Regarding financial planning and investments

POSTED BY Subh ON February 4, 2013 11:56 am COMMENTS (12)

Dear All,

I have been reading through the forum posts for a few days now. I regret not being through this website earlier, when I was starting my initial investments, and mostly I made all the investments to save my taxes rather than creating wealth or retirement planning. I am 31 years of age now.  I have an income of approx 45k per month.

I have made the following investments till date:

a) LIC – Jeevan saral policy: Rs 4,00,000 cover with a premium of Rs 19600/- p.a from 2010

b) LIC- WHole life limited payment- Rs 1,00,000 cover with a premium of Rs 3056/- p.a from 2010

c) Health insurance for myself (3,50,000 limit) and for my mom and my wife (4,00,000 ) limit

d) Birla sunlife insurance (ULIP) for myself (1,50,000) with a yearly premium of Rs14748/- started from 2006.     

e) PPF contributions (for tax saving purposes till date) Rs 23,500 approx            

               

Now after reading through Jagoinvestor posts and forums, I have decided/felt that:

a)I have invested in some wrong policies like LIC and Birla Sunlife insurance (ULIP).

b) I also feel that I should increase my insurance cover to at least 50 lacs, per the calculations given in the forums. But at the same time, I feel that either by surrendering the LIC policies or the Birla sunlife insurance, I would lose a whole chunk of money invssted till date.

c) I also need to start an emergency fund.

d) I also need to start investing in a mutual fund scheme (sip or otherwise)

e) I also need to start saving for my retirement from now onwards.

 

My questions to the respected forum members/ Jagoinvestor are the following:

a) Should i surrender/make paid up all the traditional policies and invest in a term policy rather. Or should I keep the old investments as it is and increase my life cover by buying another term insurance. I have calculated that if I give up the LIC policies, I wont get anything and if I give up the Birla sunlife insurance, I would get an amount which is very less than even that I have given till date.

b) Which mutual funds should I start investing into. I have heard that equity funds are the best ones to invest in ? Is that correct?

c) How do I plan/save for the retirement. The calculators in jagoinvestors inform that I need to save/invest at least Rs 10,000 per month (based on the logic that if I need at least 30,000 per month in order to sustain in 2013, and this would be inflated to approx 1,98,431 in 2043 in order to fulfill the requirements per year after my retirement till my death. I am confused by these calculations and would like to ask what exactly should one do to save for his/her retirement? 


Please do respond

Thank you so much for spending your valuable time going through my query.

 

12 replies on this article “Regarding financial planning and investments”

  1. Dear Subh, the moment you posted your original query here in the forum, thinking was started already. Now only conclusion is remaining. 🙂

    Take your own time but not a life’s time to conclude. 🙂

    Thanks

    Ashal

  2. Subh says:

    Hi Mr. Ramesh and Mr. Ashal,
    I think that are really good replies to guide me forward.
    I would also like to thank ‘Free Financial Calculators ‘ too for the replies along with the calculators etc.

    I would really start thinking in this respect and come to a conclusion soon.

  3. Dear Subh, please read my reply in addition to what dear Ramesh has already told you.

    Keeping your age in mind, LIC can not provide your return in the range of 7-8%. At best you can expect around 5.5 to 6%. Please do not go by my words, please calculate on your own for prem. you are paying & term of the policy. Also the policies you are invested as on date, are not at all gtd. return plans.

    The prem. of that whole life plan, may look small to you but my dear frien, the same prem. can provide you a term cover of 40-50L Rs. So to continue or not ‘ll be a personal call. Even if you opt to invest this small prem. the maturity amount in PPF alone ‘ll be far higher than policy maturity itself.

    Regarding ELSS v/s PPF, please check how much amount you are already investing in your PF & after that how much more debt allocation ypu want in your over all portfolio. Based upon this, decide the PPF figure. The remaining 80C investment if any may go for ELSS.

    Thanks

    Ashal

  4. Subh says:

    Hi Ramesh,

    Thank you so much for replying!

    I think you have a valid point. I think I really need to read and understand more about this.
    Nevertheless, after these detailed discussions, now I feel that:

    a) The LIC policy with a cover of 4 lac and a premium of approx Rs 19,600 pa should be made paid up.
    b) The LIC policy with a cover of 1 Lac and limited payment scheme (25 years and policy term of 50 years) with a premium of Rs 3080 p.a should be retained (just because it has a low premium )
    c) I should make a diversified portfolio of investment with Equity/debt or balanced mutual funds as a beginning. (I would need to research and invest accordingly)
    d) I should take a term policy (cover needs to be decided)
    e) I should increase the PPF investments (to at least 5 to 8% of my salary )
    f) I should retain the ULIP from Birla sunlife insurance and rebalance it as and when necessary.
    g) I was planning to go for an ELSS scheme of Reliance (growth) for tax saving purposes. Now I am confused whether to go for that or to go for a PPF increased contribution instead (in case now I am planning to invest in equity)

    Please share your views on the above.
    Thanks !!!

    1. Ramesh says:

      With reasonable calculations, it can be shown that if you are not interested in the insurance part of the plans, making a surrender will be more beneficial to you because:
      1. It will give you the Flexibility to invest your money, provided you do know how to invest in flexible instruments, rather than jumping from one illiquid instrument to other (this group includes endowment policies, all Ulips, all Pension Plans, PPF, NPS, FMPs, NSC to name the most prominent). Flexibility means easier management, easier asset rebalancing, and simple stuff for both you and your family.
      2. Also, it will make you more vigilant in learning the basics of money management, and add some urgency too.
      3. Your future premiums also get free from getting investing in a low-return, risky instrument (the main risks are Opportunity risks, inflation risks and the hidden volatility risk).

      So, a,b=surrender. Do the math. You can put those things here too, in case you are not certain.

      For a start, go with a Segmental Approach to Investing.
      Step 1. Assess your insurance cover. Simple rule of thumb=your Annual income *15 + Liabilities like home loan amount – Up the value to nearest round figure. If done, goto next step.
      Step 2. Check Emergency fund value. Keep 6 months of Monthly expenses (=total yearly expense divided by 2, including your discretionary and non-discretionary expenses). Keep this in a short term fund / cash in account / FD, whatever is most liquid for you and your stomach. If done, goto next step.
      Step 3. Decide upon your Asset Allocation. Between equities, bonds/debt, gold. For me, gold is 0%, but it only depends upon you (and again your stomach). Learn about the variability in returns across different assets at different periods of time within our country and also in other countries (like US, which has long data about these). If you are not sure, at least start with a 50:50 allocation between equities and debt. Then suitably modify according to your own tastes.
      Step 4. Regarding Equity MF selection, think about various strate (large / mid / small, value/growth) and select one or two of different styles. If you are not sure, start with some of the funds which have consistent management styles and teams and have provided good returns over long periods of times across market cycles. Select any of the following:
      A. Franklin Templeton- Blue chip / Prima Plus / Flexi cap / Templeton India growth / Templeton India Equity Income
      B. HDFC – Top 200 / HDFC Equity
      C. DSP – Top 100 / DSP Equity.
      Just any one or two, remember. If you want tax savers, then the tax saver of the same AMC as you have the main equity fund. So Franklin Taxshield / HDFC Taxsaver or DSP Taxsaver.
      Regarding Longer term debt funds- check for some of the Income Opportunities funds / Dynamic funds for longer term debt portfolio part. Choose only from the same AMC as of the equity funds, so that you can have Direct Investing benefits as well as easy rebalancing in the future.

      Step 5. Continue to learn more, and check things once in a while.

  5. Dear Subh, w’d you like to amputate a finger today or an Arm tomorrow due to a problem (illness) in your hand?

    Please answer.

    Thanks

    Ashal

    1. Subh says:

      Hi Ashal,
      As to answer your question, I would definitely go for amputating a finger rather than losing the whole arm.
      But somehow, I cannot compare both the situations, the LIC is going to give me certain yield, where as the finger is not going to give anything else except pain and suffering.

      And I have seen that in some cases of LIC, the yield is almost upto 7 to 8%, which is tax-free.
      So, what do you all suggest, just in case I retain my existing LIC and Birla sunlife policies and go for additional term policy (assuming that my insurance cover is low) and put apart some part of my salary for Mutual funds (equity)

      Please advise.
      Thank you !

      1. Ramesh says:

        7-8% yield. Are you sure? Is there any guarantee? Check again.

        1. There are absolutely no guarantees that LIC will give those yields.
        2. In the past, the overall long term govt bond yields have decreased slowly, and as the economy progresses and opens up more, it is bound to decrease more. So, the current 8-9% yields will come down slowly and similarly, the LIC yields will too. There is really no way government of India can continue those yields since the FII will jump on those relatively risk free returns.
        3. Even with this “huge” yield, you are still living in a high inflation environment (both official data as well as the even higher real data). So, even with those yields, you are really losing the purchasing power of money.
        4. Also the yields of PPF are 8-9%. Cut the mortality charges from your policies, add the price of Illiquidity and you are just going through Pain & Suffering in the form of either more work to save more OR decrease your expectation level of Corpus.

        In short, yYou want to live in denial, it is your choice.

        Read more, learn more, understand more.

  6. To understand how retirement calculations work read:

    http://freefincal.wordpress.com/articles/how-retirement-calculators-work/

    At 31 you could invest upto 70% in equity MFS and rest in debt instruments like PPF for your retirement

    Once you understand the calculations you could use the basic retirement calculators there

  7. Since both LIC policies were started in 2010 you should have paid three annual premiums by now, So they should be eligible for paid-up value. Please check this. If so then make them paid-up and invest elsewhere.

    you could hold onto your BIRLA ULIP and use it like a balanced mutual fund. Just check make sure the equity and debt proportions are in line with your risk profile and rebalance it each year (read more about rebalancing)

    Start investing in equity mutual funds.
    Here is a step by step guide to choose MFs

    http://freefincal.wordpress.com/step-by-step-guide-to-choosing-a-mutual-fund/

    List all your goals. The above website has a gold investment optimizer by which you can find the minimum you need to invest each month for your goals.

    Integrate the Birla ULIP with one of your goals, say retirement.

    You can also use the insurance calculator there to calculate the insurance cover you need and get yourself pure term life insurance.

    1. Subh says:

      Hi,
      Thanks so much for the reply!!!
      The link that you have given for rebalancing the Birla sunlife ULIP is somehow not functioning, could you please repost the link. Also, I tried to log on to the birla sunlife insurance website and access the features that are available to me, I dont think I have an option to set the equity and debt proportions. Can you advise what exactly needs to be done in that case?

      Secondly, I would like to ask: is it because of the low returns its adviseable to get the LIC paid up. I guess I have already paid the annual premiums you have mentioned.

      1. I didn’t give you a link for Birla Sunlife! Please contact BirlaSunlife about when you can start changing the portfolio in your policy

        Yes it is because of low returns you should make your policy paidup
        you could also consider surrendering if you have not taken 80C deductions. If you have then they will be reversed and you need to pay tax if you surrender

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Download Our FREE Ebook!

Available only for first 100 people today

Download Our FREE Ebook!

Available only for first 100 people today