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First things first

Raj wants to buy a second home, but this may compromise on other non-negotiable goals

First things first

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Raj and his wife (both 32 years of age) are both working. They are expecting a child soon. Their financial goals are the child's education and wedding, buying a car and another house, and their own retirement. Here is a financial plan for them.

Emergency corpus
Raj should set aside an emergency corpus equivalent to six months' expenditure. Raj's monthly household expenditure is Rs 50,000. So his emergency corpus adds up to Rs 3,00,000. He currently has Rs 2,00,000 in his bank account.

So he should set aside another Rs 1 lakh for the emergency corpus. He can keep this amount in a combination of cash, savings account with a sweep-in facility and liquid funds. This arrangement will ensure both easy access and higher returns.

Health insurance
Currently, Raj does not have health insurance. A medical emergency can seriously derail one's financial prospects. Hence, he must buy a family-floater health cover of about Rs 5 lakh sum insured, covering him and his wife. His premium should be around Rs 10,000-12,000. Health-insurance premiums are exempt from income tax under Section 80D.

Term insurance
Raj currently has term insurance worth Rs 50 lakh. This may not be sufficient. A good strategy for Raj would be to reduce the duration of his term insurance whilst increasing its coverage as his home-loan EMI will reduce over time and his savings will build up. He will be able to get a life cover of about Rs 1.20 crore for a 10-year timeframe at Rs 8,000-10,000 per annum.

Considering that their goals depend on the income of Raj's wife also, Raj can also consider term insurance for her. A cover of Rs 50 lakh for a 10-year term will cost around Rs 5,000 per annum.

Car purchase
For his short-term goal of buying a car, he can start an SIP in a good liquid or ultra-short duration fund. Alternatively, he may choose to use a part of his equity accumulations for this. However, money from his equity funds should be moved out systematically over a period of time.

House purchase
Raj wants to buy a house other than the one he is currently living and whose EMI he has been paying. The down payment on this new house will be about Rs 60 lakh. He plans to accumulate this capital in the next five years. He doesn't want to sell his existing property to fund the purchase of the new one.

Buying a new house with his savings will severely impact his other non-negotiable goals like his retirement. Though he doesn't want to buy the new property by selling his existing one, that still remains the most sensible option.

We don't recommend real estate as an investment option as its returns and transparency are dwarfed by the returns from and transparency of equities. We recommend buying just one house - the one in which a person plans to live.

Child's education and wedding
The future values of the amounts needed for his kid's education in 22 years and his kid's wedding in 27 years are Rs 1.61 crore and Rs 2.95 crore, respectively. Raj says that he can increase his SIP by 20 per cent per annum.

An SIP of Rs 4,200 per month, increased by 20 per cent yearly, over the next 27 years in diversified equity funds can fund his child's education and wedding.

Retirement
Raj plans to retire in 28 years. The future value of his retirement corpus works out to Rs 14.8 crore.

  • He should do a monthly SIP of Rs 7,000, growing at 20 per cent yearly, in diversified equity funds.
  • However, since expenses tend to increase with age, it's better if he budgets for an SIP of Rs 10,000 per month to meet this goal.

Funds
Raj has invested in the direct plans of three equity funds which includes a multi-cap, mid-cap and a small-cap fund. Though his portfolio is tilted towards mid- and small-cap funds, given his long time frame, he will be able to withstand short to medium term volatility in them. His home-loan repayments use up his 80C deduction limit. Hence, he need not invest in a tax-saving fund.