Q. I am a 43-year old corporate lawyer drawing a monthly salary of ₹1.3 lakh. Due to personal reasons, I could not invest until now. How much should I be investing every month and also in what vehicles, for me to retire at 65? I have an eight-year-old son.
A. It is never too late to start investing. To gauge how much you need to invest, you’ll have to make a basic financial plan first. This involves listing out your main financial goals with the timeline by which you’d like to achieve them. You will need to assess your return targets and risk appetite. Finally, you create individual portfolios towards each financial goal. Given the details you’ve mentioned, you will perhaps need to create a corpus for your son’s higher education about 10 years from now and a corpus for your retirement, 22 years from now. This apart, you will need insurance and an emergency fund to take care of unexpected contingencies.
We suggest you first take a basic term life cover to take care of your son’s needs in your absence. Do sign up for a health insurance cover for a minimum of ₹10 lakh too, if you don’t already have one. You must also set aside enough savings in a bank FD towards an emergency fund to cover 9 months of your living expenses to take care of any period of interrupted income or profession in future.
Having done this, you can plan out your long-term investments towards your son’s education and retirement goals. For your son’s education, do estimate the sum you’ll need 10 years hence (after factoring in inflation at 7-8%), for an undergraduate and post-graduate degree using online or offline help. You can invest in hybrid aggressive equity mutual funds (via systematic investment) or in a combination of multi-cap equity and debt funds to get to this goal.
For your retirement, make an estimate of the monthly expenses you will need in today’s rupees to live comfortably. To arrive at the size of retirement corpus, you will need to adjust this for inflation over the next 22 years and then multiply the annual amount by a factor of 20 or 25 times. This will be your retirement goal. The size of this corpus will decide how much you will need to invest every month.
Given that you have 20-odd years to go, you can invest in equity fund SIPs with a PPF component to get to your retirement goal. Start investing ₹1.5 lakh a year in PPF right away and invest the rest via SIPs in multi-cap and index funds. You can use online calculators for the above estimates. You may also need the help of a full-fledged financial advisor to map out your investment plan and to select the right products. Do remember that financial planning is not a one-off exercise and needs constant monitoring and course corrections along the way.
Q. I am 33 and a dentist with an academic job and a private set up. My monthly earnings are about ₹40,000. I am married and have a child. I am yet to start financial planning. How much should I save every month?
A. The first step in financial planning, as detailed above, would be to map out your key financial goals today with the timelines by which you would like to achieve them.
If you have dependants who contribute to the family’s spending, you also need to take both a term life and a health insurance cover to tide you and your family over unexpected events. You will also need to save 9 months’ of living expenses in a bank FD to meet any unforeseen emergencies that interrupt your income or work.
In our view, while real estate can be one of your investments, it cannot be the only one, given that returns from this asset are very location-specific and that land can be quite illiquid as an investment. It is best to maintain a diversified basket of investments across real estate, stocks, bonds, FDs and gold. Both your stock and bond investments can be routed through mutual funds.
Kindly start by investing ₹1.5 lakh a year in PPF which can contribute to your retirement planning and help in tax savings. You can start SIPs in hybrid equity or multi-cap equity funds towards your longer term goals such as child’s education. Financial planning is an ongoing process for which you may need the services of a qualified financial advisor, to help you quantify goals, decide on the asset allocation and choose the right products.