Ghidiyals must approach their targets one at a time & invest in a disciplined manner
Praful Ghidiyal is a rare combination of youthful zeal and prudence. The 24-year-old Mumbai-based manager has started early with his financial planning, maintains a high rate of savings despite a low income, is enthusiastic about equity investment, has clarity about his goals, and has approached an adviser at the right juncture.
“My investments may not be perfect and goals not very realistic, but I am willing to sacrifice the non-priority goals if I can achieve the big ones,” says Praful. These include saving for his sister’s wedding, brother’s education, his own wedding, buying a house, travelling and retirement. While the goals may seem daunting, the good news is that he will not have to compromise on most of these after a portfolio rejig.
Praful lives with his parents, Vijay (48) and Sarojini (42), two siblings, Pradeep (17) and Mamta (21), in their own house in Mumbai. Employed as a sales development manager with an insurance company, Praful takes home a salary of Rs 17,000. His parents earn Rs 7,000 and Rs 3,000, respectively, while his sister, who works with a travel agency, earns Rs 6,000 a month. They also get Rs 800 as rent from a room they own in Mumbai.
After accounting for household and other expenses and investments, they are left with a monthly surplus of Rs 12,280. Unlike most people who shy away from equity and prefer debt instruments, Praful has nearly 32% in equity, while debt is close to nil. On the other hand, real estate occupies 66%, while gold and cash constitute the remaining 1%.
To begin with, Praful must maintain an emergency fund and have adequate insurance to deal with the unexpected. Currently, he has three insurance plans, apart from a personal accident cover of Rs 10 lakh and a term plan of Rs 50 lakh.
Both his father and sister also have personal accident covers of Rs 10 lakh each. Shiv Kukreja of Ojas Capital is of the opinion that Praful and his family are adequately insured and do not require additional cover.
However, Praful will have to surrender the ICICI Prudential Smart Kid, ICICI Prudential Life Link Super and ICICI Prudential Pension Super, which will generate a combined corpus of Rs 1.25 lakh. This will save him Rs 2,100 per month as premium, which can be used to finance the additional expenditure on health insurance.
The Ghidiyals have a family floater plan worth Rs 3 lakh. Kukreja feels that they should buy additional insurance of Rs 5 lakh, which will cost him about Rs 1,700 every month.
As for the emergency corpus, Praful can bank on his annual bonus of about Rs 1 lakh. He can invest a part of this bonus to build the contingency fund of Rs 70,000, which will suffice for three months’ expenses.
Now, Praful can plan for his other goals. Since the family’s resources are limited, he will have to adopt a step-up approach, wherein he invests only for the top priority goals now and takes up the others after his income rises. His immediate need is amassing Rs 5.6 lakh in two years for his sister’s marriage, for which he will have to invest Rs 12,000 in debt instruments, such as a recurring deposit or debt mutual funds. This amount should rise with an increase in income.
Assuming an annual growth rate of 9%, the investment is expected to generate Rs 4.5 lakh. In addition, the Rs 1.25 lakh that Praful will receive on surrendering the traditional plans should be invested in a fixed deposit and added to the wedding corpus.
Next, Praful wants to save Rs 2.6 lakh for his brother’s education. Planning for this goal will start only after he has built a corpus for his sister’s marriage. By this time, his salary and that of his parents would have risen, so they can invest Rs 17,500 either in an RD or a short-term debt fund. This will generate about Rs 2.3 lakh, and if he has surplus from his yearly bonus, he can use it to fill the gap.
Praful also wants to buy a house worth Rs 25 lakh in three years and save Rs 5 lakh for the down payment. For this, he can allocate his current SIPs of Rs 4,700 in equity mutual funds. This will generate Rs 2 lakh, while Praful can sell off their room in Mumbai to meet the shortfall of Rs 3 lakh.
Praful also needs to amass Rs 8 lakh for his own wedding in five years. For this, he can use his current balance in equity funds worth Rs 1.2 lakh and invest the yearly bonus in debt funds. Since the bonus may fluctuate, the final corpus could be affected, but Praful does not mind compromising on this goal.
Among his less important goals is a vacation for his parents after 13 years, for which he needs Rs 2 lakh. For this, he can start a monthly SIP of Rs 1,500 in an equity mutual fund after four years.
After six years, the investment will generate Rs 1.5 lakh. In the last three years, this money should be invested in debt. It is expected that by this time, his brother will also start earning and his income will help them reach this goal as well as share the EMI burden, which is expected to be around Rs 20,000-23,000.
Finally, Praful needs to build a retirement corpus of Rs 4 crore in 35 years. His EPF will contribute Rs 25 lakh on maturity. For the rest, he should start a monthly SIP of Rs 25,000 in equity mutual funds after nine years. After 23 years, this will grow to Rs 3.6 crore. In the last two years, he should invest this in an FD, which will grow to Rs 4.27 crore.
(Financial plan by – Shiv Kukreja, CFP, Founder & Managing Partner, Ojas Capital)