Case study

Name – Abhishek Goel (30)

Family – Father (67), Mother (63)
Resides in – Delhi
Occupation: Service
Job Details: Works as Chief Manager Claims for a Private General
insurance company.
Background:
Abhishek is single and stays with his parents in his father’s house in
Delhi. He has an elder brother who works abroad. Abhishek remembers
that at an early age he got a first-hand experience on savings when his
parents encouraged both the brothers to open a children’s bank
account which was being operated from the school premises. Both
brothers started saving Rs. 5 per month and this money was utilised in
the next academic year to purchase some books, stationery, etc. His
father used to work in an engineering firm while his mother was a
teacher. When he was in the first standard, his father’s company faced
lockout and for nearly 2 years the family survived on his mother’s
income. His father got an opportunity to work in the gulf later and for
some time the family’s finances were on track.

Again, tragedy struck when his mother had to give up her job due to
health reasons. After working for a couple of years abroad, his father’s
firm closed down and he had to come back. His mother started taking
tuitions at home to make ends meet. Since the convent school where
the siblings were studying were aided by the government, they did not
have to pay any fees for their secondary school education. Abhishek’s
mother ensured that every expense was monitored and followed a
strict budget. Both the brothers understood the family’s grim financial
situation and consciously supressed their desires for story books/ toys
etc. The difficult financial situation made the brothers realise that good
education and qualification was the single most path to getting a good
job and ensure financial stability. With the generous help from
charitable donors Abhishek and his brother got interest free loans to
complete their higher education. Abhishek completed his BE in
Automobile engineering while his brother did is Hotel management.

Even during his first few years of college, Abhishek had started earning
by giving tuitions. Part of this money was deposited in his bank and rest
was given to his mother to manage the family’s expenses. Abhishek has
had a very good rise in his career in the last 9 years since he has been
working and presently he is in a very good position with a well-known
General insurance company. Since he has been only exposed to
traditional investment options like Insurance, Post office and FD
schemes, Abhishek started his investment journey from 2007 with
these products. To save tax he purchased traditional insurance policies
and invested the rest in Fixed deposits. Even then he has been able to
create a good investment basket because he has kept his expenses to
the minimum and tried to save as much as he could.

Last year he booked an under construction flat worth Rs. 62 lakhs for
which he paid the down-payment of 10% from his own savings. He is
expected to get possession of the flat by December 2018. So far, he has
taken a loan of Rs. 18.50 lakhs and he intends to try and pay as much as
he can from his own sources in the next 2 years before possession.

Savings habit: In almost all cases with a few exceptions, our parents
are the initiators into the world of savings and investments. Abhishek
too understood the importance of savings through his parents who
encouraged him right from his school day. He had never looked back
ever since. Most of us lose our way once we get caught up in our work
and other family responsibilities. Abhishek continues this habit till
today and now savings has become an integral part of his
responsibilities. He only needs guidance on how/ where to invest the
savings.
Insurance as an investment: Most people buy insurance as an
investment product or rather it is sold that way to make it attractive for
the buyer. Investment oriented insurance policies are of two types –
Traditional and Unit linked. Traditional policies typically invest in
government bonds, approved securities and instruments which provide
fixed income while Unit linked policies invest in instruments varying
from government bonds to equities as per the fund chosen by the
investor.
Traditional insurance policies typically don’t provide more than 5-6%
returns over the long term while equity oriented funds in unit linked
policies can fare better than traditional policies in the long run.
Therefore, traditional insurance policies don’t serve as a good
investment for the long term. How can a product which cannot beat
inflation help you to reach your long-term goals? Abhishek made an
early start but due to lack of knowledge and with a view of saving tax,
he invested in traditional insurance policies, allocating a good amount
of premium.

What is the present situation?

Source of Income
Source Category
Abhishek Salary
Total Monthly Income
Total Annual Income
Basic Numbers
Monthly Income: Rs 90000

Expenses Per month

Household 10000
Home loan EMI 19500
Personal expenses 10000
Insurance premium 17978
Total 57478
Monthly surplus: Rs. 32522

Networth Statement
Assets Rs. Liabilities
Savings Account 105000 Home loan 1850000
Fixed deposits 800000
EPF 532000
Insurance Cash value 454758
Equity Mutual funds 1070000
Shares 476000
Under Construction property 2500000
Total 5937758
Networth 4087758
ASSET ALLOCATION
Allocation Value
Equity 1546000
Debt 1891758
Property 2500000
5937758

Findings:
Emergency fund: Apart from the savings account, the fixed deposits
provide a decent back up In case of any emergency.
Life insurance: Abhishek is covered for Rs. 1.09 crores through 1
term pan of 1 crore and two traditional plans. He also has a traditional
pension plan for which his monthly contribution is Rs. 8145 and the
maturity is in 2041. He has a limited premium traditional policy where
the last payment is to be done next year. The last policy is an
endowment policy which will mature in 2028.
Health Insurance: Abhishek is covered for Rs. 5 lakhs through his
employer group insurance policy. His parents are covered for Rs. 2 lakhs
each through a separate policy. He also has a separate health cover of
Rs. 15 lakhs through a combination of mediclaim and top up policy.
Investments: Investments are very well diversified into debt and
equity with debt comprising 55% of the allocation and equity at 45%.
Property has been excluded as its for self-consumption.
Liabilities: Presently there is only 1 loan which is a home loan taken
on the under-construction property.

Loans Original Amount Interest & Term EMI

Home loan ₹ 19,00,000 9.75%, 15 years ₹ 19,500

Abhishek has opted for EMI payments (instead of only pre EMI interest)
as it enables him to claim tax benefits on both principal and interest
payments as well as loan outstanding keeps reducing with each EMI
payment.

Risk Profile: Moderate

Recommendations:
Emergency fund: Abhishek needs to maintain an emergency fund of
Rs. 1.75 lakhs, which should take care of nearly 3 months of expenses.
Presently he has maintained Rs. 1.05 lakhs in savings account which can
be maintained as it is and additionally he should move Rs. 70000 from
his FDs into a liquid fund.
Accident Insurance: Abhishek should take a personal accident
comprehensive policy which will cover for accidental death, permanent
and partial disability including weekly/monthly compensation for loss of
work due to total temporary disability. A PA cover of Rs. 50 lakhs with a
TTD cover of Rs. 15 lakhs are suggested. The premium for this will be
approximately Rs. 7000
Life Insurance: Considering the financial goals and outstanding
liabilities, Abhishek’s cover is adequate. He needs to stop the
traditional pension policy as well as the endowment policy which
matures in 2028. The yield on these policies are less than 6% and hence
coming out of those will make sense now rather than continue them till
maturity which is more than 12 years to 20 years from now. Surrender
of the 2 policies will fetch him approximately Rs. 3 lakhs. He should
revisit the cover post marriage.
Health Insurance: The present cover is adequate as per his age. He
should include his wife’s name when he gets married next year.
Debt Management: Even though the actual loan approval amount is
Rs. 50 lakhs, Abhishek should not take the full disbursement. He should
try and use his own sources to pay for the property and keep the loan
to less than Rs. 30 lakhs. A higher loan and EMI can hamper future
goals. He can use the Rs. 3 lakhs from insurance surrender to pay for
slab wise payments. The policy surrender will also enable the increase
in surplus amount every month.

Change in Cash flow post insurance surrender

Expenses P
Household 10
Home loan EMI 19
Personal expenses 10
Insurance premium 40
Total 43

Financial Goals:
No of years to Present
Sr.No Financial goals goal Year Value
1 Marriage 1 2017 400000
2 Buying a Car 2 2018 400000
20 2036 300000
21 2037 300000
22 2038 300000
23 2039 300000
Educational Funding for 1 24 2040 1000000
3 child 25 2041 1000000
4 Retirement at 55 25 2041 360000
1. Marriage (2017)
Current value: Rs 4 lakh

Future Value: Rs. 4.36 lakh

Status of goal 1:
Abhishek does not want to spend too much on marriage and
considering the fact that the marriage expenses will be shared with his
spouse, he would not like to exceed Rs. 4 lakhs. A part of the Fixed
deposits can be used for this goal.

Returns expected in fixed deposits: 6% post tax.

2. Buying a car (2018)

Current value: Rs 4 lakh

Future Value: Rs. 4.66 lakhs

Status of goal 2:
He needs to start Sip of Rs. 18500 in ultrashort debt funds for a period
of 24 months to achieve this goal.

Returns expected in Ultrashort debt funds: 6% post tax over the

required time horizon.

3. Educational funding for 1 child (2036 – 2041)

Current value: Rs. 32 lakhs

Future Value: Rs. 2.42 crores

Status of goal 3:
Considering the long-term nature of this goal, Abhishek needs to invest
Rs. 14000 per month for 25 years in a combination of largecap and
balanced funds. Due to the present surplus, he can easily invest for this
goal.

Returns expected in the mutual funds portfolio: 13% over the required
time horizon.

4. Retirement Planning (2041)

Present Annual expense (Excluding children’s expenses and EMI’s) –Rs.
3.60 lakhs

Future Annual Expense – Rs. 19.53 lakhs

Corpus required – Rs. 4.53 crores.

(Inflation considered: 7%, Returns on corpus during retirement 9%,

Expected life expectancy at 85 years)

Status of retirement goal– One principle which Abhishek has followed

when he left his last organisation in 2014 is to transfer his EPF to the
new employer rather than withdraw which most people do. With
compounding and regular contribution, the EPF turns out to be a good
amount during retirement. Considering a 5% increase in basic year on
year his EPF in the year 20141 should be worth Rs. 1.93 crores. The
mutual funds and equity shares if maintained that long can fetch him
Rs. 1.45 crore and Rs. 1.56 crore respectively. These 3 assets are
sufficient to create a good retirement corpus as per today’s needs.
Most of us plan retirement when there are either 10 or less years for
one to retire. That leaves very little time to enable compounding of
your investment and the savings and investments required in the short
time will also be huge.

Taxation: Abhishek’s EPF and life insurance premiums of 2 policies

(Term and 1 traditional) exceed the limit of Rs. 1.5 lakhs provided under
80C. He is also utilizing the 80D deduction up to Rs. 25000 due to
health insurance premium of self and parents. He can avail the home
loan interest benefit on under construction property in 5 equal
instalments from the year of completion of his flat.
Conclusion – It’s truly said, “Experience is the best teacher”.
Abhishek’s life is a live example of how his childhood period of financial
turmoil has moulded him to be a better saver and investor. At his age,
he had done a fairly good job of creating a good investment basket.
There are several like him who have an opportunity to choose what is
right. Many of his age, having similar salary may not have accumulated
as much as he has. In this age of uncertainty, it’s very critical that the
younger generation focuses on saving and building up a good corpus
right from the first salary. Else there will always be regrets and “I
should have done that” sighs when you evaluate your life in your 40s
and 50s.