Aman marries a woman hoping she won’t change, but she does, while a woman marries a man hoping he will change, and he doesn’t. The truth is that marriage changes both men and women, and nowhere is the impact more obvious than in their finances. A person’s financial planning is altered when he or she plans to tie the knot. Spending is reevaluated, insurance needs are reviewed, tax benefits are studied, and risk appetite changes. In short, a person’s entire asset allocation might need to be rejigged.
Our patients this time are two couples who are about to tie the knot. Lucknow-based Amit Sullere, a manager in a financial services conglomerate, will marry a doctor in February 2010. Mumbai-based Novin Vathipatikkal, a business development manager in a mobile communication firm, and Dipshikha Das, a software engineer in a foreign bank, have not finalised a date but will take the plunge next year.
The wedding year is perhaps the only similarity between the two couples. Sullere and his fiancee are already four-five years into their careers, while Vathipatikkal and Das are just starting out. In fact, they plan to go for higher studies. Their financial circumstances are so different that we have not attempted to compare the two couples. Naturally, the advice given to them also varies.Let’s consider Sullere’s finances first. Till about a few months ago, he handled them very casually. He would buy penny stocks on the basis of tips. Mutual funds were picked at random. Plastic was swiped without batting an eyelid. Not anymore. Sullere wants to turn over a new leaf. This means the risky stocks in his portfolio will have to be junked. Non-performing funds will need to be weeded out. Expenses will have to be budgeted.
What’s triggered this change of heart? For one, Sullere feels it is time he got a grip on his financial situation. His stock portfolio is bleeding profusely, with eight of the nine scrips deep in the red. In mutual funds, the inclusion of too many laggards has pulled down the overall returns of the portfolio. Besides, he has booked a flat in the National Capital Region and needs to start saving for it.
Sullere’s financial goals are ambitious but are still within reach. He wants to retire at 45, which may not be feasible given his other goals. The Rs 45 lakh home loan that he plans to take will require a repayment tenure of at least 15 years. At 10%, the EMI for a 15-year loan works out to Rs 48,500. A shorter term will be unaffordable for Sullere and impinge on other commitments. If he wants to reach his goals comfortably, he should consider working till 58 years.Next, he wants a pension of about Rs 1 lakh every month (at today’s prices) after he retires. Assuming an annual inflation of 5% over the next 25 years, he will need Rs 3.4 lakh per month when he hangs up his boots in 2034. Assuming that he will need pension for 20 years after retirement at 58, he requires a corpus of Rs 5 crore. If he withdraws Rs 3.4 lakh every month, the corpus will be completely deflated in 20 years. This assumes that the retirement corpus would grow at 10% and his withdrawals will increase by 5% every year to account for inflation.
Building a corpus of Rs 5 crore may seem a daunting task, but Sullere is well on his way. Iris says ideally Sullere should keep his accumulated capital aside for his retirement. He has about Rs 4.1 lakh invested in the Provident Fund and other debt investments. Assuming that Rs 8,000 gets added to his PF every month and the entire debt investment earns annualised returns of 8%, it will grow to Rs 1 crore in 25 years. The balance could come from investments in equity-linked options. A monthly investment of Rs 15,000 in funds, Ulips and shares that earn annualised returns of 15% over the next 25 years will grow to Rs 4 crore.
Sullere reckons he will need Rs 40 lakh at today’s prices for his child’s higher education 20 years from now. Adjusted for inflation, he would need Rs 1.28 crore. For this, he needs to invest another Rs 11,500 every month in equitylinked instruments.
To be sure, Sullere won’t be able to service the home loan as well as invest for the future with his own salary. It is here that his wife’s income becomes crucial. Though she will take a short break after marriage, his medico wife will eventually start working. This is also why Sullere should consider making her a co-owner of the house and take a joint home loan. It will allow the couple to avail of tax benefits on the home loan separately. For instance, Sullere can claim a deduction of only Rs 1.5 lakh of the total interest payment of Rs 4.4 lakh in the first year. But if his wife is a coborrower, they can claim a deduction of Rs 3 lakh. However, keep in mind that home loan tax benefits could be on their way out. The new Direct Taxes Code, which is likely to come into effect from April 2011, proposes to remove all tax exemptions.
Tax benefits apart, Sullere has taken the correct decision in booking a flat. Real estate lends stability to a portfolio. It can also start a stream of monthly income that keeps rising as the rental value goes up. Sullere is also considering reverse mortgage to fund his lifelong dream of owning a farm house. “Reverse mortgage is in a nascent stage right now, but it will become a norm in the years to come,” he says.
But first things first. Three months from now, Sullere needs Rs 5 lakh for the down payment of the flat. Since this is too short a period to allow any active savings plan, he should liquidate his equity investments to raise cash. This brings us to his portfolio, which is highly imbalanced. TCS accounts for 30% of his total equity investment, including mutual funds. Till he acquires the skills to pick stocks on his own, Sullere should take the mutual fund route instead of direct investment in equities. He should also consider partial withdrawals from the LIC Bima Plus Ulip, which he bought in 2004. The mutual fund portfolio too needs to be rejigged (see table). But many of the funds are for saving tax and it will not be possible to exit before the threeyear lock-in period.
Being in the financial services sector, the importance of life insurance is not lost on Sullere. He already has a cover of Rs 45 lakh through a term plan and a Ulip. But he needs to enhance this because of the big-ticket home loan he is planning to take. Besides, his ageing parents are dependent on him.
Also, he needs to buy a life cover till he is 60. The two policies cover him till 50 years of age. It is best to take life insurance for the longest term because buying a fresh plan when you are older (say, in your 50s) will cost you a bomb. At 35, a man will pay Rs 4,375 a year for a cover of Rs 10 lakh for 25 years. Over the full term, he will pay Rs 1.09 lakh. But if he takes a 20-year policy and another 5-year policy, he will end up paying Rs 1.26 lakh. Worse, if he doesn’t keep good health, he might even be denied insurance at the late stage.
As mentioned earlier, the financial circumstances of the other couple are very different from that of Sullere. Vathipatikkal, 27, and Das, 26, have already opened a joint bank account and assigned financial responsibilities. He is setting up the house that they intend to live in. She pays for the sundry expenses and weekend outings. The joint bank account is being used to build a common fund.
Vathipatikkal and Das combinedly earn Rs 29,000 a month and have a surplus of around Rs 11,000. But this surplus is not invested. Instead, Rs 7,000 goes into the joint account while the balance remains in their individual accounts. Instead of investing in stocks, gold and debt, the couple plans to invest in their careers. Both are planning to enrol for an MBA programme and are saving for it.
Their current savings and income will not be sufficient to fund their education. Vathipatikkal says that a large part of the expenses will be borne by their parents. They are also planning to take an education loan. Education loans are cheap but come with several strings attached. They also offer tax benefits such as deduction of the interest paid under Section 80E.
Also, the repayment starts only after an EMI holiday of 2-3 years or when the person gets a job. Experts argue that education loans help inculcate financial discipline in an individual by imposing a repayment liability very early in his career.
When they take a big loan, Vathipatikkal and Das must also buy life insurance. They have covers that have been extended by their employers, but will cease when either of them takes a sabbatical for the MBA programme. A Rs 10 lakh cover for 25 years will cost Vathipatikkal Rs 3,000 a year.
The joint bank account is a good idea but its size should be limited to Rs 1 lakh and the two should consider putting the surplus in other, more lucrative options, such as equities. Vathipatikkal intends to start an SIP in an equity fund but doubts if a monthly investment of Rs 1,000 would grow to a significant size. He doesn’t realise that the small size of the SIP is more than made up by the long term available for its growth. If his fund earns him annualised returns of 15%, the value of his SIP would be Rs 85 lakh when he retires at 60. That is the magic of compounding and Vathipatikkal should make the best use of it.