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

17 Jul 2022 - Contact Sayan Sircar
16 mins read

This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.

Case study: how this double income single kid 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

  • Anish and Neelima, husband and wife, age 35 and 33, respectively
  • One child Ekansh, age 3, boy
  • Income: 2.5L/month, post-tax in-hand combined from salary
  • EPF: 40,000/month combined over and above the amount above
  • Monthly expense: ₹1.35L/month (including EMI)
  • Loans: car loan, EMI: 15,000/month (7.5L outstanding @ 8%)
  • Credit card dues: none
  • No education, personal or home loan
  • Anish’s parents are financially independent
  • Neelima contributes ₹20,000/month to her parents’ monthly expenses (included in the monthly expense figure)

Existing assets and investments

  • Bank account: ₹3L in savings account and FD
  • EPF: ₹9L in EPF
  • PPF: ₹2L in PPF
  • NPS: ₹10L in NPS
  • stocks: none
  • MF: ₹26L in equity MF
  • Insurance policies: no investment-cum-insurance plans like endowment or ULIP
  • Ancestral assets: none of substantial value expected from either side

The total market value of these assets:

  • equity assets: ₹29L (MF + NPS)
  • debt assets: ₹18L (PF + NPS)
  • cash assets: ₹3L (bank)
  • total asset value is ₹50L
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Pre-requisites before you start 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 should be completed before investing in goals. A portfolio created for a goal has one purpose: 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. Being invested in the wrong asset class in the wrong proportion (either equity or debt) can lead to either high risk or poor returns or worse both.

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 and EMI, which is ₹1.35L x 6 = eight 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.

Over time, the family should bump this amount to 12x expenses by starting a SIP in a liquid mutual fund for the additional amount.

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

Anish and Neelima have corporate group cover of 3-5x CTC for term insurance for a total of ₹2.5 crores. However, that coverage amount is not enough considering their goals. Given the value of their goals today, they need at least ₹7.5 crores of insurance between them. Two additional life insurance policies of ₹2.5 crores per head, given their age and 25-year coverage, will cost a total of around ₹60,000/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 ₹20 lakhs covering self, spouse and child
  • separate policy covering elderly parents. Since a policy’s premium depends on the highest age of the members, parents must be covered separately. Here we have allocated ₹10,000/month, i.e. ₹1.2L/year, for two senior citizen health insurance policies for Anish and Neelima’s parents
  • 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 for both Anish and Neelima with a total premium of around ₹17,000-20,000

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. However, the car loan is at a decent 8%, and the prepayment option should be used when windfalls like bonuses occur.

Expense structuring

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

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 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 ₹7.5L 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 ₹13 crores which is what should be accumulated by the point retirement starts
  • 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 in 19 years when Anish is 54, but this may be stretched by 4-5 more years if needed.

Child goals: education and marriage

Children’s goals are very precious for a family. However, given the much shorter horizon for purposes like UG degree, the monthly investment amount can be surprisingly higher.

  • Specific: Ekansh’s school admission, school excursion, UG and PG degrees, marriage
  • Measurable: In today’s money, these goals add up to nearly one crore, with the split being school:5L, UG: 40L, PG: 40L and marriage: 10L
  • Achievable: Children’s goal planning can be challenging due to its emotional aspect. Here is a complete guide on the topic: Goal-based investing: How to save for children’s future
  • Realistic: The model’s output for this goal is relatively substantial on a monthly investment basis. We will explore this in more detail
  • Time-bound: The goals are spaced out over multiple horizons over the next 30 years

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 one crore, including registration, brokerage, shifting, interiors and other costs increasing at an inflation rate of 5%/year. The family plans to pay 30L 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 take a few foreign trips over the next 30 years and will save for those via goal-based investing
  • Early retirement: Anish wishes to retire early. We have added a 5-year early retirement to the model with the same assumptions on lifestyle as the primary retirement goal
  • Next car: The current vehicle was purchased on a car loan. The family wishes to buy their next vehicle without a loan since a car is a depreciating asset. They plan to spend ₹10 lakhs in today’s money, growing at 5% inflation, to buy a car in seven years. In seven years, they need to accumulate 10 * (1.05^7) = ₹14 lakhs.

Derivation of investment amounts

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Case Study 17 Jul 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. There is a link to download a pre-filled copy of the Google sheet via 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 17 Jul 22 SIP Output

Our new Goal-based investing tool will help you to create and manage all of your goals in one place. Click the image below to get access:

Arthgyaan creates a system for reaching your financial goals by sharing simple, actionable advice backed by research and analysis.

Your email address will not be shared with anyone and you can unsubscribe anytime.

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. Here is an article that talks about this choice: Which index funds to invest in and why?
  • 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

Disallowed investments

  • NPS: The family should not invest any amount in NPS beyond the minimum needed to get a deduction under Section 80CCD, i.e. ₹50,000/year and any amount under Corporate NPS. The logic here is that NPS locks in your money until 60 (incompatible with FIRE goals) 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
  • Other options: Cryptocurrencies, P2P loans, direct stocks and investment real estate/land (except a primary residence) should be avoided

Rebalancing plan

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Case Study 17 Jul 22 Rebalancing Plan

This section shows the current and target asset allocations for equity, debt and cash. The action on the investor will be to immediately implement the rebalancing plan as shown in the image.

This article explains what is rebalancing 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 practical difficulties in the plan, which will tackle one by one.

Moving to cash

The plan says you will immediately move the entire portfolio into cash to serve short-term (within five-year) house purchase and foreign travel goals. However, this is not possible directly due to the locked-in assets like EPF, PPF and NPS.

Due to this, the SIP should happen only in debt MF until and unless the cash bucket is full.

SIP amount is higher than surplus

The family has an in-hand income of ₹2.5L/month plus ₹40,000/month going into EPF. However, the monthly expenses are currently ₹1.35L/month, which means that only ₹1.15L/month (plus ₹40,000 in EPF) is available for investments. At the same time, the model requires ₹2.52L/month. The shortfall is, therefore, around ₹1 lakh.

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.

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More: worked out case studies for goal-based investing

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Topics you will like:

Asset Allocation (18) Basics (7) Behaviour (10) Budgeting (9) Calculator (11) Case Study (3) Children (7) Choosing Investments (24) FAQ (2) FIRE (8) Gold (6) Health Insurance (2) House Purchase (11) Insurance (8) Life Stages (2) Loans (10) NPS (4) NRI (3) News (5) Portfolio Construction (30) Portfolio Review (18) Retirement (22) Review (7) Risk (6) Set Goals (24) Step by step (4) Tax (12)

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