Financial Planning: How a working couple with one child can structure their portfolio

Hariharan (35) is married to Swapna (32). They want to build a portfolio using financial assets. They are both from Andhra Pradesh and in his opinion the family has more than adequate exposure to real estate assets for their needs.

Both did not foresee any need for goal-oriented spending in the near future. Her daughter Akshara is 7 years old. The couple’s parents are in a comfortable financial position and in good health.

Swapna is more inclined to have a better lifestyle. He wants a good education for his daughter. . They plan to stay in Bangalore, where he works, until retirement. Upon retirement, they intend to return to their place of origin. Therefore, the need to buy a house in the city did not arise.

They were risk seekers regarding their investments. They both understood the risks associated with investments related to the stock market. They showed great interest in building a portfolio for long-term wealth creation. Although their experience was very limited, considering that they participated in the stock market dream run after March 2020, they were well aware of the downsides.

Their limited experience of investing in stocks for 20-21 had given them good returns. Since they are both employed and returning to work from office mode, they wanted to move their investments into mutual funds. They were ready to make systematic investments considering the volatile nature of the market. They seemed to have been convinced of the potential of equity to generate long-term wealth.

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We assess your risk profile as ‘Aggressive’ and recommend you opt for a 70:30 asset allocation in Equities: Debt.

Equity exposure is less than 25 percent of total financial assets. With regular contributions to employers’ provident funds, ₹1.56 lakh per year for Hariharan and ₹86,400 for Swapna, they will not reach the desired allocation immediately. With a surplus of ₹7.25 lakh per year, it can take around 10 years to reach this goal. Therefore, we suggest that you invest all the surplus in stocks for the next 10 years. Any increase in salary income will result in an increase in the contribution to the PF as well. Asset allocation should be monitored in the desired ratio during market ups and downs and also every year with salary increases.

Moving on to the next point of when to exit, we recommend that you enter targets where you can have some clarity of exiting any or all investments. If they plan the current college education cost of ₹25 lakh for Akshara when he turns 18, they need to withdraw ₹71.32 lakh approximately at 10 percent inflation of the corpus. This goal can be achieved by investing ₹25,000 per month along with mapping ₹1 lakh from current MF investments. We advised them to invest this amount in a flexible cap category fund.

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The balance of ₹35,000/- was divided into a combination of two aggressive mid-cap funds and a tactical portfolio with 3 sector funds.

If they continue to invest the same amount for the next 11 years, they will have ₹1.69 crore in mutual funds at the end of 11 years with an expected return of 12 percent per CAGR. They have the option to withdraw for university education from Akshara if they cannot liquidate the real estate. If he continues to invest for the next 25 years, Hariharan, at age 60, will have Rs 12.85 crore at 12% CAGR and have the potential to generate Rs 19.2 crore with an expected return of 15% CAGR. This is without accounting for any increase in income or increase in contribution in mutual funds and EPFs.

Building wealth looks easier on paper. There could be many challenges… a) A longer than usual bear market would lower yields, which could sometimes be lower than fixed income. This is unavoidable when investing for the long term, b) Family and friends give unsolicited advice, especially launching real estate deals by providing absolute numbers that could be very tempting and very difficult to avoid. At such times, the couple must stick to their asset allocation strategy and keep a cool head; c) Understand that investing systematically to create wealth is easier said than done, as during the course of the journey, too much noise being presented as information would derail the investment journey.

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There are some mutual funds with a track record of 20 to 25 years that can show a past return of 12 to 15 percent. But how many investors have reaped the benefits with patience and discipline is the question to ponder. In making such efforts to build long-term wealth, the journey alone is not important, but every step counts!

The writer, co-founder of Chamomile Investment Consultants in Chennai, is a registered investment adviser with SEBI.


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