Question: I am 32 yrs old, married, working as a Software Engineer, making monthly take-home of 40,000 Rupees. My wife is a Home-Maker and aged 24Yrs. I have my dependent mother. We live in a rented apartment. My savings per month amounts to 8,000Rs to 10,000Rs Max. To date, I do not own any Property, Insurance or Mutual Funds, Equity etc.
By the time I reach 35Yrs, we plan to have a baby and own a plot/construct a house, a total worth of Rupees 55 lakhs. At present, I want to invest 3000Rs each every month over 5 Yrs period for my Mother and Wife benefits / credits, and also reduce tax burden. Please guide me suitable / appropriate Investment route which has good returns and profits. I appreciate if you could let me know the names of specific Investment plans. What should my necessary Investment Portfolio look like ?
Further to the above, I also plan to obtain a Life-Insurance Term Policy for my Wife and Mother which covers Health benefits, Risk coverage such as Accident, immediate Hospitalization etc ..... Please suggest the same. Is Family/Group Mediclaim Policy covered under Life-Insurance term plan? Also, I wish to increase my income level by bettering my career options down the line in 2 to 3 years.
Child Education / Fund and Retirement Plans are my next level of interest. Should you need any details, please let me know.
Answer: Dear Mr Harsha, as per the information provided to us by you, we can see that you are the only income earner in your family with 2 dependants. Your savings rate is around 25% which is reasonable, however, you may need to cut down on expenses to meet your future financial goals.
A summary of investment planning recommendation for you (as per priority) is as follows -
1) Creating an Emergency Fund is number one priority for you - We recommend you keep 2 months' expenses in your savings bank account and 4 months' expenses in a liquid mutual fund scheme. This would take care of any sudden/unexpected emergencies.
2) Insure your life! - You need to take a pure Term life insurance policy in your name immediately. You need to take a life cover in your name for at least Rs 50 lakhs so that your family would be financially protected in your absence. You may consider AEGON Religare's iTerm policy [the premium works out to be the cheapest here (~ Rs 5,300 p.a.) for a 10 year period and AEGON Religare's Level term Plan [Premium comes to ~ Rs 15,500 p.a. for a 30 year old policy] or MetLife Suraksha Plus [Premium comes to ~ Rs 15,600 p.a. for a 35 year old policy]. Choose a term life insurance policy with higher sum insured and longest coverage period.
Note: The premiums quoted above are for a regular 31 year old person with no pre-existing ailments.
3) Insure your family's health! - The third priority for you is to purchase an adequate health insurance policy for you and your family. You may consider a family floater policy for the same. A family floater health insurance policy covers the family as a whole for a fixed sum insured. So if you take a policy for 3 lakhs, each member of your family (who is covered under the policy) can utilize the entire amount. It works out cheap too compared to individual health policies.
Under the family floater policy, you can cover yourself and your spouse (and children in future). Please note that considering your mother's age, she may not be covered under this policy as most health insurers have 60-65 years as the maximum age of entry. You can opt to purchase an individual senior citizen health policy in her name or go for an OPD (out patient expenses) covered health policy.
--> In family floater policies - you may consider ICICI Lombard Family Floater or Apollo Munich Easy Health (Floater).
--> For your mother - you may consider a Senior Citizen Individual health insurance plan. In this category, you may look at New India Assurance - Mediclaim (Individual), Apollo Munich - Easy Health Standard (Individual) and Future Generali - Health Suraksha.
Note:
a) You may divert the surplus cash lying in your bank savings account for the above 3 priorities;
b) For both the above categories of policies, you can include a critical illness rider;
c) Taking a health insurance policy in your mother's name is highly recommended.
c) The important parameters to keep in mind while purchasing a mediclaim/health insurance policy are - cost, coverage of pre-existing diseases -in case one has special needs (such as diabetes), the policy must include such needs while providing coverage, the exclusions from the policy, maximum age of entry, renewability of the policy and up to what age etc.
4) Start Investing! -
i) You have indicated that you would like to purchase a house/plot in 3 years time for a down payment of Rs 5 lakhs. You need to set aside ~ RS 15,000 pm to provide for the down-payment (assuming a rate of return of 9% p.a. on your investments). You can also raise this money through any surplus in your bank savings account and/or through an interest-free/concessional loan from relatives.
ii) Apart from the above, you should also start investing for your retirement. From the information you have provided, you will be requiring ~ Rs 7.5 crores as retirement corpus (assuming you retire at 60 years, inflation @ 8% p.a, life expectancy of 85 years and monthly pension requirement equal to today's expenses (i.e. Rs 30,000 pm). To achieve this, you need to set aside ~ Rs 13,000 pm. You can invest in a basket of products to enjoy capital growth, diversification and tax benefits too.
Note: Your total outgo from the above 2 investments (excluding priority 1,2, & 3) would be Rs 28,000-30,000 pm. It is advisable to increase your savings considerably to achieve all your future goals. You can do this by reducing your monthly expenses and looking out for better career options.
5) Reduce your Tax burden - Payment of Life insurance premium is eligible for tax deduction under Section 80C of IT Act (provided annual premium is up to 20% of Sum Assured). You can also enjoy tax deductions of up to Rs 20,000 p.a. on payment of health insurance premiums. For your retirement, you can first utilize PPF (Public Provident Fund) which has EEE status - exempt from tax on purchase, interest accumulation and also on maturity, and then look for other avenues.
Note: The overall limit under section 80C has been enhanced to Rs 1.2 lakh p.a. from the current financial year 2010-11.
Warm Regards,
Expert @ InvestmentYogi