MONEYMAKEOVER Invest in equities to meet long-term goals

Value Of Investment In Debt-Based Instruments Is Eroded By Inflation,      Joypratip Sengupta, 33, currently lives in Ahmedabad with his wife Ishita, 30. He was born in Kolkata and completed his schooling and engineering in Bangalore. He did MBA from Ahmedabad and works in the private sector. Ishita, who was born and brought up in Kolkata, has completed her PG in hospitality management. Joypratip's father initially ran a business and later opted for a job. His mother was a principal in an educational institute.  What is the couple  saving for?  They are planning to buy a house worth Rs 45 lakh in a year. They wish to provide Rs 2.40 lakh annually to support Joypratip's parents. They couple also wish to buy a luxury car worth Rs 11 lakh after 3 years and plan to go on a foreign trip after a year. These costs will be revised based on inflation.  Where are they today?  Cash flow: The couple's annual gross inflow from all sources is Rs 45.50 lakh against the total outflow of Rs 21.81 lakh. The total outflow includes routine family expenses, insurance premiums, EMI on a loan on a property owned by his father, rent for a house they are currently living in and regular savings. EMI works out to 3% of their take-home income.  Net worth: The couple's total assets are worth Rs 1.20 crore, including personal assets worth Rs 1.02 crore, which comprise house owned by father, car and jewellery. There is an outstanding liability of Rs 5 lakh on the property owned by his father. The net worth comes to Rs 1.15 crore. Contingency fund: The balance in the savings bank account and FDs (less than a year) is Rs 9 lakh against the mandatory monthly expenses of Rs 1.30 lakh. This is approximately seven months' reserve.  Health & life insurance:  The couple have a health cover of Rs 5 lakh each. They are also covered by Joypratip's employer for medical expenses. Joypratip has a life insurance of Rs 56 lakh and Ishita Rs 1 lakh, respectively – this is mainly by way of investmentoriented policies.  Savings & investment: The couple's balance in the savings bank account and FD (less than a year) is Rs 1 lakh and Rs 8 lakh, respectively. Invested assets include EPF worth Rs 6.5 lakh and the cash value of insurance policies is Rs 2 lakh.  Fiscal analysis: The couple is saving a substantial part of their total income. Considering the annual expenses and all assets, their existing life and health covers are inadequate. The outstanding loan represents 4% of the total assets. There is no exposure to growth-oriented asset classes like equity and gold. In the long run, this will result in erosion of wealth due to inflation.  The way ahead  Contingency fund: They should maintain a contingency fund of Rs 3.90 lakh, of which Rs 25,000 must be held as cash in hand and the balance in a fixed deposit linked to a savings bank account. The surplus funds must be invested to provide for other goals. Health & life cover: Keeping in mind the future responsibilities, lifeinsurance for Joypratip and Ishita must be increased by Rs 2 crore and Rs 75 lakh, respectively, by way of term plans.  Planning for financial goals  Home buying: This can be fulfilled by making a part payment from the surplus funds available in fixed deposits and annual surplus from income. The balance can be funded by taking a home loan. Since, Joypratip and Ishita are young and have no dependents, they should target to be debt-free in 7-10 years maximum.  Parental responsibility:  This goal can be achieved from the annual income. As a precaution, they should open an FD and keep aside one year's reserve to ensure support to parents is not affected even if there is income turbulence.  Retirement planning: They should start an SIP of Rs 30,000 per month in an equity mutual fund and increase the amount by 10% every year once the goal of buying a house is achieved.  Planner's eye T he majority of couple's assets are in debt-based instruments, which appear safe because, unlike equity and gold, there is no daily number which tells us how much of the value is lost to inflation. On the other hand, equity and gold seem risky because we get to see their price movement daily. However, in the long run they have the potential to grow. Therefore, one must invest in equity and gold for financial goals that are over 7-9 years away. Joypratip Sengupta with wife Ishita