Geojit’s Investment Analyst, Gibin John, helps a working couple plan for their life goals which include saving for their son’s higher education and buying a car. He also explains the need for retirement planning and how they can invest to build a sizeable nest egg for their post-retirement years. Gibin John analyses the client’s current investments to help them invest and plan ahead for life.
I am a software engineer drawing a net salary of Rs. 90,000 every month after all deductions. My wife is now working in a small company earning around Rs. 33,000 per month. I am 31 years old and my wife is 28. We have an investment worth Rs.7,00,000 in share market presently. We are also investing Rs. 10,000 per month in mutual fund and current value of our investments is Rs.400000. My NPS contribution is around Rs.9,500 per month. I availed a car loan in 2017 and still continuing at Rs.11,000 monthly EMI and balance is Rs.3,50,000 to be paid off. Monthly household expenditure comes to be Rs.35,000.
Kindly guide me in better management of my finances. The investments are scattered around and are less disciplined. I am planning to buy a flat worth Rs. 50 lakh within a year. I have talked to the bank. They are ready to give a home loan up to 80% of the property value at rate of 8.50%. Kindly provide guidance whether to cut off any of the above savings – liabilities or continue with all the above- mentioned investments.
Gibin John, a Certified Financial Planner replies:
Although you have made some investments with your income, a large portion of it has not been appropriately saved or invested. More discipline in your personal financial management can solve your problems. Your total family income is Rs.1,23,000. You are spending Rs. 35,000 for living expenses and Rs.11,000 for loan repayment. After netting these income and expenses you will have an investable surplus of Rs.77,000. Out of the surplus amount you are currently investing Rs.19,500 into different schemes while the remaining Rs. 57,500 is being held in reserve. If you manage the surplus amount efficiently, you can achieve all your goals.
Your investments are several product categories, including NPS, mutual funds, and equity shares. These investments are either of a long-term nature or the performance depends on the share market. Firstly, you should create a contingency fund, which is around 6 months of expenses, for emergencies or unforeseen circumstances. In your case, this fund should be approximately Rs. 2.5 lakh. This amount can be accumulated over 5 months by saving/investing Rs.50,000 from the existing unutilized investable surplus. You may invest this amount in debt-oriented mutual funds and bank RD in a 50:50 proportion.
Your immediate goal is to buy a flat worth Rs.50 lakh within a one-year horizon. You have already contacted the bank and they are ready to provide a house loan equal to 80% of the property’s worth. Your existing investments in equity shares and mutual funds can be used for this purpose. The value of these investments are Rs.7 lakh and Rs. 4 lakh respectively. Since you will need this money right away, you can start selling all of your stocks and mutual fund investments right away and keep the fund in bank FD or liquid mutual funds. This amount may be used for down payment as and when required.
The car loan interest rate and tenure are not mentioned in the letter. When compared to a home loan, the interest rate on a car loan could be higher. Therefore, it is best to pay off the Rs.3.5 lakh car loan immediately. After creating a contingency fund, you can utilise the monthly investable surplus of Rs.50,000 for this purpose. In this manner, you might be able to pay off the car loan before starting EMI towards the new housing loan. By doing this, your high interest rate loans will get closed but, your down payment amount will reduce and home loan will increase. By doing this, your high interest rate loans will get closed but, your down payment amount will reduce and home loan will increase. But its fine. If you pay an amount of Rs.11 lakh as down payment your loan amount will be Rs.39 lakh. The EMI for this loan will be around Rs.38,500 for 15 years. However, I advise you to take out the loan for the longest possible term and pay off the balance as soon as possible by making extra loan payments. additional payments into the loan. This strategy will help you to reduce the monthly repayment obligations. Furthermore, if you have revenue problems in the future then you can manage it easily than higher EMI payments.
You are investing Rs.9,500 in NPS for your retirement purpose. Your current living expense is Rs.35,000. For maintain the same standard of living even after the retirement at the age of 55, you need to accumulate a corpus of Rs. 3.80 crores. For creating this amount during the working period of 24 years you should invest Rs.25,200 per month. Start investing additional amount of Rs. 15,700 for your retirement corpus creation. Expected CAGR of this investment is 12%.
Currently you don’t have any insurance policies, hence in future when your liability and responsibility will increase you should take a term insurance policy of at least Rs.1.50 crore. Also ensure you have adequate health cover without which your savings will get depleted in the face of emergencies.