Sumit is 24 years old. He works with a multinational company. His monthly take-home salary is Rs 35,000. Since he lives with his parents, he doesn't have to worry about the necessary living expenses. His parents would also take care of his wedding expenses; Sumit plans to marry in two years. He is a diligent saver and keeps his monthly spending below Rs 10,000. He wants us to build a financial road map for him and analyse his investments in stocks and mutual funds.
Emergency fund
Since Sumit is sin gle and stays with his parents, he doesn't have to worry about emergencies. But he should maintain an emergency corpus equivalent to at least six months' expenses once he gets married. An emergency fund acts like a cushion during tough times. It should be kept in a
combination of sweep-in fixed deposits and short-duration debt funds. This helps earn higher returns, without compromising on liquidity. Action: Maintain an emergency corpus equivalent to six months of expenses once you tie the knot.
Life insurance
Sumit has a term cover of Rs 50 lakhs. Term plans are the best form of life insurance as they provide a large cover at low cost. Endowment insurance plans and unit-linked plans (ULIPs), which are a combination of investment and insurance, should be avoided as they provide neither sufficient
insurance nor good returns. However, Sumit doesn't need such a large life cover at this stage. One
needs a life cover only if one has financial dependents. Since he has already purchased one and plans to get married in two years, he may retain the cover and reassess the needs once he gets married.
Action: Continue to stay away from endowment and unit-linked insurance plans.
Health insurance
Sumit has a health cover of Rs 4 lakhs from his employer. He had a personal health cover, too, but he discontinued it a few months ago. It is recommended that one has a personal health cover, apart from the one provided by one's employer. The health cover provided by the employer ceases with the employment and one is not covered during the job-transition phase.Hence, Sumit should buy a health cover of Rs 2-3 lakhs, which would cost him around Rs 5,000-7,000 per annum. While purchasing health insurance, Sumit should ideally go for a policy without co-pay and sub-limit clause. In a co-pay clause, you have to necessarily bear a certain proportion of the treatment cost from your pocket, irrespective of whether the total bill amount is within the health cover limit. A sub-limit clause restricts the coverage to certain expenses, like doctor fees, room rent, ICU charges, etc. For example, if a Rs 2 lakhs policy cover has a sub-limit for daily ICU charges at 2 per cent of the sum insured, the insurance company will only pay up to Rs 4,000 for the same. The balance cost has to be borne by the insured. Further, he should try not to miss any premium payment and continue with the same health plan year after year. Health plans cover treatment of certain medical conditions only when the policy has been renewed continuously for a specified number of years, which is known as the
waiting period. This may vary from two-four years depending on the policy. Also, he should ensure that his parents have the necessary health cover as unforeseen medical expenses can dent one's financial plan in a big way.
Action: Buy a personal health-insurance plan
Children's education and marriage
Sumit wants to start investing for his children's higher education and weddings. He estimates the combined cost to be Rs 40 lakhs in today's terms. This would swell to more than Rs 3 crore in 20-30 years at 8 per cent inflation, when he would need this money. Assuming a return of 12 per
cent, an SIP of Rs 7,500 in one-two good equity funds should suffice, provided the SIP amount is increased by 10 per cent every year.
Action: Start an SIP of Rs 7,500 and increase the contribution every year.
Retirement
It is too early to estimate the required retirement corpus for Sumit as his lifestyle and expenditure are likely to change in the coming years, especially after he gets married. But he should continue to invest the available surplus regularly in equity to reap the benefits of compounding over the long term.
Action: Continue to invest in equity mutual funds through SIPs Portfolio
Sumit has accumulated around Rs 2.40 lakhs in eight decently rated equity funds through SIPs. These are a mix of tax-saving, large-cap and small-cap funds. He should invest in not more than four-five mutual funds as too many schemes make it difficult to monitor the portfolio and may
result in losing out on the returns in the long run. Investments in a tax-saving fund should be limited to the amount required for tax-saving as it has a mandatory lock-in period of three years. Sumit's goals are more than 20 years away. The major portion of his portfolio should be invested in two multi-cap funds and a small portion in a good small-cap fund. Multi-cap funds have the flexibility to invest in companies of all sizes. This helps the fund manager derive the best possible return.
Since Sumit has enough time, he can continue to invest in his small cap funds. But he should remember that small-cap funds are extremely volatile and may move up or down sharply, even with the slightest movement in the market.
Sumit has also invested Rs 1.40 lakh in stocks. He should continue with them only if he has the required skills and time to invest directly in stocks. Otherwise, he should shift to equity mutual funds
.
Action: Reduce the number of funds. Invest in multi-cap funds.
Keep in mind
It's always desirable that you start investing early in life as you will be able to reach your financial goals faster and more comfortably.
Marriage increases your financial responsibilities. Make changes to your financial plan accordingly.
Don't rely only on the employer-provided health cover. Buy your own health insurance as well. Take into account the co-payment and sub-limit clauses. Four-five funds are enough for optimum diversification.
Multi-cap funds are the best category of equity funds to hold as they can invest across companies of all sizes.
Direct equity investing is fine if you know how to research stocks.
Otherwise, go for equity funds.
Emergency fund
Since Sumit is sin gle and stays with his parents, he doesn't have to worry about emergencies. But he should maintain an emergency corpus equivalent to at least six months' expenses once he gets married. An emergency fund acts like a cushion during tough times. It should be kept in a
combination of sweep-in fixed deposits and short-duration debt funds. This helps earn higher returns, without compromising on liquidity. Action: Maintain an emergency corpus equivalent to six months of expenses once you tie the knot.
Life insurance
Sumit has a term cover of Rs 50 lakhs. Term plans are the best form of life insurance as they provide a large cover at low cost. Endowment insurance plans and unit-linked plans (ULIPs), which are a combination of investment and insurance, should be avoided as they provide neither sufficient
insurance nor good returns. However, Sumit doesn't need such a large life cover at this stage. One
needs a life cover only if one has financial dependents. Since he has already purchased one and plans to get married in two years, he may retain the cover and reassess the needs once he gets married.
Action: Continue to stay away from endowment and unit-linked insurance plans.
Health insurance
Sumit has a health cover of Rs 4 lakhs from his employer. He had a personal health cover, too, but he discontinued it a few months ago. It is recommended that one has a personal health cover, apart from the one provided by one's employer. The health cover provided by the employer ceases with the employment and one is not covered during the job-transition phase.Hence, Sumit should buy a health cover of Rs 2-3 lakhs, which would cost him around Rs 5,000-7,000 per annum. While purchasing health insurance, Sumit should ideally go for a policy without co-pay and sub-limit clause. In a co-pay clause, you have to necessarily bear a certain proportion of the treatment cost from your pocket, irrespective of whether the total bill amount is within the health cover limit. A sub-limit clause restricts the coverage to certain expenses, like doctor fees, room rent, ICU charges, etc. For example, if a Rs 2 lakhs policy cover has a sub-limit for daily ICU charges at 2 per cent of the sum insured, the insurance company will only pay up to Rs 4,000 for the same. The balance cost has to be borne by the insured. Further, he should try not to miss any premium payment and continue with the same health plan year after year. Health plans cover treatment of certain medical conditions only when the policy has been renewed continuously for a specified number of years, which is known as the
waiting period. This may vary from two-four years depending on the policy. Also, he should ensure that his parents have the necessary health cover as unforeseen medical expenses can dent one's financial plan in a big way.
Action: Buy a personal health-insurance plan
Children's education and marriage
Sumit wants to start investing for his children's higher education and weddings. He estimates the combined cost to be Rs 40 lakhs in today's terms. This would swell to more than Rs 3 crore in 20-30 years at 8 per cent inflation, when he would need this money. Assuming a return of 12 per
cent, an SIP of Rs 7,500 in one-two good equity funds should suffice, provided the SIP amount is increased by 10 per cent every year.
Action: Start an SIP of Rs 7,500 and increase the contribution every year.
Retirement
It is too early to estimate the required retirement corpus for Sumit as his lifestyle and expenditure are likely to change in the coming years, especially after he gets married. But he should continue to invest the available surplus regularly in equity to reap the benefits of compounding over the long term.
Action: Continue to invest in equity mutual funds through SIPs Portfolio
Sumit has accumulated around Rs 2.40 lakhs in eight decently rated equity funds through SIPs. These are a mix of tax-saving, large-cap and small-cap funds. He should invest in not more than four-five mutual funds as too many schemes make it difficult to monitor the portfolio and may
result in losing out on the returns in the long run. Investments in a tax-saving fund should be limited to the amount required for tax-saving as it has a mandatory lock-in period of three years. Sumit's goals are more than 20 years away. The major portion of his portfolio should be invested in two multi-cap funds and a small portion in a good small-cap fund. Multi-cap funds have the flexibility to invest in companies of all sizes. This helps the fund manager derive the best possible return.
Since Sumit has enough time, he can continue to invest in his small cap funds. But he should remember that small-cap funds are extremely volatile and may move up or down sharply, even with the slightest movement in the market.
Sumit has also invested Rs 1.40 lakh in stocks. He should continue with them only if he has the required skills and time to invest directly in stocks. Otherwise, he should shift to equity mutual funds
.
Action: Reduce the number of funds. Invest in multi-cap funds.
Keep in mind
It's always desirable that you start investing early in life as you will be able to reach your financial goals faster and more comfortably.
Marriage increases your financial responsibilities. Make changes to your financial plan accordingly.
Don't rely only on the employer-provided health cover. Buy your own health insurance as well. Take into account the co-payment and sub-limit clauses. Four-five funds are enough for optimum diversification.
Multi-cap funds are the best category of equity funds to hold as they can invest across companies of all sizes.
Direct equity investing is fine if you know how to research stocks.
Otherwise, go for equity funds.
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