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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.

Case study: how this double income recently married family can perform DIY goal-based investment planning


07 Aug 2022 - Contact Sayan Sircar
17 mins read

This article shows how a young just-married couple can invest for future goals using the Arthgyaan goal-based investing tool.

Case study: how this double income recently married family can perform DIY goal-based investment planning

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.

Table of Contents

All worked out case studies for goal-based investing

If you wish to cover another scenario as a Case Study, click the button below:

Introducing the investors

Personal details

  • Jaspreet and Nehar, husband and wife, age 31 and 30, respectively
  • No children as of now
  • Income: 2L/month, post-tax in-hand combined from salary
  • EPF: 30,000/month combined over and above the amount above
  • Monthly expense: ₹80,000/month
  • Loans: no loans
  • Credit card dues: none
  • Both Jaspreet and Nehar’s parents are financially independent

Existing assets and investments

  • Bank account: ₹17L in the savings account and FDs
  • EPF: ₹5L in EPF
  • PPF: no PPF account yet
  • NPS: ₹1.1L in NPS
  • stocks: select small-cap stocks, around 4.6 lakhs
  • MF: 7.3L in equity MF
  • Insurance policies: no investment-cum-insurance plans like endowment or ULIP
  • Ancestral assets: Both Jaspreet and Nehar are expected to inherit property from their parents
  • Primary residence: The family wishes to take a home loan in some time

The total market value of these assets:

  • equity assets: ~₹12.6L (MF + stocks)
  • debt assets: ~₹5.4L (PF+NPS)
  • cash assets: ₹17L (bank)
  • total asset value is ₹35L

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?

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Pre-requisites before investing

To build a house, you need 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.

We have a risk-profiling tool here that investors should use before getting started: Do not invest in mutual funds before doing this

Emergency fund

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.

Here is a guide regarding purchasing term insurance policies: Term life insurance: what, why, how much to get and from where?

Health insurance

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.

Here is a guide regarding purchasing health insurance policies: Health insurance: what, why, how much to get and from where?

Personal Accident insurance

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.

Expense structuring

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Case Study 07 Aug 22 Expense Calculation

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:

  • mandatory: rent/EMI, food, school fees, electricity/mobile bills etc.
  • variable/discretionary: entertainment, transport, clothes, anything discretionary
  • 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 skilling 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 this link or the button below:

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
  • Achievable: Retirement planning can be daunting. Here is a step-by-step guide to getting started: A low-stress step-by-step guide to creating a retirement portfolio
  • 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
  • Achievable: The process of planning a house purchase from a goal-based investing perspective is covered here: Goal-based investing: how to purchase your dream home
  • 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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Case Study 07 Aug 22 Model Output

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:

Model output

We use the Arthgyaan Goal-based investing calculator to formulate the investment model with all the above assumptions and goals. This is the link to download a pre-filled copy of the Google sheet, or you can click this button:

Once you get your sheet, you can get access to video tutorials in the howto tab.

SIP amounts and split between goals

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Case Study 07 Aug 22 SIP Output

Goal-based-investing plan

Where to invest?

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, suppose you have followed the process until now. In that case, you will realise that coming to this stage, at 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.

Allowed investments

  • Equity asset class: Index mutual funds. An article discusses this choice: Which index funds to invest in and why?. Jaspreet should explore exiting the direct stock holdings over time in favour of index funds to avoid dedicating unnecessary time tracking and managing a mutual fund of his own. ELSS funds can be chosen to plug any gaps in 80C investments.
  • Debt asset class: Apart from the 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, they should use the same debt funds as per the debt allocation above

Disallowed investments

  • NPS: The family should not invest any amount in NPS at all. The logic here is that NPS locks in your money and requires that you invest 40% of your NPS corpus in an undesirable taxable annuity
  • 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 mised with investment: ULIP, endowment and related mixed products should be avoided due to high commissions, opaque structure, low returns and lock-ins
  • Other options: Cryptocurrencies, P2P loans, direct stocks and investment real estate/land (except a primary residence) should be avoided

Given the room in the debt asset allocation, the family should maximise their yearly contributions to PPF by opening two PPF accounts. Over time, the PPF at the current interest rates, will generate:

  • ₹12,500/month for 15 years at 7.1% will give ₹41 lakhs at maturity after 15 years

Rebalancing plan

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Case Study 07 Aug 22 Rebalancing Plan

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.

Related:
This article explains what rebalancing is and why you should do it.

Portfolio review

As time passes, three things happen:

  • markets move up and down
  • you invest or remove money from the portfolio
  • 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?

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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Worked out case studies for goal-based investing

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Topics you will like:

Asset Allocation (17) Basics (8) Behaviour (10) Budgeting (9) Calculator (13) Case Study (3) Children (9) Choosing Investments (28) FAQ (3) FIRE (9) Gold (6) Health Insurance (4) House Purchase (13) Insurance (12) International Investing (8) Life Stages (2) Loans (10) Market Movements (8) Mutual Funds (14) NPS (5) NRI (4) News (5) Pension (6) Portfolio Construction (36) Portfolio Review (22) Retirement (29) Review (7) Risk (6) Safe Withdrawal Rate (5) Set Goals (26) Step by step (8) Tax (16)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

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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


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