Realign portfolio according to your ability to take risks

By Sudipto Roy
Rushabh Shah (names have been changed), 32, is a marketing professional working with a leading FMCG company in Pune. His wife Kirti, 29, and their daughter Viranshi, 2, form their small nuclear family.
Current financial position
Shah is the sole earning member of the family with an annual take-home salary of Rs 10 lakh. The annual expenses, including household expenses, EMI and insurance premiums, are approximately Rs 8 lakh.So the annual net surplus is Rs 2 lakh with a savings rate of approximately 20%.
Their house has an outstanding mortgage of Rs 35 lakh with annual EMI of Rs 4.25 lakh (which is greater than 50% of their total spends). Their investment assets (mostly bank FDs) are worth Rs 10 lakh. The family has identified some goals for the future, shown in the table Key Life Goals.
Our advice to the Shahs
Emergency fund: The Shahs hardly have cash/bank balances to take care of emergencies. Therefore, it is recommended to set aside a corpus of Rs 2.1 lakh (three months’ expenses) as emergency fund, preferably using a liquid mutual fund scheme from a reputed fund house as it will offer good returns and sufficient liquidity.
Risk-profiling and asset allocation: A risk-profiling test was conducted for Shah to assess his capacity, propensity and attitude towards investment risk. Accordingly, Shah was classified as an aggressive investor, which means an investor willing to take higher risks in order to maximize potential returns over the long term.
However, his current investment portfolio is completely skewed towards bank FDs (short-term and longterm debt) which, though risk-free and assured, result in low post-tax yields. Based on his risk profile, we advised a greater equity exposure, especially for longterm goals. Equity MFs with a stable investment performance from a reputed fund house are the most suited option for equity. The allocation, based on his risk profile and time horizon (for goals), is given in table Redistributing Wealth.
Goal planning: The top priority for the Shahs is Viranshi’s education. While her school fees can be borne out of the annual expenses, they need to put aside Rs 14,350 per month using an SIP right away for her higher education. For her wedding, they should put aside another Rs 8,400 per month (mutual fund SIPs recommended for discipline, convenience and proper asset allocation).
We estimate Shah’s EPF to take care of almost 20% of the retirement goal. For the balance, he needs to put aside Rs 50,000 per month starting 2025 as, currently, he does not have the net investible surplus available.
Since buying a car is an immediate goal, the down payment for it can be made from current investments and the rest financed using a car loan.
We recommend holding back the international vacation goal as current finances won’t be able to support it. It can be re-considered in future with higher-than-expected income growth.
Life insurance: Shah has a total life insurance cover of just Rs 37.5 lakh with an annual premium of Rs 1 lakh. Since most of the insurance policies were savings-oriented with less-than-optimal yields, we recommend discontinuation of these policies.
Instead, based on Shah’s life goals, liabilities, expenses, etc, he should opt for a pure term life cover of Rs 2.2 crore (approximate premium will be less than Rs 20,000). This would result in annual savings of Rs 80,000 per annum, which could be utilized for Viranshi’s education. Health insurance: Shah was recommended to buy a family floater health insurance for his family worth Rs 10 lakh and an individual top-up of Rs 5 lakh.
The writer is director & business head, Principal Retirement Advisors
NEXT WEEK
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