Disciplined investment plan can deliver the goods

Disciplined investment plan can deliver the goods

Aashish Deshpande, 33, lives with his wife Gauri and their four-year-old daughter in Mumbai. The family’s gross annual income works out to Rs 40 lakh, while monthly household expenses amount to Rs 35,000, not including medical and recreational spends.

In addition, their home loan repayment entails an outgo of Rs 53,700 per month. Their investments primarily comprise equity assets and gold. Both are currently looking to buy life insurance cover. Their medium-term goal is to buy a bigger house in 2013.

The couple also wants to save for their daughter’s education. On the retirement front, Mr Deshpande wishes to move out of the city by the time he turns 45 and get into farming or set up a motel, besides saving enough to maintain the current lifestyle and fund annual vacations.

Basic financial planning

The family’s non-discretionary expenditure is close to `1,07,000 per month.

To provide for a four-six month emergency fund (for any sudden loss of income), they need to have approximately `5,00,000 in liquid funds.

Hence, an additional amount of `2,50,000 through the SIP route in a liquid fund needs to be arranged over five months.

Considering his outstanding loans, spouse’s income stream and goals for their daughter, a pure term cover of approximately `1 crore for the next 20 years should be a good start.

A health cover of at least `2 lakh for the family is also recommended.

Investment planning

If they were to follow a disciplined investment style, the family has a huge wealth-creating potential. For the young family, we would suggest an asset allocation of 70:30 in equity:debt.

His daughter is about to start higher school. In all probability, the fee amount has not been provided for in the budget. If he were to allocate Rs 1 lakh per year towards education, the amount should be adjusted against the monthly surplus of `1 lakh.

Not considering the recommended emergency fund, the family runs a monthly surplus of nearly `1 lakh. Besides the two equity SIPs of `10,000, we suggest that they invest up to `65,000 per month into equity assets.

An additional investment of up to `12,000 per month is recommended into debt products. For example, long-term debt funds, public provident fund (PPF), small savings schemes or bank FDs, which fetch a tax-effective return of 6% or more.

Daughter's education

Assuming that they would need `25 lakh when she turns 18, the couple needs to create a corpus of `56 lakh (inflation-adjusted) over the next 14 years.

Since it is a long-term goal, we would suggest allocating equity SIP of `18,000 towards this goal for the next 14 years. At a tax-effective rate of 9% annually, this should yield around `60 lakh then.

Besides, the PPF account (assuming investments of `70,000 per annum) should yield `20 lakh then

Annual vacation spend

Since this is an annual expense, we assume that the same is not invested and the money could be put into a liquid fund or even a low-risk monthly income plan to optimise earnings from the yearly float of about `1 lakh, which will be created towards this goal.

Bigger house: Based on current calculations and assuming same rates for the property, there would be a requirement of around `1.05 crore for the new house.

A 10-year loan at an interest rate of 9.75% would mean an EMI outgo of `1,37,000 per annum.

Since Mr Deshpande’s ultimate aim is to shift out of the city, it does not make sense to stress incomes for next 10 years.


Early retirement

The couple wishes to retire at the age of 45. Based on current cash flows and considering a 5% pa incremental savings over the next 12 years, they should be able to create an equity corpus of `2.32 crore.

The EPF should fetch `67.3 lakh in the 12th year (@6.5%p.a. CAGR). Hence, gross available retirement corpus is roughly `3 crore.

Calculation: Assuming that their living expenses (along with medical needs) amount to `42,000 per month, he would need to create a corpus of `2.5 crore (assuming that the corpus amount is invested in a basket of products that would earn a return of 9% annually). Hence, the retirement corpus gap will be NIL.

Conclusion: Careful investment planning should help the couple reach all their financial goals.

(Prerana Salaskar-Apte, certified financial planner, is a partner with financial planning firm, The Tipping Point)

http://economictimes.indiatimes.com/quickiearticleshow/6290306.cms