My First Financial Plan For ET Wealth

Family finances Section; October 15, 2012

Gopalans need to diversify to get financial plan back on track


Asset Current value

Real estate – Rs 95 lakh

FDs – Rs 5.5 lakh

Equity – Rs 1.66 lakh

Cash – Rs 30,000

Total – Rs 1.02 crore

Liabilities: Rs 19 lakh (current value)

A net worth of Rs 83 lakh would instil confidence in any investor. Yet, Gopalans’ portfolio seems to lose sheen when you realise that 86% of it is invested in real estate. Though this asset class has performed well in the past few years, it is illiquid and, hence, the family would do well to diversify in equity and debt.

Currently, debt comprises a meagre 10.46% of the portfolio, while equity is negligible at 3.36%. “I have always preferred real estate, but now I feel I should look at other investment instruments as well,” says Gopalan. The good news is that a calculated rejig of the portfolio will help the family achieve its goals smoothly.

Ramesh Gopalan, 47, lives with his 42-year-old wife, Uma, in Chennai, and the couple have a 14-year-old son, Rohit. Ramesh takes home a salary of Rs 45,000 as a government employee, while Uma, who works in the shipping industry, earns a monthly income of Rs 35,000. They also get a rental income of Rs 13,750 from their house in Chennai.

On the other hand, their cash outflow every month is Rs 51,775, of which Rs 20,610 is incurred as EMI for a home loan. The Gopalans bought a house in Chennai in 2010, for which they took a loan of Rs 20 lakh for 15 years, and which provides them with the rental income. Another Rs 15,000 is incurred as household expenses, while Rohit’s education costs about Rs 4,000 every month. They also spend Rs 2,365 every month on insurance. Given the surplus they have, planning for goals will not be a tough task for the couple.

The family has kept its goals simple. Given that the couple is just 13 years from retirement, they plan to use their surplus to invest only for key goals, which include Rohit’s higher education, his marriage, and their own retirement corpus. For Rohit’s education, the Gopalans will require a corpus of Rs 26 lakh in four years. Shiv Kukreja, founder of Ojas Capital, suggests that they allocate the current fixed deposit investment of Rs 4 lakh towards this goal, which is expected to grow to Rs 5.4 lakh in the next four years. To meet the shortfall of Rs 20 lakh, the couple should start a monthly SIP of Rs 42,500 in debt mutual funds.

This investment will generate the desired amount within the set time frame, assuming a growth rate of 9%.

Next, the Gopalans need to plan for Rohit’s marriage, for which they need Rs 20 lakh in nine years. After investing for his education, they are left with a surplus of Rs 9,275 per month. However, this is insufficient and the couple need to increase it to Rs 15,100 next year. An 8% rise in salary should help them take care of the investment. This amount is expected to generate about Rs 16 lakh in four years, assuming a growth rate of 12%. In March 2016, they must reinvest this Rs 16 lakh in fixed deposits so that it is shielded from volatility. In the remaining six years, the investment of Rs 16 lakh will grow to Rs 20 lakh, assuming a growth rate of 9%.

Finally, the Gopalans need to plan for retirement. In 13 years, they require a corpus of Rs 2.5 crore to meet the post-retirement expenses. For this goal, the EPF and PPF investment will generate Rs 25 lakh, with Rs 21 lakh coming from EPF and Rs 4 lakh from PPF. For the remaining amount, they need to start an SIP, but presently, they are not left with any surplus to invest for this goal. Hence, they must wait till 2014 to begin the investment for this goal. They will have to start a monthly SIP of Rs 7,000 in equity mutual funds. This investment will have to be increased over the years to enable them to generate the required sufficient corpus.

In 2016, the Gopalans will achieve the goal of funding Rohit’s education. This will release Rs 42,500, which can be directed towards the retirement goal. This, coupled with a rise in salary, will enable them to invest Rs 70,000 for retirement, assuming an 8% rise in salary every year. In this manner, they can increase the SIP amount every year, which will help them generate Rs 1.79 crore in 10 years, assuming a growth rate of 12%. In the remaining three years, this amount should be invested in FDs to shield it from volatility. Assuming a growth rate of 9%, the sum will grow to Rs 2.47 crore. The Gopalans are still left with his property in Chennai, which hasn’t been allocated towards any goal. Kukreja is of the opinion that this property be gifted to Rohit for his use in the future.

As for insurance, the Gopalans have done well in securing their lives. At present, both Ramesh and Uma have term plans of Rs 50 lakh each. However, health insurance is inadequate as they only have a family floater plan of Rs 2 lakh. Kukreja suggests that they raise this amount to at least Rs 4 lakh. This will increase the premium by Rs 382 every month, for which Gopalan can rely on his cash balance for a year, after which the rise in salary will take care of this need.

Financial plan by Shiv Kukreja, CFP, Founder & Managing Partner, Ojas Capital

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