This article shows how a young just-married couple can invest for future goals using the Arthgyaan goal-based investing tool.
Disclaimer: The purpose of this Case Study article is solely to demonstrate, as a reference guide, how an investor can use the Arthgyaan goal-based investing tool to invest in a do-it-yourself (DIY) manner. This article is not investment advice and does not solicit buying or selling of any security, stock or mutual fund. Furthermore, the individual names and numbers in the case study are hypothetical and any resemblance to actual persons, living or dead, is purely coincidental.
To build a house, you need to first build a strong foundation
Goal-based investing requires completing some steps to ensure that the investment plan is seamlessly executed without breaks due to unforeseen circumstances. We will follow the steps described here: I have heard of goal-based investing. What now?
Risk profiling
Risk profiling is a mandatory step that the family should complete before investing in goals. A portfolio created for a goal has one purpose: to meet the goal. Therefore, we need to balance risky assets that generally appreciate fast (like equity) and slow-growing assets that provide stability (like debt). The tool that is used to determine this mix of investments is risk profiling. Risk profiling, if not done, leads to a high chance of missing the goal. Investing in the wrong asset class in the wrong proportion (either equity or debt) can lead to either high risk, poor returns, or worse.
A minimum of 6 times total monthly expenses, which is ₹80,000 x 6, i.e. five lakhs. They should keep this amount in a joint bank account with sweep FD. Both spouses should have debit cards and net banking access to this bank account to get immediate access in terms of need.
For the moment, 6x expenses are sufficient. However, when a home loan is taken in the future, they should add six times the EMI to the emergency fund.
As expenses increase or the emergency fund is used up, the current month’s investments should be diverted until the fund is rebuilt.
Term insurance
Jaspreet and Nehar have corporate group cover for term insurance for two crores between the two of them. Apart from this, they need to take additional insurance coverage of ₹1.5 crores each up to the age of 60. Once their incomes increase, they should take more term insurance since their current coverage, even with the new ₹3 crores coverage, will be insufficient.
The two additional life insurance policies will cost around ₹30,000/year.
There should generally be the following policies that a family should have at a minimum:
corporate group insurance for salaried employees covering all family members
personal family floater of ₹15 lakhs covering self and spouse. Any children in the future can be added to this policy
The family should explore a one-crore super-top-up health insurance policy to cover treatments that cost much more than the family floater. This policy is for extreme cases, and the premium amount, ₹5,000/year, is a small price to pay for insuring against a significant risk
The family should also take one crore personal accident insurance each for both Jaspreet and Nehar, with a total premium of around ₹17,000-20,000. This item is currently not included in the expenses, but they should take it soon.
The purpose of the personal accident (PA) insurance policy is to provide a replacement for your income if you have an accident and cannot work after that. Unlike term insurance, where claims are paid on death, a PA cover is applicable when one of the following is the result of an accident:
accidental death
temporary or permanent partial disability
temporary or permanent total disability
Pay off high-interest loans
Fortunately, the family has no high-interest loans like credit cards or personal loans. We will plan that the home loan, to be taken in the future, is paid off in 15 years.
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To know how much you can invest for goals (the investible surplus), you need to classify and figure out approximately the major monthly expense heads under the three main buckets below:
mandatory: rent/EMI, food, school fees, electricity/mobile bills etc.
save-to-spend: these are used for the sinking fund that is used to pay for hefty annual expenses like insurance premiums, festival gifts and travel by saving for them every month
The couple will also benefit if they set up their monthly finances as per the process set up here: Life stage investing: how should couples manage finances. Both spouses need to be on the same page regarding financial goals and how money is to be managed going forward. This will not happen immediately but will gradually fall into place over time.
Setting financial goals
Having clear financial goals is the first and vital step before investing. We will use the SMART framework to write down goals:
Specific: Why do you need the money?
Measurable: How much money do you need?
Achievable: Can you do it? Do you need help?
Realistic: Can you reach this target based on where you are?
Time-bound: When do you need the money? Is the timing flexible?
We will assume that the family can increase its investments by 10% every year via upskilling and improving their human capital: Your human capital, not investment returns, is your biggest wealth creator. Given the importance of human capital, we have allocated an upskilling line item in the monthly budget. The family can use this for courses, books and other related purposes.
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Retirement (normal and early)
The SMART framework is applied like this:
Specific: To retire from active service for both spouses. In retirement, the lifestyle required is expected to cost ₹10.3L in today’s money. We assume 7% inflation both in the pre and post-retirement phase. At this inflation level, expenses double in 10 years
Measurable: The target corpus is ₹25 crores which is what should be accumulated by the point retirement
Realistic: The SIP amount per month for retirement is something the family can invest, given their income and expense levels
Time-bound: The plan is to retire early in 19 years when Jaspreet is 50
House purchase
The family currently lives in a rented house and wishes to buy their own home in five years:
Specific: Buy a house
Measurable: In today’s money, the house should cost no more than ₹70 lakhs, including registration, brokerage, shifting, interiors and other costs increasing at an inflation rate of 5%/year. The family plans to pay 20L as the down payment (and additional charges), and they will take the rest as a home loan. They intend to pay off the loan before retirement starts
Realistic: A house purchase is the most significant financial commitment that a family can undertake, and a relatively large chunk of the current corpus will get allocated to the goal once it is decided, leading to pressure on other goals, as we will see below
Time-bound: Five years is preferred but a bit flexible in case there is not enough corpus accumulated by the time for the down-payment
Other goals
Regular Foreign trips: The family wishes to go for yearly foreign trips once they take early retirement for ten years
Next car: There is no loan on their current car. For their next vehicle in five years, they have budgeted ₹14 lakhs in today’s money
Derivation of investment amounts
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The table shows the SIP amounts split amongst different goals and the portion of the current corpus allocated to each goal. Investors have two approaches to investing:
We use the Arthgyaan Goal-based investing calculator to formulate the investment model with all the above assumptions and goals. There is a link to download a pre-filled copy of the Google sheet via the button below.
Important: You must be logged into your Google Account on a laptop/desktop (and not on a phone) to access the sheet.
Once you get your sheet, you can access video tutorials in the howto tab.
Here are some tutorials on using the tool (click the image below)
For most investors, this is the most critical question. It is a variation of finding the ‘best’ of everything: the best mutual fund, PMS service, insurance policy, etc. However, if you have followed the process until now, you will realise that coming to this stage is the very end of the goal-based investing strategy.
We will keep this simple with some typical investments that the family can follow and should be sufficient for their purpose.
Debt asset class: Apart from the NPS and provident fund investments already in place, the family can explore debt mutual funds: How to choose a debt mutual fund?
Cash asset class: For goals within three years and the emergency fund, a savings bank with sweep FD or a regular FD/RD is sufficient. For purposes beyond three years, please use the same debt funds as per the debt allocation above.
Additional investment in Provident fund: Apart from the mandatory investments via EPF, the family should refrain from additional investment in VPF. Given the long time horizon of the goals, a high allocation to equity is critical.
Insurance mixed with investment: ULIP, endowment, and related mixed products should be avoided due to high commissions, opaque structure, low returns, and lock-ins.
Current prices of goals change, or new goals are added/old goals removed
These factors will require a portfolio review exercise every 6-12 months. Then, the process goes through the above steps: goal setting, capturing current asset values, and feeding them into the model to recalculate the numbers. The concept is explained here: Are your investments on track for your goals?
Rebalancing plan
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This section shows the current and target asset allocations for equity, debt and cash. Since their PF is ₹30,000/month, the rest of the monthly debt investment will go into PPF and debt mutual funds.
The action on the investor will be to immediately implement the rebalancing plan as shown in the image.
Practical considerations
There are some implementation issues in the plan, which will tackle one by one.
SIP amount is higher than surplus
The family has an in-hand income of ₹2L/month plus ₹30,000/month going into EPF. However, the monthly expenses are currently ₹80,000/month, which means that only ₹1.5L/month is available for investments. At the same time, the model requires ₹2.3L/month. The shortfall is, therefore, around ₹80,000/month.
Suppose you change the goal figures in a way the SIP amount comes to be much higher than income. In that case, you can refer to this article regarding the concept of reprioritising your goals: How to prioritise goals based on available monthly SIP amount?. The goal-based investing tool allows you to add or remove goals and see their impact in real-time. We will suggest not to increase risk by increasing the return assumptions and the salary growth rate. Instead, in this particular case, prioritising the retirement and home loan goals, which have a total requirement of ₹1.5L/month, will be prudent.
Initial rebalancing
The rebalancing plan calls for moving ₹18L of assets from equity to debt as per the asset allocation for all the goals. There are a couple of things that need to be kept in mind:
if the equity markets are falling, selling equity locks in losses
selling a large amount will attract capital gains taxes
Instead, suppose the entire SIP (minus the PF contribution) is diverted to debt mutual funds. In that case, the family can increase the debt allocation over time. As and when equity markets improve, additional profits can be harvested and moved into debt assets to achieve parity. The family should perform a portfolio review after six months.
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This post titled Case study: how this double income recently married family can perform DIY goal-based investment planning first appeared on 07 Aug 2022 at https://arthgyaan.com
