Factor in inflation when saving for future financial goals

Your investment should be based on when you need funds for your financial goal, and after considering the taxation impact


Me and my wife’s total monthly income is Rs.2 lakh and we own a house in Delhi. I will be retiring in a few months and my wife in another 2 years. After retirement, our income would be Rs.1 lakh. Currently, our monthly expense is Rs.50,000, including a Rs.20,000 equated monthly instalment (EMI) for our daughter’s education loan. We have savings in Public Provident Fund (PPF) and fixed deposits (FDs), apart from systematic investment plans (SIPs). On retirement, I will get a lump sum of around Rs.25 lakh. We have two goals—our daughter’s wedding, with a budget of Rs.20 lakh, and once my wife retires, we plan to travel over the next 10 years after that. How should I go about achieving these goals?

—Rakesh Sinha

Your goals are the following—daughter’s marriage, travelling and retirement. You could also add a contingency or emergency fund to your overall goals. You should also target to pay off the educational loan over the next two years.

It appears prima facie with the corpus you receive on retirement, you would be able to meet your daughter’s marriage expenses and, in fact, a part of the corpus may even be saved.

The post-retirement income may suffice for retirement expenses, including those related to travel, as there is no more of EMI to be paid for the educational loan. If we consider actual numbers, expenses of Rs.30,000 a month and considering Rs.20,000 as monthly average for travelling expenses, it will still leave you with enough corpus. Also, you have an existing corpus comprising of PPF, FD and SIP.

However, these estimates do not incorporate inflation. An expense of Rs.50,000 with inflation will turn into Rs.1 lakh in eight years assuming an average inflation rate of 8%. In case the inflation rate is 9%, it doubles. Hence, correspondingly, if the income of Rs.1 lakh does not increase in the same percentage or higher, then you would have to start using your existing corpus. If that is not doable, then your savings should be invested to provide inflation-adjusted return.

Your investment should be based on when you need funds for the goal of daughter’s marriage, and after considering the taxation impact. You could consider mutual funds for both debt and equity allocation. If your goal is over three years away, debt portfolio would also become tax efficient. Consider equity as an asset class if your goal still has 5 years or more to go. But equity should be restricted to 30-40%. For less than 5 years, exposure to equity should be reduced as this asset class carries an inherent risk and is also volatile.

As you come closer to your goal, start withdrawing the funds from equity and move to safer asset classes like liquid and ultra short-term debt funds. Create a mix in the debt portfolio—ultra short-term funds for contingency corpus and short-term funds. For the equity portfolio, consider a mix of large-cap, multi-cap and balanced funds.

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