Shekhar Mehta is a Tirupati based businessman. The thirty-year-old is married and the couple has just had their first baby, who is just a month old. Mr Shekhar’s mother also lives with him.
Financial goals
The biggest goal for the Mehta’s is their child’s future — education, marriage and any other expenses. Apart from that, Mr Shekhar has his own retirement to look forward to. In the short term, there are no major goals. In the medium term, over the next five to fifteen years, he will need to pay off his home loan and also spend on his child’s education. Over the long term, he’ll need to take care of higher education of his child and his own retirement needs.
Where is he now?
The major asset that Mr Shekhar currently has is his home, on which the outstanding loan is Rs 15 lakh. This also requires a monthly payout of Rs 11,000. Apart from this, his other household expenses add up to Rs 3 lakh per year. After deducting these and factoring in the taxes, he is left with an annual surplus of Rs 4.8 lakh. Mr Shekhar is also holding close to Rs 2.5 lakh in his bank account.
Recommendations
A cursory glance makes it clear that Mr Shekhar isn’t planning his taxes very well. This needs to be remedied. Possible investments include equity linked tax saving schemes, new pension scheme, PPF, pension and life insurance schemes. These investments should be made with the DTC in mind — which comes in force next year and will remove the tax cover on some of these instruments. Two investments that he can consider right now are infrastructure bonds and PPF. The former will provide tax relief now, though it will be taxed on maturity. PPF shall deliver eight per cent tax free returns and the money can come in handy during the child’s higher eduction. Apart from these, Mr Shekhar should continue to maintain the three months of income that he keeps in the bank. That can come in handy in case of any emergencies. On the risk side, Mr Shekhar needs to take a term insurance cover of Rs 30 lakh for himself — as the family’s breadwinner. In addition, a health insurance cover of up to Rs 5 lakh for self, wife and child needs to be drawn up. The total outgo on both of these will add up to Rs 13,500 per year. An additional insurance of Rs 25 lakh is also recommended for home and belongings. This would work out to `10,000 per year. On the investment side, he needs to move into stocks. The preferred route would be an investment of Rs 20,000 per month through the SIP route in two well diversified equity mutual funds. Another Rs 5,000 per month can be invested in a balanced fund for the next five years. The asset mix needs to be heavily in favour of equity to meet all the financial goals.
(L. Ravindran, PhD, is a financial advisor and managing director of Wealthmax Enterprises Management Private Ltd.)