The second webinar of our three-part series on financial independence focused on financial planning for young parents. Moderated by KS Rao, Head - Investor Education, Aditya Birla Sun Life AMC, the webinar presented the views of Dhirendra Kumar, CEO, Value Research and Mahesh Patil, Co-Chief Investment Officer, Aditya Birla Sun Life AMC. Here are the edited excerpts.
KS Rao: Dhirendra, starting a family often brings a point of inflection in the finances. What would be your advice for a young couple to start with?
Dhirendra: This is the phase when most people get concerned about their finances. You need to think carefully, as your circumstances are very opposite. Your income is low but your needs are phenomenal. At the same time, you are young. So, you also want to have fun. You'll be tempted to borrow to buy a car or other household stuff using easy EMIs.
But this can derail your investment habits. So, at this stage, you should be careful about the hierarchy of things.Ensure that you have an adequate emergency fund, the term insurance for the financially dependent and sufficient health insurance for all the members of your family. Besides, it is also important to get into the habit of regular investing. Even if you are able to spare a small amount, invest it.
KS Rao: Thanks Dhirendra. Mahesh, when I meet young couples, most of them say that they started investing in equity around two years back but their investments have not done so well. So, what would be your advice here? Should they change their asset allocation?
Mahesh: I think what is important here is how much time you are in the market. Depending on the market and economic cycle, market returns will be flattish at times and sometimes,negative for even two or three years. And that's why we always suggest that you should start as early as possible. You should be regular with your investments and stay invested for long. It will help you capture the market at various points.
When I go back and look over the last 25 years, there have been periods where we have seen markets correcting by 20, 30, 40 or even 50 per cent. People who remained invested with a longer-term perspective now look at those sharp corrections only as blips. But the worst thing is that people tend to get out of the market in such phases and pull out their investments. That is the phase where you really need to have the courage to remain invested.
But even for a longer time frame, it is important that you split your investments over a period of time, at least six months, as you don't know how the market would behave in the short term. And if you invest a lump-sum amount, even if it is meant for long-term, short-term volatility may put you under unnecessary pressure.
KS Rao: Thanks Mahesh. Coming back to you Dhirendra, I have noticed that almost every young couple has the goal of buying own house. How should they go about it?
Dhirendra: Everybody should have a house to live in. It's not an investment but something that you are buying to live in. Buying your own house has certain advantages. You save on the rent, get tax-benefits if you opt for the loan and build an asset. Home loans are available at relatively low costs. For an individual, no other loan is justified except the home loan because of these benefits. While opting for a home loan, always make sure that not more than one-third of your family income is going towards the repayment. Many people stretch their budget while buying a house and compromise on investing for other essential goals. That is not advisable. So, you should ensure that the EMI is not more than one-third of your combined income.
Also, you should make sure that you are buying a house and not a promise. This risk prevails more prominently in North India. Many big builders are in jail. They promise you something, take the money and then fail to deliver. So, it's better to buy something where you can live instead of putting your money in a promise, since the ticket size is huge. But don't avoid it because of this reason. Just be extra cautious.
KS Rao: That is indeed good advice. Mahesh, I was reading one of your articles where you said that by postponing your purchase of first house and investing the money in equity, one could buy many houses later. That sounded really interesting. What was that?
Mahesh: So I think, it all boils down to understanding what each asset class has given. Historically, last 15 to 30 years, real estate has given a return on average, 9-10 per cent. On the other hand, equities have given around 14 per cent. A beautifully actively managed fund have given more. So that is a long-term bid on what equities can deliver. If you compound that extra return over a long period of time, the resulting number would be magical. So, maybe, instead of buying your house initially, live on rent and keep investing the surplus in equity. Start early to benefit from compounding. Once the wealth compounds, you would probably have much more money to buy more than one house. That's one way to look at it.
KS Rao: The other most common goal for a young couple is to save for their child's higher education? How should one proceed?
Dhirendra: It's very difficult to plan as education costs vary dramatically. Also, you don't know which way the child will move. One should err on the side of caution. Being prepared for a little extra won't hurt you. If you have a period of 15-20 years, just invest in equity and be with it. And I would say that many people think that they really have to take care of their child's education. I would say that provide him/her with 20 per cent of the very expensive education. And then, encourage him to take education loans. They are very cheap and I feel that it will also drive the child to be more financially responsible.
KS Rao: Thanks Dhirendra. Mahesh, for the child's education, do you prefer equity fund or a hybrid fund?
Mahesh: It all depends on the time horizon. If you have enough time, say the child is just born and you are investing for his college, which is 15-20 years away, you can probably go with equity because the intermittent volatility won't matter. Besides,equity would obviously give you larger returns there. But not everything starts early. You plan for your kid's education at different points of time so that you start planning for education at different points in time. In that case, I would say the hybrid fund would probably make more sense. In a hybrid fund, you would typically have 70 per cent equity and 30 per cent in fixed-income that reduces the volatility to some extent. And in the long term, because of the natural asset rebalancing, it ensures that the returns between equity and hybrid are not too different.
And I think, normally, the time horizon available would be, say, around five to 10 years. And if that is the case with you, go for a hybrid fund. They will give you almost similar returns as equity in the longer term but with much lower volatility.
KS Rao: Dhirendra, this is the last question. Besides, these long-term goals, intermittently, most of these young couples want to have a holiday, either yearly, or once in every three years. Some even take the help of loans or EMIS for this. What would be your suggestions?
Dhirendra: One should definitely go on holidays. But they should be affordable. It should be budgeted for. And I would strongly urge people not to go on a holiday with borrowed money. So, the only way of doing it is the reverse EMIs. Do your small SIPs and earmark them for this. Once the required amount is accumulated, go on the holiday. Instead of taking a loan and paying EMIs for the holiday, follow this. Do SIPs, earmark them for your holiday and once the required amount gets accumulated, go on a holiday.
KS Rao: Thanks Dhirendra and Mahesh for sharing your wisdom.
Click here to register for the forthcoming episode of Investors' Hangout and post your question for Dhirendra Kumar.
This article was originally published on August 26, 2019.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
