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Solution

You can suggest the following to Mr. Nitin:

To allocate assets according to financial goals:

Nitin has been investing in all the major asset classes. But to achieve his financial goals,
he needs to structure them accordingly.

Ideally at his age, he should have a 60% exposure to equity, reducing it over time to
10% at the time of retirement, thus maintaining an average of 35% equity to 65%
debt.

To build a corpus for medical care for parents:

Assets(INR) Saving account 2,50,000 Move INR 8,00,000

Fixed Deposit 14,00,000 to liquid funds.

To cover the immediate medical requirement for his parents, he should move INR 8
lakhs from the FD upon maturity, and transfer that money into liquid funds.

This will give him the flexibility of a savings account with higher interest, and
further, there is no interest loss in case of pre-closure like that in an FD. He should
maintain another INR 2 lakhs in savings account for the same purpose.

Rate of Return typically expected on an FD is 6.5% (after tax), and on liquid funds is
7.5% (after dividend distribution tax)

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To ensure proper life insurance cover:

Since he has crossed the age of 35 and Suman has crossed the age of 32, they will have
a life cover requirement of INR 1,48,20,000 as shown below.

Age Annual HLV Insurance

Income requirement
Human Life Value
Nitin 35 15,60,000 6 93,60,000 (HLV)*Annual Income

Suman 32 7,80,000 7 54,60,000

1,48,20,000

Existing life insurance cover is sufficient for him and his wife.

To ensure proper health insurance cover:

Medical cover of INR 4 lakh is sufficient for him and his wife, but he should add a critical
illness cover for hospitalization, covering some specific illnesses.

To pre-pay the home loan:

Parameter Monthly(INR) Annual(INR)

Monthly Surplus 55,750 6,69,000

Move INR 25,000 of the surplus funds each month to a liquid fund, and use it to prepay
the home loan each year.

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Parameter Annual (INR)
Home Loan EMI 5,40,000

That is close to INR 3,37,000 each year (liquid yield of 7.5%) along with an EMI of INR
5,40,000. That will take the total payout for the year at INR 8,77,000, thus repaying the
entire loan in around 5 years

To create the retirement corpus:

Looking at a corpus of INR 2.5 Cr for retirement (in 25 years)

You will have to tell him the amount he needs to invest, to create the intended
retirement corpus after 25 years.

This amount should be invested in the ratio of 35% in equity with 11%
return(estimated), and 65% in debt with 8 % return(estimated), thus creating an
average rate of 9 %(estimated).

We can find this amount using the future value of annuity formula.

Where:

 FV(A) is the value of the annuity at time = n, i.e. the retirement corpus
 A is the amount he needs to invest each compounding period
 i is the periodic rate of return on his investments
 n is the number of payment periods

The monthly investment needed, will be:

2.5 Cr = A* (1+ .09/12) ^ (12*25) – 1

.09/12

Thus, he needs to put aside INR 22,300 every month to get a retirement corpus of INR
2.5 crores after 25 years (considering monthly compounding).

This is possible, as he is only contributing INR 25,000 towards prepayment of home

loan, out of the monthly surplus of INR 55,000.

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