Planning Whiz – September 2020


Geojit’s Investment Analyst, Gibin John, helps a young couple with their financial planning. He advices them on how they can plan for their children’s higher education, daughter’s marriage, manage their liabilities and accumulate a corpus for retirement.

I am Dr. Jose and my wife is Dr. Gigi Jose. We have a daughter and a son. I am 41 years old, my wife is 38, son is 10 years old and daughter is 6 years old. Our monthly net income is ₹ 2 lakh each and a rental income of ₹ 20000 per month. Currently we have no structured investment pattern. Our living expenses are around ₹ 1 lakh per month. The children’s average school fee is ₹ 8000 each per quarter and home loan (joint) EMI is ₹ 93000 per month. The outstanding loan balance is ₹ 76.50 lakh and end date is May 2031. We are investing some amount based on the advice from friends or agents and magazines. But I am not sure if these investments suit my needs or are enough to generate wealth.

We have ₹ 15 lakhs invested in a five-year bank FD with an interest rate of 7.5% and maturity date is on 14.12.2021. We also have a fixed-deposit of ₹17 lakh invested in a society which gives an interest of 10% and maturity date is 10.07.2024. Apart from that we also have ₹ 8 lakhs in our savings bank account and an RD of ₹20000 with a 6 year tenure and 6.25% interest. I took an Insurance policy in 2016 and the sum assured was ₹ 10 lakh with a yearly premium of ₹ 56,192 for 20 years. A similar insurance policy was taken by my wife and the sum assured was ₹ 10 lakh with a yearly premium of ₹ 48500 for 20 years. There is a monthly SIP of ₹ 30000 in equity mutual fund whose current value is ₹ 12 lakh. It will mature on 22.04.2022. We have a house worth ₹ 1.5 cr, an apartment worth ₹ 50 lakh and land worth ₹30 lakh. Apart from this we have 100 sovereigns of gold ornaments intended for daughter’s marriage.

Our main goal is our children’s education. We wish to earmark ₹ 35 lakh each for their higher education. For daughter’s marriage we expect an expenditure of ₹ 50 lakh. We are planning to buy a new car worth ₹ 20-25 lakh after four years. We are planning to retire when I am 60 years old. We require a monthly passive income of ₹ 50,000 at that time to meet our expenses. We also want to close our home loan at the earliest. Please guide us in achieving our dreams.

Gibin John, a certified financial planner replies:

We have noticed that like you, many people invest based on advice from friends, relatives or sales agents, but they are unable to understand if these investments are apt for them. Many of them don’t know whether the chosen investment products are suitable in helping them achieve their financial goals. This is because the advice given does not take into consideration the type of the products the investor is currently holding, the purpose of investments or when they require the money. So, before investing everyone should analyze the investment product and its suitability. A detailed financial plan will help you to choose the right products, manage your liabilities and take decisions based on your objectives.

In spite of your busy schedules, you have managed to effectively save and invest your money in different investment products. We can now prepare a financial plan which will help you utilize these investments effectively, manage your liabilities and help you make suitable investments for wealth creation.

Your current total family income is ₹ 4,20,000 per month. After deducting the monthly expense of ₹ 2,46,333 from the income you have a surplus of ₹ 1,73,667. If your entire investments including insurance premiums are converted into monthly term, the amount would be ₹ 58,724.

First, you have to set up an emergency fund, because it will help you build up a comfortable cushion against unexpected emergencies in life. For this it is advisable to keep aside six months’ worth of expenses in the form of highly liquid assets. In your case this amount would be ₹ 15 lakh. For this you can utilize the savings account balance of ₹ 8 lakh and RD account balance as and when required. You have to monitor your emergency fund periodically and make sure that it is always at the optimal levels.

Your most important goal is your children’s higher education. You are estimating a cost of ₹ 35 lakh each for their education. You will require this amount for your son’s higher education after 7 years. But you will also have to account a higher cost as a result of inflation. And assuming an inflation rate of 8% then the cost will become ₹ 60 lakh in seven years’ time. For accumulating this amount, you have to invest ₹52000 every month. Likewise for your daughter’s higher education after 11 years, the inflation adjusted amount will be ₹81.60 lakh. You can create this corpus by investing ₹ 37000 every month. Both these goals are of long term nature, so you can choose equity oriented mutual funds. The expected average return from this investment is 9%.

Another important goal is your daughter’s marriage when she is 25 years old. You have currently estimated an expense of ₹ 50 lakh. After taking inflation into account this amount may increase to least ₹ 1.51 crore (inflation at 6%). Also you had decided to use existing gold ornaments for her wedding. Here I am allocating 75% of gold ornaments at today’s price which will be around ₹72 lakh. If the gold value increased at the rate of 5% then this allocation will be sufficient to meet the marriage expenses.

Post retirement period is more important than the working period. There is no income during this period, so everybody should plan for an income flow for this period. You are expecting the monthly living expense to be ₹ 50,000 during the post-retirement period. But, due to inflation, this expense will increase to ₹ 1,51,000 by the time you retire at 60 years. In your case, you currently have a rental income of ₹ 20000. We assume that this income will continue during post retirement period also. After factoring this income you should create a net corpus of ₹2 crore for meeting inflation adjusted expense till your age of 80. For creating this corpus you should invest ₹ 35000 in equity oriented mutual fund.

Buying a new car after 4 years is a short-term goal. You want to buy a car worth ₹20 – ₹25 lakh. For this you can utilize the money you will get on the sale of your old car and for the balance amount you can use the maturity amount from your fixed deposit in society. The maturity amount of this FD will be around ₹ 33 lakh.

You also needed help for the early repayment of home loan. You have not mentioned about interest rate of the home loan. However current loan interest rate is very low. As both of you are in the 30% income slab, we assume that both of you are utilizing the loan repayment amount for income tax deduction. So, it is advisable to to continue the loan without early payment. After the maturity of existing fixed deposit, the reinvestment interest rate will be very less. So, you may choose other investment options like bonds, real estate, equity investment etc.

Your existing insurance policies are not giving sufficient insurance cover for meeting the expenses in case of unfortunate event. So, both of you should take term insurance of minimum ₹ 1 cr. each. We assume that the home loan has been already insured. If this loan is not insured then that amount also need to be added to the proposed coverage.

We have not utilized the entire existing investments. We have not allocated the Bank FD ₹ 15 lakh, existing mutual fund holding value of ₹ 12 lakh, land worth ₹ 30 lakh, maturity values of insurance and partial amount of fixed deposit in society. You can utilize these amounts for new goal which may come in future. Also, we have not considered your salary increment in this plan. You should invest the incremental part in your salary that will help you to accelerate your wealth creation as well as financial discipline.


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