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Ask Mint Money | For short-term requirements, park funds in liquid assets

Ask Mint Money | For short-term requirements, park funds in liquid assets
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First Published: Mon, Feb 14 2011. 10 31 PM IST
Updated: Mon, Feb 14 2011. 10 31 PM IST
I am 27 years old and my net salary is Rs50,000. I stay in a rented accommodation with my family. I invest Rs 2,224 per month towards medical and life insurance. I have also invested Rs88,500 in mutual funds. I own equity worth Rs1.40 lakh. I have Rs1 lakh in savings account and another Rs1 lakh in provident fund. I have a few immediate goals such as buying a two-wheeler, getting married and acquiring a plot for which I will need around Rs9 lakh. I am also expecting Rs15,000 hike in salary this year. I am assuming that after marriage the net income will go up to Rs90,000 including my wife’s salary. I also intend to buy a car and start constructing a house in another two years for which I need Rs31 lakh. In order to attain medium-term goals, I need additional Rs11 lakh in the next four years. I also want to fund my long-term goals which include my children’s education and marraige, foreign trip and retirement plan. Suggest a customized investment plan to achieve inflation-indexed returns. If required I can also pool in additional money if my monthly savings portion is not enough to meet my goals.
—Vijay Ramachandran
It is good you want to start early in life as planning early in life not only gives you a head start, it also comes with the advantage of power of compounding. You will realize the importance of this simple yet so effective tool when your interest starts earning interest.
However, be careful not to lose focus in the long term. You may not see the wealth creation in the short term as it is a long-term process and that’s when many people start getting complacent.
You need to define your financial goals both in the short term as well as the long term. While you have ably put all your goals, there are some changes you need to make for the short-term goals. Short-term needs you have defined as buying two-wheeler, your marriage and purchasing a plot. We have deferred plot purchase by another year due to cash flows. These three goals are expected to cost you Rs9 lakh. Going forward you want to start construction on the plot and buy yourself a car. For this you have kept a budget of Rs31 lakh. Additionaly Rs11 lakh is to be provided which also we have deferred by a year.
We have also considered your long-term needs where we have considered your family as your spouse and two children and hence their education need at 5 lakh each for four years for each child. Similarly we have provided for their marriages where we have taken the cost as Rs10 lakh each. Your retirement has been considered when you turn 58 and the monthly retirement expense is taken as Rs40,000 per month. We have not considered your foreign holiday right now. This can be build in the cash flows going forward.
Assumptions: Growth rate has been taken as 7% for the first 10 years and subsequently at 5%. Inflation has been taken as 7% and the interest rate at 10%. Both these rates are considered to be an average over long term. It is also assumed that the saving will be kept for the earmarked purposes. Your savings in the first few years is governed more by the growth in savings mentioned, i.e. first year savings has been taken at Rs30,000 per month. In the second year the same has been increased to Rs40,000 per month and from third year it is Rs50,000 per month.This has been done due to the change in your income levels.
We assume you will take a loan for constructing house and buying a car. This will also help in reducing your income tax.
Financial planning: The total corpus available for you when you retire is Rs6.42 crore. However, from this corpus you need to provide for your second child’s marriage. The corpus reaches a break-even when you start withdrawing from your principal and the interest does not suffice, when you turn 62. This corpus will then be sufficient to last till the age of 75 which is a concerning factor as it is recommended that the corpus should last at least till the age of 80. However, we have not counted the provident fund contribution and this corpus would also attain a sizeable amount by the time you retire and can help us in bridging this shortfall. Investment planning: You need to make sure that all the short-term needs are provided and this can be done by parking your investments in liquid assets. Start reducing the exposure to existing equity gradually as you need to fund your three short-term goals. In the first few years you have
many expenses and therefore have investment baskets which are liquid and are still yielding a healthy interest. Distribute the next few asset blocks in products such as sweep in deposits, fixed maturity plan, monthly income plans, hybrid equity funds.
The long-term baskets can be assigned in the equity asset class as you also need to keep a watch on the overall earnings and this is the asset class which will help you optimize the overall return of the portfolio.
Ideally look at mutual funds instead of direct stocks. Have two-three funds in the debt asset class, one fund in hybrid and another two in the equity basket. Use systematic investment plans for the same. Insurance: While you have mentioned that you are paying premium for both medical as well as life insurance, consider increasing both of them with
the increase in your responsibilities as well as age. Include your dependants in your health cover (your spouse when you get married and subsequently your children).
Things to consider: Like everyone you also have lots of ambitions in life. However please make sure you financial needs and your income match with each other. There is no harm in planning big in life, but that itself should not become a stumbling block.
Queries and views at mintmoney@livemint.com
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First Published: Mon, Feb 14 2011. 10 31 PM IST