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The future is now

The future is now
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First Published: Mon, Apr 20 2009. 01 43 AM IST

Updated: Tue, Apr 28 2009. 03 50 PM IST
Suparno Chowdhury, 29, and his wife Surabhi, 25, have been married for four months now. Both are techies and diehard foodies who make it a point to check out all the new restaurants in Kolkata.
However, the past few months have seen them become cautious about their spending. “While I do not know anybody who has lost his job, there is no guarantee about it either. Also, there is almost no chance of any increment this time,” says Suparno, whose investments in mutual funds and unit-linked investment plans (Ulips) have eroded by at least 50% over the last year.
They, however, have age on their side and correct long-term strategies can see them achieve their goals, which include buying a house and covering medical costs for Suparno’s parents, who live with them. Surabhi plans to retire from her job in another 10 years and go back to her original love, teaching. Suparno, too, intends to retire at 50.
Though they do not plan to start a family anytime soon, children still have to be factored into their future plans.
For his goals to be fulfilled, Suparno understands the importance of making “intelligent investments”. He has seen many of his friends don’t have concrete financial plans in place and does not want to make the same mistake. A voracious reader of personal finance magazines, he tries to understand what investment decision will work for him. And in this he finds a companion in Surabhi, who, apart from managing the household expenses, actively participates in the couple’s financial planning exercises.
Says Suparno: “If things go well, we plan to run a small business at a seaside town and live a life away from the city after retirement. This is a dream that both of us share.” We give them a financial plan to help them fulfil their dreams.
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THE RIGHT STRATEGY
by Lovaii Navalakhi
Surabhi is 25 and Suparno, 29. They don;t have children and both work. While Suparno is a computer analyst with Eaga Energy, Surabhi is an assistant manager with Wipro. They, along with Suparno’s parents, live in rented accommodation. His father is retired and draws income from his investments in monthly post-office schemes.
Current position
Cash flow: Surabhi and Suparno together bring in Rs44,000 as salary income every month, and a fixed deposit brings in another Rs2,500. Their average monthly expenses are Rs14,000. An average Rs8,000 a month goes towards insurance policies.
Investments: They have Rs36,000 in mutual funds and Rs3,000 each in a Public Provident Fund (PPF) and a gold scheme. Their combined monthly contribution towards their EPF is around Rs2,300. They also have a fixed deposit worth Rs3 lakh. They do not have any liabilities.
Goals
House: The couple plans to buy a house for Rs7 lakh to live in by 2014 (future value Rs9.8 lakh, with 7% inflation per year). They want another house as an investment, for which they need to make a down payment of Rs2.5 lakh this year. They plan to sell the house in 2011, when it is ready for occupancy. They expect to make a profit of around Rs2 lakh
Travel: A European tour in 2015 for Rs2 lakh (Rs2.8 lakh future value).
Retirement: Surabhi plans to retire in another 10 years and Suparno, after 20 years. Estimated post-retirement monthly expenses are Rs25,000 (around Rs80,000 then, at 6% inflation per year).
Diagnosis
Inflow from the various insurance policies has not been included due to inadequate information. These, along with EPF accumulations, could go towards additional goals.
Savings: They have time on their side. With a healthy savings-to-earnings ratio of 50%, they can achieve their goals and have a comfortable corpus to continue their present lifestyle after they retire. They need to review their situation once they have more responsibilities, children, for example.
Retirement:A corpus of Rs1.2 crore is required for a period of 40 years, taking the couple’s life expectancy to be 90. Taking returns of 10% on accumulated and future savings and an inflation rate of 7% per year, this corpus is achievable.
Way ahead
Liquidity: They should have two months’ expenses in the bank and another two months’ expenses in liquid mutual funds for easy withdrawal in case of emergencies.
Asset allocation: The focus needs to be on growth assets. With many earning years left, they can afford to invest in equity-linked assets. The debt portion is the Rs3 lakh in fixed deposit, which Suparno plans to invest in real estate soon.
Also See Goals and how to reach them (PDF)
Recommendations
Retirement: Suparno could extend his retirement if need be, since his retirement age has been taken as 50 at present.
Real estate: We recommend property only as a long-term investment and, considering the current real estate scenario, the couple should ideally not invest in a house for around two-three years. There are also short-term capital gains to be considered if the property is sold within three years of purchase.
Investment: Any surplus should be invested with discipline. They should invest 65-70% from every month’s savings into SIPs of equity-linked mutual funds and build a corpus. An average return of 10% on these will suffice for their goals.
Click here to see our recommendation for the existing mutual fund investments.
The planner is the managing director of International Money Matters.
The views expressed on this page are not the newspaper’s opinion and are provided for information purposes only by Outlook Money. Readers are requested to do their own research. Neither Mint nor Outlook Money will be responsible for any actions and outcomes based on information provided here.
CONNECT
Do
You can rebalance your Ulip portfolio to adjust to market movements and maintain the desired asset allocation through switching. Typically, up to four switches are free in a year. Once you have exhausted these, the insurance company deducts Rs100-500 from your fund value for every switch. However, some policies offer a very high number of free switches in a year. For example, HDFC Standard Life’s Unit Linked Endowment Plus II offers 24 free switches, while Reliance Super InvestAssure Plan offers 52. You can also redirect your fund allocation at the time of policy renewals.
Know
If you are environment friendly and are going in for a green home, here’s good news for you. State Bank of India (SBI) has announced a new Green Home Loan Scheme to support environment-friendly residential projects. Under the scheme, it will offer various concessions, including reduced margins, lower interest rate and zero processing fee. These loans will be sanctioned for projects rated by the Indian Green Building Council. The interest rate for loans under the scheme will be 25 basis points lower than the prevailing rate. The upfront margin money has been reduced from 20% of the total cost of the house to 15%.
Invest
To cushion your money, you can use a strategy called laddering. As the name suggests, it involves creating an income ladder, one rung at a time. Here’s how it works. Instead of investing your entire corpus, say, of Rs5 lakh, in a five-year deposit, you break it up into five equal parts of Rs1 lakh each. Then invest one block in a one-year deposit, another in a two-year deposit, and so on till you invest the fifth in a five-year deposit. A year down the line, the one-year deposit will mature and it can be reinvested in five-year paper to create a sixth rung. When the two-year deposit matures, it can be reinvested in a five-year deposit to create income in the seventh year.
Buy
A loan against a life insurance policy is an advance against the cash value of the policy. The surrender value at the time of the loan application is basically the cash value of the policy. The amount of loan granted is always less than its cash value. In an endowment policy, for instance, the loan amount may be up to 90% of the surrender value. The insurance company assigns and holds the policy to secure repayment of the loan. The loan amount needs to be repaid before the policy matures.
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First Published: Mon, Apr 20 2009. 01 43 AM IST