You must always keep your goals in mind, not just market conditions, says Gaurav Mashruwala
Honesty is his best policy. Soumya Gupta saw tough days in his childhood. His family's finances were always unstable. They had to borrow money to pay for his higher education. When he first came to Mumbai from Kolkata to work, relatives supported him financially to meet his initial setting-up expenses. Yet, he never dithered from his childhood teaching of 'honesty is the best policy'. Therefore, when it came time to finalise his marriage plans with Debshree, he insisted that her family visit him and verify his living conditions. His would-be in-laws were also told that his parents were completely dependent on him. Marriage bells are going to ring in November 2009 for Soumya. The 31-year-old has a degree in pharmaceuticals and works with a leading pharmaceutical company as a scientist in Mumbai. Debshree has done her MA in political science.
WHAT IS SOUMYA SAVING FOR?
(1) His biggest anxiety is to accumulate Rs 1.75 lakhs for his marriage. (2) Over the next eight years, he wants a house worth Rs 25 lakhs. (3) Also, he wants to set aside Rs 10 lakhs to take care of his parents. (4) Over the next 20-25 years, he will need Rs 35 lakhs towards educating and getting his children married. (5) Finally, he needs Rs 1 crore for retirement after 33 years. All these are at today's rates of inflation.
WHERE IS HE TODAY?
Cash flow: His total monthly inflow is Rs 48,000. Against this, his outflow is Rs 46,500, which goes towards routine household expenses, taxes, rent, EMI for house in Kolkata where his parents are living, insurance premium and mandatory savings. The EMI is 4% of monthly inflow. Net worth: The total value of the assets is worth Rs 17.03 lakhs. This includes assets worth Rs 14.60 lakhs for self consumption. Against this, the outstanding loan is Rs 1.24 lakhs. Loans constitute about 7.32% of assets.
Contingency fund: Against mandatory expenses of Rs 35,200 (excluding monthly savings), the balance in the savings bank account is Rs 12,000. This is equivalent to about 10 days' expenses.
Health & life insurance: His employer covers him for health expenses upto Rs 3 lakhs. The total life cover is Rs 12.70 lakhs through investment-oriented polices. For this, he pays premium of Rs 1.04 lakhs every year.
Borowings: Of total loans of Rs 1.24 lakhs, the outstanding balance on the education loan is Rs 59,700, housing loan Rs 58,000 and Rs 7,000 for personal loan. Savings & investment: The balance in the savings bank is Rs 12,000 and EPF is Rs 72,000. The market value of equity funds and ULIPs is approximately Rs 1.29 lakhs. Another Rs 30,000 is given as deposit for his rented house in Mumbai.
FISCAL ANALYSIS: About 27% of income is being saved. But, unfortunately, most of it is in the form of a high-expense ULIP, which has not completed three years and hence is illiquid. The contingency fund is low. Life cover is low. Borrowing is very well within limits. The only way to fund marriage expenses is to borrow.
WAY AHEAD
Contingency fund: Liquidate equity mutual fund (even at a loss) and keep aside those funds for contingencies. Over a period of time, build up this corpus to Rs 1.05 lakhs.
Health & life insurance: Health coverage is taken care of by the employer. Enhance life cover to Rs 50 lakhs through the term plan in the next one year and, further, to Rs 75 lakhs in next two years. Loans: For the time being, continue paying EMI on loan. There is no scope for prepayment of loans. In all probability, most loans will be completed in the near future.
Planning for financial goals: The financial situation will be a little difficult for about a year. But after marriage, there will be two earning members. Also, most
loans would have been paid back and there will not be the burden of EMI.
Marriage expenses: If there is any bonus expected, then set that aside in the bank FD. Whatever is the shortfall, borrow from the employer or opt for a personal loan.
Home buying: After about a year, once most loans are settled, start an SIP in an index fund for about six years. At the time of buying a house, liquidate this amount and borrow the shortfall.
Parents: Use spouse's income to create a corpus for parents. Start another SIP in an index fund to create a corpus for parents. Continue this for about six years. Later, start shifting them into a debt instrument. At the end of eight years, the allocation should be about 80% debt and 20% equity. Plan all other long goals after the home buying is complete.
PLANNER'S EYE
The fundamental difference between investment advice and comprehensive financial planning is as follows: Investment advice aligns income to market conditions. Therefore, if the equity markets are up, funds are parked there and when interest rates go up funds are invested in fixed deposits. This does not look at goals. In the case of comprehensive financial planning, every bit of income is invested only keeping in mind financial goals. Soumya needs funds for marriage in the next six months. However, investment is in insurance polices where it cannot be withdrawn for three years. Also, last year, equity funds were bought without realizing that his fund requirement is near term. On top of it, there is an outstanding loan. Now, when markets are down, he will have to liquidate investments at loss. So, for peace of mind, always align investments to your condition and not to market conditions.
WHAT IS SOUMYA SAVING FOR?
(1) His biggest anxiety is to accumulate Rs 1.75 lakhs for his marriage. (2) Over the next eight years, he wants a house worth Rs 25 lakhs. (3) Also, he wants to set aside Rs 10 lakhs to take care of his parents. (4) Over the next 20-25 years, he will need Rs 35 lakhs towards educating and getting his children married. (5) Finally, he needs Rs 1 crore for retirement after 33 years. All these are at today's rates of inflation.
WHERE IS HE TODAY?
Cash flow: His total monthly inflow is Rs 48,000. Against this, his outflow is Rs 46,500, which goes towards routine household expenses, taxes, rent, EMI for house in Kolkata where his parents are living, insurance premium and mandatory savings. The EMI is 4% of monthly inflow. Net worth: The total value of the assets is worth Rs 17.03 lakhs. This includes assets worth Rs 14.60 lakhs for self consumption. Against this, the outstanding loan is Rs 1.24 lakhs. Loans constitute about 7.32% of assets.
Contingency fund: Against mandatory expenses of Rs 35,200 (excluding monthly savings), the balance in the savings bank account is Rs 12,000. This is equivalent to about 10 days' expenses.
Health & life insurance: His employer covers him for health expenses upto Rs 3 lakhs. The total life cover is Rs 12.70 lakhs through investment-oriented polices. For this, he pays premium of Rs 1.04 lakhs every year.
Borowings: Of total loans of Rs 1.24 lakhs, the outstanding balance on the education loan is Rs 59,700, housing loan Rs 58,000 and Rs 7,000 for personal loan. Savings & investment: The balance in the savings bank is Rs 12,000 and EPF is Rs 72,000. The market value of equity funds and ULIPs is approximately Rs 1.29 lakhs. Another Rs 30,000 is given as deposit for his rented house in Mumbai.
FISCAL ANALYSIS: About 27% of income is being saved. But, unfortunately, most of it is in the form of a high-expense ULIP, which has not completed three years and hence is illiquid. The contingency fund is low. Life cover is low. Borrowing is very well within limits. The only way to fund marriage expenses is to borrow.
WAY AHEAD
Contingency fund: Liquidate equity mutual fund (even at a loss) and keep aside those funds for contingencies. Over a period of time, build up this corpus to Rs 1.05 lakhs.
Health & life insurance: Health coverage is taken care of by the employer. Enhance life cover to Rs 50 lakhs through the term plan in the next one year and, further, to Rs 75 lakhs in next two years. Loans: For the time being, continue paying EMI on loan. There is no scope for prepayment of loans. In all probability, most loans will be completed in the near future.
Planning for financial goals: The financial situation will be a little difficult for about a year. But after marriage, there will be two earning members. Also, most
loans would have been paid back and there will not be the burden of EMI.
Marriage expenses: If there is any bonus expected, then set that aside in the bank FD. Whatever is the shortfall, borrow from the employer or opt for a personal loan.
Home buying: After about a year, once most loans are settled, start an SIP in an index fund for about six years. At the time of buying a house, liquidate this amount and borrow the shortfall.
Parents: Use spouse's income to create a corpus for parents. Start another SIP in an index fund to create a corpus for parents. Continue this for about six years. Later, start shifting them into a debt instrument. At the end of eight years, the allocation should be about 80% debt and 20% equity. Plan all other long goals after the home buying is complete.
PLANNER'S EYE
The fundamental difference between investment advice and comprehensive financial planning is as follows: Investment advice aligns income to market conditions. Therefore, if the equity markets are up, funds are parked there and when interest rates go up funds are invested in fixed deposits. This does not look at goals. In the case of comprehensive financial planning, every bit of income is invested only keeping in mind financial goals. Soumya needs funds for marriage in the next six months. However, investment is in insurance polices where it cannot be withdrawn for three years. Also, last year, equity funds were bought without realizing that his fund requirement is near term. On top of it, there is an outstanding loan. Now, when markets are down, he will have to liquidate investments at loss. So, for peace of mind, always align investments to your condition and not to market conditions.
No comments:
Post a Comment