Rajan and Kavita were showing keen interest to have a financial plan to meet their goals. They were not sure of the goal cost estimates and were unsure of the impact of low interest rates p

Rajan, aged 39, was working in a multinational company and his salary structure included stock options. He never sold any of the stock options. Kavita, 36, was working in an IT behemoth but earning lesser . Recently, she had moved to a start-up with a reasonable hike in salary. Though this move helped her getting higher package, she was not sure how long this trend will continue.

Their priorities were listed as below.

1. Emergency fund to cover 3 months’ expenses

2. To provide for higher education expenses of their daughter Anushka, aged 7, in the US at a cost of ₹1.25 crore

3. Rajan’s retirement at 60 for a comfortable living expense of ₹80,000 per month

4. To close their housing and car loans

5. Lifestyle fund of ₹10,000 per month for Kavita from her age of 45 till she turns 75. She likes to have this fund irrespective of her earning status

6. Wealth creation with different asset classes

We assessed their risk profile and they both felt comfortable to opt for equity assets / growth assets to the tune of 50 per cent of their investment portfolio, in financial assets. They have adequate health and life cover individually and at family level.

Review and Recommendations

1. Recommended to keep ₹8.45 lakh in fixed deposits towards Emergency Fund. This would be sufficient to address six months of expenses.

2. Recommended to maintain ₹3 lakh in liquid funds towards three months EMI of housing and car loans.

3. With the current housing loan interest rate of 7.25 per cent per annum, their housing loan would close in the subsequent 138 months with total interest outflow of ₹33.32 lakh. As they were not comfortable to service the housing loan considering employment and salary uncertainties, it was recommended to partially close the housing loan with ₹20 lakh from fixed deposits. Fixed deposits were fetching 5per cent per annum interest and both the individuals were falling in the highest tax slab. It was also advised to pay additional ₹3 lakh per annum from 2022 towards housing loan foreclosure. These actions would help them reduce the interest cost to ₹13.28 lakh saving them ₹25 lakh over the balance tenure of the housing loan. They would be able to close the housing loan in next 61 months.

4. Car loan was chosen for a term of five years. As per amortisation table, they had already paid 50 per cent of the total interest component. Hence, there was not much benefit in foreclosing this loan. They were advised to close the loan from cash flow surplus as and when they could considering their appetite towards “debt free” living.

5. Their high priority goal was to plan for daughter’s college education at a cost of ₹1.25 crore for the subsequent 11 years. Inflation assumed at rupee terms is 7 per cent. Rajan wanted to set aside ₹Rs 60 lakh from his stock options towards this goal. He agreed to keep monitoring the price of his stock options and exit 3-4 years in prior to target year, to fund this goal. They were advised to invest ₹42,000 per month towards this goal to get a corpus of ₹2.63 crore at an expected return of 10 per cent along with mapped stock options. They were advised to diversify the portfolio with new investments other than stock options.

6. PF from their two accounts along with further contribution of ₹5.15 lakh per annum in Rajan’s PF a₹nd ₹4 lakh per annum in Kavita’s PF will fetch ₹7.64 crore when Rajan retires at his age of 60. As they needed to accumulate ₹10.45 crore, they were advised to invest ₹29,000 per month at an expected return of 11 per cent in a combination of large and mid-cap mutual funds. If Kavita decided to quit her employment earlier, they would be forced to use their real estate assets and the balance of fixed deposits towards this goal.

7. Recommended to move balance fixed deposits to a combination of debt and liquid funds as both were falling in the highest tax slabs. This should help them to generate tax efficient returns in the long run.

8. We had observed that they were displaying a disciplined savings habit. With increase in income and the resultant higher surplus, they could improve their savings ratio. The expenses were less than 30 per cent of their total earnings. As there were lot of uncertainties about their career growth, they wanted to get into investments without any long term savings commitments. We advised to them to build MF portfolio along with PPF and NPS. They were advised to invest ₹1.5 lakh per year — in each PPF accounts and ₹1.5 lakh in Sukanya Samriddhi Scheme. They were also advised to invest in NPS for a maximum of ₹3 lakh. These investments will help them to manage the fixed income portion of their portfolio.

9. It is equally important to build wealth when one makes right career move and earn well. As they do not have much experience in investing for long-term, they were advised to invest in equity mutual funds through systematic investment plan for their goals and wealth creation.

10. Kavita’s need of getting monthly income of ₹10,000 is a trivial goal for their financial position. We advised her to modify her goal over the years. Otherwise, this goal can be funded with accumulated assets at any time. Withdrawal from any investments will be made at tax cost. If there is no specific need, it would be better not to exit other than portfolio rebalancing. This will help them to create wealth over time.

The writer, Co-founder of Chamomile Investment Consultants in Chennai, is an investment advisor registered with SEBI