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.
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All worked out case studies for goal-based investing
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 should be completed 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. 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.
A minimum of 6 times total monthly expenses and EMI, which is ₹1.5L x 6 = nine lakhs. They should keep ideally 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. However, in this case, they have ₹30 lakhs parked in the home loan overdraft accounts. This amount together with high-value credit cards will easily cover standard emergencies. Just for liquidity purposes, the family should ensure they have 2-3 lakhs in their joint bank account as well.
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
Ashwini has a corporate group cover of ₹1.2 crores as term insurance. Additionally, he has personal term insurance of ₹2.6 crores. Ruchika has a personal term plan for a more modest ₹50 lakhs.
As we will see below, this coverage amount is not enough considering their goals. Given the value of their goals today, they need at least ₹6 crores of insurance between them. Two additional life insurance policies of ₹1.5 crores per head, given their age and 20-year coverage, should cost a total of around ₹36,000/year. Since Ruchika has a lot lower coverage, she should buy her new policy immediately.
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 » they have a ₹10L family floater along with a ₹95L super top-up cover. The base policy should be increased to ₹20 lakhs to account for increasing costs of medical procedures
separate policy covering elderly parents. Since a policy’s premium depends on the highest age of the members, parents must be covered separately. Here Ashwini’s parents have a ₹10 lakhs policy for each. Ruchika should cover her parents with a similar policy
The family has a ₹95 lakhs 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, ₹4,500/year, is a small price to pay for insuring against a significant risk
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
The family should therefore take ₹1-2 crore personal accident insurance each for Ashwini and Ruchika with a total premium of around ₹17,000-35,000.
Pay off high-interest loans
Fortunately, the family has no high-interest loans like credit cards or personal loans.
Paying off the home loans
The family is currently having two home loans, both of which are overdraft loans. As a family, they are currently paying an EMI of ₹73k/month plus some small amount as prepayment. However, interestingly, they have parked ₹30L combined in the two OD accounts which reduces their interest outgo.
We support this amount parked in the OD accounts since:
it is substantial enough to offset the extra interest cost of the SBI Magnum OD loan
it provides a liquid cash buffer that can act as an emergency fund
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
Given that they have a 1-year old baby, their expenses will likely shoot up once the child starts going to school. The current expenses do not consider this point.
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 7% 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, the family should allocate 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:
Please note that this is a paid service.
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 ₹9L 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 ₹7.72 crores which is what should be accumulated by the point retirement starts
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 15 years when Ashwini is 50 years old. Ruchika plans to retire at the same time
Child goals: education, marriage, and house purchase
Children’s goals are very precious for a family. However, given the much shorter horizon for purposes like an UG degree, the monthly investment amount can be surprisingly higher.
Specific: Hitesh’s school admission, school excursion, UG and PG degrees, marriage, and down-payment for his first house
Measurable: In today’s money, these goals add up to more than ₹50 lakhs, with the split being school:2L, UG: 40L, marriage: 12L and a token amount for the house downpayment
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
Investment property purchase
The family wishes to buy an investment property, for rental income in ten years:
Specific: Buy a property for giving on rent in Ashwini’s city in the suburbs
Measurable: The target here is to spend ₹80 lakhs in today’s money. The goal value is expected to appreciate around 4% a year for the next 10 years
Achievable: The process of saving for the downpayment of a home, as a one-time expense is covered here: SMART goals: investing step-by-step for buying your dream home. The family needs to revisit this goal and instead consider investing for the down-payment of Hitesh’s first house
Realistic: Given the amount of capital at their disposal, this goal is feasible
Time-bound: The target is to buy the asset in 10 years but the target date will be flexible
Other goals
Foreign trips: The family wishes to take a few foreign trips over the next 30 years, for special occasions like anniversaries, and will save for those via goal-based investing
Early retirement: Ruchika wishes to retire early along with her husband. We have added a 3-year early retirement to the model with the same assumptions on lifestyle as the primary retirement goal
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 case studies using the tool (click the image below)
SIP amounts and split between goals
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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, 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. The action on the investor will be to immediately implement the rebalancing plan as shown in the image.
Practical considerations
Moving to cash
The plan requires that a good amount of the equity allocation to be moved to debt and cash today. This allocation choice enables a larger part of the monthly EMI to be invested in equity and therefore leads to a lower SIP amount required per month. If selling a large chunk of equity investments is not possible immediately, the family can invest more in debt mutual funds until the gap narrows.
Lump sum investing
The family has some vested RSUs this year as well as some LIC policies maturing soon. These lump sum amounts should enter the cash balance of the portfolio first and then reinvested as the asset allocation of that time using the Arthgyaan Have-vs-Needs framework for investing lump sum amounts.
SIP amount required is in line with the investible surplus
The family has an in-hand income of ₹4.27L/month including ₹52,000/month going into EPF. Along with the ₹73k/month home EMI payments, they spend a total of ₹1.67L/month. These expenses leave them with an investible surplus of ₹2.60L/month which is broadly in line with the requirement as per the model output.
In this case, the family is doing well in creating and following a goal-based investment process and they should continue it.
Investing for the child’s first home
We are a big advocate of both
not having investments in real estate beyond the primary residence
investing for the goal of funding the downpayment of the first house purchase of the child
This position is due to our opinion that real-estate investments, after buying the primary residence, should be attempted only after primary goals (retirement / FIRE, children-related etc.) are fully funded vs. market-linked assets like stocks and bonds. We are also seeing the rapid increase in real-estate in major metro cities. We have made our case on this topic in detail here: Why parents should invest for the downpayment of their child’s first home?.
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This post titled Case study: how a family in their mid-30s with a newborn kid can FIRE and invest in real estate? first appeared on 30 Apr 2023 at https://arthgyaan.com
