How must I save for next year?

My investments are in life insurance, Public Provident Fund and a pension plan. I am also servicing a home loan.

My wife earns around Rs 1,20,000 per annum. She has no investments in her name and I would like her to buy a life insurance policy.

Do you think I invest in the stock market or maybe an equity mutual fund? Also, must I get a medical cover? Currently, my employer covers me and my wife.

- K Date

Hi Kaustubh,

Why do you want to buy a life cover for your wife?

The essence of life insurance is to make up for the economic loss caused by the death of a person.

I am aware that this sounds morbid, but you need to ask the correct questions when buying a life cover for a person. If this person were to die, what expenses will I need to incur? What loan will I need to repay? What income, that someone is dependent on right now, will stop flowing in?

In your wife's case, I would expect that typically your answer to all this would be nil. Since she has no one dependent on her and neither is she servicing a loan. If I am right, then you don't need to buy her a life cover.

On the contrary, if she asks the same questions about you, I think you might get a figure you never thought of. You could at least begin with rough and conservative estimate and later consider getting professional advice for that. I encourage you to take advice from fee-only advisors and not from commission based advisors who benefit from selling you a particular plan. Paying for unbiased and competent advice will reap large benefits in the long run.

I also believe that buying a term cover is the best way to cover risks.

Most insurance agents will be inclined to offer products that bundle investments into insurance. My experience is that such products have quite high expense ratios.

Instead, if you use the premium payment schedule of such products and construct a combination of term cover with investments in mutual funds, you might end up wealthier and also retain flexibility and control.

• The best term insurance policy for you  

I am not able to advise you on Mediclaim as I do not know the amounts and expenses covered.

• Why office Mediclaim is not sufficient 

Where your stock market investments are concerned, I certainly advice you to learn to use mutual funds to your benefit.

For most working professionals who need to spend a lot of time and effort at work, mutual funds really offer a great investment solution.

Hope that helps.

• Time to start your tax planning

I am 26 with a monthly take home of Rs 28,000. My monthly expenses are roughly Rs 10,000.
I will be buying a car with an Equated Monthly Instalment of Rs 5,000 over the next years next year.

I want to have a corpus of Rs 2 crore (Rs 20 million) present value by the time I turn 46. Can you suggest sectoral investment avenues suited to my needs. My current investments and cash balance is around Rs 2,50,000.

- Aseem  Paliwal

Hi Aseem!

Honestly I don't know which would be the right sectors, now or for the next 20 years.

My suggestion would be to stick to diversification over various market capitalistions and pick up mutual funds targeted at them.

I would certainly goad you to be careful with Unit Linked Insurance plans. They are pretty expensive.

Here's a simple math calculation. You want Rs 2 crore in today's prices after 20 years.

Today, you have roughly Rs 2,50,000.

If you earn a nominal return of 16% per annum on your current portfolio and inflation persists at 6% per annum through this period, you need to invest Rs 26,000 every month. But, this is in today's prices. In other words, the monthly investment of Rs 26,000 needs to increase every year with inflation.

Also Rs 2 crore will be worth almost Rs 6.50 crore in terms of inflation adjusted value after 20 years (6% inflation assumed).