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News & Views

Tuesday, Aug 16, 2016

Discipline to invest regularly for the long term is key to saving

[Source : Live Mint]

Retirement planning is one of the most expensive goals to provide for as this is a goal where you need regular income for many years

I am 35 and want to plan for retirement. I have a differently-abled sister and want to build a separate fund for her too. How should I go about it? I earn Rs.1.5 lakh a month and expenses are of Rs.50,000. I’m married and my wife earns around Rs.70,000. I have investments of Rs.5 lakh in Public Provident Fund (PPF) and Rs.3 lakh in tax-saving fixed deposits (FDs). I have a term plan of Rs.50 lakh and family floater health cover of Rs.20 lakh.

—Gagan Tamble

Retirement planning is one of the most expensive goals to provide for as this is a goal where you need regular income for many years, without even knowing till when you will need it. Along with it comes providing for inflation protection as well, as it is one of the few goals where you have years when you may not be earning, or if earning, then not at the same pace.

Hence, it is important to realise the same early and plan to start creating a retirement corpus. It is critical to understand your own expenses to ensure that the required corpus is created, which provides you inflation-adjusted income. This becomes more important for you as it is to be created for your family as well as for your sister.

At the same time, the good part is that you have the capacity to save, and at your age, you can start now to ensure that these goals are protected. Also, you cannot forget about other goals, which will come up in due course, such as your children’s education and their marriages.

The key to saving is to be disciplined for the long term. With your potential to save, including for your sister, you need to start doing monthly savings, and here, investing into mutual funds via systematic investment plans (SIPs) is the best option.

Asset allocation, too, becomes important as this will determine how much inflation protection can be achieved. Here your risk appetite should decide how much risk asset (read equity) can be allocated in the overall portfolio. It is recommended to have equity as an asset class in the portfolio to ensure inflation-adjusted returns, and with age on your side, i.e., we are talking about more than 20 years of investment, equity allocation will play an important role in the long run.

Create an equity portfolio mix of large-cap, multi-cap and even balanced funds. Risk appetite permitting, add a mid-cap fund as well.

In the debt space, debt funds (short-term) along with PPF will suffice. Prefer to have investments that give you a return that matches inflation, if not more.

In terms of insurance, you have a term insurance cover. Review the sum assured regularly and increase the cover as your income and expenses go up. It is good to have a sum assured that is 6-8 times your annual income. In your case, consider having it on the higher side.

Likewise, your health insurance cover appears to be in order. Ensure that your sister is also part of the policy. Else, get her a separate health insurance.

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