Planning Whizz- June 2023

Financial Planning

Geojit’s Investment Analyst, Gibin John, helps a couple working in the private sector plan for their life goals which include building a house and saving for their daughter’s higher education and marriage. Gibin John analyses the client’s current savings to help them invest and plan ahead for life.

I am 43-year-old and my wife and I, both have private sector jobs. We have a daughter who is studying in 5th standard. My wife earns Rs.46,000 and I earn Rs.59,900 per month. Our living expense is Rs.26,000 and rent is Rs.11,000. I am investing Rs.16,000 per month through mutual fund SIP. Our existing investments are stocks Rs.7,50,000, mutual fund Rs.1,20,000, bank savings account Rs.90,000 and fixed deposits Rs.5,00,000.
My first goal is to construct small house worth Rs.50,00,000 within the next five years. The next goal is to invest for our daughter’s higher education and marriage. The expected cost for these goals is Rs.15,00,000 each. Company provides a health insurance coverage of Rs.5,00,000. Please give your valuable advice for fulfilling my dreams.

Gibin John, a Certified Financial Planner replies:
The two of you have been working hard and have accumulated some investments. Now you want to know if your current investments as well as the future earnings would be enough to achieve your dreams. You have invested in various investment products, which has allowed you to diversify your holdings and reduce the risk. Your current total income is Rs.1,05,000 and the expense is Rs. 37,000 so the surplus amount is Rs.68,000. You currently have investments in banks, mutual funds, and stocks.
Firstly, you should create a contingency fund which is the money you should keep aside to use in the event of financial

problems or emergencies. It is impossible to know how long an emergency will last, so it is best to set up a contingency fund that can cover your needs for at least six months. In your situation, you may set aside a contingency fund of Rs.2,22,000. Your current fixed deposits can be used for this. You may keep half of the money in liquid funds, when the FD matures and the other half in a fixed deposit.
You want to construct a house within the next five years at a cost of Rs.50,00,000. Accumulating the entire amount in such a short period of time is challenging. Therefore, you may avail a housing loan to fill the gaps. You can invest Rs.40,000 per month for the next five years in debt mutual funds or recurring deposits to build a corpus towards the down payment. During the next five years, if this investment generates a 6% return, you can make about Rs.27,92,000. You may use the current stock and mutual fund investments in addition to this corpus amount for this purpose. If these investments are able to earn a 9% return over the next five years, the present equity-related investment of Rs. 8,70,000 will increase to Rs.13,30,000. This means that you can raise a total of Rs.41,00,000 for this purpose. You can get a home loan for the remaining amount of Rs.9,00,000. Since you have not mentioned the retirement age, we assume it will be 55. Your employment will be for seven more years after you have completed this goal. So, before retiring, you should pay off your mortgage. The EMI for the loan will be Rs.15,000.

Your next goal is to build a corpus for your daughter’s higher education. The expected cost for this goal is Rs.5,00,000. In seven years, the cost of higher education will be Rs.26,00,000 if the education inflation is 8%annually. Since time period for achieving this goal is medium-term, you can build a portfolio that includes both equity and debt. The portfolio’s weighted average return will be 8.4% if you invest 60% in stock and 40% in debt, respectively. You must invest Rs.23,000 per month to accumulate this sum.
The expected cost for your daughter’s marriage is also Rs.15,00,000. Taking inflation into account, this cost will increase to around Rs.34,00,000 in the next 14 years. As this goal will be realized in your post-retirement period you may have only 12 years to accumulate this amount. You will be able to contribute towards this goal only after building your house. You may invest Rs.25,000 per month in debt oriented mutual fund for creating this corpus and accumulate Rs.26,00,000 from this investment.
You have employer provided health insurance of Rs.5,00,000 this may be sufficient to meet your current medical expenses. Also, you should take a term insurance of Rs.75,00,000. The maturity sum from the current insurance policies has not been allocated to any purpose because you have not provided the policy details.

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