Use surplus income to pre-close home loan
I am 30 years old and work at a company. My wife, 27, is also employed. We have a 1-year-old son. My mother is dependent on me.
My contribution towards EPF including the voluntary contribution is 23 per cent. Please let me know the investments that I need to make to reach all my goals.
My monthly surplus is Rs 26,000. I receive an annual bonus of Rs 75,000.
Through a group health insurance policy, my family is covered for Rs 4 lakh. I live in my own house and plan to retire at 58.
— Ranjith
You have been making profits continuously by trading regularly. But at the same time you have not cared to build an equity portfolio for the long-term. Since you seem to understand the nuances of equity investments, you should try and build a portfolio of large-cap stocks from your equity trading profits.
In general, as you age your risk appetite would decrease and increased work commitments would mean that your trading frequency will decline. Your monthly surplus, barring the trading income is low. Fix a target while you trade and carefully try to increase your monthly surplus.
Currently, your expenses are under control. But once your son starts attending school and your mother ages, your expenses are likely to increase. Hence now is the ideal time to build a corpus with appropriate asset allocation.
Once your son starts school, you will need a lump sum.
For the subsequent years’ education expenses, start a mutual fund systematic investment plan. Since you already have over Rs 1 lakh in an RD, reduce the monthly instalment by Rs 6,000 and divert it to equity SIPs.
For his graduation, you will need Rs 25 lakh. So, invest monthly a sum of Rs 3,700 for the next 17 years. If your portfolio earns 12 per cent, you can reach the target.
Since the goal is a long-term one, invest in equity mutual funds. If you reach the target a few years before the goal, shift the proceeds to safer debt schemes.
Regarding your retirement, if you have a corpus of Rs 20 lakh at retirement, it will fetch you Rs 2,00,000 annually, if the deposit rates are at 10 per cent. Your current annual expenses of Rs 2.4 lakh will be Rs 15.95 lakh at the time of retirement, if inflation is at 7 per cent.
To receive such a monthly income at retirement, you should have a corpus of Rs 3.1 crore. The investment should earn at least one per cent over and above the prevailing inflation for the corpus to sustain till you turn 80.
Your contribution towards EPF is healthy. If your contribution increases by 5 per cent every year, your EPF kitty will be Rs 2.3 crore at retirement, if interest rate remains 8.5 per cent. To meet the shortfall, you need to save Rs 2,800 every month for the next 28 years.
When surplus increases, use the amount along with your bonus for pre-closure of your home loan.
The maturity proceeds of your insurance policies can also be utilised for the purpose.
Buy a term insurance policy for Rs 1 crore to protect all your goals.
Source : http://www.thehindubusinessline.com/money-wise/use-surplus-to-preclose-home-loan/article4960261.ece