DON’T LET YOUR FUNDS IDLE

Despite having fixed income plans and equity investments, the Tendulkars kept a big amount in a bank. A revised plan put this idle money to work

Vinod Tendulkar was casually discussing with his colleague personal financial matters. When he wanted guidance regarding some investments, his colleague advised him to visit a certified financial planner.
    Vinod approached us and gave the following information about his present financial situation: fixed income investments in bank fixed deposits of Rs 6.39 lakh, post office schemes of Rs 1.50 lakh and provident fund (PF)/public provident fund (PPF) of Rs 17.16 lakh.
    He also had equity investments in shares of Rs 5.50 lakh and mutual funds of Rs 3 lakh. His bank balance amounted to a big amount of Rs 15 lakh.
    Vinod said that he kept a substantial portion of his surplus funds in a bank savings account as he was confused about the present market situation. He held a perception that since the interest rates were rising, he should wait and not commit further funds to fixed income plans like bank fixed deposits. He was also worried about the stock market's performance as the very high rate of inflation had led interest rates to rise, which affects corporate bottom lines.
    He analysed the situation and reached a conclusion that corporate earnings may slow down due to these factors. Thus, he was not sure of investing in stocks now. Some of the mutual funds he held over the last one year were showing negative returns. So, this option too was ruled out.
    Vinod had an insurance policy from LIC of India for a sum assured of Rs 7.75 lakh and the premium amounted to Rs 43,876 per annum.
    He had purchased a house in the western suburb of Mumbai with a bank loan and his equated monthly instalment (EMI) is Rs 15,000, which he will have to repay over the next 15 years. He opted to increase the duration of his loan and kept the EMI steady at Rs 15,000, after the recent hike in home loan rates.
    Since his tax savings is substantial, due to the interest on home loan, he would like to continue the loan for a longer duration. Vinod and his family stay
in the same ownership flat.
    Vinod's monthly budget details work out as follows: a salary net of income tax of Rs 65,000, domestic expenses of Rs 20,000, home loan EMI of Rs 15,000, insurance premium and other payments of Rs 5,000. Thus, the surplus amount available for investment was Rs 25,000.
    During our talk, Vinod wanted to know whether it would be a good option to take up a job in the Middle East. The salary offered worked out to twice his current income with an option to take his family too.
    We told him that being the sole income earner, his life is the most valuable asset for the family. But it was not insured adequately. This became necessary due to the high present income, higher income earning potential and a home loan outstanding of about Rs 13 lakh.
    The first step that Vinod should take is to protect his family's future by availing a life policy in his name for Rs 50 lakh. This should be in addition to the existing insurance cover. We recommended a term insurance plan of 15 years where the yearly premium paid would be nominal.
    The next priorities were his daughter's education and marriage. He wanted his daughter to study engineering and then pursue higher studies abroad. This would mean that the family should be prepared with a capital outlay of at least Rs 40 lakh in about 12 years time.
    After 15 years, they may need an additional amount of Rs 20 lakh to meet the child's marriage expenses. Thus, they will have to start investing regularly on a monthly basis to meet both these requirements.
    Considering their age, they have a shorter period for building a capital for Neha's education, marriage and their own retirement needs.
    Assuming that the family will invest at least Rs 25,000 per month over the next 15 years, they may be able to fulfill their daughter's education and marriage needs. But the retirement capital may fall short, unless the monthly investments are stepped up over a period.
    As his daughter is young, it may not be a bad idea for Vinod to take up an assignment abroad for the next five years. This will help him to set aside much bigger amounts each month and meet all the financial goals comfortably.
    We identified two diversified equity funds with a track record of fiveyear performance and told Vinod to invest on a systematic investment plan (SIP) basis an amount of Rs 20,000 per month for five years.
    The ready cash in his bank could be invested in a floating rate debt fund initially and later in two largecap diversified equity funds over the next 15 months with a systematic transfer plan (STP). This can be done by transferring Rs 1 lakh per month from the floating rate debt fund to the diversified equity funds in an equal pattern.
    Keeping big amounts in bank fixed deposits was counter productive for a person like Vinod who pays tax on his income at the rate of 30%. The bank interest that he earns is hardly 6 to 7% net-of-tax, which is much lower than the rate of inflation.
    We also explained the concept of tax-efficient fixed term plans of mutual funds which currently offer more than 10% returns per annum for a period of one to three years.
    D Sundararajan is a certified financial
    planner and investment consultant,
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