I am a 32 year old government servant with Basic salary of 82590/- and I am deducting Rs. 13,500/- monthly towards KGID with assured sum of Rs. 40,23,000/-, My question is, considering the inflation is the assured sum worth it?

Ans: Evaluating the Worth of Assured Sum Considering Inflation

As a 32-year-old government servant with a basic salary of Rs 82,590, you are currently contributing Rs 13,500 monthly towards a Karnataka Government Insurance Department (KGID) policy with an assured sum of Rs 40,23,000. Your concern about whether the assured sum is worth it, considering inflation, is very valid. Let's evaluate this comprehensively.

Understanding the Impact of Inflation

Inflation erodes the purchasing power of money over time. What Rs 40,23,000 can buy today will be significantly less in the future due to inflation. Typically, inflation in India hovers around 4-6% annually. Over 20-30 years, this can drastically reduce the real value of your assured sum.

Assessing the Assured Sum

While Rs 40,23,000 may seem substantial today, it’s essential to consider its future value. In 20 years, at an average inflation rate of 5%, the purchasing power of this amount will be considerably less. This means that the financial security you perceive today may not hold the same value when you actually need it.

Considering Your Financial Goals

Your financial goals and responsibilities play a crucial role in determining if the assured sum is adequate. As a government servant, you might have benefits like a pension, but it’s essential to ensure that your family’s financial needs are fully covered in case of any unforeseen circumstances. Evaluating your long-term goals, such as children’s education, marriage, and retirement, is crucial in this context.

Alternative Investment Options

While the KGID policy provides a sense of security, exploring other investment avenues can offer better inflation-adjusted returns. Diversifying your investments can help in building a robust financial portfolio.

Mutual Funds and Systematic Investment Plans (SIPs)

Mutual funds, especially actively managed funds, can provide better returns compared to traditional insurance policies. Investing in equity mutual funds through Systematic Investment Plans (SIPs) can help combat inflation and build wealth over the long term. Actively managed funds are preferred over index funds due to their potential to outperform the market through professional fund management.

Disadvantages of Index Funds

Index funds passively track market indices and do not aim to outperform them. This means that during market downturns, your investments in index funds will also suffer. They lack flexibility and do not provide the active management needed to navigate market volatility effectively.

Advantages of Actively Managed Funds

Actively managed funds have professional fund managers who make strategic decisions to outperform the market. They can identify undervalued securities and manage market fluctuations effectively. This active management approach can provide better returns and help in achieving your long-term financial goals.

Understanding Direct vs. Regular Mutual Funds

Direct mutual funds have lower expense ratios but require you to make all investment decisions. This can be overwhelming without professional guidance. Regular funds, invested through a Mutual Fund Distributor (MFD) with a Certified Financial Planner (CFP) credential, offer valuable advice and help in selecting the right funds.

Disadvantages of Direct Funds

Managing direct funds requires significant financial knowledge and time. Without expert guidance, you might miss out on potential opportunities or make poor investment choices. The cost savings from lower expense ratios in direct funds might not compensate for the potential loss in returns due to lack of professional management.

Benefits of Regular Funds

Investing through an MFD with a CFP credential provides access to expert advice, ensuring your investments align with your financial goals. They help navigate market complexities and make informed decisions. The additional cost of regular funds is justified by the professional guidance and support you receive.

Insurance vs. Investment

Insurance and investment serve different purposes. Insurance is meant for risk coverage, providing financial security to your family in case of your untimely demise. Investment, on the other hand, aims to grow your wealth. Relying solely on an insurance policy like KGID for wealth accumulation is not advisable.

Term Insurance

A better approach is to separate insurance from investment. Consider opting for a term insurance policy with a higher coverage amount at a lower premium. Term insurance provides pure risk coverage without any investment component, ensuring your family is financially protected.

Investing the Savings

The savings from opting for a term insurance policy can be invested in mutual funds or other investment avenues. This combined approach of adequate risk coverage through term insurance and wealth accumulation through investments can provide better financial security and growth.

Evaluating Investment Cum Insurance Policies

If you currently hold LIC, ULIP, or other investment cum insurance policies, it’s essential to evaluate their performance. These policies often have high charges and lower returns compared to mutual funds. Surrendering these policies and reinvesting in mutual funds might be a better option.

Maintaining Liquidity

Liquidity is crucial to meet unforeseen expenses. Keeping a portion of your investments in liquid assets, such as savings accounts or short-term fixed deposits, ensures you can access funds without disrupting your long-term investment strategy. Maintaining an emergency fund of at least six months of living expenses is advisable.

Tax Implications

Consider the tax implications of your investments. Different investment avenues have varying tax treatments. For instance, long-term capital gains from mutual funds are taxed differently than interest from fixed deposits. Planning your investments and withdrawals to minimize tax liabilities is crucial for optimizing returns.

Health Insurance

Health expenses can significantly impact your financial stability. Ensure you have adequate health insurance coverage to protect your savings from being depleted by medical costs. Regularly review your health insurance and update it as needed to ensure comprehensive coverage.

Reviewing Your Financial Plan

Financial planning is not a one-time activity. Regularly reviewing and adjusting your financial plan is essential to ensure it remains aligned with your goals and market conditions. Life events, such as marriage, childbirth, or job changes, may necessitate adjustments to your plan.

Engaging a Certified Financial Planner

A Certified Financial Planner (CFP) can provide personalized advice tailored to your unique situation. Their expertise can help you optimize your investments, manage risks, and achieve your financial goals. Engaging a CFP ensures you have a professional guiding your financial decisions.

Empathy and Understanding

We understand that managing finances and planning for the future can be overwhelming. Your dedication to securing your family’s financial future is commendable. Seeking professional guidance to navigate these complexities can provide peace of mind and help you make informed decisions.

Genuine Compliments

Your proactive approach to evaluating your financial plans at a young age is commendable. This foresight will benefit you and your family in the long run. By exploring various investment options and seeking expert advice, you are on the right path to securing a robust financial future.

Systematic Withdrawal Plan (SWP) in Mutual Funds

A Systematic Withdrawal Plan (SWP) allows you to withdraw a fixed amount from your mutual fund investments regularly. This can provide a steady income stream while keeping the remaining funds invested. An SWP is an effective way to manage your mutual fund investments for regular income. It helps in mitigating the risk of market volatility and ensures a disciplined approach to withdrawals.

Advantages of SWP

Provides a regular income stream.
Keeps the corpus invested for potential growth.
Tax-efficient compared to lump sum withdrawals.
Flexible withdrawal amounts and frequency.
Implementing an SWP in your mutual fund investments can help you generate the desired monthly income while keeping your investment intact for future growth. It is a practical approach to manage your retirement income needs.

Final Insights

Considering inflation, the assured sum of Rs 40,23,000 may not be sufficient in the long term. Diversifying your investments to include actively managed mutual funds, term insurance, and other avenues can provide better financial security and growth. Engaging a Certified Financial Planner (CFP) for personalized advice ensures your financial plan aligns with your goals. Regularly reviewing and adjusting your financial plan is crucial to stay on track.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in