I am 25, single and working in Dubai. I intend to return to India after five years, and buy a house on loan. My current salary is Rs 60,000, and expenses total Rs 25,000. I invest Rs 15,000 a month in mutual funds for my retirement corpus, and another Rs 5,000 in the Public Provident Fund (PPF). I am left with a surplus of Rs 15,000, which I plan to invest in high-yield products for five years to part-fund my house. What are my investment options? How much would I need to borrow after calculating my corpus for the next five years? And what would be the equated monthly instalments (EMIs)? The current price being quoted in the area where I plan to buy a house is Rs 35-40 lakh.
Ideally it is recommended to save 20-25 per cent of one’s income. You are currently saving 33 per cent of your income, which is good. Assuming that insurance and contingencies have already been taken care of, the funds for buying a house in the next five years should be invested in hybrid funds. Hybrid funds are a mixture of debt and equity and are prudent investment options for goals that are mid term. Considering inflation, the cost of the house five years later would be Rs 50-55 lakh.
The value of the corpus created by investing regularly for buying a house will be Rs 11-12 lakh. Hence, you will have to borrow up to Rs 40 lakh. The EMI would be Rs 40,000. The assumed inflation rate is seven per cent and interest on home loan 9.75 per cent. It is acceptable if 45 per cent of your income is being used to service mortgage loans. You will also have to purchase an additional term insurance to the extent of the loan amount. Further, it is assumed that the PPF account was opened while you were a resident Indian.
I am 23 and working for the past five months. Recently, the HR department asked me to submit my investment details for tax computation. On submission, I was told I need to invest Rs 65,000 more, if I have to avail of tax benefits. What instruments should I invest in? I earn Rs 20,000 and have saved Rs 50,000 in the last five months. I have no responsibilities.
Investments should be linked to one’s goals rather than tax saving or any other external conditions. In your case, the first step should be to identify the financial goals for which money needs to be saved.
According to the Income Tax Act, 1961, an individual who pursues investments based on financial goals will get tax benefits by default.
You should first create a contingency reserve equivalent to 1.5 months of the monthly expense. Then, obtain insurance cover by way of a pure term plan only. The premium for this will be eligible for tax exemption under Section 80C of the Act. Also, obtain health insurance and avail of benefits of tax exemption under Section 80D.
Next, your focus should be on investments, aligned to your goals. For short-term goals, choose debt products like bank fixed deposits (FDs), National Savings Certificates and PPF. All of these qualify for deductions under Section 80C. For long-term goals, equity-linked savings schemes offered by mutual fund companies can be considered. These also qualify for Section 80C. So, focus on financial goals, and tax benefits will follow.
I am 27 and have been working for four years, but still do not have a proper investment plan. I have been investing Rs 5,000 a month in PPF for the last three years. I had also invested a lump sum of Rs 8,000 in an equity-linked savings scheme in early 2009 and took an endowment plan with a sum assured of Rs 5 lakh (yearly premium of Rs 25,000) last year. I had also invested Rs 40,000 in a FD two years ago in the State Bank of India’s 1,000-day deposit. I had saved six months’ salary as a contingency fund, but the fund (Rs 1.5 lakh) will have to be diverted as my father needs to buy a house in my hometown. Also, my PPF investments have also been hampered as the house will cost up to Rs 22 lakh. Further, my sister is getting married in six months and I will need the money then. How do you advise I plan all the upcoming expenses? I delayed my plans to buy a car owing to the wedding. My current income is Rs 40,000 and I have one month’s salary as a contingency fund.
The first step to a healthy financial future is prioritising your goals. This exercise will help you allocate investments to meet your ends. PPF investments are ideal for retirement. Liquidating these for goals that are immediate is not advisable. Most goals are near term, so investments should be done in debt-based instruments such as FDs, debt mutual funds etc. In both FDs and debt mutual funds, you can invest every month. To invest in an FD, start a recurring deposit. To invest regularly in debt funds, opt for a systematic investment plan. Borrowing money can also be considered to meet some of your goals.
In the absence of complete information, it is assumed that your health insurance has been taken care of. Remember that asset class equity should be chosen for goals that are seven-nine years away and debt for goals two-three years away. A mixture of debt and equity should be selected for goals four-six years away.
The writer is a certified financial planner. Send your queries to yourmoney@bsmail.in
