Saving Rs77,000 a month can give you more than saving Rs1.1 lakh a month

The savings for your goals need to start early in life to create inflation-adjusted returns, and this will surely require allocation to risk assets

I and 43 years old and have 2 daughters in classes VII and IV. My annual income is about Rs35 lakh. How much do you suggest I should have for their higher education, keeping inflation in consideration?

—Name withheld on request

The corpus required for education will be dependent on the kind of education you want to provide. It could mean that after their schooling, you could either want them to study in the country or you may want to send them overseas for higher education. It could also be that you want them to graduate from India and do their postgraduation abroad. And yes, as far as education is concerned, the goal is highly variable as the targeted amount will change as the child grows, which brings more clarity on the expenses to be incurred. You also need to be careful as the corpus needs to be inflation-adjusted and more importantly, inflation linked to the education industry. While there are no benchmarks available for education inflation, you need to build some assumptions that are to be reviewed periodically. Typically, in the current scenario, you can assume the education inflation to be around 12%, which is much higher than the consumer price index (CPI) and hence requires extra effort on portfolio construction. This implies that the savings for this goal need to start early in the children’s life, to create adjusted returns, as this will surely require allocation to risk assets; else the savings rate needs to increase in case you are starting late in child’s life.

So, if we assume that the need of children’s education corpus is Rs50 lakh for each child at today’s value, and is required when the child turns 18 years and assuming the growth rate to be same as inflation rate of 12%, the targeted corpus becomes Rs88.11 lakh for the elder daughter—which requires a savings of Rs1.1 lakh per month for the next 5 years. The targeted corpus becomes Rs1.24 crore for the second daughter, where all else remaining same, the required savings required would be Rs77,000 per month.

I am 29 years old, married, and have one daughter. My monthly income is about Rs40,000 per month. Can you advise where I should invest my money for better returns?

—Anmoldeep Singh

It is not always about better returns. A little planning would help in optimising your returns. You are young, married and with one daughter. Do a cash flow analysis to understand your savings potential on a regular basis. And these savings are to be invested on a monthly basis. The said savings are to be further divided in short-term and long-term corpus or goals, the way you prefer it.

The short-term corpus can be invested in bank recurring fixed deposits or short-term debt funds. And the long-term corpus can be invested in equity asset class—balanced, large-cap, multi-cap are the categories within mutual funds where you can start monthly savings via SIPs.

I wish to restructure my portfolio to make it more tax efficient and goal oriented, and have comfortable liquidity with modest returns. The only critical illness and mediclaim covers I have are employer-provided. Please suggest some good schemes for it. I also want to purchase a house and have a good retirement corpus. I want to know what to do for retirement planning along with current investment of NPS? The need of self-consumption of my property will not be there before retirement (age 60). So I am confused about what is the correct time to buy a house as I will not use it now. Please also advise on how to switch from fixed deposits to mutual funds, considering that there is talk of a bond bubble and fears of erosion of principal if that bubble bursts.

—Aman Ramani

Let’s start with insurance. Life insurance: you already have term insurance protection, which is adequate. And this is when currently you don’t have any dependents. We are assuming your parents are not dependent on you. Once you are married and have dependents, that should be the time to consider re-evaluating your life insurance to ensure future protection of goals. Going forward, as a thumb rule, you can assume 6-8 times of annual income to be your insurance cover.

For health insurance, while your employer has provided a cover, the sum assured needs to be reviewed and increased. Also, do check whether there is an option of porting insurance. Which means, can you transfer the insurance in your personal capacity after you leave the current employment? It is recommended that you should have a separate medical cover for yourself and dependents, which can be increased gradually to match the healthcare-cost inflation rate. And critical insurance can be added along with your existing insurances as a rider or also as a separate policy.

About your financial goals, you have rightly highlighted the need of house after your retirement, which is 32 years away. To invest in real estate for personal usage, which is few decades away, may not be the right strategy and then comes the difficulty to decide where to buy, as the place you want to stay after retirement cannot be predicted now. Plus, the age of the property is also a consideration. If you buy a property now, the building would get old when you need a few decades down the line. It may be contemporary now but will not have the contemporary amenities when you will need to stay in it.

At the same time, to provide for the inflation and the growth rate of real estate, the savings need to be converted into investments to create a corpus for the purchase of house property. We have not factored inheritance from family over here. The same along with your retirement corpus are the two broad financial goals for that you need to start investing. And as both the goals are long term, you need to create an asset allocation that has a higher equity exposure. But with modest return expectations, you may want to reduce your risk exposure but do take enough to provide for an inflation-adjusted return. At the same time, you need to realise that your Public Provident Fund (PPF) and National Pension Scheme (NPS) exposure are predominantly safe asset class. (In NPS, you do have an option to take equity exposure up to 50%). Increasing your risk appetite over a period of time will also help in generating a higher degree of efficiency for long-term investment.

Your income being secured should help you in starting monthly investment and where a systematic investment plan (SIP) is the best way to start a disciplined investment structure. Create a portfolio of debt and equity and when you do asset allocation, do consider your existing contribution in both PPF and NPS. Combination of debt funds with both short-term and long-term strategy and equity funds of large-cap, multi-cap including balanced funds should be a good mix. You also need to convert your fixed deposits to debt mutual funds and there you can consider short term debt funds.

Surya Bhatia is managing partner at Asset Managers.

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