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Shobhit Agrawal, CFPCM
Rahul Kapoor works for an IT company in Hyderabad. He is a contract worker and gets his entire salary in hand. He is 32 years old and earns Rs.6.5 lacs every year. Rahul is married to Shruti who is a freelance architect. She is 30 years old and earns approximately Rs.3.5 lacs every year. The have a 3 year old daughter. They wish her to become a doctor.They are residing in own house against which they have a loan of 10 lacs for which they pay Rs.10, 000 as EMI every month. The market value of their house is Rs.15 lacs now.Apart from the EMI payment they incur Rs.25,000 every month as living expenses.They have car worth Rs.4 lacs and jewelry worth Rs. 2.5 lacs. Regarding investments they have Rs. 1 lac in NSC, Rs.80, 000 in equity funds and fixed deposit of Rs.50,000. Rahul also has got an insurance policy of Rs. 2 lacs. They always keep around Rs. 35,000 in their savings bank account.Rahul is little worried about Retirement Planning as he is not having any savings towards retirement and also wants to save taxes as much as possible. He wishes to take his family to Europe tour in next 3 years.
AnalysisRahul and Shruti have got a net worth of Rs.13.5 lacs as on today. At any given point of time Net worth represents how much assets would be left after paying of the liabilities. They have very good cash flow position which is positive, with an annual savings potential of Rs.4.8 lacs after paying of the taxes.
Emergency Fund Though Rahul and Shruti keep Rs.35,000 in their savings bank account, they should keep atleast Rs.1.5 lacs in cash or equivalents. This is equal to their 6 months total expenses. The emergency fund is required to meet any contingencies that may arise in the near future.
Risk ProfileBased on the work profile of Rahul and Shruti and their current net worth and cash flow position, they seem to have a moderate risk profile.
Asset AllocationThe target asset allocation after considering the risk profile of Rahul is Shruti is as shown below:
Financial Goals
Daughter’s EducationThe cost of higher education of their daughter is assumed as Rs.15 lacs as on today and this may go up to Rs.36 lacs after 15 years assuming an education inflation of 6%. They need Rs.9 lakhs to be invested as per the above asset allocation as on today to meet this goal or they should start saving Rs.9,654 every month for next 15 years.
Daughter’s MarriageThe daughter’s marriage is assumed to cost Rs.10 lacs as on today. This may go up to Rs.26.5 lacs over the next 20 years assuming an inflation of 5%. To meet this goal they need to save Rs. 3, 985 every month for next 20 years.
Foreign TripThe Europe tour which costs Rs. 1.5 lacs today would cost Rs.1.74 lakhs after 3 years assuming an inflation of 5%. For this goal they need to save Rs.4, 392 every month for next 3 years.
RetirementThe household expenditure after retirement is assumed to cost Rs. 2.4 lacs p.a. as on today growing at an assumed inflation rate throughout retirement.Rahul would require Rs.166.08 lakhs at the time of retirement to meet their household expenses after retirement. To meet this goal they need to save Rs 7,427 every month for next 28 years.
Risk ManagementAfter taking into consideration Rahul and Shruti’s cash flow, their liabilities and survivor expenses, we found they are adequately insured. Hence further insurance coverage is not recommended. But we recommend the couple to take an adequate heath policy to cover any type of medical emergency which also avails some tax benefit (up to Rs.10,000 p.a.) U/S 80 D.
Tax PlanningAs per the investment recommended earlier for achieving financial goals, part/ whole of the investment amount has to be in some tax saving instruments, which are covered U/S 80 C of Income Tax Act, 1961. Some of the deductible instruments are as follows:ELSSPPFNSC etc.
How this Plan can be a help:
For the Client: With the above advice, he can meet his financial goals of life easily at time without bearing any extra burden on his financial position and effecting him adversely by taking out funds from emergency reserves or taking loans attracting interest to increase his liability.
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