Don’t lock all your funds in business

Bhupendra Shah (47) lives in Mumbai with his wife Dharini (43), two children — Kunal (20) and Akshita (9) — and parents. He is an insurance agent.
What is the couple saving for?
They will require Rs 15 lakh each for their children’s education three and eight years later; and Rs 15 lakh each for their marriage 7 and 15 years from now. They also wish to support Bhupendra’s parents financially.For their retirement after 20 years, the couple needs a corpus which could generate Rs 10 lakh annually. All these costs will be revised based on inflation.
Where are they today?
Cash flow: Annual gross inflow from all sources is Rs 21.4 lakh, against the total outflow of Rs 15.46 lakh. The total outflow includes routine family expenses, taxes, EMI and insurance premiums.
Net worth: The couple’s total assets are worth Rs 4.7 crore. These include personal assets worth Rs 2.5 crore in the form of a house. There is an outstanding home loan liability of Rs 17 lakh, which is about 3.5% of the assets.
Contingency fund: Against the mandatory monthly expenses of Rs 87,000, total balance in savings bank account and cash is Rs 3.5 lakh — approximately 4 months’ reserve.
Health & life insurance: Bhupendra has a life cover of Rs 57.86 lakh, mainly by way of investment-oriented policies and term plans. Health cover for the couple is Rs 3 lakh each, Rs 2 lakh each for children and Rs 5 lakh each for parents. They also have a family floater policy of Rs 12 lakh, which covers four members of the family.
Savings & investment: The balance in savings bank account is Rs 3 lakh. Invested assets include PPF balance worth Rs 2.25 lakh, equity shares and mutual funds worth Rs 14.50 lakh, fixed deposit worth 30,000 and business assets worth Rs 2 crore.
Fiscal analysis
The family is saving more than 40% of their total income, a very good savings rate. The contingency fund of four months’ expenses is fine considering they have aged parents. Their health cover seems to be sufficient now but should be enhanced considering rising costs. Most of the life insurance policies are investment-oriented. Their invested assets are skewed in favour of funds locked in business assets. This may not be very prudent for overall portfolio creation over a longer period of time.
The way forward
Contingency Fund: They should continue to maintain it at the current level.
Health & life cover: Healthcare costs in country are rising and it is recommended that Bhupendra enhances mediclaim cover to Rs 5 lakh each for himself, wife and children. The couple should also increase the healthcare cover of parents whenever possible.
If possible, they should turn their investment-oriented policies fully paid-up and obtain an additional term plan worth Rs 50 lakh.
Planning for financial goals
Children’s education: The couple can use the money invested directly in equities and some part of the yearly surplus to fund this goal.
Children’s marriage: They should start an SIP of Rs 15,000 in a large-cap fund and a gold fund to meet this goal. They should increase the SIP amount by 10% every year.
Retirement planning: The couple should start investing by way of SIPs in equity-based mutual funds. They must also contribute regularly to PPF.
Parental responsibility: Their current income is sufficient to support parents. However, as a precaution, they should create a corpus of Rs 5 lakh over the next two years and park the amount in a bank FD.