Personal Finance

Save Smart: Venture out, with some sound planning

Nalinakanthi V | Updated on March 10, 2018

Here’s how this young entrepreneur can make his dreams come true

Many youngsters today dream of becoming entrepreneurs and building their own business. But while their passion and drive are appreciable, the journey of an entrepreneur is rarely smooth. There are challenges to be overcome on both the professional and personal front.

One needs to think through and plan the finances before taking the plunge. Else, entrepreneurship can land you in a debt trap.

Bengaluru-based Rohit Bhat, who graduated from IIT Delhi last year, decided to take up the campus job offer and has been working for an engineering multinational for a year now. The 23-year-old alumnus of one of the country’s top-notch institutes has some start-up ideas and has been working on them alongside work. He has been putting off his decision to take the plunge, given his family situation.

“I come from a middle-class background, I have financial commitments towards my family and have to support my dependant parents,” says Rohit.

He wants to mop up ₹40 lakh by 2022, which he can dip into in case his start-up takes longer to ramp up. Of the ₹40 lakh that he will save, he plans to set aside ₹10 lakh as investment capital for his start-up.

His monthly net income is ₹85,000. He currently resides in his ancestral home which is owned by his father. The family has also let out a portion of the house on rent which fetches them ₹10,000 every month. The monthly expenses for the family of three works out to ₹40,000, leaving him with a monthly saving of ₹55,000. His monthly savings over the past year are currently parked in a bank as fixed deposit.

His father, Krishna Bhat, who is 70, has ₹10 lakh invested in a fixed deposit scheme of a public-sector bank. His father and mother, Veena, 65, do not have a health insurance cover. Given their age, getting an insurance cover may be very expensive. “I have hence decided to earmark my father’s FD investment of ₹10 lakh for any medical emergency,” says Rohit.

His employer currently provides him term cover and the sum insured is ₹1 crore. Given that Rohit wants to build a corpus of ₹40 lakh by 2022, he can invest in an equity oriented balanced fund.

Assuming the investible surplus increases by 10 per cent every year, and an annualised return of 10 per cent on his investment, Rohit will have to invest ₹43,000 every month in equity oriented balanced schemes to accumulate ₹40 lakh by the end of 2022.

Given that the equity market can be volatile over a five-year time frame, an equity oriented balanced fund that can juggle equity and debt and thereby contain downside better during downcycles is a better option.

Balanced schemes with a good performance track record such as HDFC Balanced Fund, ICICI Pru Balanced, and L&T India Prudence (about 18 per cent annualised return over the last five years) are options to consider.

The balance surplus of ₹12,000 can be invested in a diversified large-cap oriented scheme. Since this is surplus money, Rohit can take slightly higher risk.

Several diversified large-cap oriented schemes such as Aditya Birla Sun Life Frontline Equity and ICICI Prudential Focussed Bluechip (annualised gains of over 16 per cent over the last five years) have delivered healthy double-digit gains.

Assuming an annualised gain of 12 per cent on these investments and annual increase of 10 per cent in the investible surplus, Rohit will be able to build a corpus of about ₹12 lakh over a five-year time frame which can come in handy for the business.

The writer is co-founder, RaNa Investment Advisors

Published on December 10, 2017

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