From investing in MFs to buying insurance: Your guide to financial planning

My wife and I have a combined monthly income of Rs 170,000. I took a term plan of Rs 8 million to cover my home loan. My wife has a traditional plan of Rs 2.5 million. How much more insurance do we need?

Fundamentally life insurance should not be taken with any linkage to income. It should be taken to cover your family’s lifestyle expenses, to cover liabilities and provide for financial goals. From that standpoint, I think you are way too underinsured. As a rough calculation, just to cover a monthly expenditure of just Rs 25,000 you need to have a life insurance of a minimum of Rs 9 million to Rs 10 million. 

My bank offers a strategy for systematic investment plan (SIP) in mutual funds. It takes a bulk amount and put it in a fixed deposit. If I invest around Rs 1.25 million, I will get about Rs 5,000 interest a month, which the bank will invest in my choice of funds. The plan looks attractive as it preserves the capital. Please share your thoughts on it?

This is a strategy that will benefit the bank more than it will help you. If you put your entire Rs 1.2 million into mutual funds, you could expect your funds to double every five years. In 10 years you would have close to Rs 5 million or more. With your bank's proposed strategy, in 10 years time, you will barely reach Rs 1.5 million. So much for capital protection and so much for the bank playing on your fear. Please remember, the more you sow, the more you reap.

I have got a bonus. I am wondering if I should use the money to pre-pay my home loan. It’s a 20-year loan and has been ongoing for seven years now.

I would say enjoy the home loan which comes to you at a very low-interest cost of approximately 8.5 per cent. When you invest in growth-oriented instruments like stocks and mutual funds, you tend to on a much higher rate of return in the range of about 15 to 17 per cent or more in some years. So it would be wise to invest more so long as you can afford to keep paying the equated monthly instalment and the cash outflows doesn’t hurt you.

I started investing in mutual funds two years back. I ended up investing in about eight funds. I want to make a proper portfolio now. Can you give broad guidelines on how should I go about it?

A broad strategy of investing would be about a third of your money into large caps, about 25 per cent into mid-caps, 25 per cent in small caps, and the remaining money into promising sectors like financial services, pharmaceuticals and healthcare and consumption opportunities. Create a portfolio that can serve you for decades together. Consider no more than one to two in each category, which would mean a maximum of about six to eight funds.

My friend got me brochures of a scheme that promises 30 per cent return a year. For these returns, investors need to buy a holiday home property. The house is then rented out, and 30 per cent fixed return is promised to the buyer. Is this a scam or is it for real?

I would not call it a scam, but I think it is really difficult to get a return of 30 per cent, and that too guaranteed. Many factors are at play simultaneously - location, initial cost, per night rental, maintenance rate, occupancy rate, and needless to mention, the staff to monitor and administer all this. Investigate and read the fine print carefully, consult a few highly cynical people, and then take your decision.

I retired in July from a government job with a corpus of Rs 7.2 million. I have already invested in a house worth Rs 3.5 million. I don’t need the remaining Rs 3.7 million for a few years as my pension is sufficient. I may need it in the future. How can I invest the money for future use?

The question is for how many years will you not need to dip into your investment corpus. If you have five to seven years in hand, then I would suggest that you have 60-65 per cent of exposure to equities. This you should do strictly via a systematic transfer plan route. This way you will be ready to combat inflation 10-15 years later. Once you start utilising the corpus, consider paring down the equity exposure to as much 15-30 per cent or lesser.