Madhu (38) is a single mother of a five-year-old girl. She works with a private company. Her monthly take-home salary is Rs 1.5 lakh. She lives in her own house and has accumulated around Rs 85 lakh. This amount is spread across fixed deposits, equity funds, stocks, Public Provident Fund (PPF) and Sukanya Samriddhi Yojana. Besides taking care of her retirement and daughter's education, Madhu plans to go on a vacation abroad and buy a new car. She would also need some money in a couple of years for the general maintenance of her house. She wants us to draw a financial road map for her, keeping in mind all these goals.
Madhu's monthly expenditure is Rs 80,000. The ideal emergency corpus should be equivalent to six months of your expenses. This works out to be Rs 4.8 lakh in her case. Madhu has Rs 30 lakh in bank fixed deposits. A part of those can be used for creating the emergency fund. However, instead of maintaining the emergency corpus purely in fixed deposits, a combination of sweep-in fixed deposit and short-duration debt funds should be used. Doing so will help her earn higher returns without compromising on liquidity.
Action: Use a combination of sweep-in fixed deposit and short-duration debt funds to maintain your emergency corpus.
Madhu has a health cover of Rs 15 lakh, which also covers her daughter. It is sufficient for both of them. However, she does not have a life insurance. An adequate life cover is essential for anyone with a financial dependent. Madhu's five-year-old daughter is dependent on her. A life cover of Rs 1.5 crore would be sufficient to meet her daughter's living expenses for the next 20 years, along with the cost of her higher education, in her absence.
Term plans are the best form of life insurance as they provide you a high cover at a low cost. A term cover of Rs 1.5 crore would cost Madhu Rs 13,000 to Rs 15,000 per annum. She should stay away from buying hybrid products which are a mixture of insurance and investment. Such products are expensive. Moreover, they provide neither sufficient insurance nor good returns.
Action: Buy an adequate life cover.
Daughter's higher education
Madhu wants to send her daughter abroad for higher education. She estimates the total cost to be around Rs 1 crore in today's value. This amount would swell to Rs 2.52 crore at an inflation rate of 8 per cent in 12 years, when it would be required. Madhu has already accumulated a sum of Rs 40 lakh in equities, which should fetch her Rs 1.56 crore, assuming a return of 12 per cent per annum. For the balance, she can invest Rs 25 lakh more in equities.
Madhu may use a part of her money in fixed deposits for this purpose as equities fetch far more returns than fixed deposits over a long period of time. However, the investment should be spread over a period of 18 months to two years and should not be invested at one go. Spreading your investment in equity over a period of time helps to reduce the risk of catching a market high.
Madhu recently started investing in the Sukanya Samriddhi Yojana (SSY) for her daughter's education and has accumulated a few lakhs in it. Though the SSY offers guaranteed returns, it may not be the best option to invest for your child's higher education. Equity funds offer much higher returns over a long period of time as compared to the average 8-9 per cent given by the SSY.
Also, Madhu won't need the whole amount for her daughter's higher education at one go. The requirement would be spread over a period of three to four years. She should start withdrawing the required amount systematically 12-18 months before the goal falls due. This will reduce the risk of exiting at a market low.
Action: Earmark Rs 65 lakh in equity funds for your daughter's higher education.
Given Madhu's current lifestyle and monthly expenses, a retirement corpus of Rs 11.71 crore would be required to meet the inflation-adjusted expenses during her post-retirement years. We have assumed a life expectancy of 85 years. Madhu intends to work for another 22-25 years. A monthly SIP of Rs 50,000 in equity funds (assuming a 12 per cent return) would be sufficient to accumulate the required corpus. However, the contribution should be increased every year by 10 per cent. This can be easily managed with annual increments.
Action: Invest Rs 50,000 every month in equity funds.
Madhu wants to buy a new high-end SUV worth Rs 30 lakh in another two to three years. She would also need around Rs 5 lakh every five to seven years time for the general maintenance of her house.
After taking care of the retirement and the life-insurance premium, Madhu would be left with a monthly surplus of around Rs 18,000. Investing around Rs 8,000 to Rs 9,000 in a short-duration debt fund every month would solve the requirement of her house maintenance. However, buying a car worth Rs 30 lakh may derail other important goals like her retirement and daughter's higher education. Hence, buying a less expensive car would be wise. Alternatively, she should bring down her monthly expenses and revise other goal amounts. This will require her to critically assess her lifestyle.
The monthly surplus of Rs 10,000 would allow her to accumulate Rs 3.6 lakh in three years. This amount can be used to meet around 40 to 50 per cent of the cost of a small car. The balance can be financed. It should not be a problem to service the EMIs from the available surplus.
Going for a vacation abroad is another goal on her list but it seems difficult for her to achieve it due to limited resources. She will have to decide between the car or a vacation abroad. The other alternative could be to wait for the maturity of her PPF account.
Action: Re-consider your goal to purchase a high-end SUV. Make a choice between the car and the vacation.
Madhu has accumulated a corpus of Rs 40 lakh in stocks and mutual funds. You should invest directly in stocks only if you have the time required for research and have the necessary skill. Otherwise, it's prudent to take the equity route through mutual funds. Given that Madhu's goal are at least 10 or 20 years away, she should invest in three to four good multi-cap funds. These funds invest in companies of all sizes across sectors.
Madhu has around Rs 12 lakh in the PPF. Though the PPF offers guaranteed returns, it does not give you inflation-beating returns. She may continue to keep the account operative by depositing the minimum amount of Rs 500 every year. On maturity, she can move the PPF corpus to equity funds for higher returns. Again, she should do it over six-12 months. Madhu's PPF account is due for maturity in 2026 and it won't be possible for her to withdraw the accumulated balance completely before that.
Action: Invest in three to four good multi-cap funds.
This story was first published in February 2019.