Disciplined investing helps scale peaks

Mani (31) works in an MNC, earning a package of Rs 12 lakh with additional perks of Rs 2 lakh. His family includes his wife (25), child (1) and mother (53). The couple plan to have their second child next year.

Financial goals

Mani is a simple man and has set himself achievable goals, as follows:

Post-tax retirement income of Rs 29,000 p.m. in today’s rupee terms, starting 2025.

Rs 15 lakh for first’s child higher education in 2025 and Rs 20 lakh for second child’s higher education in 2029.

Rs 14 lakh for first child’s marriage in 2032 and Rs 18 lakh for second child’s marriage in 2037.

Rs 10 lakh in 2020, Rs 15 lakh in 2030 and Rs 20 lakh in 2035 for medical expenses.

Rs 1 lakh for a holiday once a year in today’s rupee terms.

Rs 7 lakh for a car in 2008.

Current situation

Mani’s monthly expenses are around Rs 29,000 and his other annual expenditure, which includes his vacation and festival expenses, are Rs 1,67,000. He plans to retire early and wants financial freedom by the age of 50. We have considered 70 years as his life expectancy for the purpose of calculations.

Mani has a list of various insurance policies with a total sum assured of Rs 8.55 lakh, for which he is paying an annual premium of around Rs 43,300. He also has an accidental policy with a sum assured of Rs 7.5 lakh. He does not have any liability as of now.

His assets and investments are as follows:

Asset Value (Rs).

Home 50,00,000.

Valuables 1,00,000.

Mutual funds 75,748.

Equity 1,79,287.

Cash in hand 50,000.

Bank FD 2,50,000.

Post-office savings 4,00,000.

PPF 3,00,000.

Total 63,55,035.

Mani’s equity investments include a diversified equity mutual fund portfolio. He has just started investing through the systematic investment route and has saved almost Rs 50,000 as follows: Fund Distribution Monthly

Category (%) SIP amount (Rs)

Balanced 33 15,000

Equity others 48 23,500

Equity - sectoral 19 10,500

Asset allocation strategy

Mani’s goals are long term and as of now, he does not have the desire to utilise his funds for any major expenses. I suggest growth asset allocation for his profile, according to which, he should have a 30:70 debt-equity allocation in his portfolio.

Mani being a young professional can take risks at this level and have a higher exposure to an asset class that grows his capital. A return of 8 per cent on debt and 18 per cent on direct equity or equity related mutual funds would be required by Mani to achieve his goals.

This would fetch him a weighted average return of 15 per cent on his portfolio. As of now, his investment portfolio is not in the designed asset allocation. He should increase the equity allocation till the designed asset allocation is achieved and continue investing in the same. He has a good diversified allocation in SIPs.

Achieving financial goals

Retirement planning

Retirement planning is crucial considering the increasing life expectancy in India and increasing cost of living due to inflation. Mani should consider his current investments into PPF for this purpose. He would require a corpus of Rs 1.21 crore at the time of retirement (50 years), which would fetch him an inflation-adjusted return of 3.80 per cent (interest rate post retirement 9 per cent and inflation rate 5 per cent).

Of this, Rs 13.36 lakh would be funded through his current investment in PPF and an additional yearly investment of Rs 1,000 towards it. To meet the shortfall, he would have to make SIP investments of Rs 8,460 per month, which would grow to Rs 1.08 crore by the time of his retirement.

His monthly requirement of Rs 29,000 in today’s terms would amount to Rs 73,281 at the time of retirement, increasing at 5 per cent (inflation rate) over 19 years.

Education & marriage planning

Mani will need to save an amount equal to Rs 3,530 per month, which should grow at a rate of 15 per cent. He requires this money for further studies and marriage of his two children.

Expense Future Yr Yrs Monthly head cost left investment

Education (Rs) (Rs)

1st child 15 lakh; 2025 17 1,600

2nd child 20 lakh; 2029 21 1,130

Marriage

1st child 14 lakh; 2032 24 500

2nd child 18 lakh; 2037 29 300

Total Rs. 3,530

Health coverage

Mani hasn’t taken adequate health cover for himself or his family. We suggest a health cover of Rs 5,00,000 for the family. Ideally, he should buy a critical illness cover of that amount, for which he would have to pay around Rs 3,500 per year.

Vehicle planning

We would recommend that he fund 25 per cent of the car cost (Rs 7 lakh) from his own funds and the rest through an auto loan. For this, he would have to pay an EMI of Rs 11,700 at a rate of 12 per cent, which is on a higher note.

He can fund his share of the cost, which works out to Rs 1.75 lakh, from the bank FD.

Last, but not the least, Mani has to keep in mind that the crucial part of successful planning is the execution, which requires discipline.

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