Over long- term equity to beat inflation comfortably.
I am 33 and work in a private company. My wife is a homemaker. We have a son in kindergarten. My aged parents live with me. Their health condition are a matter of concern, but for medical emergencies they have set aside some amount. After a few years, I will have to pay monthly ?4000 a month as maintenance to my in-laws. I wish to build an emergency fund of ?5 lakh by 2020.
Due to my bad investment experience in 2008, I invest only in recurring deposits. I need to build a large house, save for my son’s education and want to take an international vacation soon.
Please outline a plan to reach my goals. I have an endowment policy with sum assured of ?5 lakh.
Narashiman
Over the long term, equity funds are expected to beat inflation convincingly. Just because you had a bad investment experience earlier, it doesn’t mean that you completely stay off the asset class.
If you had started investing regularly in funds from 2008, you would have been sitting on healthy gains by now.
From now on, for the goals beyond five years, invest in equity mutual funds. As a conservative approach, maintain an asset allocation proportion of 50: 50 in favour of equity and debt.
Son’s education: You will need to accumulate ?20 lakh in 12 years for your son’s education. Invest ?7,500 a month till you reach the goal. The suggested asset allocation is expected to earn 9.5 per cent annually.
International vacation: Save a sum of ?10,000 every month for the next two years.
House: If you borrow ?50 lakh at an interest of 9.5 per cent, your EMI will be ?52,200. Your expenses would rise once you start paying your father-in-law. Given your limited surplus, first build your emergency fund before going for an enhanced loan. Alternatively, earmark the current accumulation of ?3.2 lakh in recurring deposits. Invest the same in liquid funds in your parent’s name.
Retirement: At 58, you will need ?16.3 lakh annually, if inflation is 7 per cent. You need to have a corpus of ?3.2 crore to earn such an income and it should earn more than inflation to last till you turn 80.
Your current balance in the EPF and your future contributions would generate a corpus of ?3.61 crore, if the interest rate continues to be 8.5 per cent.
Insurance: Buy a term cover for ?1 crore.
The writer is a financial planner and founder myassetsconsolidation.com. Send your queries tofp@thehindu.co.in.