Mohan, aged 45, approached us for his financial planning recently. He wife Geetha, aged 41, is a home maker. Their income and expenses are as given below.

The family was living in a rented house and paying rent of ₹30,000 per month. Total expenses, including rent to be paid, school expenses, living and other miscellaneous expenses, totalled ₹1.5 lakh per month.

Their assets and liabilities were as follows:

Goals

After a discussion, the following goals were identified.

The couple wanted an emergency fund of ₹6 lakh. They wanted to provide for their son’s college education at a current cost of ₹20 lakh falling due in the year 2025, and for his higher education at a current cost of ₹40 lakh falling due in the year 2029.

Mohan wanted to retire at the age of 60, at which point the family’s expenses at current cost was expected to be ₹85,000 per month. The couple expected to reside in one of their own houses after retirement. The other property would likely be let out on rent and be reserved as a gift to their son in the future.

The couple wanted to provide for their son’s wedding at a current cost of ₹10 lakh likely to be due in the year 2032. They wanted to go on international vacations once in two years till retirement, at an estimated cost of ₹2 lakh as on today.

Mohan wanted to create wealth of ₹3 crore when he retired, in addition to his retirement fund.

Risk analysis

Upon running risk analysis tests, it was identified that Mohan belonged to the category of ‘growth investors’. He was willing to invest 70 per cent of his investible surplus in growth-oriented assets. We advised him to restrict his exposure to growth assets to 60 per cent and deploy the balance in fixed income instruments, within the financial assets space.

This asset allocation was expected to be reached over three to four years, considering the PF contribution and its current value. Mohan was comfortable with this, as it gave him ample time to deploy his money and diversify without having to worry about timing the market.

Sticking to fundamentals would help every investor. We recommended that Mohan deploy money in equities for his goals that were five or more years away. For deploying money towards medium-term goals that were three plus years away, we advised him to choose dynamic asset allocation funds. For the set of short-term objectives and goals that were falling due within a year, we advised him to use fixed deposits and liquid funds.

Recommendations

Based on the above, we gave the following set of recommendations to Mohan and Geetha. First, we told them to set up an emergency fund by deploying 50 per cent in fixed deposits and the remaining in liquid funds. Next, we advised Mohan to opt for a risk cover of ₹2 crore through a pure term insurance policy with regular premium payment.

Mohan was adequately covered on the health insurance front through his employer-provided group medical insurance policy. But considering his lifestyle, we recommended that he opt for a ₹10-lakh health cover as a family floater policy. We also recommended to opt for ₹10 lakh as top-up cover.

We advised Mohan to close his high-cost housing loan with cash in fixed deposits of ₹8 lakh and the balance with 13 months regular EMI. Once he completed his first housing loan, he could increase his EMI for the second housing loan to ₹93,000. This would help him save about ₹6 lakh in total interest cost and he would be in a position to close the second housing loan in the next 44-45 months. During this uncertain time of job cuts and salary reductions across industries, Mohan was showing an inclination to foreclose the housing loans at the earliest, which we felt was one of his top priorities.

We mapped ₹5 lakh from Mohan’s mutual fund portfolio towards the goal of providing for his son’s college education. In addition to this, we advised him to invest ₹30,000 per month in dynamic asset allocation funds till the year 2025 to reach a targeted corpus of about ₹29 lakh. Education inflation was assumed to be at 8 per cent per annum.

We also mapped ₹10 lakh from Mohan’s mutual fund portfolio towards the goal of providing for his son’s higher education. We also advised him to invest ₹32,500 per month in large-cap mutual funds towards this goal till year 2029. This would fetch him a targeted corpus of about ₹77 lakh. As Mohan wished to send his son abroad for higher education, we assumed an inflation plus currency depreciation of 7.5 per cent per annum.

Mohan was advised to reserve his restricted stock units (RSU) holdings towards his goal of setting up a retirement corpus. If he decided to exit at any point in time due to specific reasons, he understood that the proceeds had to be redeployed in equities towards his retirement corpus. He expected around 8 per cent compounded annual growth rate (CAGR) post-tax from his RSU holdings over a longer period of time. This, along with the provident fund (PF), would fetch him a corpus of about ₹4.33 crore at retirement with a realistic return expectation inclined towards the lower end of the range of returns.

Mohan would have to accumulate a retirement corpus of ₹8.24 crore to fund his current lifestyle need of ₹85,000 per month towards retirement expenses. To fund the deficit, he needed to invest ₹95,000 per month in a combination of large- and mid-cap funds till retirement. Due to non-availability of surplus, we advised him to start investing ₹40,000 per month towards retirement. He could step up his retirement savings once he completed his housing loan commitments. With a planned long-term career, he would be able to achieve this goal as well.

We also advised Mohan to set aside funds towards continuous learning, as this is a must to have a sustained long-term career in any field.

Mohan and Geetha had limited goals and had clarity and focus to achieve these goals. With proper planning, discipline in execution, and continuous monitoring, this couple should be able to achieve their goals.

(The writer is a SEBI-registered investment advisor at Chamomile Investment Consultants)

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