Planning Whizz- February 2023

Financial Planning

Geojit’s Investment Analyst, Gibin John, helps a couple with their financial planning. They wanted him to assist them in meeting their financial objectives, such as buying a car, purchasing a flat, accumulating a corpus for their children’s higher education and daughter’s wedding. Gibin John analyses their current investments and helps them plan to achieve their goals. 

I am a 41-year-old government employee. My wife is 39 years old and is working for a government organization. My salary after all deductions is Rs. 55,000, while my wife’s salary is Rs. 58,000. We have a son, aged nine, and a daughter, aged five. We spend Rs. 40,000 a month on living expenses. We currently have two mutual fund SIPs of Rs. 10,000 each, and they will end in December 2027. The value of this fund is Rs. 3,00,000. We save the remaining amount in a bank account. I have shares worth Rs. 3.75 lakh, a Rs. 5 lakh bank fixed deposit, and Rs. 2.25 lakh in savings account. Please advise us how to manage our investments for achieving life goals.

Our goals are to purchase a flat worth Rs. 60 lakh within the next five years, buy a new car immediately and the expected cost is maximum Rs. 18 lakh. For children’s higher education, we estimate a cost of Rs. 10 lakh each. The estimated expenditure for daughter’s wedding, when she is 26, is Rs. 20 lakh.

Gibin John, a Certified Financial Planner replies:

Government jobs are considered to be very secure and as both you and your wife are government employees this is a major plus point. Your family’s total income is Rs. 1,13,000 per month. After deducting the living expenses, your investable surplus is Rs. 73,000. From this monthly surplus, you are currently investing Rs. 20,000 in mutual funds. The balance amount of Rs. 53,000 is lying idle. Keeping your money idle is a deterrent to wealth creation. A financial plan will enable you to invest wisely your surplus funds and help you achieve your financial goals.

Firstly, you should create a contingency fund for meeting any unexpected expense. For this purpose, you may set aside the Rs. 2.25 lakh in the savings account. This amount will be sufficient to meet your expense for five months. You may also invest this amount in liquid mutual funds to get a higher return than a savings account.

One of your immediate goals is to buy an apartment worth Rs. 60 lakh within the next five years. Your total investment amount falls short of covering the entire cost of the apartment. So, you will have to rely on a home loan. You have to make a down payment of 20% to 25% of the property value. You may create this corpus of Rs. 20 lakh by investing Rs. 28,000 every month for next five years in debt mutual fund or in a recurring deposit. Along with this corpus you may allocate fixed deposit of Rs. 5 lakh towards the down payment. If the fixed deposit generates a return of 6%, the investment will become Rs. 6.69 lakhs after five years. For the balance amount of Rs. 33.31 lakh, you may take a home loan. The EMI of this loan will be around Rs. 32,000 for 17 years. The assumed interest rate of loan is 9%. In short, today onwards you have to keep minimum Rs. 32,000 for this dream goal till the completion of the loan.

Your next goal is to buy a car. You can delay it or lower the budget to Rs. 10 – 12 lakh if this goal is not crucial. You can use your current investments in mutual funds and stocks, to purchase the car. Both these investments are worth approximately Rs. 6.75 lakh. To fulfill this dream, you may take a vehicle loan for Rs. 6 lakh over a five-year period. The loan’s EMI will be Rs. 13,000 per month.

Accumulating a corpus for your children’s education is another important goal. You will need this amount for your son’s higher education after 8 years, and daughter’s higher education in 12 years’ time. Your current estimate is to accumulate a corpus of Rs. 10 lakh for each child. But given an inflation rate of 8%, you will need to accumulate Rs. 18.50 lakh and Rs. 25.18 lakh, respectively. The monthly investment required to achieve these goals will be Rs. 12,800 and Rs. 9,300 in equity oriented mutual funds.

For daughter’s marriage, you estimate a cost of Rs. 20 lakh. Taking inflation of 6% into account, your present estimate of Rs. 20 lakh for your daughter’s wedding will increase to Rs. 68 lakh. You need to invest Rs. 8,400 in equity oriented mutual funds till her age of 26.

As a government employee, you will be eligible for pension so there may be no need to accumulate corpus for the retirement. However, once you have achieved your other financial goals, you should keep investing to create additional corpus for your retirement.

To protect your family, you should purchase a term insurance policy for at least Rs. 1 crore. Also purchase a Rs. 10 lakh family floater health insurance policy to cover unforeseen medical costs.

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