Geojit’s Investment Analyst, Gibin John, helps a couple working in the private sector plan for their life goals, which include building a house, saving for their daughter’s higher education and marriage. In addition, he discusses the need for health insurance and how to invest 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 40-year-old engineer. My wife and I are working for private firms. We have a daughter, studying in UKG. My salary is Rs 70,000 and my wife’s is Rs 40,000. Our monthly living expense is Rs 30,000 and rent Rs 15,000. I am investing Rs 6,000 every month in mutual funds through SIP. Our existing investments are stocks worth Rs 3,50,000, mutual funds worth Rs 4,50,000, and bank savings of Rs 1,80,000.
My first goal is to build a house worth Rs 50 lakh in the next five years. I have already purchased 5 cents of land. Another goal is our daughter’s higher education and marriage. The expected cost of these goals is Rs 15 lakh for education and Rs 10 lakh for wedding. My company provides health insurance coverage of Rs 2 lakh. Please give your valuable advice to help me achieve my dreams.
Gibin John, a Certified Financial Planner replies:
It is good to note that you have been investing a portion of your investable surplus. And you now want to know whether your current investments and future earnings are enough to realise your dreams. Your current total income is Rs 1,10,000 and the expense is Rs 45,000, including rent expenses. Considering these values your investable surplus amount is Rs 65,000. Your current investments are in banks, mutual funds, stocks, insurance, and property. This diversification will help you to reduce risk.
Firstly, you should create a contingency fund for meeting unexpected expenses, which will affect the cash inflows. For this purpose, you must set aside an amount that is equal to the expenses of 3 to 6 months. In your case, this amount is Rs 2,70,000. Your existing savings account balance can be earmarked for this purpose, this will be sufficient to meet four months’ living expenses. From the amount in your savings account, you may invest a portion earmarked for contingency fund in liquid funds and the balance amount in a fixed deposit to earn better returns.
Your immediate goal is to build a house in the next 5 years. The expected cost for this goal is Rs 50 lakh, which, after accounting for 6% inflation, will increase to Rs 67 lakh over the next five years. It is difficult to accumulate the entire amount in this short period. So, you may have to rely on a housing loan to make up for the shortfall. To create a corpus towards this goal, you may invest Rs 50,000 per month for the next 5 years in debt mutual funds or in recurring deposits. If this investment fetches 6% returns you can create a corpus of around Rs 34 lakh during this period. Along with this corpus amount, you may utilize the existing stock and mutual fund investments for this purpose. If these investments generate 9% returns during this period, the existing equity and mutual fund investment of Rs 8 lakh will become Rs 12 lakh in five years. So, you can create an aggregate corpus of Rs 46 lakh for this goal. For the balance amount of Rs 21 lakh, you may take a home loan.
You have not mentioned anything about your retirement. We assume that the retirement age will be 55 years. After achieving this goal of building a house your working period will be 10 years. So, you should repay your home loan before retirement. The EMI for the loan will be around Rs 26,000. You can use the current rental amount and an additional Rs 9,000 towards loan repayment.
Your next goal is to create a corpus for your daughter’s higher education. The expected cost of this goal is Rs 15 lakh. If education inflation increases by 8% every year, this cost will become Rs 38 lakh in twelve years. As this is a long-term goal you may create a portfolio with a combination of different categories of equity mutual funds. If you invest Rs 12,500 per month with an expected average return of 12% then you will be able to accumulate the required amount for this goal.
The expected cost for daughter’s marriage is Rs 10 lakh. This cost will be around Rs 34 lakh in 21 years. This goal will be realised in your post-retirement years hence to accumulate this amount you may have only 15 years in hand. But in the first 5 years, your investment focus should be on your dream home and accumulating corpus for your child’s education. So, you will get 10 years to invest in this goal. After achieving the primary objective of building a house, you can invest Rs 15,200 a month in equity-oriented mutual funds to build this corpus.
You have employer-provided health insurance of Rs 2 lakh, which may be insufficient to meet ever-increasing medical expenses. Therefore, you need to increase the health insurance to Rs 7 lakh. Also, you should take a term insurance of Rs 1 crore.
After allocating the amount towards all goals, it will be difficult to accumulate the amount for meeting the post-retirement expenses. If you can reduce the budget for house construction to Rs 46 lakh, you can avoid the home loan and then you may invest the amount set aside for EMItowards retirement corpus creation.
You will be happy to note that your existing investments and future cash flows are sufficient to meet your goals. But you have to practice extreme discipline in your financial life.
