Mr. Ravi Sharma, a 45-year-old IT professional, is approaching you for
investment advice. He has been working for 20 years and plans to retire at the
age of 60. Ravi’s current annual income is ?15 lakh, and his household expenses
amount to ?8 lakh per year. He wants to create a financial plan that ensures
financial security post-retirement and maximizes tax benefits.
Ravi’s financial goals include:
- Retirement Planning: A corpus of ?2 crore by the age of 60.
- Children's Education: ?30 lakh in 5 years for his son's higher education.
- Emergency Fund: 6 months of living expenses.
- Tax Savings: Maximizing his tax savings under Sections 80C and 80CCD(1B).
He has saved ?10 lakh in fixed deposits and ?5 lakh in a savings account, but
now realizes he needs a more structured investment plan. Ravi is risk-averse but
open to moderate-risk investments if the returns justify them.
Assets and Liabilities:
- Home Loan: Outstanding balance of ?20 lakh, EMI of ?30,000 per month.
- Insurance: ?1 crore life cover (term insurance), and ?10 lakh health insurance
cover.
Ans: You've done well in recognizing the need for a more structured financial plan, and I'm happy to guide you in achieving your goals. Let's break down your current situation and financial objectives to create a balanced plan that ensures financial security, maximizes tax benefits, and meets your future needs.
Retirement Planning
Goal: Rs 2 crore by the age of 60
You have 15 years until retirement, which gives us enough time to build your corpus. However, your existing savings are insufficient to meet the Rs 2 crore target. Here's a strategy for you:
Invest in Large-Cap and Hybrid Mutual Funds: Since you prefer moderate risk, large-cap and hybrid mutual funds are ideal. They provide balanced growth with less volatility than pure equity funds. A monthly SIP of Rs 35,000 to Rs 40,000 should help you reach your goal. Over 15 years, assuming a return of around 10-12%, this should be sufficient for a Rs 2 crore corpus.
Diversify your Investments: You can invest a portion in debt mutual funds for stability and balance out the equity exposure. A well-diversified portfolio will ensure your capital is protected while providing moderate growth.
Optimize Current Savings: Instead of leaving Rs 10 lakh in fixed deposits and Rs 5 lakh in your savings account, move a part of these funds into debt mutual funds or hybrid mutual funds. This will provide better returns and help you move closer to your retirement goal without taking on excessive risk.
Children's Education Fund
Goal: Rs 30 lakh in 5 years
To accumulate Rs 30 lakh for your son's higher education in 5 years, you'll need a more conservative approach, as we can't afford significant risks in the short term.
Debt-Oriented Mutual Funds: For this goal, you should look at debt-oriented or balanced mutual funds. Investing Rs 50,000 to Rs 55,000 per month in such funds should allow you to reach your target while minimizing risk.
Fixed Maturity Plans or Recurring Deposits: If you’re more comfortable with fixed returns, you could opt for recurring deposits or fixed maturity plans (FMPs). These will provide stability but come with slightly lower returns than mutual funds. However, they suit your risk-averse nature for short-term goals.
Emergency Fund
Goal: 6 months of living expenses
An emergency fund is essential to cover unexpected situations. Given that your household expenses amount to Rs 8 lakh per year, you should aim to maintain Rs 4 lakh as an emergency fund.
Liquid Mutual Funds: Rather than keeping Rs 5 lakh in a savings account, you can shift a portion of this amount to liquid mutual funds. These funds provide better returns than savings accounts while ensuring easy access when needed.
Tax-Saving Options
You can optimize your tax savings under Sections 80C and 80CCD(1B) to reduce your overall tax liability.
Section 80C (Rs 1.5 lakh deduction): Maximize your savings by investing in:
ELSS (Equity Linked Savings Scheme): While these are equity-focused, they come with a 3-year lock-in period and tax savings, along with higher returns compared to other 80C instruments.
PPF (Public Provident Fund): Since you prefer safer investments, PPF is an excellent option. It offers tax-free returns and is government-backed, which means there's no risk of loss.
National Savings Certificate (NSC): This can be another low-risk investment for your portfolio under 80C.
Section 80CCD(1B) (Additional Rs 50,000 deduction): You can take advantage of this section by investing in the National Pension Scheme (NPS). NPS gives you exposure to both equity and debt and offers flexibility in deciding the risk level. It’s also beneficial for long-term retirement planning.
By fully utilizing these tax-saving options, you’ll reduce your taxable income by Rs 2 lakh, helping you save more while investing for the future.
Home Loan Strategy
Your home loan has an outstanding balance of Rs 20 lakh with an EMI of Rs 30,000 per month. Here’s how you can manage it efficiently:
Consider Prepayment: You could use part of your savings (Rs 10 lakh in fixed deposits) to make a partial prepayment. This will reduce the interest burden and help you close the loan faster. However, if you’re more focused on maintaining liquidity, continue with the current EMI plan and focus on building your investments instead.
Tax Benefits: Don’t forget to claim the tax benefits on your home loan. Under Section 24(b), you can claim up to Rs 2 lakh on the interest paid, which will help reduce your overall tax liability.
Insurance Coverage
You have a Rs 1 crore life insurance cover through a term insurance plan, which is great for securing your family's future. Additionally, your Rs 10 lakh health insurance coverage is adequate for now, but you may want to consider increasing this in the future.
Health Insurance Top-Up: With rising healthcare costs, a top-up plan on your health insurance can give you extra protection. This will ensure you don’t dip into your savings or emergency fund in case of a medical emergency.
Investment Strategy Tailored for You
Given your moderate risk appetite, your investments should provide a balance between growth and safety. Here’s a clear strategy for you:
Equity and Hybrid Mutual Funds: Invest in large-cap or hybrid mutual funds through monthly SIPs to benefit from compounding over time. This will help grow your wealth steadily while minimizing volatility.
Debt-Oriented Investments: For short-term goals like your son’s education, focus on debt-oriented funds or recurring deposits. These options provide predictable returns with minimal risk.
Systematic Investment Plans (SIPs): SIPs in mutual funds will help you invest consistently and take advantage of market fluctuations through rupee cost averaging.
Optimizing Your Existing Savings
You currently have Rs 10 lakh in fixed deposits and Rs 5 lakh in your savings account. This money is underutilized.
Move a Portion to Mutual Funds: Move some of these funds into balanced or debt mutual funds for better returns while keeping risk low.
Keep a Small Portion Liquid: Maintain Rs 4 lakh in a liquid fund for your emergency fund. The rest should be invested for higher returns, as keeping too much in a savings account earns minimal interest.
Final Insights
Ravi, here’s a quick recap of your plan:
Retirement: Invest Rs 35,000 to Rs 40,000 per month in large-cap and hybrid mutual funds to achieve a Rs 2 crore corpus by the age of 60.
Children’s Education: Save Rs 50,000 to Rs 55,000 per month in debt or balanced funds to meet the Rs 30 lakh goal for your son’s education in 5 years.
Emergency Fund: Keep Rs 4 lakh in liquid funds for emergencies.
Tax Savings: Maximize your tax savings through ELSS, PPF, and NPS under Sections 80C and 80CCD(1B).
Home Loan: Consider prepaying a portion of your Rs 20 lakh home loan or continue with your EMI while focusing on investments.
Insurance: Your current life and health insurance cover is adequate, but consider adding a health insurance top-up for extra protection.
With this comprehensive plan, you’ll be well on your way to achieving financial security, meeting your goals, and reducing your tax burden. I’m confident that this approach will help you secure your future while maintaining a balanced approach to risk and returns.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
