Shilpa (23) wants to plan her financial path to a better life. She has been working hard and wants her money to work harder for her.
Shilpa (23) wants to plan her financial path to a better life. She has been working hard and wants her money to work harder for her.
Cash-flow statement (Rs)
Per month Per annum
Inflow (A)
Salary 20,000 2,40,000
Outflows (B)
Living expenses 7,500 90,000
Incidental expenses
(Gifts, lifestyle, etc) 1,500 18,000
Insurance 425 5,100
Total outflow 9,425 1,13,100
Surplus (A-B) 10,575 1,26,900
Tax planning
As per the prevailing tax rules, Shilpa would be entitled to tax exemption up to Rs 1.35 lakh. She can claim tax deduction u/s 80C and 80 D to further reduce her tax liability and even bring it down to zero. Looking at her salary and cash outflow, she appears to be in a position to invest the required amount.
Investment planning
Shilpa wants an investment portfolio that both gives her good returns but helps fulfill the goals she sets, going forward. Considering her age and savings potential, which is high at present (close to 50%), she is well-poised to take advantage of the power of compounding on her investments and create a sound portfolio to let her achieve her goals, whatsoever.
Her investment portfolio of Rs 70,000 is entirely in debt instruments. Given her young age and risk profile, a 30:70 (debt-equity) allocation is recommended for the next 5 years, subject to periodic review and changes. This would help create wealth for Shilpa to achieve the goals she sets along the way.
Retirement planning
Though Shilpa is too young to think of retirement, it is neither too late nor too early to plan. The above investment strategy would help Shilpa build a respectable nest egg for life post-retirement.
Insurance planning
Life Insurance is not of much concern for Shilpa, as she is alone at present and has no dependents. Nonetheless, she should subscribe to other forms of insurance: disability insurance, medical insurance and house/ household contents insurance.
Recommendations
1. Mutual Funds: As per the tax and investment strategy, it is advised to invest the potential monthly savings in systematic investment plans of recommended debt and equity schemes of mutual funds. In other words, of about Rs 10,575 per month, around Rs 3,000 can go into debt and Rs 7,000 into equity; the rest can be kept as cash in hand for incidental expenses or savings.
The following mutual fund schemes are recommended:
Debt: Floater - long term; MIP
Equity: Tax-saver (Rs 5,000-7,000 as per tax planning); diversified (for the remaining amount)
The tax-saving investment should be continued for a long period, even after the lock-in, to let the investment accumulate for a retirement nest egg. Shilpa can even plan for early retirement if the returns come good.
2. Insurance: With the consultation of insurance advisor, Shilpa should subscribe to the following schemes with the mentioned riders/ benefits:
* Disability insurance: Monthly annuity benefit for a specified period of 5/10/15/20 years, with premium waiver rider, critical illness coverage.
* Medical insurance: Minimum coverage with cashless facility.
* House/ content insurance: If she owns an apartment, she should take an insurance policy at least for the household contents, including electronic goods. Third part liability clause should also be included in the policy.
3. Emergency Fund: An emergency fund is inevitable and Shilpa must have one. The present investment in bank FDs is sufficient enough to take care of this aspect, since the fund should be at least six months of monthly expenditure. But, it is advised to transfer the amount from bank FD to mutual fund floater scheme-short term, as this will not only help her to protect the amount from any interest rate fluctuation, but will also provide an easy access as and when required, compared to bank FD.
Assumptions
Inflation 5-6% pa
Returns
Equity & MF equity schemes 15% pa
Debt & MF debt schemes
Long-term 8% pa
Short-term 6% pa
Disclaimer: The author is a certified financial planner, working for Gurukul Online Learning Solutions, This plan has been prepared on the basis of the information and data provided, and needs to be updated once a year to factor in any change in the individual’s circumstances and other factors. Views expressed are those of the author and do not necessarily represent those of FPSB India. Feedback may be mailed to myplan@fpsbindia.org.
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