Financially secure your dependents before other investments

One of the most important steps towards a sound financial plan is to get yourself and your dependents insured, particularly if there is only one earning member in the family, says Harshvardhan Roongta of Roongta Securities to CNBC-TV18.

“Imagine one earning member who passes away accidently, what happens to the rest five dependents who are completely at the mercy of the earning member?" asks Roongta.
In such a scenario, he says the first step towards financial planning is that you need to secure your dependents financially. "It’s not as difficult to protect yourself financially, if you take a term policy for an Rs 50 lakh cover for a 30 year old person the premium is between Rs 6000 and above Rs 11000-12000 per annum. You need to take an insurance of at least a 10-15 times of your annual income so that your dependents can be assured of some kind of money in case that sole earning member is no more,” Roongta advises. Below is an edited transcript of his interview. Q: I invest Rs 12,500 per month through SIP. I want to buy a home worth around Rs 50-75 lakh in five years. What’s your advice?
A: You mentioned that you were already making an investment of about Rs 12,500 per month and you wish to increase it further. I assume a similar amount of about Rs 12,000 is what you wish to start investing over a period of five years from now.
Even if I project the growth at 14% for equities in the next 5 years, Rs 12,000 per month would become about Rs 10 lakh. You are going to be largely short of your target of about Rs 75 lakh. At the time of buying the house, you could probably liquidate the investments which you have already made through SIPs and the fresh investments. Use that as a down payment to buy the house and the balance amount you can take in the form of a housing loan from a bank or a financial institution.
Considering that you have five years and you need to accumulate a large corpus, I suggest a slightly aggressive portfolio which you can divide between the three funds. You can put Rs 4,000 into an HDFC Equity Fund, another Rs 4,000 into UTI Dividend Yield Fund and the balance into the SBI Emerging Businesses Fund. I need to also mention that you have about two small and midcap funds into your portfolio already.
So you could stop making investments into DSP Blackrock small and midcap and add that amount into the SBI Emerging Businesses Fund. With this, you will have a little aggressive portfolio in the form of the funds that you are investing into. But I think that is what is needed to get you that kind of a push for a large corpus over five years. Q: Should I stay with the tax saving plans?
A: At least till the time the Direct Tax Code comes into play, you will need to invest into them for tax benefits under Section 80 C. If that is the requirement then he must continue. If not, you can always choose to invest into something which does not have a lock-in because you need the funds after five years. So any investments that you make three years prior will be locked in. Assuming that you need 80 C benefits, continue it till the time the DTC comes into implementation and then stop immediately after that because ELSS is not included under 80 C. Q: I can invest Rs 10000 per month. My goal Rs 1 crore and my timeframe is about 10 years. How should I allocate the money?
A: Simple calculation would say that you need to set aside an amount of about Rs 40000 a month for a period of 10 years so that he will accumulate that kind of corpus, even if he takes a long term equity return of 14%.
There is only one earning member in the family and there are five dependents. Now, that is a scenario which is – and you have no insurance or a very little insurance in the form of a ULIP policy from Max New York Life Insurance.
What my suggestion is that at this moment, you concentrate more on protecting the family and dependents financially.
Imagine one earning member who passes away accidently or unfortunately, untiringly and what happens to the rest five dependents who are completely at the mercy of the earning member. So in such a scenario, the first step towards financial planning is that you need to secure your dependents financially. So in this case, I would suggest that you concentrate on that immediately and take some action towards it.
It’s not as difficult to protect yourself financially, if you take a term policy for an Rs 50 lakh cover for a 30 year old person the premium is between Rs 6000 and above Rs 11000-12000 per annum. You need to take an insurance of at least a 10-15 times of your annual income so that your dependents can be assured of some kind of money in case that sole earning member is no more.
You need to take an overall view of his finances. Consult a financial planner because he will be able to work out a balance between all the financial aspects in life, how much should you be allocating towards the house? How much for retirement? Should you make a provision for medical for all the dependents?
So more appropriate measure for you would be to approach a financial planner, take a detailed view rather than look at just one aspect of your life, which is house, and lastly, one basic suggestion is that whatever protection you need to buy in the form of insurance buy it only as a term insurance policy. If you need to make long term growth investments, use equity and if you are not comfortable with direct equities, use mutual fund as a route.