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Friday, February 11, 2011

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Invest surpluses diligently for a better future

Suresh Sadagopan
Ramesh was getting ready to leave office. It was not yet dark at 7.30.
Returning from the washroom, he was humming a tune. But he was feeling some uneasiness.
Was it something he ate that afternoon?
Apart from the lunch packed by his wife Malini, he had a couple of samosas in the evening. That must be it.
He was now retrieving his bag and it happened…a searing pain in the chest and he just collapsed.
There was no one nearby. He was passing out.
He thought he heard the some footsteps approaching. And then, nothing.
When he opened his eyes, his gaze fell on the white screen…where was he?
He was not able to move. No one seemed to be there. Why was he there?
Then he remembered the pain. Malini was entering the room with someone else… must be the doctor.
He learnt he had suffered a massive heart attack and he should be thankful to his colleague Pranav for rushing him
to the hospital within the first 10 minutes. Else, instead of seeing his wife, he would have been communing with his
father, up there in the heaven.
The hospital was his home for the next two weeks.
The bills were not a problem. The tab was picked up by his company. He also had a good mediclaim policy of his
own.
What he was now worried was about any changes in his lifestyle, from here on.
First, he wanted to know if he can work like before. The doctor had given a qualified answer—yes, he can, but without
exerting too much.
Malini was worried. They have two small children aged six and nine.
She also knew they had no major savings. They had about `8 lakh in provident fund, about `2.5 lakh in mutual funds,
`2 lakh in fixed deposits and another `50,000 in National Savings Certificate. They had bought a home, which today
is worth `1.25 crore.
The balance loan payable on it was about `29 lakh. Ramesh had taken `1.5 crore term insurance at that time.
All insurances of Ramesh came to `1.64 crore. So, at least insurance-wise, they were reasonably covered.
Malini was the caretaker of the family finances. She was the one who pored over newspapers and magazines and
decided where to invest.
Some back of the envelope calculation and Malini realised that they were woefully underfunded.
Ramesh was drawing a decent salary — `1.43 lakh per month after taxes and deductions. They were paying an EMI
of `54,500. Though they had prepaid a portion of the loans overtime, they had not brought down the EMI amount, so
that the loan gets over fast.
Their expenses came to `40,000 per month. Annual expenses like vacation, etc came to another `2.6 lakh and
insurance premiums `1.45 lakh. The surplus should have be `8.3 lakh then. But it never was.
Malini had been trying to figure out where it was going. She was prepaying about `5 lakh of the principal, every year.
But still, that should leave another `3.3 lakh. But her investments were totalling just under `2 lakh.
She approached Ruchira, a certified financial planner to assist her with her finances. Ruchira saw the problem. She
suggested a liquidity margin of `3 lakh, given Ramesh's medical situation.
It was to be kept in sweep-in deposits with the bank and can be cashed in on demand. She then sugges ted that
Malini open a new account and move `40,000 every month there and spend from there.
To bring in discipline, she also suggested that she should invest the rest, so that accumulation can happen at an
accelerated pace. Now `3.3 lakh will start getting invested.
Quick calculations, assuming Ramesh (now 41) will work for another 14 years and income increased 10% year on
year, with inflation at 7% throughout the period showed that things will work out.
She had factored `10 lakh each in today's cost for graduation expenses (growing at 8% per annum) of their son and
daughter.
Marriage for daughter has been factored in too, and `15 lakh (in today's cost) has been apportioned for that.

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2/11/2011 Printarticle-DNA E-Paper - Daily News …
The corpus at the end of 14 years after expenses (factoring in inflation) roughly came to `2.3 crore. That corpus was
enough for them, since they own a home.
She did not factor in post-graduation expenses for neither the son nor the daughter. But if it comes to that, they could
at least part fund it, depending on the requirements.
Education loans were available and could easily take care of the funding for PG courses, if it were to become
necessary.
Ruchira showed Malini the calculations, who seemed relieved after seeing all the numbers.
Ruchira cautioned Malini that all these will work only if they invested the surpluses diligently. Malini had already
made up her mind on that.
She wanted to slip the good news to her husband.
Ramesh was watching Avatar for probably the twentieth time since he bought the latest, updated version. He was
smitten by it.
He lowered the sound when Malini came in. Malini gave a snapshot of their financial picture. Ramesh just said
—"Fine". He always knew it will work out. He did not want to see the numbers.
When Malini was deflated a bit at this, he said to the retreating figure, "When Malu is taking care, why should I
worry?"
Ramesh was adept in boosting people. Malini smiled. Ramesh went back to what gripped him the most — sci-fi
movies.
All was well in the Ramesh household.
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