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Rediff.com  » Business » How to live like a king now, and forever

How to live like a king now, and forever

By Rahul Shringarpure
January 23, 2007 11:30 IST
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Vipul Shah, 45, has a flourishing garment business. Annual turnover of his business is around Rs 5 crore (Rs 50 million) and is growing at 10 per cent a year. Net profit after tax and all expenses, which is around Rs 30 lakh currently, is also rising at 10 per cent a year. His wife Dipti, aged 42, is a housewife.

Their only son 19-year-old Rakesh is pursuing commerce graduation in Mumbai University. Vipul's parents are entirely dependent on him. His father, who is 70 now, is a heart patient and mother, 65, is a diabetic.

The family's annual expenses are around Rs 5 lakh. These include expenses on Rakesh's education, parents' medical and Vipul's travelling.

In addition to all this, Vipul also spends Rs 5 lakh a year on entertainment and leisure trips.

They live in a big house at a posh locality. Vipul has already paid off the loan on the house, whose current market value is Rs 80 lakh. He owns a Toyota Corolla, whose depreciated value is Rs 8 lakh.

Vipul has invested heavily in equities - to the tune of Rs 90 lakh. He also has fixed deposits worth Rs 5 lakh, and jems and jewellery worth Rs 10 lakh. He purchased a land near Pune three years ago, whose present market value is Rs 20 lakh.

But what Vipul has not done! He has not taken any insurance - neither life nor medical. As both Vipul and his wife are in good health he thinks they do not need a medical or life cover.

Goals

After five years, Vipul and Dipti will be celebrating the silver jubilee of their wedding. Vipul wants to gift a costly diamond set to his beloved wife on the occasion, the cost of which will be around Rs 10 lakh at that time.

Rakesh, after graduation, wants to study abroad - pursue a three-year MBA in a foreign university. Vipul pegs this cost at around Rs 30 lakh. He also expects Rakesh to get married when he turns 26, and presumes the marriage expenses to be around Rs 50 lakh. And at the time of the ceremony, Vipul wants to gift a Mercedes C-Class car to the married couple.

Vipul has not planned for his retirement but intends to build a corpus of Rs 4 crore (Rs 40 million) at the age of 60, just when he retires. Further, he wishes to build a retirement home on the Pune plot. He expects the inflation adjusted cost at that time will be around Rs 1 crore (Rs 10 million).

Current portfolio Assumptions

We assume inflation rate to be around 5 per cent and rate of return on FDs around 8 per cent, PPF gives 8 per cent returns a year. In the long run, we expect equities and equity mutual funds to deliver 12 per cent returns.

Further, we assume that the balance fund will offer returns of 10 per cent. We also presume that in the long run, property will deliver 10 per cent returns.

Recommendations

Risk level: If we take a look at Vipul's investments, we can easily make out that he is a risk-taker and aggressive kind of investor. His major investments are in direct equities, with debt portion in his portfolio being very less.

But considering his age, we put Vipul in a growth category and recommend him to invest further: 40-60 per cent in equities, 0-10 per cent in property, 10-30 per cent in debt and 0-10 per cent in cash.

Insurance: We have noticed Vipul's ignorance about insurance. May be in his busy schedule of business activity, he has not taken a look at this aspect. But insurance is a must in everybody's portfolio.

As Vipul and his family have certain goals to be achieved, in the eventuality of an untimely death of Vipul, the family will have a huge setback. Although the premium will be higher at this moment, he has to go for a life insurance cover - but it is simply unavoidable.

According to Vipul's income and the needs, we recommend him to buy a life cover for Rs 1 crore (Rs 10 million). We advise him to purchase term insurance for 20 years, with the premium for a Rs 1 crore cover - as per his age - at Rs 80,000.

Even though Dipti is a housewife, she has a big responsibility of looking after the whole family. So she too needs a life cover. The premium for this cover will be Rs 30,000. As Rakesh is still studying, we do not recommend any life cover for him.

It is better if Vipul can take medical cover for his parents. But it is difficult considering his father and mother are aged 70 years and 65 years respectively, and also they are suffering from heart disease and diabetes.

He can take benefit of the Varishta mediclaim policy recently launched by National Insurance Company. This policy specially for the elderly and covers the pre-deceased ailments. But for this, he has to shell out Rs 15,000 as premium for both father and mother for a Rs 2 lakh cover.

Investment: If we take a look at Vipul's investment strategy he has invested a larger chunk towards equities. Of the total invested amount of Rs 125 lakh, he has invested Rs 90 lakh or around 72 per cent in equities. We recommend him to reduce his equity exposure to around 50 per cent.

Further, we advise him to reduce direct equity exposure and go for the equity mutual fund route - ie restructure his portfolio. We have recommend him to keep the direct equity exposure to Rs 30 lakh and invest Rs 30 lakh in diversified equity mutual funds.

Further, we advise him to invest Rs 12 lakh in debt funds, Rs 12 lakh in RBI bonds and in Rs 10 lakh in fixed deposits. We would like to restrict his investment in jewellery up to Rs 10 lakh only.

Further, we would not like to touch his investment in plot of land, as Vipul is interested in constructing a retirement home on this plot. As Vipul has not kept any cash, we also advise him to keep cash of Rs 1 lakh for emergency.

Restructured Portfolio

Vipul has an annual income of Rs 30 lakh. His annual living expenses are Rs 5 lakh and entertainment and leisure trip expenses too are Rs 5 lakh. Further, he has to shell out Rs 1,35,000 towards insurance premium. So he is left with Rs 18,65,000 for investments.

It seems Vipul has not yet planned for his retirement. He has neither opened a PPF account nor is he contributing to any annuity plan. As he is a businessman and is not enjoying the facilities such as EPF or pension, these investments are a must for him.

So our first aim for him is to see investment for retirement. We advise him to open two PPF accounts in his name and his wife's name, and contribute Rs 70,000 a year in each account.

Cash flow analysis

Achieving Goals

Vipul's short-term goal is to make provision for Rakesh's MBA education expenses, which he will incur after three years. As his previously invested direct equity investments will become Rs 35 lakh after three years, he can use this amount for Rakesh's education expenses.

His first medium-term goal is to gift a diamond set to his wife on their 25th wedding anniversary, which falls after five years. He can liquidate his previously invested FDs at that time, which will become Rs 15 lakh after five years.

Now the most important goal - retirement, for which Vipul requires a corpus of Rs 4 crore and a further Rs 1 crore to build a retirement house.

His PPF investment will become Rs 38 lakh in 15 years and annuity plan investment will become Rs 27 lakh. Diversified equity mutual funds will grow to Rs 1.5 crore (Rs 15 million) and direct equity investments will become Rs 1 crore. 

Conclusion

Taking into consideration the above recommendations, Vipul will certainly be able to meet all his goals in life.
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Rahul Shringarpure
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