Pradeep Prabhakaran is a software engineer who stays with his homemaker wife and a six-month-old child in a rented house in Hyderabad. He brings in a monthly income of Rs 74,000 and after considering expenses and investment, is left with a surplus of Rs 8,709. His portfolio of Rs 28 lakh includes equity worth Rs 12.69 lakh in the form of stocks and mutual funds, debt of Rs 12.69 lakh in the form of EPF, fixed deposit and debt funds, and cash of Rs 2.65 lakh. His goals include building an emergency corpus, buying a house, saving for the child’s education and wedding, and his own retirement.
Maalde suggests that Prabhakaran first build a contingency corpus of Rs 3.54 lakh, which is equal to six months’ expenses, by allocating Rs 2.3 lakh of cash. For the remaining amount, he should save the surplus amount before buying property. This should be invested in a liquid or an ultra short term fund. To buy a house worth Rs 35 lakh in a year, he wants to make a down payment of Rs 7 lakh. This can be funded by allocating his fixed deposit, debt fund and remaining cash. For the remaining Rs 28 lakh, he can take a loan, which at 8% for 30 years, will result in an EMI of Rs 20,545.
For the child’s education goal in 18 years, he needs Rs 69 lakh and can build the amount by allocating his stocks worth Rs 9.6 lakh. For the child’s wedding in 25 years, he wants to amass Rs 54 lakh and will have to start an SIP of Rs 3,000 in a diversified equity fund. Since he doesn’t have enough surplus currently, he can do so after a rise in income. Finally, for retirement, he needs Rs 5.5 crore in 27 years. For this, he will have to assign his EPF and equity fund. Besides this, he will have to start an SIP of RS 15,000 in a diversified equity fund. This can be sourced from the surplus since he will save on rent after buying property.
How to invest for goals
* Investment for this goal to begin after a rise in income.
Annual return assumed to be 12% for equity, 8% for debt funds. Inflation assumed to be 7%.
For life insurance, he has a Ulip worth Rs 25 lakh for which he has paid a single premium. Maalde suggests he stop paying the premium for the plan, and instead buy a Rs 1 crore term plan, which will cost him Rs 1,000 a month. As for health insurance, Prabhakaran has a Rs 4 lakh family floater plan provided by his employer and has taken another Rs 4 lakh plan, for which he is paying Rs 458 a month. Maalde suggests he buy an independent Rs 10 lakh family floater plan, which will cost Rs 1,250 a month. He should also buy a Rs 25 lakh accident disability plan for himself, which will come for a monthly premium of Rs 333.
* Since premium has been paid only once and will be stopped it has not been considered in the cash flow. Premiums are indicative and could vary for different insurers.
Financial plan by Pankaaj Maalde, Certified Financial Planner
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