Great start, but change some points

I am 37 and have been investing in mutual funds since 2004. My monthly salary is Rs 90,000 and my wife earns Rs 40,000 pm. I was thinking of increasing my investments in PPF (started in 2004) to Rs 70,000 per year and also open a recurring deposit in the Post Office of Rs 5,000 pm for five years, then shift to NSCs. I have a home loan of Rs 23.5 lakh, started in November 2008, and I would like to close it in seven years, by prepayment of Rs 1.4 lakh per year. We are expecting a kid in October 2009. I plan to retire at 54 and take up farming. For this, I wish to purchase farming equipment after eight years. I also plan to buy a new car next year. My current investments are Rs 5 lakh in mutual funds, Rs 1.5 lakh in PPF and Rs 70,000 in NSCs. I can invest up to Rs 25,000 pm and increase it by a tenth every year.

I have also taken a home loan protection insurance plan. I have an additional sum assured of about Rs 14 lakh. I also have two Ulips, for which a total premium of Rs 35,000 is being paid.

 

 

First, without considering your life insurance policies, your investment value stands close to Rs 6.95 lakh.

With that as the foundation, a monthly investment of Rs 25,000 and increasing it by a tenth every year can help you comfortably accumulate the required corpus for your child’s education and your retirement. A 10 per cent return on your investment will help you accumulate a sum of Rs 3.15 crore in 18 years, by the time you retire. This will be sufficient to pay for your child’s education and give you the required income post-retirement. Meanwhile, you will also be in a position to withdraw Rs 5 lakh after eight years from your investments to give you a firm foothold in the farming sector to purchase equipment.

However, your goal for an apartment in Bangalore in 10 years will require you to start with a total monthly investment of Rs 30,750 now, while increasing this by a tenth every year. For the car, you may consider taking a loan.

PORTFOLIO
While you have made a lot of invested a lot through the systematic investment plan (SIP) route, you have made some mistakes in your investment approach. These being:

NFO centric: You have bought into five new funds. They should have been avoided. Four of these funds in your portfolio have, in fact, been the worst performers over the past year.

Too many funds: There are 16 funds in your portfolio. Although eight are 4-star funds, forming almost half of your mutual fund (MF) portfolio’s value, the low-rated funds should be shunned.

Taxing travails: You have overdone your tax saving exercise. Your life insurance premiums are already eligible for tax deduction under Section 80C of the Income Tax Act. Besides, you are paying off your home loan and its principal repayment is eligible for exemption, too. Other eligible investments such as PPF, NSC and tax saving MFs involve a lock-in of money. You should avoid investing in these instruments on exhausting exemption limit of Rs 1 lakh.

Overbought on PPF, NSC: Don’t get us wrong, both are very good debt investments, and there will be no need for a dedicated debt fund if you are already invested in these. In your case, as you have a lot of years in hand before reaching your goals, equity should be a preferred investment option.

Inadequate life cover: You have already insured your home loan through a term plan, a very prudent thing. However, apart from this, the total sum assured in your case, about Rs 14 lakh, is short of the requirement. Ideally, the total sum assured should be about 10 times your annual expenditure, plus the value of outstanding liabilities, if any. Having already insured your home loan, you should increase your sum assured by another Rs 20 lakh, taking it to about Rs 35 lakh.

Ulips are a costly form of life insurance and should be avoided. You should consider moving out of these when the plan permits surrender without any charge. The premium presently going towards Ulips can then be directed towards your goals.

While your aspirations are noteworthy, the time assigned to reach your goals has been inflexible. You need to be accommodating on some of these points to reach your goals in a more systematic manner that would leave a lot of room for emergencies, too, like a slowdown in the economy that may stretch into a couple of years.