How Amit achieved his life’s financial goals (and peace of mind) with Right Investment?

Amit (name changed for privacy) is a 28 year old man who belongs to the widespread Indian middle-class society. He is married and has a 3-year old son and a 6-month old daughter. He is employed in a private IT firm and his monthly income is INR 55000. His family’s monthly expenses were about INR 45000 and he managed to save about INR 10000 per month.

He and his wife had some life / financial goals in mind:

  • Higher Education of their children
  • Their daughter’s marriage
  • Provision of expenses after he retires after he turns 60 years old.

They lived in their ancestral house and Amit’s company used to send them for one week long vacation bi-annually.

They were planning to deposit their savings in Bank Fixed Deposits and Post Office schemes which easily earned them 7-8% return per annum.

Few days ago, Amit had read my LinkedIn posts on “The When & How of Investing” and “Turn Your Child’s Dream Into Reality” (You can read them here and here) and found them beneficial. Therefore he approached me (with the above in mind) and expressed his interest in financial planning so that he can achieve his financial goals.

Saving for future is good, but were they on the right track?

As aforementioned, Amit and his wife had clearly identified their fiancial goals, something which every responsible person should do. Higher education of children, their marriage and retirement planning are the goals which everyone has to fulfill in a typical Indian middle class society. The earlier you go about it, the better it is.

They were saving money and wanted to invest INR 10000 every month was a heartening thought towards fulfillment of their life goals but was the investment in bank deposits a step in the right direction?

We met and assessed that, after considering inflation, the following sum of monies shall be required by the family in future:

  1. Rs. 15 Lac (INR 1500000) for higher education of son when Amit will be 43 years old.
  2. Rs. 17 Lac (INR 1700000) for higher education of daughter when Amit will be 46 years old.
  3. Rs. 40 Lac (INR 4000000) for daughter’s marriage when Amit will be 53 years old.

Rs. 1.2 Lac (INR 120000) per month to meet the household and medical expenses of the ageing couple when Amit retires at the age of 60 years. To achieve this, the corpus required should be at least Rs. 1.20 Crore (INR 12000000).

What would investment in Bank deposits fetch them?

  1. At, say 8% annual compounded growth, INR 10000 per month shall grow to Rs. 35 Lac (INR 3500000) in 15 years, out of which he can easily withdraw Rs. 15 lac (INR 1500000) for higher education of his son. Corpus Left: Rs. 20 Lac (INR 2000000).
  2. In another 3 years, this corpus will grow to Rs. 29.5 Lac (INR 2950000) out of which he can again easily withdraw Rs. 17 Lac (INR 1700000) for his daughter’s higher education. Corpus Left: Rs. 12.5 Lac (INR 1250000) which shall continue to grow along with regular infusion of INR 10000 per month in bank deposits.
  3. By the time Amit turns 53 years old (after another 7 years), their wealth would have grown to Rs. 33 Lac (INR 3300000). He will face an impossible situation of marrying his daughter and will have to compromise with his standards. Corpus Left: NIL
  4. At time of retirement, investment of INR 10000 per month for next 7 years will accumulate his wealth to Rs. 12 Lac (INR 1200000).
Will this be sufficient to meet their monthly expenses? No! This amount will not even suffice for next one year.

Where lies the mistake?

… in a common myth that bank deposits are safe and investing in mutual funds is risky.

Will these traditional investments be able to beat the current rate of inflation?

Consider the cost of a loaf of bread, which costed INR 18 until last year and now costs INR 20 — an increase of 11%+. With this rate, the average household expenses double in five years’ time.

Our fixed deposit fetches us 7% per annum and some senior citizen post office schemes may earn up to 8% per annum. ULIPs earn 9% but have hidden costs which erode the principal amount. More than 60% of investments are currently lying in these products. Are these post-tax returns going to beat inflation rates?

No! Your money will Go, not Grow

The bank rate of return is not sufficient to meet the cost of living and lifestyle index of anyone, leave alone Amit. On top of it the bank interest income is taxable, which further dents the returns.

Why invest in Mutual Funds?

Historically, Mutual Funds have always delivered excellent returns in the long run. The longer the period, the better the returns. More so in SIPs which have an inbuilt cost indexation feature.

Also, mutual funds have a variety of plans starting from full equity to full debt including hybrid plans which combine equity and debt in various ratios.

Mutual funds, which include equity in full / part have always given very decent inflation adjusted returns. And the best thing is that returns are tax free.

So, what should Amit do?

A diversified investment of INR 2000 each by way of SIP in five different mutual funds, having a track record of decent returns. Considering a 12% annualized compounded returns on these investments, Amit can easily fulfill his financial goals.

  1. At, 12% annual compounded growth, INR 10000 per month shall grow to Rs. 50 Lac (INR 5000000) in 15 years, out of which he can easily withdraw Rs 15 lac for higher education of his son. Corpus Left: Rs. 35 Lac (INR 3500000).
  2. In another 3 years’ time, this corpus will grow to Rs. 54 Lac (INR 5400000) from which he can easily withdraw Rs. 17 Lac (INR 1700000) for his daughter’s higher education. Corpus Left: Rs. 37 Lac (INR 3500000) which shall continue to grow along with regular infusion of INR 10000 per month.
  3. When Amit’s age will be 53 (after another 7 years), his wealth would have grown to Rs. 98 Lac (INR 9800000). He can again, easily withdraw Rs. 40 Lac (INR 4000000) and marry his daughter as per his wish. Corpus left: Rs. 58 Lac (INR 58000000).
  4. At time of his retirement (after 7 more years), regular investment of INR 10000 per month will take his wealth to Rs. 1 Cr 24 Lac (INR 12400000).

Done!

This will not only be sufficient to fetch him Rs. 1.24 Lac (INR 124000) per month but his wealth will also remain intact.

Easy Enough?

In summary, what did Amit do? He has …

Let Money Grow, not Go