Planning whiz – September 2023

Financial Planning

Geojit’s Investment Analyst, Gibin John, helps a couple plan for their life goals, which include building own house and creating a corpus for their son’s higher education. Gibin John analyses the client’s current savings to help them invest and plan ahead to achieve their dreams. 

I am a doctor, 40 years old, practicing in a private hospital and my wife, aged 37, is not working now. We have a son. He is studying in 1st standard. Currently, we are living in a rented house close to the hospital. My monthly salary is Rs. 1,90,000 and our family expense is Rs. 55,000, including rent of Rs. 18,000.

At present, we have bank deposits and recently started investing in mutual funds. Our major investments include Rs. 14 lakh of bank deposit and Rs 23 lakh in mutual funds. I have a term insurance in my name with a sum assured of Rs. 1 crore and am paying premium of Rs. 27,000 p.a. and it will end when I am 70 years old.

We are planning to build a house worth Rs. 1 crore within next 4 years. For the higher education of our son, we would require Rs. 50 lakh. These are our main goals, and if any shortages are found in achieving any goal, as a planner you may reduce the goal amount accordingly.  We request you to guide us towards achieving all our goals on time.

Gibin John, a Certified Financial Planner replies:

Your current cash flow is strong. But you need to fine tune your investment pattern. You have already realised the benefits of the goal-based investments. If you draw a financial plan then you can easily allocate the investments based on the requirements. A financial plan will also help you to understand the current financial strength and weakness and also it will give you the road map to achieve your goals. Your monthly income is Rs. 1.90 lakh and monthly outflow is Rs. 57250, including insurance payment. Considering these values, your monthly surplus is Rs. 1,32,750.

Firstly, you must set up an emergency fund for meeting unexpected expenses in your life. You can set your bank deposit as 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 home within 4 years. You are expecting a cost of Rs. 1 crore for this purpose. It is difficult to create entire amount from the existing surplus in a short period. Generally, when I plan for a goal, I consider the future inflated value of the goal and suggest investments which can fetch inflation beating returns to make sure that inflation does not weigh down your dreams. Since you run a deficit in terms of cash flow Vs aspiration, I am working the other way round. Let me consider Rs. 1 crore as the inflated amount and hence the current value of the home has to be around Rs. 75 lakh. Then you need to invest Rs. 1,00,000 every month for next five years in debt instruments or other risk free investments. If this investment fetches 6% return, then you can create a sum of Rs.70 lakh within this period. If you avail a home loan of ₹30 lakhs for a 12 year term, till the age of 57, at 9% interest rate then the EMI will be Rs. 34000. You are currently paying a rent of Rs. 18,000 and you shall set aside additional Rs. 16,000 from the surplus for paying this EMI. If you avail home loan for building the house, you can claim tax benefit.

The next goal is your son’s higher education. For this purpose, you are expecting Rs. 50 lakh at today’s value. Your son is studying in 1st standard. You have 11 years to create corpus. If we consider education inflation, at the time of this goal date Rs. 50 lakh will become Rs. 1.17 crore. We are assuming that the cost of inflation will be 8% during this period. For creating this amount, you would need to invest Rs. 50,000 every month in equity oriented mutual fund. In this case, you may utilise existing mutual fund holding of Rs.23 lakh. If this amount grows at 10%, it will become Rs. 65 lakh. After considering this investment you need to invest Rs. 22,200 per month only towards this goal.

You have not mentioned about your plans for retirement in the letter. We advise you to create a corpus for post-retirement purposes. At 6% inflation, your current living cost of Rs. 40,000 (excluding rent) which will become Rs. 1,07,700 at the age of 57. To maintain the same standard of living at least till the age of 80, you may need to create a corpus of Rs. 2.68 crore when you retire. After you build your home, you can start a monthly investment of Rs.1,00,000 till your retirement in equity oriented mutual fund. After the completion of each goal, you should also increase the investment amount towards retirement by adding the amount that you were investing for other goals. This will help in reaching the retirement corpus in a slow and steady manner.

I suggest you take an additional term insurance of Rs. 2 crore which will help you to fulfil the family goals even in your absence.

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