Planning whiz – July 2022

Financial Planning

A young professional, who has two children approached Geojit’s Investment Analyst, Gibin John, seeking assistance to create a financial plan. Gibin guides him on how he can invest in for his children’s higher education, accumulate a corpus to build a house and plan for retirement. He also advices him on the need for life and health insurance.

Rahul is a 37 years old engineer working in a private firm. Rahul told Gibin, “My wife, age 36, is a doctor and she is practicing in a hospital. We have a daughter and a son. They are studying in 2nd and 4th standard respectively. Currently, we are living in a rented house close to our office. My monthly salary is Rs.1,25,000 and wife’s salary is Rs.1,00,000. Our monthly living expense is Rs.75000, this includes the rent of Rs.25000 per month.
“Our major investments include Rs. 10 lakh in bank deposit and Rs.20 lakh in mutual funds. One insurance policy was taken in my wife’s name with a sum assured of Rs.12 lakh and it has a premium of Rs.12500 and the maturity date is August 2025.”
Speaking about Rahul’s future plans, he said, “We are planning to build a house worth Rs. 1 crore within next five years, for which we have already purchased the land. For higher education of children, we would require Rs.25 lakh each. At present, we do not want to plan for our daughter’s marriage.
“Well, a building a house and our children’s education are our main goals, and if you feel that achieving these goals is difficult, then as a financial planner you may reduce the goal amount accordingly.
“However, please suggest the appropriate investment avenues for achieving our goals on time.”

Gibin John, our certified financial planner analysed Rahul’s financial situation and shared his views.
Your current cash flow is strong but you need to fine-tune your investment pattern. I am of the view that a good financial plan will help you to easily allocate the investments based on the requirements. Your family income is Rs. 2.25 lakh and your monthly outflow is Rs. 87500, including insurance payment. Considering these values, your monthly surplus is Rs. 137500.
Firstly, you have to set up an emergency fund for meeting unexpected expenses in your life. You can set aside an amount of Rs.5,00,000 from your bank deposit as an emergency fund. You may keep 30% of the amount in liquid mutual fund or savings account, and balance amount you can keep in other short-duration mutual funds which provide fast liquidity.
Your immediate goal is to build a house within the next five years. You are expecting a cost of Rs. 1 crore for this purpose. After considering inflation of 6% this amount will go up to Rs. 1.34 crore. It is difficult to invest and build the entire corpus for constructing the house from the existing surplus in such a short period of time. If you reduce the budget of Rs. 1 crore for this goal to be around Rs.75 lakh, then you need to invest Rs.1 lakh every month for the next five years in debt instruments or other risk-free investments. If this investment fetches 6% returns, you can accumulate a corpus of Rs.69 lakh within this period. For the balance amount, you may avail a home loan of Rs.30 lakh. If you avail a home loan with a tenor of 13 years, which will be till you reach the age of 55, at a 9% interest rate, then the EMI will be around Rs. 33,000. You are currently paying a rent of Rs. 25000 and you can set aside an additional Rs. 8000 from the surplus for paying this EMI. If you avail a home loan for building the house, you can claim tax benefit. If you want to increase the budget for building the house to Rs. 1 crore, then you may utilise the amount you will receive after the insurance matures. You could also use this insurance maturity proceeds for retirement planning or any other new goal.
Your next goal is to accumulate a corpus for your children’s higher education. For this purpose, you are expecting a cost of Rs. 25 lakh each at today’s value. Your daughter is studying in the second standard and son, in the fourth standard. For son’s higher education, you will have 8 years to generate the corpus. At the time of the goal the required amount will become Rs.46 lakh from the estimated goal amount of Rs 25 lakh, if we take education inflation at 8%. For creating this amount, you may invest Rs. 32,000 every month in an equity oriented mutual fund. You have 10 years’ time to build a corpus for your daughter’s higher education. Again, assuming an 8% education inflation you will require Rs.54 lakh by that time. For this purpose, you may utilise the existing mutual fund holding of Rs.20 lakh. If this amount grows at 9%, it will become Rs. 51 lakh in 10 years’ time.
You have not mentioned about your plans for retirement. I advise you to create a corpus for post-retirement purposes. At 6% inflation, your current living cost of Rs.50000 (minus the rent) will become Rs.1,60,000 by the time you are 57 years old. For maintaining the same standard of living at least till the age of 80 you will have to create a corpus of Rs.4 crore by the time you retire. After building your house, you can start a monthly investment of Rs.1,00,000 till your retirement in equity-oriented mutual fund.
I advise you to take a term insurance of Rs. 1 crore each in your name as well as in your wife’s name also. It would be prudent to take health insurance of Rs. 10 lakh, if your company is not providing the same. There is an unallocated amount of Rs. 30,000 which can be utilized for paying the health insurance premium. If there is any surplus money left after the premium payment you can divert that amount to make further investments.

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