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RECOMMENDATION
Since Shankar is in between jobs currently, we need to examine whether he and his family are adequately insulated for the loss of income in this indefinite period. Conservatively speaking, to provide for upkeep for the next 4 months, he needs to arrange for a liquid kitty of Rs 4,00,000. This may be provided from any lumpsum receivable and for any shortfalls, he may dip into the fixed deposits and mutual funds corpus (in that order).
INSURANCEIn spite of paying insurance premiums of nearly Rs 64,000 a year, the total sum assured is only around Rs 17 lakh, which is highly inadequate considering the expenses. There is a need to examine the policies in detail and convert those ULIPs or endowment policies into fully paid-up ones or discontinue them. The family needs to have a total life cover of at least Rs 35 lakh. Shankar could consider buying a pure term policy for the outstanding amount.
INVESTMENTSShankar's biggest investment is his house. He needs to build a portfolio comprising debt and equity investments based on his financial goals, risk appetite and time horizon of the goals. Since his monthly surpluses are adequate, he could start SIPs worth Rs 30,000 per month or even FDs.
CHILD'S EDUCATION GOAL
Since he plans to eventually transfer the RD into PPF, we suggest he invest the money directly into the PPF account every month, so as to give him an 8% tax-free return. Also, this amount (PPF) can be utlilised for retirement rather than for his son's education-related goals. To create a corpus of Rs 7 lakh by June 2014 for the latter goal, he needs to start an SIP of Rs 12,000 per month from September 2010 (assuming 12% CAGR).
RETIREMENT
Considering current expenses, at the time of retirement, (after taking into account inflation) he would need to provide for a monthly income stream of Rs 70,000 p.m. If he were to retire at 60 and not at 54 as planned, he would need to provide for Rs 1,00,000 p.m. Thus, he would need a corpus of Rs 2 crore in 12 years or Rs 3 crore after 18 years. He needs to put aside Rs 63,000 p.m or Rs 40,000 p.m, if he were to retire in 12 or 18 years, respectively (assuming 12% CAGR). If he is able to invest the remaining surplus in equities (Rs 30,000 - Rs 12000 = Rs 18000 p.m.) beginning September, he would be able to build a corpus of Rs 57 lakh in 12 years or Rs 1.36 crore in 18 years.
CONCLUSION
In times of unsteady income streams, it is imperative to prioritise between financial goals; the hierarchy may be based on urgency, aspirations and recreation-related goals as well as long, short and medium-term goals. One can safely say that the priorities in this case should be insuring the family, creating a retirement corpus, and keeping aside decent fund for the child's needs. Prerana Salaskar-Apte, a certified financial planner, is a partner with financial planning firm The Tipping Point.
Source :http://epaper.timesofindia.com/
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