Sow young, reap the rewards

Financial planner Gaurav Mashruwala advises parents not to shelter their children from money matters

 Education and self-reliance usually go hand-in-hand. This is what Viral Harsora's parents believed in and practiced for him. While education was his primary focus, and Viral went on to do his BE, right through college, he also used to do small assignments to earn pocket money. His parents insisted on teaching him the value of being financially independent. Viral earned his first income when he was a teenager.
    Today, 33-year-old Viral lives with his parents, wife and son in Pune. The family has a residential property in Mumbai as well as Pune.
WHAT ARE THEIR GOALS?
    (1) Firstly they want a bigger house, which would cost about Rs 1 crore. (2) For his son's higher education after 15 years they need Rs 8 lakhs, and Rs 5 lakhs for his marriage after 20 years (3) The couple also wants a corpus of Rs 2 crore at the time of retirement after 25 years. All these costs are at today's rate of inflation. If wealth permits, they wish to purchase a luxury car worth Rs 15 lakhs.
WHERE ARE THEY TODAY?
Cash flow: Their total income from all sources is about Rs 10 lakhs. Against this, they spend Rs 5.62 lakhs on routine expenses, insurance premium, EMI towards the mortgage. About 14% of the income services their home loan.
Statement of net worth: The total value of their assets is Rs 53.30 lakhs. This includes cash, invested assets and assets for self-consumption. Noninvested assets are worth Rs 42 lakhs (house Rs 40 lakhs and jewelry Rs 2 lakhs). Outstanding liability on the home loan is Rs 2 lakhs.
Contingency fund: Mandatory expense per month is Rs 40,000. They have Rs 1 lakh in cash, which is 2.5 months' expenses.
Health & life insurance: Viral's employer provides health cover for the family so his parents are covered. In addition, he has independent health insurance of Rs 2 lakhs each for himself, his wife and child. Total life cover for Viral is about Rs 10 lakhs, all in investment-oriented policies.
Savings & investments:
Value of total assets is Rs 53.30 lakhs. The balance in the savings bank is Rs 1 lakh. The balance in EPF/PPF is Rs 7 lakhs. At current market rates, the equity portfolio is valued at Rs 2 lakhs and equity mutual fund, Rs 1 lakh. They have Rs 30,000 in post office schemes. Asset allocation between debt and equity is 64:36.
FISCAL ANALYSIS: The family is able to save more than 40% of inflow. This is great. The contingency fund is a little low. The health insurance is currently sufficient. However, in case Viral were to quit his job, his parents may not have coverage. Life insurance is very low and is in investment-oriented policies. Debt:equity allocation is not optimal. Since most goals are far-off, equity has to be higher. Borrowing is well within permissible limits.
WAY AHEAD:
Contingency funds: Since there are elderly parents, keep aside funds equivalent to about 4/5 months monthly expenses towards contingency.
Health insurance: Purchase maximum possible health cover for both parents.
Life insurance: Recommended life cover for Viral is Rs 1 crore--because the couple dreams of a bigger house for which they will have to borrow funds and they also need large retirement corpus. Cover should be bought in form of term plan. In case of any eventualities, use insurance proceeds to pay off loan and invest balance to create desired corpus.
Borrowing: After increasing contingency reserve, purchasing health cover for parents and life insurance for self, aggressively pay-off home loan. Try and complete loan within a year.
PLANNING FOR FINANCIAL GOALS.
Bigger house: After meeting recommended financial obligation, invest maximum possible amount every month in a mutual fund having 75% equity and 25% debt. When buying the bigger house, sell off the existing Pune residence. Also, liquidate mutual fund portfolio. Use proceeds to make a down payment. In case of shortfall, borrow the funds.
Son's education & marriage: After buying the house, invest Rs 40,000 in mutual funds every month. Allocate between an index fund, international equity fund and gold fund. Do not invest in sectorial, thematic or structured products.
Retirement: Continue the above investment strategy for retirement planning as well.