Being over cautious can be detrimental

Hemant Bhardwaj, 44, works in the financial services space. He lives in a suburb of Mumbai with his wife Manju, 35, son Rohan, 18, and daughter Ashi, 15.
What are they saving for?
The couple wants to purchase an additional house worth Rs 75 lakh after five years. They want to build a Rs 40-lakh corpus for each of their children’s education
after five and eight years.They want to save Rs 50 lakh for the marriages of their children after 10 years. They also want a Rs 1-crore corpus to fund their retirement. They aspire to go on a foreign vacation and buy a holiday home.
All the costs will be revised based on inflation.
Where are they today?
Cash flow: The couple’s gross annual inflow from all sources is approximately Rs 59 lakh, while yearly outflow is Rs 50.30 lakh. The outflow includes routine household expenses, car loan EMI, insurance premium, taxes, school fees and certain regular savings. About 3.3% of the inflow is being utilized to pay the EMI.
Net worth: The total value of the couple’s assets is Rs 2.67 crore. This includes personal assets worth Rs 1.75 crore, which comprises house, car and jewellery. Their outstanding loan on the car is Rs 13 lakh. This is about 5% of their overall assets.
Contingency fund: Against the monthly mandatory expense of Rs 1.83 lakh (including EMI), the couple’s balance in savings bank account, liquid funds, bank FDs and cash in hand is Rs 81 lakh. This is almost equal to 43 months’ reserve.
Health & life insurance: The couple hardly has any health insurance. Both Hemant and Manju have a life insurance cover of Rs 5.25 lakh each.
Savings & investments: Apart from the balance in savings bank account, the couple has liquid funds worth Rs 10 lakh. Their bank deposits amount to about Rs 45 lakh. They have other investments worth Rs 11.50 lakh.
Fiscal analysis
The couple has a decent flow of income. They have a large amount of funds lying idle in savings bank account. If we factor in bank FDs, then their contingency fund is very high. Both their health and life insurance is insufficient. The couple needs to invest in growth-oriented asset classes like equity and gold.
The way ahead
Contingency fund: The couple must keep aside funds equivalent to about three months’ mandatory expenses. This comes to about Rs 5.50 lakh. Of this, they should keep about Rs 30,000 as cash at home and the rest in a savings bank account linked to an FD. The excess funds need to be used to meet other goals.
Health & life cover: The couple needs to purchase health insurance of Rs 5 lakh for each member of the family. Also, Hemant’s life cover needs to increase by Rs 2.5 crore by way of term plans.
Planning for financial goals
Additional home buying: The couple wishes to buy a house worth Rs 75 lakh in five years. This can jeopardize their other important financial goals like children’s education, marriages, etc. Also, it will skew their overall portfolio in favour of illiquid real estate.
Children’s education: The couple can invest Rs 15,000 in equity-oriented mutual funds and increase this SIP by 10% every year. Also, they must utilize the amount in savings account for this goal. However, until the time the funds are actually needed, they can be parked in a debt fund to generate more tax-efficient returns.
Children’s marriages: The couple can start an SIP of Rs 10,000 in a large-cap fund and a gold fund to build a corpus. Also, they can utilize the funds in bank FDs. Our only recommendation is to transfer the FD to tax-efficient debt products like tax-free bonds, etc.
Retirement: In order to save for their retirement, the couple should start investing by way of SIPs in equity-based mutual funds. Also, they can contribute regularly to PPF to help save for this goal.