Making Dreams Happen

Financial planning is one thing which is required at each and every stage of life. It is always beneficial if we start managing our finances from a very young age, but as rightly said, it is never too late to start a good thing. My friend introduced me to his uncle’s family from Bhilai, Devendra Jain, 46, and his wife Priti Jain, who are accounts and tax consultants. Together they earn around Rs 16 lakh per annum. The couple has their own house and office premises. Devendra has insurance cover of `1 crore and a mediclaim policy of Rs 5 lakh (family floater). The family has some goals in mind but have no plan of action.

So the first thing would be to pen down the goals. Once the goals are decided, half the task is done. I always believed in the saying -“Dreams once converted into goals become achievable”.

Jotting down the goals

The family has three sets of goals in mind. First, the couple wants to retire within 15 years. Second, they have to marry off their son in seven years and daughter in the next 10 years. Corpus required for each of these events is around Rs 25 lakh. Their education expenses are already taken care of. Third, in the next 10 years, they want to buy a car worth Rs25 lakh. Currently, they have a fixed deposit worth Rs 20 lakh and a saving bank deposit of Rs 5 lakh. This money if properly allocated can be used toward achieving their goals. Their liabilities include frequent use of credit cards and a personal loan of Rs 2 lakh.

Investment plan 1

Investment required for  retirement goal – Monthly SIP of Rs 25,000

Retirement, when planned properly ends up being the best time of one’s life. With all the responsibilities coming to an end, retirement can turn out to be the beginning of a new life. So, considering the yearly inflation rate of seven per cent, the present expense of Rs30,000 (their monthly expenditure) per month will become Rs 82,700 at the time of retirement. An SIP of `25,000 every month will help them create a corpus of Rs 1.42 crore at the time of retirement. Return is kept at 13 per cent per annum on investments made till the age of retirement. But post that, it will decrease to 10 per cent considering that the risk appetite at that stage is reduced. Presently, the family can start two SIPs of equal amount – one in small cap funds and another in multi  cap funds. 

Investment plan 2

Children’s marriage – Monthly SIP of Rs 4,000 and fixed deposit

Mayank’s Marriage- Rs 10 lakh from the fixed deposit can be allocated to balanced funds with an expected net return of 10 per cent which will give around Rs19.50 lakh in seven years. For the balance Rs 5.5 lakh, an SIP of Rs 4,000 per month can be started in equity mutual fund (preferably multi cap) with  an expected return of 13 per  cent yearly.

Akanksha’s Marriage– Rest of Rs10 lakh can again be invested in a balanced fund which will make Rs 25 lakh in 10 years.

Investment plan 3

Car- Monthly SIP of Rs 10,000

For reaching the goal of having a car worth Rs 25 lakh approximately in 10 years another SIP of Rs 10,000 can be started. This SIP can be allocated in a focused equity fund giving the portfolio a complete range of investment style.

Additional action pointers

Emergency fund - The family should start an additional SIP of Rs10,000 and keep it as an emergency fund. This can be started in a defensive large cap equity fund. This will ensure that any emergency hurdles are properly taken care of.

Free additional term insurance- These days some fund houses provide free term insurance along with SIPs. The amount of cover is up to 100 times of the SIP amount. So by properly allocating it, one can have a free term insurance cover of around Rs 40 lakh over and above without any additional cost.

Limit the use of credit card – Jain and his family although pay their credit card installments on time, but it is recommended to limit its use.

Use of liquid fund to pay-off debt– The couple can pay-off their personal loan using the liquid cash in their savings account. Out of the balance Rs3 lakh, around Rs 2.50 lakh can be invested in liquid funds which can be utilised as and when required.

Use of debt fund as an investment option – The family makes some extra income time to time, which  is around Rs 2 lakh per annum. However, there is no certainty of  this income.

So, as and when any surplus money is getting accumulated it needs to be invested in an accrual-based debt fund with a three-year horizon, which will yield an eight to nine per cent tax efficient returns. It can be used as an alternative to  fixed deposit.

Keeping above pointers in mind, Jains will be able to reach their goals and at the same time maintain their financial stability.

Anant Ladha, CFA, CA, CFP, LL.B.

Founder, Invest Aaj  for Kal