I am 33, married and have a four-year-old daughter. I am the only earning member of my family and earn Rs 45,000 monthly. I live in a rented apartment (monthly rent = Rs 12,000). My other monthly expenses amount to Rs 15,000. My investments are in mutual funds (Rs 5,000) and the Public Provident Fund (Rs 5,000). My employer covers me and my family under a group health insurance. I am left with an investible surplus of Rs 8,000 every month. My immediate goals are sponsoring my daughter’s education in the next two years (estimated cost = Rs 30,000 yearly) and buying a car, for which I will take a loan of Rs 4 lakh. How should I plan my investments and save for my goals?
We have assumed that your daughter’s education will start in 2012 and end in 2022, that is, for 10 years. The cost of the goal will inflate at six per cent. The goal is able to generate 8.24 per cent internal rate of return. You need to start a systematic investment plan (SIP) of Rs 5,000 a month. The SIP amount will increase by 10 per cent, with increase in your income. It means the amount of investment will increase every year by 10 per cent.
We have assumed progressive asset allocation, where investment in debt funds increases every year with the goal approaching. A lump sum investment of Rs 2.85 lakh would be required, if you do not want to take the SIP route. But we recommend you to start an SIP, as it gives benefits of cost averaging and compounding.
You plan to buy a car worth Rs 4 lakh, which we assume will be after two years. The cost of the car after two years will be Rs 4.84 lakh. Assuming you take a loan of Rs 4 lakh at nine per cent interest rate for a five-year term, the equated monthly instalment would be Rs 8,500.
You also need to plan your retirement corpus. Assuming you retire at 58 and that your current expenses are Rs 15,000, the retirement corpus at 58 would be Rs 1.5 crore. The monthly investment for this goal will be Rs 8,000. An aggressive asset allocation, where the equity and debt ratio is 80:20, is recommended, since the time horizon of the goal is long.
I have an investible surplus of Rs 15,000 every month. I want to invest this amount for my son’s higher education (15 years away). Where can I invest the money to get the best returns? Should I consider unit-linked insurance plans (Ulips) for children, as these are considered more investor friendly after the recent regulatory changes? Or, are mutual funds preferable? How do I choose?
It is good that you have identified your goal and you want to invest accordingly. It is recommended that you identify the cost associated with your son’s higher education. Considering the fees scenario, we have assumed the education cost will be Rs 10 lakh. After 15 years, the cost will be Rs 24 lakh at six per cent inflation.
You should follow a progressive asset allocation, where investment in equity and debt is maintained at a fixed percentage for a year and proportion of debt increases as the goal approaches. It means that, as the goal comes near, you become more conservative by making sure you invest in debt schemes, as the risk component is less in these schemes compared to equity schemes. When the goal period is more than seven years, we recommend you adopt an aggressive asset allocation where the ratio of equity to debt is 80:20. To begin with, you can invest in equity-diversified mutual funds — HDFC Top 200, DSP BR Equity, Reliance Growth and Birla Sun Life Midcap.
The regulatory authority has made some changes associated with Ulips. The product has become more transparent. Investing in Ulips also should be made after articulating your goals. But we recommend that you start with mutual funds because in Ulips the premium that you have paid is not invested totally. Also, there are charges associated with Ulips such as policy administration charges, fund management charges and mortality charges.
My wife recently inherited a plot near Nagpur. We do not travel to that region often and won’t be able to maintain the property. I am planning to sell it off at Rs 25 lakh. I want to invest the amount in real estate. I can invest an additional Rs 5-10 lakh, along with this amount. Is buying a property the only way to invest in real estate? I have heard about real estate portfolio management services (PMS). Can I consider these? What are the pros and cons of these investments?
Real estate PMS deals are picking up pace as high networth individuals look beyond equities. Regarding real estate PMS, there are a few asset management companies such as HDFC, Birla Sun Life and ICICI Prudential who offer the service.
The minimum ticket size is generally Rs 25 lakh. It is a close-ended fund with a lock-in period of five-seven years. PMS aims to generate 18-20 per cent internal rate of return, but there is no guarantee. PMS that were launched in 2008 and focused on commercial space did not perform well. Besides, there are fund management charges of 2-2.5 per cent. Hence, we recommend that since your knowledge about investing in real estate through buying property is good, you opt for a purchase of physical property. You can purchase the property in an area where you are residing. Thus, you can also monitor the property regularly.
The writer is founder and CEO, Ffreedom Financial Planners. Send your queries to yourmoney@bsmail.in
