Planning Whiz- May 2020

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Geojit’s Investment Analyst, Gibin John, helps a couple, who are doctors by profession with their financial planning. He advises them on how they can plan their investments for their dream house, children’s higher education, daughter’s marriage expenses, etc.

My name is Dr. Varun, age 38, practicing in a private hospital and my wife, age 37, is also a doctor and she is practicing in a different hospital. We have a daughter and a son. They are studying in 1st and 4th standards respectively. Currently, we are living in a rented house close to our hospitals. My monthly salary is Rs. 125,000 and wife’s salary is Rs.75,000. Our family expense is Rs.60,000 per month, including rent of Rs.20,000 per month.

At present we are investing in bank deposits and recently started mutual fund investments. We now want to start goal-based investments and plan our finances accordingly. Our major investments include Rs. 10 lakh in bank deposit and Rs. 20 lakh in mutual funds. We have two insurance policies, one in my name, the sum assured is Rs. 10 lakh with a premium of Rs.15,000 per annum and it will end in March 2022. The other policy is in my wife’s name and has the sum assured is Rs.10 lakh and we are paying a premium of Rs.12,000 and the maturity date is June 2025.

We had purchased a 10 cent plot worth Rs.50 lakh 4 years ago. We are planning to build a house worth Rs.1 core within the next five years. If we incur any shortage of funds, we may sell 4 cents from the property which should fetch around Rs.30 lakh. For higher education of children, we would require Rs. 20 lakh each. Daughter’s marriage, planned for when she is 25 years old, is expected to cost around Rs.20 lakh. These are our main goals, and if any shortages are found in achieving any goal, as a planner you may adjust the goal amount accordingly.

Please guide us on how we can achieve 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 have a financial plan then you can easily allocate the investments based on the requirements. The financial plan also helps you to understand the current financial strength and weakness and also it will give the road map to achieve the goals. Your family income is Rs. 2 lakh and monthly outflow is Rs.62250, including insurance premium payment. Considering these values your monthly surplus is Rs.137750.

Firstly you have to set up an emergency fund for meeting unexpected expenses in life. The current lockdown and sudden freeze in cash flows are a great eye-opener for many in terms of the significance of keeping contingency reserves. You can set your bank deposit as an emergency fund. You may keep 30 percent of the amount in a liquid mutual fund or savings account, and balance amount you can be kept in other short duration mutual funds which provide fast liquidity.

Your immediate goal is to build a house within the next five years. You are expecting a cost of Rs 1 crore for this purpose. It is difficult to accumulate the entire amount from the existing surplus in a short period. Generally when we plan for a goal, we take the future inflated value of the goal and make investments to reach that inflated value, to make sure that inflation does not eat into the dreams. Since you run a deficit in terms of cash flow vs aspiration, I am planning by considering the Rs.1 crore as the inflated amount and hence the current value of the home would to be around Rs. 75 lakh. You will need to invest Rs.1,00,000 every month for the next five years in debt instruments or other risk-free investments. If this investment fetches a 6 percent return you can create a sum of Rs.70 lakh within this period. For balance amount, you may either sell a part of the land which you mentioned in the letter or you may avail a home loan of Rs.30 lakh. If you avail a home loan of 12-year term, till the age of 55, at 9 percent interest rate then the EMI will be Rs. 34000 per month. You are currently paying a rent of Rs.20000 and you shall set aside an additional Rs.14000 from the surplus for paying this EMI. If you avail home loan for building the house, you can claim tax benefit as well as you can utilise the piece of land for funding a retirement corpus.

The next goal is your children’s higher education. For this purpose you are expecting Rs. 20 lakh each at today’s value. Your daughter is studying in 1st standard and son is in 4th standard. For son’s higher education you have 8 years to create a corpus. If we consider education inflation, at the time of this goal date, Rs. 20 lakh will become Rs. 37 lakh. We are assuming that inflation will be 8 percent during this period. For creating this amount you shall invest Rs.26000 every month in equity oriented mutual fund. You will have 11 years to build a corpus for your daughter’s higher education and you will require Rs.47 lakh at the time of goal date. In this case, you may utilise existing mutual fund holding of Rs.20 lakh. If this amount grows at 9 percent, it will become Rs. 51.60 lakh.

For daughter’s marriage you are expecting Rs. 20 lakh expences. If this cost increases at 6 percent per annum you will require a corpus of Rs.64 lakh. After allocating existing surplus amount to other goals, there will be a shortage of amount for investing for this goal now. So you can start the investment to this goal after achieving the corpus for a new house, which is after five years. At that time you have 15 years to achieve this goal and you shall invest Rs.18000 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 percent inflation, your current living cost of Rs.40000, except for rent, will become Rs.121000 at the age of 57. For maintaining the same standard of living at least till the age of 80 you will have to create a corpus of Rs.3.34 crore by the time you retire. After building your new house you can start a monthly investment of Rs.80000 till your retirement in an equity oriented mutual fund. After the completion of each goal, you should also increase the investment amount towards retirement by adding the amount which you were investing for other goals. This will help in reaching the retirement corpus in a slow and steady rate.

You shall take term insurance of Rs. 1 crore each in your name as well as in your wife’s name. This will help in the realization of the family goals even in your absence.

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