 once you retire. More, if your retirement goal is postponed to 25 years, then the monthly payment towards this goal will come down from Rs 10,150 to Rs 8,300; 
 

You currently invest Rs 9,500 every month and it is insufficient. You need to increase your monthly savings to Rs 23,450 and do so consistently till the time you retire. This may be difficult, so here's a suggestion. Your annual premium towards ULIPs is Rs 32,000. You should discontinue your ULIPs after they complete five years; they are a costly way to get insured. Redirect this money towards saving for your goals. As for insurance, stick to term insurance plans.

TAX-SAVING FUNDS
Your contribution to tax-saving instruments is more than required. Don't go overboard.

ADEQUATE LIFE INSURANCE
You have not mentioned how many dependents you have. But you have said your monthly expenses amount to Rs 20,000. Ideally, you should have a life cover of around 10 times your annual expenses, so that your family can be well taken case of in any eventuality.

SELECTION OF FUNDS
A good thing about your portfolio is the quality of funds selected.All funds are rated either 4-star or 5-star. Hence, there isn't much tinkering you should do with your portfolio. With six funds, your portfolio is quite compact and can be easily managed. At a later point you might consider adding a debt fund to your portfolio.

CONSISTENCY IS IMPORTANT
You started investing in December 2007 when the stock market was at its all-time high. We suggest you follow a systematic investment route and do not invest at one go. This way you invest at market highs and lows.

REBALANCING IS IMPORTANT
Invest in equities as your goals are long-term. As you approach your goals, you can select a good debt fund and slowly channelise your current investments towards it.