Sukumar, aged 38, is working in the merchant navy. He wants to plan his finances.

Due to uncertainties associated with his career, Sukumar is keen to ensure that his primary financial goals are met at the earliest. His wife Savita works as a school teacher. His daughters are in class 3 and class 1, studying in a local school. The couple live in their own house and have no liabilities.

Sukumar wants to set up a corpus to fund his daughters’ school and college education. He plans to return to regular employment to avoid sailing or establish his business in the next five years. Savita’s income is sufficient to take care of family living expenses and school expenses. The family can allocate ₹24 lakh per year after all other annual expenses towards their financial goals.

Sukumar wished to invest aggressively as he had only 5 years to fund his primary goals. He is not keen on retiring immediately Savita chose to be a bit risk averse and wanted a balanced approach to family investments. She also felt that long-term goals are critical to the family and may be a deciding factor when Sukumar changes his career. It was mutually agreed to follow 60:40 asset allocation in equity:debt.

Review and recommendations

1.      Sukumar has already opted for a term insurance for a sum assured of ₹2 crore. It was recommended to continue servicing the policy. Savita was advised to opt for term insurance cover of ₹75 lakh immediately.

2.      The family was advised to increase the health insurance to ₹50 lakh through a combination of family floater and super top-up policies.

3.      The couple have ₹12 lakh in fixed deposits and have marked it for emergency fund. This covers almost 16 months of family expenses, excluding annual travel.

4.      As Savita’s income was adequate to take care of the school fees, it was explained that setting up a separate fund for this need is not a high priority. They were advised to increase emergency funds by two years of school fees and additional coaching expenses, assuming Sukumar would return to employment inland within the next 5 years or so. This was assigned medium priority and to be funded with incremental income in the next couple of years.

5.      It was agreed to plan for ₹3 lakh per annum at a cost increase of 10 per cent per annum for a period of 5 years for both daughters towards their higher education. Sukumar and Savitha needed to have ₹71.62 lakh at the end of 5 years and were advised to invest ₹95,000 per month in large and mid-cap mutual funds for the next 60 months at an expected return of 12 per cent CAGR.

6.      If they want to fund the college expenses for ₹4 lakh per annum as above, they have to increase the monthly investments by ₹30,000.

7.      They have the potential to generate ₹58l to ₹66l in the next 5 years by investing ₹75,000 per month in suitable investments. This second portfolio may be invested aggressively with 70 per cent allocation to equity asset class.

Since Sukumar wants to focus on the next 5 years of investments, it is essential to understand how the investment strategy works. The investment horizon for the daughters’ education fund is from 10th  year to 17th year, with fund requirement in every year. Hence, the couple need to monitor the asset allocation and systematically rebalance the investment portfolio to reach the financial goal.

It is desirable that they invest ₹95,000 per month in equity oriented schemes and the additional ₹30,000 per month to be invested following the dynamic asset allocation model matching the risk profile. The same strategy should be reversed when nearing the goals with systematic movement of funds from equity to fixed income for the annual withdrawal based on the goals suitability matrix.

When Sukumar quits the merchant navy and takes up a regular job after 5 years, it is important to reassess the risk profile and goals and accordingly draft the new investment strategy to suit the changed risk profile. Sukumar needs to plan for his retirement phase and daughters’ marriage goals from his new income after five years. The second portfolio will help them to build on the wealth with additional income and investments.

The author is a SEBI Registered Individual Investment Adviser; Can be reached at