BackIt’s good to teach children the concept of saving
Children should also be taught the difference between savings and investment, and a good place to start the latter is recurring deposits
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I am 40 years old. I have recently started investing in mutual funds for the long term (15-20 years) with a few goals in mind. For retirement and wealth generation (Reliance-Small Cap fund, direct plan; Rs15,000); and daughter’s education and marriage (SBI Bluechip Large Cap fund; Rs15,000). If needed, I will shift these to a balanced fund after 10-15 years. I also have Rs5,000 SIP in L&T Tax Advantage fund direct plan. Apart from these, there is Rs2 lakh in fixed deposit (FD), Rs2.5 lakh in PPF and Rs2.8 lakh in PF. I have ancestral land (2 acres) in a good locality. I have term insurance of Rs70 lakh and Rs63 lakh coverage from the employer under group insurance. There is survivor benefit for my daughter (4 years old). My wife is no more. I have Rs10 lakh health insurance, and Rs2 lakh health cover for my parents.
I have a home loan of Rs18.7 lakh (EMI Rs18,200), and I get net rental income of Rs12,000. My rent is Rs10,000. My salary is Rs84,000 per month, which is likely to increase to Rs1.2 lakh in a year or two. My other monthly expenses are Rs20,000.
I want to close the home loan and buy another property (land) after selling the house. I also want to buy a car in 2019. My parents’ retirement funds are in FDs, from which an SIP of Rs5,000 can be created. Please advise.—Name withheld
Let’s start with your insurances. Your life insurance is in order as you have seven times your annual income as a term plan and you have a group insurance provided by your employer. Your medical insurance is also in order. However, try to increase the sum assured for your parents.
For achieving your financial goals, assuming your SIP in tax saving fund is also part of your retirement and wealth creation, the total savings per month is Rs15,000 and Rs5,000 per month. This means a total of Rs2.40 lakh per annum. In 20 years, the principal corpus becomes Rs48 lakh and at 15% growth rate, the corpus becomes Rs3 crore. Likewise for your daughter’s education and marriage with the current savings of Rs15, 000 per month and for 20 years, the principal corpus becomes Rs36 lakh and with a growth rate of 12%, the corpus becomes Rs1.50 crore. And this is when we have not added any further increment to savings. It is assumed you will be saving a higher amount every year as your income increases. The same can be used to counter inflation as the above amounts are of today’s value and not inflation adjusted.
In the funds selection, you have picked up large cap, tax saving and mid cap funds. It will be good to add a multi-cap fund to your portfolio to create a diversified equity portfolio. Your other investments are in order. You can consider FD as your emergency corpus and in that case you can consider ultra short-term debt fund in lieu of bank deposits to increase tax efficiency. For your parents, you can start an SIP in a balanced or large-cap fund.
On the housing front, prima facie you have your own property but are staying on rent. You are allowed to set off the interest on housing loan against your rental income (subject to provisions of income tax) and if that is the case, you can continue with the housing loan as the borrowing cost net of taxes is low.
For the new land purchase, it is better you decide considering it as a pure investment decision and only if you believe that buying land would deliver superior returns i.e. equal to more than your other financial assets.
My son is 15 years old and is earning Rs2,000 a month by giving computer classes to some elderly neighbours. Where should he save? —Czaee Singh
It is encouraging to hear that your son is helping elderly neighbours to understand the usage of computer and in the process also earning pocket money. You should use this opportunity to help him understand the value and importance of money and help him cultivate the habit of saving.
Savings can be started in something as simple as a bank recurring deposit (RD). As he is earning a monthly income, it is prudent that the same is saved on a regular basis and that’s why an RD is recommended where every month a fixed amount is debited from the bank account to a bank fixed deposit. You should also teach him the difference between saving and investment as money sitting idle in a savings bank account is not an investment. Also, it will be good if he is allowed to spend some part of his earnings by creating small goals so that he remains interested and participates in the discussion of saving and investment.
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