Financial services professional M Madhusudan, 37, lives with his wife and a year-old son in Cuttack. His annual income is close to Rs 20 lakh, while the monthly expenses amount to nearly Rs 25,000. This apart, every month, he directs Rs 27,000 towards his housing loan equated monthly instalment (EMI) and another Rs 9,400 towards servicing his car loan. His portfolio is insurance-heavy, with unit-linked insurance plans (ULIPs), term as well as endowment policies finding a place. He is also investing Rs 20,000 per month through SIPs, with his son's higher education in mind. His other goals include creating a corpus for refurbishing his house and retirement.

Mr Madhusudan seems extremely well-placed in terms of financial inflows. However, we need to examine whether there are any financial shortcomings with regard to financial goals vis-à-vis fund deployment and requisite financial planning.

INSURANCE COVERAGE

Considering the current monthly expenditure, outstanding car loan, home loan and the aspirational education goal for his son, the term insurance cover is adequate for the family. Apart from the Rs 2-crore term cover, there is an overdependence on ULIP products. ULIP as a wealth creation tool might fall short compared to pure equities/mutual funds in terms of costs - mortality costs, management fee, etc - as well as returns, especially when the individual is adequately covered otherwise. Such products could probably be made a small part of an investment plan rather than the largest investment in the plan. ULIPs could be made fully paid as soon as possible, saving an additional Rs 1,60,000 per year.

ASSET ALLOCATION

An equity:debt composition of 60:40 is recommended, given his age and other financial factors.

CONTINGENCY PLANNING

His savings account balance (Rs 3.5 lakh) should take care of his emergency needs.

CHILD'S EDUCATION

Considering the amount required, we assume that the goal has already been inflation-adjusted. He is looking at a Rs 25-lakh corpus in four years. He has an SIP going @ Rs 20,000 pm since the child's birth, which could amount to Rs 16,33,000 in the fifth year. Given his monthly surplus of Rs 34,000, he could increase the SIP amount by Rs 30,000 pm. Four years hence, the corpus from this additional contribution could amount to Rs 18,36,000, resulting in a total corpus of Rs 34,69,000 - assuming 12% CAGR. Upon the child completing five years, he could redeem the required proceeds and continue with the SIP - balance in the fund would amount to nearly Rs 10 lakh.

RETIREMENT

This goal is around 23 years away. If savings on premiums are invested monthly in hybrid papers returning a safe 9% p.a., it would create a Rs 1.18-crore corpus. The ULIP maturity amount could also be added to the corpus. While prioritising the goals, one needs to consider the cost of the goal (interest rates), time duration and importance of the goal. For refurbishing his home (spending Rs 10 lakh), he would need to take a loan.

We suggest:

(i) He does not pre-pay his housing loan in November 2011 using the lumpsum expected, but use part of the proceeds to do the home interiors and take a short-term loan to bridge the gap of eight months (March 2011 to November 2011).

(ii) He could postpone the home refurbishment to November 2011, and fund it through the expected lumpsum.