How a conservative investor created his own financial plan

Published: September 28, 2021 at 8:17 am

In this edition of the reader story, we meet Vamshi and learn how he created his own financial plan with a conservative mindset.

I am grateful to readers for sharing intimate details about their financial lives for the benefit of readers. This is the 19th such reader audit. Previous editions are linked at the bottom of this article. If you would like to contribute to the DIY community in this manner, send your audits to freefincal AT Gmail. They can be published anonymously if you so desire. Please note: We welcome such articles from young earners who have just started their investing journey (this edition is a good example. Also see, for example, audits by Suhas and Avadhoot linked below). Now over to Vamshi.

Hello All, I have created this article to keep the track of the rationale with which I have created my own financial plan and hopefully, this will provide some idea to you in terms of planning your finances better.

Please note I am a conservative investor and the below assumptions should depict that. This may or may not work for you and plan your goals accordingly.

1. Emergency Fund 
An emergency fund is one of the most important attributes of financial planning. An emergency could be anything be it a medical necessity, job loss or any other issue which needs money on an immediate basis.
Hence the emergency fund should be liquid enough and should be in instruments that are less volatile.
How much emergency fund should one have? Start with 6 months of expenses( include EMI’s and other mandatory expenses) and increase as per your need.
Below are some guidelines for you –
1) 6 to 12 months expenses
2) Medical emergency corpus(depending on the area you are living)
3) Insurance premiums for 1 or 2 years
4) EMI’s for 3 to 6 months
For me, the estimation is around 10 lakhs which plan to accumulate over some time.
I have planned to accumulate the Emergency Fund in the below instruments –
1) ICICI Savings Bank Account & Sweep In Deposit – Joint account with wife as another account holder
2) Credit cards – for immediate credit need
3) Arbitrage Mutual Fund – Direct plan – For monthly contributions
I have accumulated 2 months equivalent of expenses and planning to complete 6 months by end of 2022.


2. Life Insurance 
Life Insurance is the contingency to compensate for the risk of losing the breadwinner of the family. This plays a pivotal role in one’s financial plan. Term insurance is the best form of life insurance and provides large coverage with less premium.
The approximate calculation goes like this –

(Annual expenses as of today * number of years you think your spouse will survive) + Liabilities + Other Goals Corpus(like kids education etc) – Assets

I have calculated my term insurance need considering all the expenses, goals and liabilities. I need a cover of 3 crores to provide sufficient income to my family in case something were to happen to me.
I am currently having term insurance of 2 Crore from max life purchased in 2021 and would like to purchase 1 Cr policy next year (from the same insurer).

3. Health Insurance
Health insurance is mandatory in today’s day and age as the medical costs are increasing day by day and a large hospitalization can derail the finances.
So, I have purchased health insurance for my family and my parents and the coverage should suffice for the next 20 years at least.
Parents(2A) – 10L base + 1Cr super top-up (Both from Liberty)
Family(2A +1C) – 10L base +1Cr super top-up(Base from ICICI Lombard and ST from Liberty)
Why 1 crore super top-up? Considering the medical inflation, the expenses may reach a very high level in 15-20 years and we may not get that much coverage as our age increases. Also, the premium is very cheap for super top-up as of today.
Better to purchase it from now.

4. Accident & Disability Insurance

Accident insurance is must for the reason that disabilities which occurs due to accident can have prolonged effect on the income of a family. An accident to the breadwinner can hamper your cash flow and hence one needs accident and disability insurance.
Currently, I have not purchased this and planning to take insurance with coverage between 1 Crore to 1.5 Crore. This is extremely important insurance but we don’t realize it until this hits us.

5. Short Term Goals
I have 4 short term and recurring goals –
i) Kids school education
ii) Vacation every year
iii) Misc. expenses
iv) Insurance payments
i) Kids School Education – I have to save for this goal from 2023 as my kid is still 10 months old. I have estimated of yearly education cost of 80k with an inflation of 10% every year and it might be different at different locations across India.
ii) Vacation – This is very important for me to refresh my body once a year. I have estimated a yearly cost of 40k with an inflation of 7% every year
iii) Misc. Expenses – This is mainly for some of the unexpected expenses that one have to incur in life. For this also I am estimated yearly cost of 40k with an inflation of 7% every year.
iv) Insurance payments – This goal is to save enough money to pay all the insurance premiums explained above. I have marked my yearly bonus for this and any remaining can be taken from the short term goal corpus
Term Insurance – 25k (for 2cr + planned 1cr)
Health Insurance – 50k currently with inflation of 10% every year
Accident Insurance – 15k(for 1cr)
All these goals are clubbed and the money is saved into the below instrument. Since this is a short term goal, I will not be investing in equity
ICICI Arbitrage Mutual Fund – Have chosen this to provide FD kind of returns with better taxation

6. Long Term Goals 
I have 5 long term goals as stated below –

  1. Retirement
  2. Kids Education
  3. Kids Marriage
  4. Purchase Car – This is a recurring goal that repeats every 10-15 years
  5. House Renovation & Reconstruction – This is also a recurring goal that repeats every 15-20 years

1) Retirement – This is one phase which everyone has to go through post their working life without any income to live with.
For my case, the estimated corpus is 3.6 crores in today’s value or 15.8 crores in future value with the below assumptions
Inflation – 7%
Retirement age – 60
Life Expectancy – 100
Goal Year – 2052

Here, I have considered zero real return with 50:50 Equity to debt allocation. Why not more equity? Well, I am not comfortable with too much equity drawdown and there is no guarantee that equity will perform over the long term. So I would like to err on the safe side.

2) Kid’s Education – Being a parent we have the responsibility to give a better life to our kids. In that process, education plays a pivotal role. In my case for 2 kids, I have estimated the future education costs for both graduation and post-graduation and the required amount is 72 lakhs in today’s value or 5.4 crores in future value amount drawn from 17th year to 25th year, with below assumptions
Inflation – 10%
Goal Year – 2038,2042,2046
In this case, also I am going with 50:50 Equity to debt allocation.

3) Kid’s Marriage – This is one of the optional goals one can have, but in today’s day and age people are spending a lot on kids marriages so wanted to accumulate a decent corpus for this goal.
The estimated corpus for both the kids marriage is 20 lakhs in today’s value or 1 crore in future value after 26 years and below are assumptions –
Inflation – 6%
Goal Year – 2049

4) Car – This is one of the recurring goals one should plan. Before and after retirement included, the value of the estimated car goes up to 16 lakhs in today’s value or 45 lakhs in future value and below are the assumptions –
Inflation – 7%
Goal Year – 2031,2047
I have considered these costs into retirement corpus also as a car is required post-retirement also

5) House Renovation and Construction – This is one of the recurring goals one should plan. Before and after retirement included, the estimated value goes up to 40 lakhs in today’s value or 1.75 crores in future value below are the assumptions –
Inflation – 7%
Goal Year – 2034, 2050

I have considered these costs into retirement corpus also as house renovation is required post-retirement also

I am following a Unified Portfolio Approach for all long term goals and below are the instruments in which I would be investing –

Equity –
1) Nifty 50 Index – Direct Plan – 25%
2) Nifty Next 50 Index – Direct Plan – 25%

Debt –
1) PPF/EPF – 40%
2) Arbitrage fund – Direct Plan – 10%

Why only 50% equity? I am comfortable with volatility but not with sharp drawdowns, which equity will have from time to time. I feel a 50:50 portfolio provides a good risk-adjusted return to achieve future goals.

I have chosen Index funds as my vehicles instead of active funds because I don’t want to put any effort into chasing after the best fund every time and shift corpus every time, which creation tax and exit loads.

Arbitrage is chosen predominantly for rebalancing purposes.
If I max the EPF and PPF, then I will add Gilt Mutual Fund to the portfolio to add the extra amount. Below are the return assumption –

Post tax Equity Return – 10%
Post tax Debt Return – 6%
Total Portfolio Return – 8%

I have started investing in the above portfolio recently, and it is predominantly in debt products. Currently, my corpus is equal to 1 year of my expenses, with equity being 10% and debt 90%

Important Notes:
1) Rebalance If allocation goes deviates by 10%. i.e., if equity goes to 60% and debt to 40%, redeem 10% from equity and invest in debt and vice versa.

2) Returns are estimated post-tax in line with inflation

3) Following Unified Portfolio approach separately for Short and Long term goals to manage the portfolio easily

4) Arbitrage fund of 10% in long term goal portfolio is predominantly for rebalancing and to make use of equity volatility

5) Don’t venture into products that you don’t understand – such as cryptocurrency, trading, future and options, small cap stocks etc.

6) I know it is difficult for me to invest that much amount today but start investing whatever possible and increase skills and salary

Liabilities

I have two active loans running, which I have taken at the time of purchase of the house.
1) Home Loan
2) Gold Loan

I plan to close the gold loan and have only the home loan.

Next Steps:

1) Build an emergency fund of 3L by 2022 and save monthly into it
2) Purchase 1cr term insurance
3) Purchase accident insurance of 1 to 1.5 crore
4) Change health insurer from ICICI Lombard to Liberty
5) Start investing for short and long term goals

How do evaluate whether I am financially independent or not?
Total Corpus should be (100-retirement age) times the annual expense plus inflation-indexed corpus for other goals.

If this is achieved, I call myself financially independent.

Guidelines

1) Don’t panic if equity fall by 50%
2) Deploy more cash if possible in case of equity fall
3) Accumulate required corpus in fixed income products as goal nears.
4) Review and rebalance your portfolio once a year if necessary
5) Worry about risk not return.

Similar audits by other readers

As regular readers may know, we publish a personal financial audit each December – this is the 2020 edition: How my retirement portfolio performed in 2020. We asked regular readers to share how they review their investments and track financial goals.

These published audits have had a compounding effect on readers.  If you would like to contribute to the DIY community in this manner, send your audits to freefincal AT Gmail. They could be published anonymously if you so desire.

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