Personal Finance

Time is your friend in investing

Sridevi Ganesh | Updated on April 21, 2019 Published on April 21, 2019

Long-term investing can lead to inflation adjusted returns, and aid in compounding

‘M’ had approached us for his financial planning needs. He is aged 32, married to ‘P’, and they have a son aged two. ‘P’ works as a school teacher. After the initial discussion, we agreed upon the following goals for his family.

  • Emergency fund - ₹3,60,000 (priority, immediate)
  • Son’s school admission in 2020 - ₹1,50,000
  • Son’s college education at a current cost of ₹20,00,000
  • House purchase in 2025 at a current cost of ₹80,00,000
  • Retirement at age 58 with an annual expense of ₹6,00,000
  • Change of car in 2021 for a cost of ₹10,00,000
  • Family event in 2024 at a current cost of ₹4,00,000

After going through the data ‘M’ provided, the networth statement and the income/expense statement were prepared (see table).

 

He will be in a position to accumulate ₹2.85 crore in his EPF account when he retires. We mapped his PF towards his retirement goal. Though he does not have much experience in equity investing, his risk profile suggests that he can opt for 60 per cent in equity, and he seems to understand the benefits of long-term systematic investing in equity mutual funds.

We advised him to use liquid and debt funds for tax-efficient returns than parking surplus in FDs. He had been opting for FDs, and had saved in his wife’s name based on a perception that tax outflow would be lower for his wife. We explained him about the clubbing provision in I-T calculation.

 

 

The financial advice for ‘M’ was:

1. Park an emergency fund of ₹3,60,000 as a fixed deposit.

2. Balance amount from his existing FD and ₹1,60,000 cash in hand, a total of ₹9,50,000, to be divided as below:

a. ₹1,50,000 in a fixed deposit towards son’s school admission.

b. ₹5,00,000 to be invested in large-cap funds towards house purchase with a time horizon of five-plus years.

c. ₹3,00,000 to be invested this year towards son’s college education in a multi-cap fund (or a combination of large- and mid-cap funds) for a time horizon matching the goal target of 16 years.

3. By investing ₹30,000 per month towards his house purchase goal along with a lump-sum investment this year, he should be in a position to accumulate ₹36,60,000, which would be around 30 per cent of his house purchase budget in 2025. We expect his house purchase goal to get inflated to ₹1.2-1.3 crore by 2025. The deficit in this goal should have to be funded by way of a housing loan. He was advised to revisit his contribution towards house purchase every year, and any income increase should be used to increase the savings towards this goal. This will help him reduce his housing loan. We also advised him to use his current holding of mutual funds and ULIP towards the house purchase.

4. He needs to accumulate ₹92,00,000 towards his son’s education in the next 16 years. Hence, in addition to his investment of ₹3,00,000 towards this goal, we advised him to invest ₹14,300 per month in a mid-cap fund for a period of 16 years.

5. We also advised him to invest ₹5,000 per month from P’s income in an RD, towards the car purchase. The fund can be used to pay the upfront cost, and the balance needs to be paid through a loan. He needed to consider saving more from his increase in income in subsequent years, so as to reduce the car loan

6. With his current commitment, it is a challenge to fund his retirement right from the current year. But, by investing ₹20,000 per month towards his retirement, he would be able to accumulate ₹3.6 crore towards his retirement. He should increase his contribution to the retirement goal after the house purchase is done with. We also advised him to use his PPF towards retirement savings as part of his debt allocation.

7. He was also advised to immediately opt for a term insurance cover for a sum assured of ₹2 crore, and a health insurance policy for a sum insured of ₹5,00,000.

The following were the assumptions taken:

The return expectation from equity mutual funds in large-cap was taken to be around 10 per cent, and from multi- and mid-cap funds at 12-13 per cent, over a period of 16-26 years.

When his salary increases, his contribution to PF will also increase. Hence, with the time horizon on his side, he would be able to accumulate a sizeable corpus in his PF account. In addition, he can increase his retirement savings in MFs over the years.

He has the huge benefit of having time alongside, and this should favour long-term investing by way of attractive inflation-adjusted returns. This will also aid in utilising compounding to his advantage in the longer run.

The writer is an investment advisor registered with SEBI

Published on April 21, 2019
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