Geojit’s Investment Analyst, Gibin John, helps a young couple, both working in finance, by providing expert guidance on comprehensive financial planning. With a combined monthly income of Rs. 30,000 and existing investments including an emergency fund and gold-backed loan, they aim to secure their family’s future through insurance coverage while building funds for children’s education, marriage, and early retirement through strategic investment in shares and mutual funds.
My name is Adityan. My wife and I are 27 years old. We work for a private financial institution, earning a combined monthly income of Rs. 30,000 (Rs. 16,000 and Rs. 14,000 respectively) with annual increments of Rs. 500 – Rs.1,500. We live with my parents and plan to have our first child next year, followed by a second child later. Our monthly household expenses amount to Rs. 15,000.
Our current financial position: I have accumulated an emergency fund of Rs. 1 lakh. I have also made an investment of Rs. 3 lakhs through the company itself. I raised this amount by securing a gold loan by pledging 56 grams out of 80 grams we own. This investment yields Rs. 3,000 monthly at 12% annual interest. I don’t have any obligation other than this gold loan and expect to clear the gold loan next year. Additionally, I have invested in a chit fund worth Rs. 1 lakh, maturing in January 2025, with monthly payments of Rs. 5,000. We plan to use this amount to cover the delivery expenses of our first child’s birth.
I would like to ensure the financial security of my family through appropriate investment options, health and term insurance coverage. I also aim to build a retirement corpus and save for our children’s education and marriage. What would be the optimal investment strategy using shares and mutual funds to achieve these goals?
Gibin John, a Certified Financial Planner replies:
Financial planning is essential regardless of one’s current income level or financial status. Starting early allows for greater financial security with lower monthly investments, while delayed planning poses significant challenges in meeting financial goals and post-retirement needs. It is also crucial to understand that financial planning requires regular review and adjustment to accommodate changing circumstances. It is prudent to have financial discipline and invest to achieve financial goals by making and following a financial plan.
At age 27, you and your wife are in the early stages of your careers, and your current ability to save 50% of your income (Rs. 15,000 out of Rs. 30,000) demonstrates good financial discipline. However, given your relatively modest income, increasing your earnings should be a priority. Consider seeking higher-paying positions or developing additional income streams to maintain financial stability as expenses increase.
Your current financial arrangements show foresight. The Rs. 1 lakh emergency fund should be kept in two or three fixed deposits for optimal interest earnings while maintaining accessibility. Remember, this amount should only be utilized for unplanned expenses or financial emergencies. It is also important to prioritize and rebuild the emergency fund once you have used this fund.
The maturing chit fund of Rs. 1 lakh will adequately cover the anticipated childbirth expenses. As it is maturing in January 2025, you only have one more instalment left.
Regarding the Rs. 3 lakh investment which was made by pledging gold, ensure you allocate a portion of the monthly interest income of Rs.3000 to repay the gold loan to avoid future complications.
For long-term goals- children’s education and marriage and your retirement, I recommend you start investing Rs. 3,000 monthly in equity-based mutual funds, right now for each child’s future needs. By doing this, you can accumulate the equivalent of Rs. 5 lakh today after 18 years. Equity-based mutual funds are suitable as long-term investments.
For retirement planning, assuming a working life until age 60, you will have a 33-year investment horizon. Based on your current monthly expenses of Rs. 15,000, you have to accumulate a retirement corpus that can sustain your current lifestyle for approximately 20 years post-retirement (until age 80). Assuming an annual inflation rate and considering the time value of money, you would need a retirement corpus of Rs. 2.25 crore. To achieve this target, I recommend investing Rs. 5,200 monthly in equity-based mutual funds, which historically have demonstrated the potential to generate returns of approximately 12% per annum over long investment periods.
However, it’s important to consider that your monthly expenses may increase over time. If your monthly expenses were to rise to Rs. 20,000, you would need to build a larger retirement corpus of Rs. 3 crore. In this scenario, your required monthly investment would increase to Rs. 7,000 to achieve this higher target.
This means from your current savings capacity of Rs. 15,000, allocate Rs. 10,000 toward children’s education and retirement funds. This structured approach will help ensure steady progress toward your retirement objectives while maintaining sufficient investment for other financial priorities.
From your remaining monthly savings of Rs. 5,000, prioritize securing comprehensive insurance coverage for your family’s protection. I strongly recommend investing in a health insurance policy with a coverage of Rs. 2 lakh and a term insurance policy of Rs. 50 lakh. These insurance policies form a crucial safety net for your family’s financial security. Additionally, explore government-sponsored insurance schemes that may offer complementary coverage at competitive premium rates. This strategic allocation of funds towards insurance coverage will help safeguard your family’s financial well-being while ensuring your other financial objectives remain on track.
Given your current financial situation, it is imperative to focus on enhancing your household income through career advancement opportunities or additional revenue streams. This increased earning capacity will enable you to expand your investment portfolio and maintain financial stability. We recommend achieving this income growth before planning your second child, ensuring you have adequate resources for increased investments to secure your family’s future needs.
