Column

Two weeks ago, we had drawn up a financial plan for the Shah family through this column. The exercise has generated tremendous response from readers —- at least that’s what my inbox tells me. Many have requested that a similar practical application of investment theory be reconstructed and this piece is in deference to these requests.

This week, we shall analyse and review the finances and goals of the Shah family.
Mr and Mrs Shah are in their mid-thirties and are the proud parents of a lovely three-year-old daughter named Priya. They have a combined income of Rs 1 lakh a month.

After catering for household and other expenses as also the equated monthly instalment (EMI) for their house, they together manage to save around Rs 26,000 per month. Mrs Shah has Rs 6 lakh in her Public Provident Fund (PPF) account, which is maturing in 2009 and the couple had some miscellaneous post-office investments and fixed deposits amounting to Rs 5 lakh. They have never bought shares directly, but have a portfolio of mutual funds amounting to Rs 3.40 lakh. They also have a running systematic investment plan (SIP) of Rs 5,000. Lastly, their combined provident fund balance is Rs 11.50 lakh, with the monthly provident fund deduction being around Rs 10,000 per month. Given this background, their key goals are to provide for the education and marriage of their daughter. They also want to buy a sedan for the family worth Rs 8 lakh. Of course, last but not the least on the agenda is providing for retirement.

Given this information, let’s try and help the Shahs meet their financial goals.

Priya’s education
Since the first and foremost priority for the Shahs is to provide for Priya’s education, it is suggested that they start a PPF account in her name. Since she is three years old, ordinarily the need for spending for higher education would arise say 18-20 years from now. For this purpose, a sum of Rs 70,000 per annum or Rs 5,800 per month can be accumulated in the PPF account. The funds required for this can be sourced from the Shah’s monthly surplus mentioned above.

This would ensure that they have an assured and guaranteed sum of Rs 32 lakh by the time Priya grows up and requires the money. I repeatedly emphasise that no child plan or any other investment can offer such a high guaranteed amount.

Marriage
The next need in the order of priority is provisioning for gold for Priya’s marriage. Here, it is assumed that she would be married around the age of 26 years —- which means there are around 23 years to go for her marriage.

For this purpose, it is suggested that the Shahs buy one unit of any gold exchange traded fund (ETF), equivalent to 1 gram of gold, per month. One unit per month over 276 months (23 years) works out to 276 grams or approximately 28 tolas. Last week, we discussed the concept of gold ETFs in detail. Suffice it to say that the ETF route is one of the most efficient ways of investing in the yellow metal.

The funds required for this (around Rs. 1,400 per month at current prices) can be out of the balance monthly surplus of Rs 20,200 (after accounting for PPF). The balance of the surplus would be routed towards retirement planning as discussed later on.

Car
The vehicle is expected to cost around Rs 8 lakh. For this, the Shahs could use Mrs Shah’s PPF account, which is due to mature shortly, to partly defray the cost of the car. The balance money required could come out of redeeming the post office investments.

Retirement
It is assumed that the couple would work till the age of 58, which means they have around 20 years left for retirement. Their current PF balance (combined husband + wife) is Rs 11.50 lakh. Their monthly provident fund contribution as stated is Rs 10,000 per month. The maturity value of this amount at the current PF interest rate of 8.5% p.a. over the next 20 years would work out to Rs 1.25 crore.

Additionally, their current investment in equity and mutual funds is around Rs 3.40 lakh as lump sum and Rs 5,000 as SIP.

Furthermore, it is suggested that out of the balance monthly surplus, Rs 10,000 be earmarked for retirement by way of investing in quality mutual funds on an SIP basis.
At a very conservative rate of 15% p.a., the total amount (current as well as the suggested SIP) would grow over the next 20 years to around Rs 2.92 crore.

This way, the combined retirement proceeds including the PF money would work out to Rs 4.17 crore (Rs 2.92 crore + Rs 1.25 crore of the PF money).

Pension
After retirement, one typically needs a monthly pension to take care of day-to-day needs.

The above retirement fund may be invested either at the rate of risk free 9% p.a. or in mutual funds @15% p.a. At the risk-free rate of 9% p.a. (say in a bank fixed deposit) the Shah’s would receive a cheque of Rs 3.32 lakh per month. At 15% p.a., the monthly proceeds would work out to Rs 5.26 lakh.

Ideally, the money should be invested in a mix of risk-free deposits and mutual funds.

Emergency fund
Though the Shahs haven’t specifically mentioned this, a prudent financial planner would always provide for a certain amount of money that is liquid and readily available to cater to unforeseen emergencies. For this purpose, we advise the Shahs to put the balance Rs 9,000 from the monthly savings into a recurring deposit. This way, the emergency fund, till such time it is used earns enough at least to cover inflation.

Finally
As usual, the Shahs would be well advised to periodically review this financial plan and make the necessary adjustments along the way, if necessary, with the help of a professional financial planner. And to repeat something from the previous article, remember, however, that it is never a good idea to depend entirely upon someone else. Start drawing your own map, and go to the professional only for the fine-tuning.

The writer is director, Wonderland Consultants, a tax and financial planning firm. He may be reached at sandeep.shanbhag@gmail.com