Goals vs expenses: Striking a balance

It is important to make the right investments at the appropriate time

Akash, aged 45 and his wife Chitra, 40 were anxious when they met us for the first time regarding their personal finance situation. After multiple discussions, we listed out their needs on a priority basis and a few additional goals.

High-priority needs

1) Set up an emergency fund that can cover one year expenses as Akash has plans to start a new venture 2) Set up regular income that can cover his monthly expenses from his investments for 24 months as the income from his new venture is expected to be unstable for the initial two years 3) Business start-up expenses ₹10,00,000 as his investment 4) School expenses for his son aged 13 for the next four years to be set aside 5) Son’s college education, current goal cost ₹15,00,000 6) Son’s higher education; current goal cost ₹40,00,000 7) Retirement income to be planned with retirement age as 60; current monthly expenses at ₹65,000, excluding child-related expenses 8) Wealth accumulation at current goal cost of ₹3,00,00,000 at the time of retirement.

His assets

1) Self-occupied house in Chennai valued at ₹2,00,00,000 2) EPF valued at ₹50,00,000 3) Fixed deposits worth ₹78,00,000 4) Equity portfolio, predominantly bluechip stocks, valued at ₹50,00,000 5) Equity mutual funds valued at ₹25,00,000 6) REC Capital Gain tax savings bond investment value ₹50,00,000; beneficiary of interest payment of 5.25 per cent per annum till 2024; maturity in 2024 7) Life insurance policies valued at ₹21,00,000

Current monthly expenses at ₹85,000 per month, excluding school-related expenses of ₹1,50,000 per annum for the next four years; he has to pay ₹45,000 towards his life insurance premium; he doesn’t have any liabilities. He recently sold one of his lands and used the sum to close his housing loan and invested ₹50,00,000 in Capital Gain tax savings bond.

We estimated his risk profile as balanced and, at the time of planning, he had around 27 per cent of his net worth, excluding his self-occupied house, in equity. We recommended an asset allocation of 50:50 in equity: debt.

His goals were redefined as:

1) Emergency fund of ₹10,20,000 to cover 12 months regular expenses 2) School expenses fund of ₹6,00,000 3) Business start-up fund ₹10,00,000 that was needed immediately 4) Son’s college education expenses of ₹15,00,000 that would inflate to ₹21,96,000 at an expected rate of 10 per cent per annum by 2024 5) Son’s PG education expenses of ₹40,00,000 in 2028 would inflate to ₹71,33,000 at an expected rate of 7.5 per cent per annum (foreign education cost inflation at 2.5 per cent and currency depreciation at 5 per cent per annum) 6) Retirement at 60 with current expenses of ₹65,000 per month would need funding of ₹6,00,00,000 7)Wealth accumulation of ₹3,00,00,000 is not a goal that can be achieved quickly; hence we modified it to ₹1,00,00,000 and the balance ₹2,00,00,000 could be planned, based on the success of his business; his target year goal cost would be ₹25,00,00,000 at an inflation of 7 per cent per annum

Our recommendation

1) Opt for life cover through pure term insurance for sum assured of ₹2,00,00,000

2) Go for health insurance cover of ₹10,00,000 as family floater and property insurance to cover self-occupied house against fire and natural calamities immediately

3) With no contribution to EPF, PF interest would be taxable; retain the same for subsequent 12 months till business stabilises. He also has the option to come back to employment after two years; EPF is relatively a safe investment and offers 8.65 per cent per annum interest

4) Invest ₹20,40,000 in a liquid fund and withdraw ₹85,000 towards monthly expenses through systematic withdrawal plan; expected return of around 4 per cent, post-tax, could be used to pay life insurance premium

5) Set apart ₹6,00,000 towards school expenses in bank fixed deposits and ₹10,20,000 towards emergency fund in a liquid fund

6) Expected income from REC bond to be invested in large-cap funds towards son’s college education expenses. Maturity value along with this invested value would be ₹62,18,000 in 2024. Expected return from large-cap funds assumed to be 10 per cent per annum

7) Son’s college education expenses would be ₹21,96,000 in 2024; balance to be invested at an expected return of 10 per cent for four years to fund son’s higher education expenses. This is likely to fetch him ₹58,88,000 in 2028. This would not be sufficient to fund higher education. Deficit, if any, needs to be managed with an educational loan 8) Retain EPF towards retirement needs, along with his direct equity portfolio and equity mutual funds portfolio, after rebalancing to match risk profile.

At the end of 15 years, he can expect around ₹6,00,00,000 at an expected return of 11 per cent per annum.

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