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Managing children's education

Praveen, a software professional, has twins and is concerned about their primary and higher education. Here is a complete financial plan for him


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Praveen (38) is a software professional and takes home Rs1.8 lakh per month. His family comprises his wife (35), mother (65) and 18-month-old twins. The family's monthly expenditure is Rs80,000. Praveen invests the balance in various equity mutual funds through SIPs. This has helped Praveen accumulate a mutual fund corpus of Rs19.50 lakh. He also owns two houses. Praveen wants us to analyse whether he is on the right track for achieving his goals. He also wants some guidance on how he should manage the regular school fees of his children.

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Emergency fund
Praveen has an emergency corpus of Rs7 lakh. It is in a combination of fixed deposits (Rs4 lakh) and an aggressive hybrid fund (Rs3 lakh). Aggressive hybrid funds invest 65-80 per cent in equity, which makes them highly volatile and risky for short-term investment. Hence, they are not appropriate for an emergency fund.

An emergency fund should be parked in non-risky investment products which can be easily liquidated. It can be maintained in a combination of fixed deposit and short-duration debt funds. Short-duration debt funds also generate better returns than a savings account.

Action: Move your emergency corpus from the aggressive hybrid fund to a short-duration fund.

Health insurance
Praveen solely depends on the health cover provided by his employer. Employer-provided health insurance is good only as long as you are associated with the employer. Your cover ends if you switch your job. You are not covered even during the job-transition phase and there is no guarantee that the other employer will provide the same benefits. Praveen should buy health insurance of at least Rs5-7 lakh, covering his wife and kids. He should also buy a senior-citizen health-insurance plan for his mother.

Action: Buy health insurance independent of your employer

Life insurance
Praveen has two term plans, providing him a combined life cover of Rs3 crore. He pays an annual premium of Rs40,000 for them. This life cover is sufficient. A term plan is better than endowment or unit-linked insurance plans as it provides sufficient cover at low prices. Endowment and unit-linked plans provide neither sufficient insurance nor good returns.

Action: Continue to stay away from endowment and unit-linked insurance.

Children's education
Praveen estimates that he will need Rs16,000-20,000 every month for his kids' school fees. He may consider reducing his monthly SIPs as and when the expenditure arises. Even the reduced SIPs are sufficient to fulfil his goals. An average 8-10 per cent annual increase in the school fee can be met through his annual appraisals.

Praveen would like to spend Rs80 lakh on his children's higher education. Considering an inflation of 8 per cent, this amount would swell to Rs2.74 crore by the time this money is required. He has already accumulated Rs3.72 lakh for this purpose. Considering a return of 12 per cent, an SIP of Rs25,000 would fulfil this goal. But he needs to increase the SIP amount every year by at least 10 per cent.

Action: Invest Rs25,000 every month in multi-cap funds for children's higher education.

Children's marriage
Praveen aims to spend Rs20 lakh each in today's value on his kids' weddings. At an inflation rate of 8 per cent, this amount would inflate to Rs2.35 crore for both of his kids. He has accumulated Rs2.4 lakh in mutual funds so far for his children's weddings. An SIP of Rs7,500, increasing every year at 10 per cent, would be sufficient for this goal.

Action: Invest Rs7,500 every month in multi-cap funds.

Retirement
Praveen would need a retirement corpus of Rs12.94 crore to maintain the same lifestyle in his post-retirement years (at a return of 9 per cent and an inflation of 8 per cent in the post-retirement years). He has so far accumulated Rs10.54 lakh for this purpose. His mandatory monthly EPF deductions of Rs25,000 would alone fetch him around Rs4.36 crore at an average interest rate of 8 per cent. For the remaining amount, he can do an SIP of Rs31,000 per month. Again he needs to increase this contribution by 10 per cent every year.

His current accumulation includes Rs2 lakh invested in a tax-saving fund. Although, the lock-in period in a tax saver is only three years, one should try to stay invested as long as possible to reap the benefits of compounding. Further, the investment in a tax-saving fund should be linked to a long-term goal like retirement.

Action: Do a monthly SIP of Rs31,000 towards retirement. Link your tax-saving investments to retirement.

Funds
Praveen's portfolio comprises five well-rated equity funds. Although the schemes selected by him are good, only 37 per cent of the corpus is in multi-cap funds. The rest is in either aggressive hybrid funds or large- and mid-cap schemes. He doesn't need to invest in a hybrid fund, which has a debt component, as all his goals are more than 15 years away. Simply investing in three-four good multi-cap funds and a tax saver is enough. Multi-cap funds have the flexibility to invest across all sectors and companies of all sizes.

Also, he should start moving to a conservative portfolio as his goals near so that he doesn't have a diminished corpus at the time of goal realisation should the market fall.

Praveen may consider selling his second house and investing the proceeds in multi-cap funds over a period of three years. As an investment, real estate yields low returns and has a high maintenance cost. Alternatively, he may rent out the property and invest the monthly rent in multi-cap funds.

Action: Move to multi-cap funds. Consider selling your second house and investing the proceeds in multi-cap funds.

Keep in mind
1. The emergency corpus should be in safe avenues. It shouldn't be in equity funds.
2. Even if you have employer-provided health cover, buy one independent of your employer.
3. Link your tax-saving investments to a long-term goal like retirement.
4. In equity funds, multi-cap funds are the best option as they can invest across all market caps.
5. Avoid investing in property as it is illiquid and generates low returns.

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