When it comes to making investment decisions, women tend to shift this responsibility on their close family member. While trusting one’s close family members is not wrong; completely depending on them can lead to trouble when one is left alone. The reasons could be an eventuality in the family or a separation from spouse.

Separation leads not only to emotional distress but can also make women financially handicapped, especially when they are not working or the spouse was managing the finances. Therefore, to secure ones life financially, it is important for women to have a wealth plan.

Facts of the Client :

• Ms. Shikha Mehta is 32 years old and is working as a Deputy Managar with a Bank and drawing a post-tax salary of Rs. 30,000 per month (p.m.).
• She has a 5 years old son.
• She had taken car loan for 5 years @ 12%; the EMI for this comes to Rs 8,500.
• She had taken a joint home loan for 2BHK apartment with her ex-husband for 20 years; the total EMI for this comes to Rs. 25,000.
• Her total monthly expenses are Rs 24,500 p.m.

Current Portfolio

 

Instruments	Corpus(Rs)
Public Provident Fund (PPF)*	50,000
Fixed Deposites (FD)*	120,000
Cash	100,000
Gold jewellery	100,000
Total Assets	370,000

 

*PPf will mature after 11 years and FD will mature after 5 years

Observations

• Ms. Shikha Mehta cannot maintain the same lifestyle given her current circumstances.
• Her investments were in conventional fixed income instruments with no exposure to equity.
• Her loans i.e. car loan EMIs and home loan EMIs took away more than 50% of her salary.
• Before separation, she was dependent on her husband for her personal expenses.
• She was not similar with different investment avenues.

 

The course of action

After conducting several rounds of discussion with Ms. Shikha Mehta, the wealth manager identified her immediate and long-term was to buy a house. The other goals were buying car, saving for her child’s education and her retirement.

The table displayed below summarizes her financial goals and time horizon.

 

Financial goals	Time horizon(years)	Future cost (Rs)
Buying a house	5	675,000*
Son Education	12	3,000,000
Retirement	28	11,200,000

*comprises of down-payment (35, 00,000 x 15%) + 150,000 of stamp duty & registration

Assumptions

• Advised her to maintain at least Rs. 100,000 in bank account to meet any contingency.
• Interest income on cash is not considered as part of her monthly income.
• Her salary will grow by 10% p.a. and inflation will increase by 6% p.a.
• Not considered the impact of alimony in this case study. However, for women in similar situations that can be an additional source of income.
• The current house will be either transferred in the name of her ex-husband or sold and  that there was no profit generated from this transaction.
• Her life expectancy to be 75 years.
• Return of 7 % p.s. post-tax on investment in fixed deposits and equity.

Solution

1. Cut down expenses: I started Ms. Shikha Mehta wealth planning by projecting her monthly cash flows by getting the break-up of income, expenses and savings. The table below shows that her monthly expenses were more than 90% of her salary, which led to negligible savings. Hence the first advise was to stop spending liberally on things that were secondary for her day-to-day operations. To name a few, spending on movies, dinner, vacations, shopping are some of the expenses that she was advised to cut down on. Spending more can lead to increase in debt and reduced savings, which in turn would delay her financial goals.

I, as wealth manager,  advised her to sell her current car and prepay the loan and defer this goal by 3 years.

 

Monthly Budget	Current (Rs)	Recommended (RS)
Salary	30,000	30,000
Total Expenses	24,500	18,000
(a)Household exp.	15,000	9,000
(b)Child’s Education	1,000	1,000
(c)Car EMI	8,500	—
(d)House Rent	—	8,000
Total Savings(A-B)	5,500	12,000

2. Opt for Insurance: The most important instrument that was missing in her portfolio was insurance. Insuarance helps the insured’s dependents in case of the eventuality. In this case, her 5-yr old son was the sole dependent and has at least another 15 years before which he can take care of himself financially. Hence the manager suggested her to opt for term insurance policy for cover of Rs. 50 lakhs for 20 years Rs. The annual premium for this comes to Rs. 14,000.
Next I advised her to opt for medical insurance with insurance cove of Rs. 5 lakhs. The premium for the same worked out to Rs. 5,000 per year.
3. Buying house: Based on her income, financial commitments and ability to service the loan, the manager advised her to opt for a 1 BHK house worth Rs. 35 lakhs. She should avail of home loan for 85% of the cost. I advised her to stay in a rented apartment till the time she is able to accumulate the corpus for the down-payment and the stamp duty and registration fees. The monthly rental worked out to Rs. 8,000 p.m.
Next step was to make a plan for accumulating corpus of Rs. 675,000. The stamp duty and registration charges of Rs. 150,000 will be taken care by the fixed deposit which will mature after 5 years Rs. For the down-payment of Rs. 525.000, the manager advised her to invest Rs. 7,300 p.m. for next five years, assuming return of 7 % p.a. post-tax.
4. Son education plan: Ms. Shikha Mehta wishes to send her son to engineering college after completion of Higher Secondery i.e. after 12 years Rs. The expenses for the same worked out to Rs. 30 Lakhs. I advised her to avail education loan same worked out to Rs. 30 lakhs. I advised her to avail education loan for 80% of the estimated cost. For the balance cost of Rs. 6 lakhs, She was advised to invest Rs. 2,700 p.m. for next twelve years, assuming return of 7 % p.a. post-tax.
5. Retirement planning: Ms. Shikha Mehta plans to retire at the age of 55 years. Given her current financial commitments, she cannot start planning for her retirement immediately. Hence, it was suggested that she start her retirement planning from the age of 43.
Her expenses post-retirement will comprise of:
· Household expenses
· Premium towards medical insurance
· Healthcare expenses
· Travelling expenses
Assuming growth of 10% p.a. in salary was expected to be Rs. 10 lakhs p.a. at age of 43. Considering her current house hold expenses and travelling /healthcare expenses; her retirement corpus worked out to Rs. 44,200 p.m. from the age of 43 years till the age of 55 years, assuming return of 7% p.a. post-tax.
Summary of wealth Plan

Financial goals	Time horizon(years)	Future cost (Rs)	Start investment at the age of	Investment horizon (years)	Investment required per month (Rs)	CAGR(%)
Buying a house	5	675,000*	32	5	7,300	7%
Son’s Education	12	3,000,000	32	12	2,700	7%
Retirement	28	11,200,000	43	13	44,200	7%

Asset Allocation

The risk-appetite of Ms. Shikha Mehta is  moderate. Hence as wealth manager, I  recommended asset allocation of 45% in equity and 55% in debt. As she does not have the required skill sets to invest in equity directly, I advised her to invest in equity mutual funds via SIP route.  For debt investments, she was advised to invest in fixed deposits and debt mutual funds. I also advised her to invest in tax efficient products like ELSS and PPF to save on taxes.