I am 42 years old earning Rs. 2.20 lakh per month, with monthly expenses of Rs. 1.2 lakh. My monthly investment: Rs. 9,000 in NPS, Rs. 5,000 in VPF, Rs 22,000 in EPF, and Rs. 65,000 in equity MFs. My savings: NPS: Rs. 11 lakh in tier 1; PPF: Rs. 18 lakh; EPF: Rs. 19 lakh; MFs: Rs. 36 lakh (including Rs. 3 lakh in a debt fund for emergencies); FD: Rs. 3 lakh; Equity stocks: Rs. 5 lakh; Corporate FD and SGB: Rs. 12 lakh. I also have a pending home loan of Rs. 8 lakh, which will be paid off in 2 years. I aim to build a retirement corpus of around Rs. 8 crore by 60.
Response: Firstly, it’s refreshing to see someone your age showing such awareness and discipline in their post-retirement investment. Your sustained focus has placed you in a comfortable position to reach your target retirement corpus timely. Before reviewing your existing and incremental investments, I would suggest you to increase your emergency fund to at least Rs 7.2 lakh, i.e. 6 times of your monthly expenses. You can park your emergency fund, including your Rs 3 lakh exposure to debt funds, in the high yield bank FDs of small finance banks like Unity Bank, Suryoday Bank, Ujjivan Bank, Utkarsh Bank and Jana Bank. Many of these banks are offering yields of 8% and above on their FDs with much higher income certainty, liquidity and capital protection than debt funds.
Your existing investments amount to Rs 1.04 crore, of which Rs 38 lakh is invested in equities and equity related instruments, Rs 11 lakh is in NPS and Rs 55 lakh is invested in fixed income and sovereign gold bonds (SGB). Your existing investments have a fixed income bias and my suggestion would be to shift to an active asset allocation option in NPS, if not already chosen, and opt for 75% exposure to equities. The rest of your existing NPS investments can be spread between corporate bonds and/or government bonds as per your risk appetite. Assuming a 12% annualised return from your existing equity exposure and a 5% post tax return from your fixed income corpus, your existing investments should grow to about Rs 5 crore in 18 years.
Now coming to your monthly incremental investments, I would suggest you stop fresh contributions to VPF and limit your annual contribution to NPS at Rs 50,000, the maximum deduction available under Section 80CCD(1B). Maintain an equity exposure of 75% in your fresh NPS contributions too. Continue to invest Rs 500 each financial year in your PPF account to keep it active. The rest of your investible surplus should be invested in equity funds, leading to an equity debt ratio of 7:3 in your total incremental contributions. Note that equity funds outscore both NPS and VPF in terms of upside potential, liquidity, flexibility and product choice. Also, sell your holdings in stocks, except the high conviction ones, and invest the funds in equity mutual funds.
Assuming the same returns from equity and fixed income instruments as used for your existing investments, your incremental monthly investments should grow to about Rs 6.36 crore in 18 years. Thus, you will have a corpus of Rs 11.36 crore by time you reach your retirement age. Distribute your existing and fresh equity fund exposure equally between large cap, flexicap and multi-asset funds. You can consider the direct plans of Parag Parikh Flexi Cap Fund and/or Quant Flexi Fund for the flexicap category; ICICI Prudential Bluechip Fund and HDFC Top 100 Fund for the large cap category; and Quant Multi Asset Fund or ICICI Prudential Multi Asset Fund for the multi-asset category.
Also, ensure to purchase term insurance plan(s) covering 20 times of your family’s annual expenses for ensuring financial security of your dependents in case of an unfortunate event of your untimely demise. You can visit Policybazaar.com to compare and choose term insurance cover(s) from any of the following private sector life insurance players — ICICI Prudential, Max Life, HDFC Life, Bajaj Allianz Life, PNB Metlife and Tata AIA.
Purchase health insurance cover of at least Rs 1 crore, with a base health cover of Rs 5 lakh and super top-up cover of Rs 95 lakh. You can visit Policybazaar.com to compare and choose health insurance cover(s) from Niva Bupa or Aditya Birla health insurance companies. These private sector health insurance companies offer bigger covers at very low premiums.
An edited version of this article was published in Economic Times Wealth on May 27, 2024.