Hi, I'm Pooja (unmarried). My monthly income is ?1.20 lakh. I am 27 years old. My investments are as follows: ?2.5 lakh/year for a private life insurance company for 10 years. ?26k/year in LIC India. ?50k/year in PPF (Public Provident Fund). Currently, I have ?3 lakh+ in PPF. I have a home loan with a monthly EMI of ?25k (6 months running, tenure is 20 years). I invest ?25k/month in ULIPs (Unit Linked Insurance Plans). I plan to withdraw the ULIP amount after 5 years to close the home loan. I pay ?80k/year for medical insurance for myself and my family. I have invested ?3 lakh in mutual funds, but currently, there is no SIP . My goal for the next 5 years is to close at least 80% of the home loan and then buy a car. I live in Bangalore, so the cost of living is high. Short-term plan: I need money for my sister's and my wedding. Is my investment strategy correct?
Ans: Assessing Your Current Investment Strategy
Pooja, you're on a great path by starting early with a diversified portfolio. Your investments in life insurance, PPF, and mutual funds show a solid foundation. However, there are areas where your strategy can be refined for better long-term growth and achieving your goals.
Evaluating Your Insurance Investments
Private Life Insurance & LIC: You are paying Rs 2.5 lakhs/year and Rs 26k/year for insurance. Insurance is essential, but investment-cum-insurance products may not provide optimal returns compared to other investments. It's wise to consider whether these policies are truly meeting your insurance needs or if you're over-allocating funds here.
ULIPs: Investing Rs 25k/month in ULIPs might not be the most effective strategy. ULIPs combine insurance with investment, but the returns can be lower due to high charges. Considering actively managed mutual funds could offer better growth potential.
Medical Insurance: Your medical insurance of Rs 80k/year is crucial. Ensure it provides adequate coverage for yourself and your family. Given the rising healthcare costs, this is a good step.
Assessing Your Home Loan Strategy
Home Loan: Your monthly EMI of Rs 25k is manageable within your income. However, the plan to use ULIP withdrawals to close the loan might not be the most efficient. Depending on the ULIP returns, you might want to consider whether this approach aligns with your financial goals.
Prepayment: Prepaying your home loan is a good strategy if your home loan interest rate is higher than what you could earn from other investments. Prepayment reduces your interest burden and helps achieve your goal of closing 80% of the loan within 5 years.
PPF and Mutual Fund Investments
PPF: Investing Rs 50k/year in PPF is a safe and tax-efficient option. With Rs 3 lakhs already accumulated, continuing this investment ensures stable, long-term growth. However, PPF has a lock-in period, so it may not be ideal for short-term needs.
Mutual Funds: Your Rs 3 lakhs investment in mutual funds is a strong start, but since you are not currently doing SIPs, you're missing out on the benefits of regular investing. SIPs can provide rupee cost averaging and reduce the impact of market volatility.
Short-Term Financial Needs
Weddings: You mentioned needing funds for your sister's and your wedding. It's essential to start earmarking these funds now. Setting aside a dedicated savings plan or investing in short-term debt funds could be helpful.
Recommendations for Improvement
Reevaluate Insurance: Consider replacing your current insurance policies with a pure term insurance plan. This can provide higher coverage at a lower premium, freeing up funds for more growth-oriented investments.
Shift from ULIPs to Mutual Funds: Redirect your ULIP investments to actively managed mutual funds. This change could help you achieve better returns and meet your home loan prepayment target faster.
Increase SIP Contributions: Start or increase SIP contributions in diversified equity mutual funds. This will help you build a corpus over time and prepare for your short-term needs.
Emergency Fund: Ensure you have an emergency fund covering at least 6 months of expenses. This fund should be kept in a liquid or short-term debt fund for easy access.
Final Insights
Your current investment strategy has a solid base, but with a few adjustments, you can achieve more substantial growth and meet your goals more effectively. Focus on maximizing returns by shifting from low-yield insurance investments to higher-yield mutual funds. Prioritize your home loan prepayment if the interest rates are high, but balance this with other investment opportunities.
Remember, the key is to ensure your investments align with your goals, risk appetite, and time horizon.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
