Sunday 30 June 2013

Pawars' shift to equity to help reach important financial goals



A review of Pawars' portfolio after a year of laying out a financial plan for them shows that they have added new goals, shed inhibitions about equity investment, and are on the right course.

One of the common misconceptions about financial planning and equity investment is that these are the prerogatives of the rich. On the contrary, when the income and surplus are low, it's even more important to invest wisely.


When the Pawars approached us a year ago, their portfolio lacked direction and had the usual set of problems: high percentage of debt, inadequate health and life covers, and almost zero equity investment. The silver lining was their high rate of saving.


Despite paying both rent and a home loan EMI, the couple was saving about 20% of their income, with the amount set to rise after they moved into their house in a few months. As we review their portfolio after a year, we find that the Pawars have tweaked their goals, but thanks to their impressive savings and implementation of the recommendations, they are set to achieve all their important objectives.


The original plan


When the Pawars approached ET Wealth for help with their financial planning, it was easy to see why. Arjun, 34, lives with his wife, Dnyaneshwari, 30, who is a homemaker, and their 2-year-old daughter, Sayee, in a rented apartment, in Mumbai. Working with a telecom company, Arjun earned Rs 55,000, and after accounting for their expenses, they were left with a surplus of Rs 10,963.




They were not investing this money and it was set to rise to Rs 17,643 after they shifted to their own house at Navi Mumbai. They had been paying a home loan EMI of Rs 14,900 for this house. Despite having four insurance policies, the couple had a meagre cover of Rs 9 lakh, while they depended on Arjun's employer for health cover.

Their goals included saving Rs 55,000 for their daughter's school needs; this was met by withdrawing Rs 50,000 from their cash balance of Rs 1 lakh and investing it in a one-year bank fixed deposit. Other goals included building a corpus of Rs 50 lakh for Sayee's college education, Rs 2.5 crore for her marriage, and Rs 3 crore for their retirement.


Our suggestions


To begin with, we asked the Pawars to beef up their insurance, suggesting a family floater policy worth Rs 2 lakh, which would cost Rs 4,000 a year. We also recommended a term plan of Rs 1 crore, which would cost Rs 11,000 per annum. They wanted to save Rs 3 crore for their retirement, and Sonia Chadha of SKP Securities said that the monthly contribution of Rs 3,000 to the EPF and Rs 1,000 to the PPF would suffice.


While they followed the suggestion on insurance, they have not started investing in the PPF and Chadha believes they should do so immediately, raising the amount as and when their income increases. Though the Pawars were asked to continue with the Ulips, they surrendered these, receiving Rs 2.8 lakh as surrender value.


More importantly, they have revised their goals as the Pawars are planning a second child and want to build an education and marriage corpus for the baby. So, now they want to save Rs 22.6 lakh for their daughter's education and Rs 41 lakh for her marriage. They also want Rs 26.9 lakh for their future child's education and Rs 1.5 crore for marriage.





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