Certified financial planner and wealth advisor Gaurav Mashruwala comments on Nikhil and Arpita's expenses and investments.
Nikhil and Arpita are a double-income couple of a new generation. They combine old teachings and new aspirations. Their savings habits are by and large traditional even though Nikhil invests some amounts in equity.
When it comes to lifestyle, they certainly have the mark of a new generation -- movies at a multiplex, multiple credit cards, shopping, eating out and visiting pubs.
Their aspirations are simple: Buying a home, retirement savings and providing for their child.
Wealth protection
Nikhil and Arpita have smartly insured all their household goods. But there are some other areas they need to focus on.
They did not reveal whether they have sufficient contingency reserves or not. My advice to them would be to set aside an emergency fund that is equivalent to about three months' household expenses. This must also include the monthly payment towards the educational loan.
Now, let's talk of insurance.
Both have a medical covering by their employers. I would advise them to consult their respective HR departments and read the health insurance benefits. Usually, salaried individuals rarely know the exact terms of health provided by the employer.
Their life insurance coverage is insufficient. Both of them should obtain a term policy of Rs 20 lakh (Rs 2 million) each.
Also, in the future, insurance should not be used as an investment product. Due to the high brokerage paid on insurance, returns get severely impacted.
Wealth accumulation
Over here, there are three goals aspects to consider.
1. Buying a home
They want to do so after 10 years. Unless there is specific reason, the purchase of a house should not be delayed for such a long period. Currently, they do not have expenses related to children; neither do they have any parental responsibilities.
So why not now? This is good time to purchase a house. Why pay rent if you can pay your Equated Monthly Installment instead?
I suggest they complete the payments towards the education loan in the next two to three years and then plan for a house immediately.
Towards this end, they should start investing a mutual fund. I suggest a fund that invests around 20% in equity and 80% in debt. Investments should be made via a Systematic Investment Plan, which means you invest a fixed amount every month in this mutual fund.
At the time of purchase, you will need some money to make the downpayment. The money you invest in the above fund can be used for this purpose. Also, you can sell the units of some of the existing equity based mutual funds.
2. Retirement
A look at their investments (assuming that both have an Employees Provident Fund) reveals that their entire retirement savings is in debt-based instruments.
Considering their age, two sources of income and retirement which is more than 30 years away, they should invest in equity based mutual funds.
Equity is volatile if you invest for just a few years. Hence, for their near term goal of buying a home, I recommend predominantly debt based investments. However, for their retirement goal, equity is wise. Unlike debt, in the long term, equity has the potential to beat inflation by substantial margins.
3. Child's education
Their immediate focus should be on buying their house and saving for their retirement. Once planning for the house is complete and the downpayment made, they can shift focus on the child's education. Towards this end, they can start an SIP in a diversified equity fund.
On a closing note, I suggest Nikhil and Arpita each draw up a Will. I would recommend this for any individual/ couple the moment they have any assets.
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