Case study: how this double income recently married family can perform DIY goal-based investment planning
This article shows how a young just-married couple can invest for future goals using the Arthgyaan goal-based investing tool.
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.
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This article shows how a young just-married couple can invest for future goals using the Arthgyaan goal-based investing tool.
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This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.
The total market value of these assets:
Nehar typically invests most of her monthly investible surplus in FDs as she is unfamiliar with the tax-efficiency benefits of debt mutual funds: Mutual Fund vs Fixed Deposit - where should you invest?
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 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.
We have a risk-profiling tool here that investors should use before getting started: Do not invest in mutual funds before doing this
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.
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.
Here is a guide regarding purchasing term insurance policies: Term life insurance: what, why, how much to get and from where?
There should generally be the following policies that a family should have at a minimum:
Here is a guide regarding purchasing health insurance policies: Health insurance: what, why, how much to get and from where?
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:
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.
We will use this retirement expense estimation tool to calculate today’s expenses and determine how much to spend in retirement.
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:
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.
Having clear financial goals is the first and vital step before investing. We will use the SMART framework to write down goals:
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.
Before going into the details of the goals, if you, dear reader, wish to cover another scenario as a Case Study, click the button below:
The SMART framework is applied like this:
The family currently lives in a rented house and wishes to buy their own home in five years:
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.
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.
As time passes, three things happen:
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?
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.
There are some implementation issues in the plan, which will tackle one by one.
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.
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:
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