DIVERSIFY TO GROW YOUR WEALTH

Overexposure to realty will affect the Parashar family’s liquidity, says Lovaii Navlakhi, FounderCEO of International Money Matters.

Overexposure to realty will affect the Parashar family’s liquidity, says Lovaii Navlakhi, Founder-CEO of International Money Matters.

Rohit Parashar, 35, is a sales manager with an MNC who stays in a rented flat in Nanded, Maharashtra, with his parents, wife Maya, a 29- year- old teacher, and daughters Yashika ( aged 4) and Tanisi ( aged 1). The couple’s net salary is ` 1.77 lakh per month and they have a surplus of ` 88,583 after meeting all expenses, including insurance premiums, a vacation cost of ` 8,333 and ` 20,000 for dependent parents, among others. For life insurance, Rohit and Maya have purchased an endowment plan with ` 5 lakh sum assured that costs them an annual premium of ` 25,000. As for health insurance, they have a family floater plan of ` 5 lakh and pay a yearly premium of

` 18,000. Other assets include a plot of land worth ` 13,50,000 and investments in mutual funds through a monthly SIP of ` 25,000. Rest of their savings are kept in bank accounts ( see table Assets, Liabilities & Net Worth).

Goals and Approach

The couple has several short- term goals, including buying a second plot of land worth ` 12 lakh in 2018 ( for investment purpose) and a house next year for selfoccupation, which will cost around ` 40 lakh. They also want to purchase a car by 2020, priced at around ` 15 lakh, and go on a dream vacation by 2022, estimated to cost around ` 10 lakh. In the long term, they are looking to build an education corpus of ` 75 lakh for each daughter and a marriage fund of ` 50 lakh for each of them. Finally, Rohit and Maya should be able to fund their retirement as they are planning to go off work in 2040 and want to have a monthly income of

` 75,000 in today’s value to meet their post- retirement expenses ( see table Goals to Pursue).

All these will take some meticulous planning as their investments are skewed towards realty and bank deposits. While real estate lacks liquidity and fails to generate any regular income, a high bank balance means missing out on the opportunity to earn effective post- tax returns. The family should look at investing into assets yielding effective post- tax returns without compromising on the liquidity factor. Ideally, they should sell the real estate to fund their home buying. Their plan to buy a second plot for investment purpose should also be avoided as it will become another non- liquid asset. For now, they should reduce the vacation goal to ` 6 lakh. Moreover, the goals regarding their daughters’ education and marriages look a little ambitious and need to be revised. On the other hand, they have taken the first step in the right direction by investing in mutual funds and this should be increased and continued.

The couple must invest ` 1,11,450 per month and annually increase it by 10 per cent to achieve all their goals. But currently, they are falling short of the target, going by the existing cash flow. Their incomes are rising, though, and they will be able to reach the investment target in about five years from now. Even then, cash flows could be erratic, and it may not be possible for them to start saving for all the goals all at once. So, they need to increase their savings and investments in line with the income hike, on a yearly basis. The surplus should be invested in equity mutual funds via SIPs and bring the asset allocation to the recommended level ( see table Asset Allocations). The table Inflow/ Outflow features current year’s cash flow and the projected cash flow of 2019, showing that long- term in-

vestment surplus is available over and above their current committed investments.

The financial road map presented here is based on the information provided by the couple and plan assumptions are listed at the end. A feasibility study has also been done, taking into account the current assets and investments of the family, along with the year- on- year estimates. But financial planning is not a one- time activity, and regular reviews would help them evaluate and restructure their investments.

How to Fund It

Short- term targets: As discussed above, the Parashar family should sell the plot and the part of proceeds can be utilised to make a 30 per cent down payment, or ` 12 lakh, when they purchase their residential property next year. It will also help them save on the capital gains tax . They should raise a home loan for 15- 20 years to fund the rest. Similarly, the bank balance and the cash in hand can be used for a 60 per cent down payment for the car ( around ` 9 lakh, the balance can be paid through a car loan) while ` 2.65 lakh, equal to three months’ basic expenses, should be set aside for an emergency corpus/ liquidity fund. The remaining ` 2.05 lakh (` 1.5 lakh from land sale proceeds and ` 55,000 from bank balance- cash in hand) can be used to fund the dream vacation partially. The fixed deposit of ` 3 lakh can also be utilised for this purpose. These funds can be parked in liquid/equity savings mutual fund schemes until utilised. The next two years will also see a vast change in the spending pattern as there will be no rental expenses when the family shifts to their new home and Tanisi starts school.

Additionally, Rohit and Maya need to get life insurance cover of ` 4 crore and ` 1.25 crore, respectively, to protect future expenses and critical goals such as the daughters’ education. The same can be done in a staggered manner by purchasing term insurance. For health insurance, we suggest that the existing cover should be continued for the parents while a basic cover of ` 3- 5 lakh along with a super top- up option of ` 10 lakh should be purchased for Rohit, Maya and their daughters. Super top- up policies along with individual covers are a good option providing for a relatively larger cover at an affordable rate. Further, Rohit and Maya should also buy a critical illness policy of ` 25 lakh each and a personal accident policy of ` 50 lakh and

` 25 lakh, respectively.

Long- term goals: As of now, the couple should revise the education corpus to ` 50 lakh and the marriage fund to

` 20 lakh for each daughter. These goals are at current value and duly adjusted in the Goals table. Further, Sukanya Samriddhi accounts can be opened for Yashika and Tanisi. As for the equity portion, investments into mutual

Cash flows could be erratic, and it may

not be possible for the family to start saving for all the goals all at once. They must increase their savings and investments in line with their income hike

funds should be continued through SIP.

Next comes the most crucial financial goal, the retirement corpus. During retirement, a total corpus of ` 9.64 crore will be needed to fund their household expenses, medical cost and vacation spending. So, the retirement fund has been planned in three parts – a corpus of ` 7.8 crore for household expenses, ` 1.21 crore for medical and

` 63 lakh for vacation. Their PPF and EPF funds and existing MF mutual funds can be utilised for this goal.

Tax Planning

Contributions to EPF and PPF, the premiums paid for life and health insurance policies and opting for a home loan will earn Rohit and Maya a lot of tax benefits. For instance, Rohit can avail tax benefit under section 80D against the health insurance premium paid up to ` 25,000 for self and family and ` 50,000 for parents who are senior citizens. Plus, he can get a deduction of ` 2 lakh for interest on the home loan when he opts for it. The couple should have an estate plan in place for ease of asset transfer.