Personal Finance

Rationalise your targets

Deepesh Raghaw | | Updated on: Jun 23, 2019
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Too many short-term goals can crowd out the investments for your long-term goals

H (30) and V (28) are based in Pune and work in the software industry. They have a two-year-old son. Their combined monthly take-home income is around ₹2.4 lakh. They recently purchased a house through a home loan of ₹95 lakh. The home-loan EMI is ₹85,000. They have already moved into the house and will thus save on house rent. Most of their liquid money was wiped clean for making the down-payment towards the house. Apart from a fixed deposit of ₹3 lakh, they have a combined EPF corpus of about ₹9 lakh. There are no other investments. Their combined monthly EPF contribution (including employer contribution) is ₹26,000 per month. Excluding the home loan EMI, their regular monthly expenses amount to ₹55,000.

They want to:

1. Purchase a car costing about ₹15 lakh within the next two years

2. Take a foreign vacation next year; expected cost is ₹5 lakh

3. Spend ₹5 lakh on home interiors in the next six months

4. Save for their retirement

5. Invest for their son’s education: ₹1 crore in 15 years

Both have term insurance cover of ₹1 crore each. The life policies have been assigned to the bank. They have health cover of ₹5 lakh each from their respective employers. In addition, they have purchased a private health cover of ₹10 lakh.

Theirs is a dual-income household. Therefore, the total life cover of ₹2 crore is reasonable. However, since the current home loan outstanding is ₹95 lakh, they can enhance the life cover by ₹50 lakh each. This will cost them around ₹1,250 per month. The health insurance coverage is adequate. At the same time, they must target to build a medical fund of ₹5 lakh in the next five years. For this, assuming a post-tax return of 6 per cent pa, they will have to invest ₹7,000 per month in a liquid fund.

In addition, I advised them to build an emergency buffer of ₹8 lakh in the next three years. They can earmark their existing FD of ₹3 lakh towards this goal. They will have to invest ₹11,500 per month towards this goal in a liquid fund or a good credit quality ultra-short duration fund (assuming annual post-tax return of 6 per cent).

Paring down

For your short-term goals, you have to invest in less volatile investments such as bank fixed deposits and debt mutual funds. For the long-term goals, you can invest aggressively and must consider some exposure to equity investments, too. Short-term investments have lower return expectations. Therefore, if you have too many short-term goals, the investments for such goals may crowd out the investments for your long-term goals.

The couple has listed down an expensive car purchase, home interiors and foreign vacation as some of their short-term goals. In addition, since they are down on liquid investments, we will have to shore up emergency buffers, too.

To reach these goals (car purchase, interiors and foreign vacation), they need to invest ₹1.44 lakh per month. Adding allocations for medical and emergency funds, they must invest ₹1.63 lakh on a monthly basis. Their investment ability, excluding the EPF, is ₹1 lakh per month. Therefore, they are advised to rationalise some of these short-term goals. Emergency and medical funds are top priority goals and they should invest for these goals. They mentioned that home interior is a high priority goal and they can stretch the goal for up to one year. For this goal, they can invest ₹40,000 per month in a liquid fund.

Plans for foreign vacation should be put on hold for now. They can plan to purchase a cheaper car after 3-4 years. Once the home interiors are done, they can route the funds towards these goals.

For their son’s education corpus target of ₹1 crore in 15 years, they need to invest ₹25,000 per month. They can start an SIP of ₹20,000 per month in a balanced fund and increase the allocation whenever possible.

For the silver years

The remaining savings of ₹22,500 (₹1 lakh - ₹18,500 - ₹40,000 - ₹20,000) can be invested for retirement. This is in addition to the ₹26,000 per month towards EPF. Since their retirement corpus is completely made up of the EPF at this point, they can put the entire ₹22,500 in equity funds. They can invest ₹10,500 in a large-cap fund and ₹6,000 each in a mid- and a small-cap fund.

For the retirement in 30 years, they need to reach a target corpus ₹20 crore. They need to invest ₹92,000 per month. Their current contribution is about ₹48,500 (₹26,000 + ₹22,500). They should increase the allocation towards long-term goals as their income grows and as some of their short-term goals get achieved. (I have assumed a post-tax return expectation of 10 per cent for all equity and hybrid investments.)

The writer is founder,

Published on June 23, 2019

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