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Have patience and carry on

Mukesh's house-purchase goal may be away, but he can achieve it over the long term

Mukesh is a government employee. He has a wife and a six-month-old child. He has to mandatorily contribute to the National Pension System (NPS). He has the following goals: child's higher education, buying a house and his retirement. Here is how he can plan his financial course.

Income Amount (₹)
Salary (Monthly) 49000
   
Expenses (Monthly) 27000
   
Savings and investments  
Mutual Funds 20000
Fixed Deposits 35427
Savings account 150000
NPS 500000
Total 705427
   
Insurance Premia  
Jeevan Shri (endowment) 51000
Health Insurance (through CGHS) 0
   
Loans/Liabilities 0
   
Assets (Plot) 1000000

What he has (Cash Flow)

  • Monthly income: Rs 49,000

What he wants (Goals)

  • Child's higher education
  • Retirement corpus
  • Buying a house

What should he do?

Emergency fund
Mukesh already has sufficient emergency funds in his savings account and fixed deposit. But he should go for a savings account with the sweep-in facility. This way he can maintain liquidity and earn higher interest.

Health insurance
Mukesh is covered under the Central Government Health Scheme. This scheme is good for costly treatments. However, it is not available in all Indian cities. Also, it doesn't provide cashless facility. So Mukesh can buy a basic family-floater cover. He can opt for ICICI Lombard or Apollo Munich Easy Health family floater plan. For a cover of Rs 2 lakh, the annual premium will range between Rs 8,000 and Rs 10,000.

Life insurance
Since his family is financially dependent on him, it is imperative for Mukesh to take life insurance. He has LIC Jeevan Shree policy. Since it is expensive and does not give good returns, he should surrender it. He can buy term insurance of Rs 1 crore. Max Life Online Term Plan, which will cost him around Rs 7,500 to Rs 8,500 annually, is a good option.

Roadmap to goals
Retirement
: Mukesh contributes Rs 4,500 to the NPS monthly. This amount is matched by the government. His contribution will increase with time, but to be conservative, we have considered this contribution to remain constant till his retirement. The return is estimated at 11 per cent (based on five-year NPS returns). He should accumulate Rs 3.4 crore in the NPS. With the current contribution in the NPS, he cannot build a corpus to maintain the same standard of living in his retirement. He will need to start a monthly SIP to bridge this gap.

Buying a house: Mukesh has a plot of land, which he plans to liquidate to buy an apartment in Delhi for his post-retirement stay. Whenever he wants to buy a house, he must liquidate the plot well before time because the procedure of selling a plot and buying a house will be time consuming.
Mukesh doesn't have enough surplus to pay the home loan EMI even if he saves on monthly rents. Hence, he can delay the house-purchase decision. For now, he can allocate towards house purchase the surplus that is left after investing for the other two goals. He should increase this allocation by 10-20 per cent annually.

Child's higher education: Mukesh wants to build a corpus for his child's engineering education 17 years later. He can earmark his existing mutual fund for this purpose. With the rest of the investable surplus, he can start a monthly SIP in our recommended funds. He should shift from equity to debt two-three years before reaching the goal.

Investments
Mukesh currently has one mutual fund, an ELSS. He can continue with that. He can do SIP in two-four of our recommended multi-cap funds, which are mentioned on the graphic.

He should ensure that his tax-saving investments, along with his life-insurance premiums and the NPS, are up to Rs 2 lakh to claim tax deduction under Sections 80C and CCD(1B).