Too many goals spoil a plan

My son, 39, is a software engineer. He wants to start a business without any investment. Our monthly expense is Rs 25,000 and is likely to go up to Rs 40,000 from next month. His monthly expenses and investments are met via fixed deposits interest income of Rs 6 lakh and rental income of Rs 15,000.

Financial goals: My grandchildren are in Class III. We may require Rs 25 lakh for each of them in 2020 for higher education. We are planning to build a second floor on our house; the project cost is Rs 30 lakh. Is it advisable to take a home loan? We are planning to rent the second floor for Rs 20,000. Based on my son's monthly expenses, how much should he save to meet his monthly expenses from the time he turns 60 till he is 80? For retirement, is it okay to save through New Pension Scheme? Please suggest changes in our mutual fund portfolio. Our investment horizon is 10 years. My son has no life or health insurance. Please suggest an appropriate term and health insurance for his family. — Balachandran

Solutions: Prioritising your goals is as important as setting them. Trying to achieve too many goals simultaneously without appropriate surplus may lead to challenges while making a portfolio.

Until your son finalises his business plans, concentrate only on the children's education, on which there is certainty. The asset allocations in MF investments are not balanced. The portfolio is skewed towards debt and real estate.

Education: With the surplus of Rs 3 lakh, your son will be able to meet only his children's education goal. For instance if Rs 50 lakh is needed after nine years save Rs 25,900 a month and it should earn a return of 12 per cent per annum. As a long-term goal, construct a portfolio with 60 per cent in equity and the rest in debt. Ensure that the equity component is earning 15 per cent and the debt portion 8 per cent.

Retirement: We have noted that after your son's retirement, the financial need is for a family of two rather than for a family of four.

Your monthly expenses may be Rs 40,000 but it may be better to take Rs 30,000 for retirement calculation. If Rs 30,000 is inflated at 7 per cent after 20 years, it will be Rs 1.16 lakh. To get this monthly income for 20 years from retirement, have a corpus of Rs 2.3 crore; and it should earn an interest at least 2 per cent above inflation.

Letting the accumulation in PPF to grow at 8 per cent for 20 years will ensure a corpus of Rs 1.23 crore. If there is a willingness to take a moderate risk and a return of 10 per cent, the corpus will grow to Rs 1.78 crore. If your son can ensure this return, the shortfall for the retirement corpus will be Rs 50 lakh.

To reach this target, save Rs 5,000 for next 240 months. The investment should earn at 12 per cent. As there is no surplus to meet the goal, start contribution once business starts giving a regular income. We have ignored the rental income for calculations. The direct investment in equity, if allowed to grow at 10 per cent, will be Rs 38 lakh.

Home loan: It is better to take a home loan than a mortgage loan. If you prefer a mortgage loan because there is no employment income, shift FDs to a bank or financial institution and use the deposits to take a home loan.

A loan of Rs 30 lakh at 10.5 per cent for 15 years will have EMIs of Rs 33,162. Assuming that you are leasing out the house for rent of Rs 20,000, it will be difficult to meet the liability.

Insurance: It is better to take a term insurance for Rs 3 crore to meet the goals. The premium outgo will be Rs 49,607 a year. With your grandchildren in the equation, it is better to take health floater polices for Rs 5 lakh.

Investment: Continue contributing to HDFC Equity, HDFC Top 200 and Birla Sun Life Dividend Yield. It is better to move out of HDFC Premier Multi-Cap fund; add IDFC Premier Equity Fund (midcap) to the portfolio.

Regarding New Pension Scheme, it is a low-fee pension product and the contributions get tax relief. However, it is better to go for one of the recommended large-cap mutual fund schemes if you or your son has the capability to handle the maturity proceeds.

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