Once insurances are in order, you can start creating a corpus for various goals
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I am 27 years old and my take-home salary is Rs1.2 lakh a month. I will get married this year and wish arrange my finances. Till now, I have invested Rs60,000 in ELSS and I have one LIC policy. Post-wedding, my wife and I can save up to Rs90,000 every month. Please suggest some schemes to invest in, build an emergency corpus, get insurance, and other steps. Short-term goals are buying a car, and a vacation abroad and long-term goals are child’s education and my retirement.
You should first put insurances in order. As after marriage you will have responsibility, you should have a term life insurance. You can target to have a life cover of 8-10 times of your annual income. And along with life insurance, also go for health insurance. Once the insurances are in order, start creating a corpus for various goals. The immediate need of funds being your marriage followed by short-term needs of car and vacation. The short-term goal corpus needs to be invested in a secured asset class. Since the marriage goal is immediate, within the year, you can invest for it in an ultra short-term fund, and the money can be used as and when you need the funds for marriage expenses. For your other short-term goals—car and vacation—you can start saving in a short-term debt fund and for part of the goals which are 2-3 years away, also consider equity albeit in a small percentage and then you can consider equity savings fund category, which also brings tax efficiency. Since the long-term goals are really long term—20-25 years away—do look at equity as an asset class to deliver a superior inflation-adjusted return. However, also understand your risk profile, i.e., how much risk you can take, your risk appetite. Do consider mutual funds and create a portfolio mix of large-cap, multi-cap and mid-cap equity funds.
I want to set aside money to buy a home. The flat costs Rs70 lakh. I have savings of Rs30 lakh. I also have investments worth Rs25 lakh in mutual funds and stocks, and my wife’s gold is worth Rs32 lakh approximately. If I liquidate all of this, I can easily buy this home and furnish it with another Rs6 lakh. Is it wise to do so or should I consider a home loan of Rs30 lakh? I earn Rs1.4 lakh a month and save about Rs30,000 (which I can push to Rs40,000). Please advise.
—Name withheld on request
As you plan to invest in a residential house for your own residential purposes, it is recommended that you buy a house which is ready to move in. It is assumed that you are currently staying in a rented accommodation. Also, it is recommended that you consider opting for a housing loan and as rightly mentioned look at Rs30 lakh as the borrowing amount. This amount will ensure that you are able to exhaust the current ceiling of interest (Rs2 lakh) on housing loan benefit as per the income tax Act. Hence, the cost of borrowing net of taxation benefits will be much lower versus the actual cost of borrowing.
However, you will also have to ensure that the current assets being held are generating a return higher than the cost of borrowing. If not, then it will be prudent to use these to take a lesser amount of loan or to repay the debt. So it is good to review your mutual fund portfolio and weed out the underperformers as well as reduce the debt or bonds portfolio. This, along with the investment in gold (which for the part is done purely from an investment perspective) needs to be also pruned. Lastly, you need to push your savings to the maximum of your capacity since, going forward, you will also be paying the monthly EMI on the housing loan.
Surya Bhatia is managing partner of Asset Managers. Queries and views at email@example.com.