Geojit’s Investment Analyst, Gibin John, helps 31-year-old civil engineer and business owner seeking to secure his family’s financial future. Gibin John analyses the client’s current finances, savings and investments to help him plan ahead for life.
I am a 31-year-old civil engineer managing my own construction business. My wife is currently not employed, and we have a one-year-old child. My annual income stands at Rs. 15 lakhs. Our monthly expenses are as follows: housing rent: Rs. 9,000, household expenses: Rs. 20,000, support for parents residing in their native place: Rs. 10,000
My investment portfolio includes monthly mutual fund SIP of Rs. 15,000, bank fixed deposit of Rs. 5 lakhs, an emergency fund of Rs. 5 lakhs in savings account, equity investments of Rs. 10 lakhs, and a lump sum mutual fund investment of Rs. 3 lakhs (showing a CAGR of 20%). Additionally, I have a family health insurance coverage of Rs. 5 lakhs. I own a vehicle and am currently debt-free.
I have two primary financial objectives -one is to construct a house within the next 10 years, with an estimated cost of Rs. 50 lakhs (including land acquisition).And the second is to accumulate Rs. 50 lakhs for my child’s higher education, which is approximately 17 years away.
Please advise on how I can plan my finance to achieve my goals. Furthermore, I have Rs. 5 lakhs available for immediate investment and would appreciate recommendations on where to invest.
Gibin John, a Certified Financial Planner replies:
I appreciate your decision to seek professional help for financial planning at your age. Since you run your own business, your income may vary monthly. However, you can use the amount remaining after monthly expenses for investments. If you have excess money, you can make additional investments.
Your annual income is Rs. 15 lakhs, which is approximately Rs. 1,25,000 per month. Your total monthly expenses are Rs. 39,000. This will increase when your child starts school, but we’ll assume your income will also grow in the future. For now, we’ll base calculations on your current figures.
You have Rs. 5 lakhs as an emergency fund in your savings account. Since you don’t have any loan liabilities, you need only Rs. 2.50 lakhs as emergency fund to cover six months of expenses. But if you expect significant fluctuations in business income, you can set aside the entire Rs. 5 lakhs.
You have invested Rs. 18 lakhs in various schemes: Rs. 10 lakhs in shares, Rs. 3 lakhs in mutual funds and Rs. 5 lakhs in fixed deposits. This means 27% of your total investment is in low-risk assets, and the rest is in high-risk equity. Considering your current financial position, you could allocate up to 80% of your investments to high-risk schemes.
Your major goals are building a house and your child’s education. I suggest you add retirement planning to your long-term goals.
Your first goal is to build a house. You estimate Rs. 50 lakhs for this goal. Considering 6% inflation, this would grow to Rs. 90 lakhs in 10 years. You can use your existing equity and mutual fund investments of Rs. 13 lakhs and start a monthly SIP of Rs. 22,000 in equity-oriented mutual funds to accumulate this corpus. Without using your present investment, you would need to invest Rs. 40,000 monthly through SIP.
Next goal is your child’s higher education. You estimate Rs. 50 lakhs for this goal. Considering 8% education inflation, it would cost Rs. 1.85 crores in 17 years. You may start investing Rs. 30,000 monthly in equity mutual funds towards this goal.
Next important goal is retirement planning. Assuming you work until age 60, your current monthly expenses of Rs. 40,000 will grow to Rs. 2,16,735 in 29 years, after taking into account an inflation of 6%. To maintain your present living standards until age 80, you would need Rs. 4.75 crores. To accumulate this amount, you may invest Rs. 18,000 per month in equity-oriented investment schemes, assuming a minimum 12% long-term growth.
Your current monthly income is Rs. 1,25,000. After deducting Rs. 39,000 for expenses, you have an investible surplus of Rs. 86,000. You may consider allocating this surplus, in addition to current equity investments, as follows: Rs. 22,000 for building a house, Rs. 30,000 for child’s higher education, Rs. 18,000 for accumulating the retirement corpus and the remaining Rs.16000 can be invested in low-risk schemes. You can use this money along with your fixed deposit in case you need to fund any other goals in the immediate future.
Last but not least, you should consider taking a term insurance policy as your family is fully dependent on your income. I suggest you take a term insurance policy of Rs. 2 crore coverage. Your current Rs. 5 lakh medical coverage is sufficient for now. You can increase the coverage in the future using top-up options.
Regarding the Rs. 5 lakhs you want to invest, consider allocating it based on your risk tolerance and the timelines of your goals. You might split it between equity mutual funds for long-term goals and debt instruments for short-term needs.
