Investing while repaying a loan

I am 35 years old and work with a private company. Ours is a single-income household. I had taken a loan to purchase a house, and pay an EMI of ₹33,000 per month. The outstanding loan amount is now ₹15 lakh. I have been working for the last 12 years, but I do not have many investments. Most of my savings went towards home-loan repayment. I have put the remaining savings in bank fixed deposits. I have fixed deposits totalling ₹10 lakh. I have also purchased an LIC plan (sum assured: ₹2 lakh) and pay an annual premium of ₹16,700 towards it. My and my employer’s combined monthly contribution to my EPF account is ₹5,600. My current EPF corpus is ₹9.3 lakh. After EMI and other expenses, I can invest ₹45,000 per month.

  • My goals are to save for my kids’ education and wedding, and my retirement. My daughter is seven years old and my son is four years old. I want to save ₹15 lakh each for their education, and ₹20 lakh each for their weddings.
  • I want to save ₹1 crore for my retirement in 25 years.
  • I want to spend ₹50,000 per annum on vacation.
  • Where should I invest for these goals?
  • My employer provides me a health cover of ₹4 lakh. Should I purchase a private health cover?
  • I want to purchase life insurance, too. How much cover should I purchase?

It is not uncommon to see young investors route bulk of their savings in the initial part of their careers towards repayment or prepayment of housing loans. At this rate, your loan will get repaid in the next 56 months. Since the outstanding loan amount is less, there is no need to route more money towards repayment. You can simply let the repayment run its due course and divert your monthly savings towards other goals.

You have ₹10 lakh in bank fixed deposits. In my opinion, you should use the amount as an emergency fund. This fund can be utilised to meet any financial exigencies or to fund a medical emergency.

You can keep the amount in a bank FD or move it to liquid funds. Bank FDs are safe and easy to understand, but the interest earned is taxable. Given that you fall in the 30 per cent tax bracket, taxes may eat into a significant bit of your returns. Liquid funds take slightly higher risks but can provide better tax-efficient returns if your holding period inches above three years.

Even though you have health insurance from your employer, you can be left without a cover during any break in jobs. Moreover, this coverage from the employer is only as long as you are working. Once you retire, your cover will cease. Purchasing health cover at an advanced age might be tricky, too, especially if you contract any health ailments in the interim. Moreover, a cover of ₹4 lakh in a big city may not be enough for a family of four. Therefore, you must purchase additional health cover of ₹10 lakh. This will cost you about ₹1,750 per month.

About life insurance, you have a cover of only ₹2 lakh from an LIC plan. This is clearly not enough. Even though life insurance calculation can be made quite complex, the rule of thumb is that you must have a life cover that is at least 10-15 times your annual income. At your level of income and given that your family is quite young and yours is a single-income household, you must purchase a life cover of ₹2 crore. This will cost you around ₹1,800 per month.

You must also consider a disability insurance of ₹1 crore, which would cost about ₹1,000 per month. After insurance-premium payments, you will be left with about ₹40,500 to invest for your goals.

You have specified four goals — kids’ education and wedding, retirement and vacation. For your vacation goal of ₹50,000 per annum, you can invest ₹4,000 per month in a liquid fund. You will then be left with 36,500 to invest towards the remaining goals.

Kids’ education and wedding, and retirement are long-term goals, and hence it may be a good idea to take exposure to equity funds.

To begin with, you can target 50 per cent of your incremental investments towards equity funds; the remaining can be channelised towards debt investments.

  • Children’s education: Funds for your daughter’s and son’s undergraduate education will be needed in about 10 years and 13 years, respectively. You have not accounted for inflation in your estimates. Considering an inflation of 6 per cent and a return of 10 per cent on your portfolio, you will need to invest ₹24,000 per month.
  • Children’s weddings: Considering a minor cost escalation of 4 per cent per annum and planned weddings after 18 and 21 years, you need to invest about ₹12,500 per month.
  • Retirement: The target of ₹1 crore looks quite understated. The impact of inflation has not been considered. Assuming an inflation of 8 per cent per annum, ₹1 crore today is equivalent to ₹6.84 crore after 25 years. With this revised target and an assumed return of 10 per cent on the portfolio, you need to invest about ₹50,000 per month. I have considered the current EPF corpus to work out the numbers.

The total investment required for your long-term goals is about ₹86,500 per month. You can invest ₹36,500 + ₹5,600 (EPF) = ₹42,100 per month.

Recommendations

  • Large-cap funds: ₹11,000/month
  • ₹5,000/month in a mid-cap fund
  • ₹5,000/month in a small-cap fund
  • ₹15,500/month in a liquid/ultra short-duration or a low-duration fund
  • EPF: ₹5,600

While there should be urgency to invest more, there is no need to panic and give up on the small pleasures in life. Over a period of time, as your home loan repayment gets over and as your income grows, you will be able to invest more.

Moreover, as you meet your goals, you can route the monthly savings from the accomplished goals towards other goals.

The writer is founder, PersonalFinancePlan.in

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