Money Matters with Lovaii Navlakhi

Lovaii Navlakhi, from International Money Matters advises investing after calculating 200 times of the monthly expenses of an individual who in this specific case is the sole earning member of his family. She helps him understand how to arrive at the insured amount he wishes to achieve.

Q: I can invest Rs. 5,000 per month. I have two LIC policies. In the long term in 10 years, I would like to earn around Rs. 8-10 lakh. How should I allocate the money?

A: As per his query, if I do a simple calculation of something like 9.5% per annum will help him meet the goal of 10 lakhs in 10 years. But what I also notice is that he is the sole earning member. He mentioned that he has some investment in LIC and it's very important that he first looks at what he has to cover. He should make sure he is protecting his family because he is the sole earning member and then decide to make investments.

Q: How should he make that calculation? Should it be some kind of a multiple of the monthly expense or annual income that he enjoys today? How will you help him arrive at that insured amount?

A: Typically the simple way to do it is 200 times his monthly expenses. Suppose he contributes to his family Rs 5000 a month. This is what he is ensuring that his family gets even if he was not earning. Then he needs to insure that he has 200 times that amount as the sum assured. So let us say in this case Rs 10 lakhs is the sum assured. The simple calculation is 6% per annum on that Rs 10 lakh will equate to Rs 60,000 a year and that is Rs 5000 a month. So that is the bare minimum that he needs to take care if his family is depending on him for Rs 5000.

Since he requires to achieve that Rs 10 lakh corpus in the next 10 years, we need to evaluate how important that Rs 10 lakh is. What happens if it is postponed or is achieved early? That 9.5% per annum at today's situation where fixed income is giving you close to 8% and maybe equity you can assume something like 12-14%.

He may need to put one third of his money in equity, two third of his money in fixed income and invest it in a staggered manner because that is his goal. Typically what happens is people start off with this and say in 10 years I need the Rs 10 lakh but actually 10 years later he may want to draw out only Rs 4 lakh and then continue the rest of the investment in which the equity could be more.