Planning whiz

Geojit’s Investment Analyst, Gibin John, helps a young couple working in private firms with their financial planning. They want him to help them with their finances and invest for achieving their life goals such as building a house, daughter’s education and marriage. Gibin John analyses their current investments and helps them plan to achieve their goals. 

I am a 43-year-old engineer working for a private firm and my wife is also working for a private firm. We have a daughter. She is studying in 5th standard. My salary is Rs. 59,000 and my wife’s salary is Rs. 46,000. Our living expense is Rs. 29,000 and we pay Rs.13,000 as house rent. I am investing Rs.12,000 per month in mutual fund SIP. Our existing investments are stocks worth Rs. 6,50,000, mutual fund investments of Rs. 70,000, bank savings of Rs.100,000, and fixed deposits worth Rs. 2.5 lakh. I have an insurance policy in the name of our daughter and the sum assured is Rs. 2 lakhs. I am paying Rs.  2,500 per annum towards this policy.

My first aim is to build a small house worth Rs. 50 lakh in next five years. I have already purchased land for building a house. Another goal is our daughter’s higher education and marriage. The expected cost of these goals is Rs. 10 lakh for education and Rs. 10 lakh for wedding. The Company provides health insurance coverage of Rs. 4 lakh from my company and Rs. 2 lakhs from my wife’s company. Please give your valuable advice for fulfilling our dreams.

Gibin John, a Certified Financial planner replies:

Good to see that both of you have tried to save as much as possible to create wealth. Now let us analyze if your saving and investments are enough to achieve your dreams. You have invested in various types of investment products and this diversification will help you to reduce the risk. Your current total income is Rs. 1,05,000 and the expense is Rs. 42,000 so the surplus amount is Rs. 63,000. Your current investments are in savings accounts, mutual funds, stocks, insurance, and property.

Firstly, you should create a contingency fund for meeting unexpected expenses, in case your cash inflows are affected. For this purpose, you have to set aside an amount which is equal to your expenses for 6 months. In your case, this amount is Rs. 3,78,000. Your existing fixed deposits and savings account can be earmarked for this purpose. You may keep half of the savings bank balance in liquid funds to earn better returns.

Your immediate goal is to build a house in the next five years. The expected cost for this goal is Rs. 50 lakh. It is difficult to accumulate the entire amount in this short period. So, you may have to rely on a housing loan for bridging the shortage. To raise some corpus for down payment, you may invest Rs.30,000 per month for next 5 years in debt mutual funds or in recurring deposits. If this investment fetches 6% return you can create a corpus of around Rs. 20.94 lakh during this period. Along with this corpus, you may utilize the existing stock and mutual fund investments for this purpose. If this investment can generate 9% return during this period, the existing equity related investment of Rs. 6,50,000 will become Rs. 9.17 lakh in four years. After that you may withdraw the equity investments and park it in a fixed deposit. If this investment fetches 6% return, then the investment value will become Rs. 9.70 lakh on goal date. So, you can create an aggregate corpus of Rs. 30.50 lakh for this goal through investing. For the balance amount of Rs. 19.50 lakh, you may take a home loan.

You have not mentioned anything about your retirement. We assume that your retirement age is 55. After achieving your goal to build a house, your working period will be 7 years. So, you should close your home loan before the retirement. The EMI for the loan will be around Rs. 31,000.  You can use the amount which you set aside to accumulate the corpus for down payment, to pay the home loan EMI for the next seven years.

Your next goal is your daughter’s higher education. The expected cost of this goal is Rs. 10 lakh. If the education cost increases by 8% every year, this cost will become Rs. 17 lakh in seven years. The time period to achieve this goal is medium term so you may create a portfolio which is a combination of equity and debt. If you are investing in the ratio 60:40 percent in equity and debt respectively the weighted average return of the portfolio may be around 8.4%. For accumulating Rs.17 lakh by then, you will need to invest Rs. 15,200 per month.

The expected cost for daughter’s marriage is Rs. 10 lakh. Taking inflation into account this cost will become around Rs. 22.60 lakh in next fourteen years. This goal will happen in post-retirement period hence for accumulating this amount you may have only 12 years. You may invest Rs. 8000 per month in equity oriented mutual fund for creating this corpus.

You have employer-provided health insurance of Rs. 6 lakh. This may be sufficient to meet current medical expenses. Also you should take a term insurance of Rs. 1 crore.

Mutual fund investment and insurance maturity amount are not allocated for any goal. You can use these amounts for any other future goals.

0 Shares:
Leave a Reply

Your email address will not be published. Required fields are marked *

You May Also Like