Financial Planning For Long-Term Goals

I am 30 years old, and am a seafarer by profession. I work on a contract basis, and do not get a fixed salary. My estimated annual salary is around Rs 7 lakh. I am married, and have two kids aged 3 years and 2 years respectively. My monthly household expenses are around Rs 25000. I do not have any amount in savings, except for a life insurance policy of Rs 3 lakh, for which I pay a premium of Rs 15000 per year.

Request you to suggest an investment plan for my children’s future as per the following requirements:

1. I wish to invest an amount for my children’s higher education, which will cost me around Rs 25 lakh each 20 years from now.
2. I wish to invest for my daughter’s wedding, the cost of which will be around Rs 25 lakh approximately 22 years from now.
3. I plan retire at the age of 55. Post retirement, my estimated household expenses would be around Rs 50000 per month.
4. I am the only earning member of the family. How much of life insurance cover do I need to provide for my family if unfortunately something happens to me?
5. Presently, I am living in a rented house and I also have a plan to build a home 10 years from now, the cost which will be around Rs 25 lakh.

Based on these facts and requirements, kindly suggest the amount that I need to invest and the funds in which to invest this amount.

- Rakesh Singh

Reply

In order to construct an economical financial plan, your goals have been defined as per your requirements and their estimated time horizons. This is highlighted in a summary format in the following table:

(*Assumption: Child 2 is your daughter)

We recommend a systematic investment plan, according to which you would need to invest Rs 39000 per month till the year of maturity of your goals. This is anticipated to grow to the target corpus you need.

In order to achieve the target corpus, you need to take a certain amount of risk. We have classified a moderate-aggressive risk profile that will help you in achieving this target. The total monthly investment of Rs 39000 can be divided in the ratio of 35 per cent for Debt and 65 per cent for Equity (which are riskier assets).

For your retirement plan, we have arrived at an estimated corpus of Rs 270 lakh that you would require, considering a reasonably long life expectancy.

The total amount that you need to invest per annum to achieve your goals is Rs 4.68 lakh. In addition, you need Rs 3 lakh per annum to fund your household expenses currently. We also suggest that you purchase a term insurance plan for 20 years for a sum assured of Rs 79 lakh. This would come at a premium of Rs 14500 per annum, and would fund the educational and other needs of your children as per the goals you have set out, as also the asset purchase in case of any unforeseen event. To sum up, there is a requirement of Rs 7.81 lakh each year. This slightly exceeds the current annual salary that you earn.

In case it is difficult to gather the aforesaid amount, you can aim for an incremental earning of 15 per cent each year in order to overcome the deficit. Also, the target corpus required for your children’s education and marriage can be reduced to around Rs 30 lakh. Another option can be taking an education loan for both children in their respective goal years. Finally, if there are any properties or financial assets owned by you, these can be sourced for your children’s goals.

For your investments, with a 35 per cent Debt and 65 per cent Equity exposure, we have selected certain funds that will provide a balanced mix of stability and risk, along with growth in the portfolio.

In the Equity component, the ICICI Pru Focused Blue Chip Equity Fund and the HDFC Equity Fund are outperforming funds that deliver risk-adjusted returns close to 25 per cent and 29 per cent for three years respectively. The HDFC Equity Fund is more aggressive, and would add an accelerating factor in your portfolio’s growth. The IDFC Premier Equity Fund is a Small and Mid-Cap but stable fund. Hence, these funds are ideal for your portfolio.

For the Debt part of your portfolio, the ICICI Prudential Corporate Bond Fund is a good investment opportunity. It proposes to invest in corporate papers of three-five years duration with AAA and AA ratings. Another long- term debt fund, Templeton India Corporate Bond fund is also a suitable option, with a yield to maturity of 10.75 per cent and a modified duration of 1.56 years. These funds would provide safety to the portfolio and higher post-tax returns.

Shown here is the scheme performance of the funds suggested for your portfolio.