Jan 22

ASSET ALLOCATION REVISITED FOR A 35 YR OLD

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How much should you allocate for wealth creation? I think it is a question which troubles all of us. Anshul Gaur, a regular reader has posed a very pertinent question. It is difficult to write when you watch two beautiful ladies answering funny questions on Koffee with Karan. I have just finished watching Priyanka and Deepika in a candid conversation with Karan Johar. So, I can concentrate on the blog. ūüôā

Actually asset allocation is a function of your savings. First decide how much you can save. Percentages are advised by financial planners but you need to see your family responsibilities and your salary.

If I take an example, let us assume you are a 35 year old professional. Your salary is Rs 100,000 per month. You have to save Rs 9000 per month to get benefits of sec 80C. This money can go into PPF or an Equity Linked Saving Scheme(ELSS) tax saver Mutual Fund.  If you put it into PPF it is going into debt but if you put it in ELSS it is equity allocation.

Rs 13000/- goes to the government as Income tax. You are left with Rs 78000/-. Assuming you have monthly expenses of Rs 60000/- . You are left with Rs 18000/- per month extra. Now, comes the million dollar question, how do I create wealth with this 18000/- ?

The answer is you have already invested Rs 9000/- towards equity. Your employer is contributing some money towards your Provident Fund, along with some contribution from you which becomes your “need money”. Assuming your basic salary is Rs 50,000/- You will contribute about Rs 6000 per month to the PF and so will your employer.

So a corpus of Rs 12000 per month goes to PF (debt) in which your contribution is Rs 6000;  Rs 9000 goes to ELSS (equity). You are still left with Rs 12000 per month to plan and allocate.

What would I do with it? I would put Rs 5000 per month in another good Mutual Fund for the long term. Thus, Rs 14000 per month in Mutual Funds on a conservative¬† CAGR of 14% over 35 years will become close to Rs12.5 Crores. That is your “Greed Account” go and poof it off.

The balance Rs 7000 per month goes towards catering for emergency expenses (after building a corpus) and gradually into your other need or greed goals.

I have not taken into account your increase in salary as well as increase in expenses. But remember, to get rich you got to take care of expenses. They should not be proportionate to increase in salary. If salary increases by 20% and expenses by 18% you would do fine.

So the allocation would be something like this 

Salary:                              100000

Income Tax                       13000

Household Expenses     60000

ELSS                                    9000 Equity

PF by you                           6000  Debt

PF by employer                           6000 Debt

Mutual Fund eg PPFAS      5000 Equity

Saving AC/Liquid Fund   7000    (save for two years and put in a liquid fund for emergency expenses)/ (save for three years to buy your car)/ ( buy a property and pay EMIs)

THIS IS THE AMOUNT WHICH WILL CATER TO NEEDS/GREED DEPENDING ON WHAT YOUR PRIORITY IS. IF YOU HAVE A HOUSE ALREADY, SPEND IT ON VACATION, BETTER CAR,  etc. And if need be take a loan from PF to meet your major need based requirements. Your equity exposure will give you a VERY big corpus for retirement needs.

Caveat: You need the discipline and patience to save for 35 years and stay the course.

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11 comments

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  1. Thanks Beth

    • anshul gaur on March 23, 2014 at 7:00 pm
    • Reply

    DEar sir,
    1. NO, i dont intend to sell off any of the houses, instead am plg to put them up for rent so as to earn a second income.

    2. Spouce is well learned (MA MEd M.Phil) and has taught in a college for about a yr after marriage. BUt i intend her to stay with me, so her income may sparodic and spasmatic. So i dont think we should incl her income.

    3. ALso, parents may be dependent on me but they have a flat in delhi which if leased out can fetch 12-13k pm easily.

    4. GRoss income per month is Rs 70k, total IT was 93k last yr. HOuse loan deduction being availed for IT.

    5. Thank you sir.

    1. ok

    • anshul gaur on January 29, 2014 at 7:11 pm
    • Reply

    Sir,
    1. Further to my previous comment, i was wondering the following issues
    a. One needs to work even after faujis retirement ie till 70 yrs of age.
    b. Any withdrawls would reduce the corpus accordingly.
    c. Can the DSOP cater for all ur needs..l kids studies, marriage., own retirement….
    D. How to decide on own needs and allocate enough mollah for it?

    2. Secondly, i was referring to Jayant Pai of thePPFAS in my postscript in previous comment. Anything on the cards sir?

    3. Lastly, would thank u again for a simple, logical and lucid explanation..

    Anshul

      • Fauji on February 1, 2014 at 2:12 am
        Author
      • Reply

      The basic question/start point is Definition of needs. As you have yourself asked. Let me know your needs and I will show you the road map. ūüôā

        • Anshul Gaur on March 16, 2014 at 6:09 pm
        • Reply

        Dear Sir,

        1. Further to our dscn on the sub of Asset allocation. I am taking the liberty of encl my financial bal sheet and my goals so that you may advice me on the asset allocation. Other readers may also take a cue from the same and may create their own Financial Plan.

        2. Before I start, a bit about myself. i am 32 yrs old govt employee, with an average income of 75k (less allces) and have a wife and a lovely 4 yr old daughter and another issue is on his/her way. My parents are not yet dependent on me, but will be so after 5 yrs.

        3. Now, My Financial Bal Sheet
        (a) ASSETS
        (i) AGIF insurance cover of 6000k with monthly premium of 5k.
        (ii) DSOPF of 550k.
        (iii) PLI policy of 500k cover wef from Aug 2005 with monthly premium of Rs 2576. (Am in the process of liquidating the same)
        (iv) FD in bank of approx 50k.
        (v) Equity worth 100k.
        (vi) Cash in Bank worth 400k.
        (vii) Two bedroom flat in ghaziabad (with EMIs on and Possession not yet gtd).

        (b) LIABILITIES
        (i) 500k worth payments for possession and Registration of flat within next 3 months (Hence the cash).
        (ii) Home Loan EMI till 2023 of Rs 20k.

        (c) INCOME – Salary approx 75k pm (less allces)

        (d) EXPENDITURES
        (i) Monthly premium AGIF 5k.
        (ii) Monthly DSOPF Subscription 10k.
        (iii) Household expenses 25k.
        (iv) Home Loan EMIs of 20k (min EMI is approx 13k).
        (v) IT approx 7k.
        (vi) SIP with PPFAS of 5k.

        4. FINANCIAL GOALS
        (a) Emergency fund in cash/ liquid MF of approx 250k (NO time limit)
        (b) House possession by paying 500k (3 months)
        (c) Home renovation/ woodwork as prelude to renting it out approx 150k (24 months)
        (d) Purchase of Second house of approx 5000k (by 2020)
        (e) 12k for higher edn for first child (by 2026)
        (f) 12k for higher edn of second child (by 2030)
        (g) 25k for marriage of first child (by 2036)
        (h) 18k for marriage of second child (by 2040)
        (j) 3500k spare cash for enjouying retirement (by 2036)
        (k) 7000k for a big retirement house in NCR (by 2036)

        NOTE – these values are not adjusted for inflation. also, as future growth in income is not known, not been catr for here. Retirement from job as per present rules is 2036. am eligible for 50% last drawn pay as pension. Also, am en-cashing PLI to pay off the house down payment as PLI investment wasn’t planned correctly.

        5. QUESTIONS
        (a) Are these goals attainable?
        (b) Am I insured adequately? (am closing the PLI policy)
        (c) What should be the ASSET ALLOCATION to attain these goals?
        (d) If goals are not attainable, what changes are needed?
        (e) what instruments/ investing veh do you suggest to attain these goals?
        (f) Is the emergency fund enough? I have a stable income with fairly good medical backup for entire family.
        (g) Any other aspect that you, sir, would advice me on?

        6. Eagerly awaiting your response, sir.

        7. Hope other investors/ salaried pers will be able to benefit from this too..

        Anshul

        1. Dear anshul,
          Will reply separately after studying your requirements as it needs a bit of time.

            • anshul gaur on March 22, 2014 at 8:10 am

            DEar sir,
            1. I seemed to have got some figures mixed up. UNdermentioned are the amended ones. May i request u to pls replace them in the original text :-
            (A) Para 3(a) (iv) FD in bank of approx 180k.
            (B) Para 3(a) (vi) Cash in bankapprox 300k.
            (C) Para 4 (b) House possession by paying 600k by May 2014.
            (D) Para 4(e) 1200k
            (E) Para 4(f) 1200k
            (F) Para 4 (g) 1800k
            (G) Para 4 h) 1500k.

            2. Thank u sir.

            • Fauji on March 23, 2014 at 12:54 am
              Author

            I was going to ask you about education allocation which you clarified. Also when u say at retirement u want a bigger house in NCR what do u imply? Do u want to sell the existing smaller flat and the one which you are planning to buy next to replace by a bigger house or you plan on three houses by the time you retire? Pls clarify. Also is spouse working?

            • Fauji on March 23, 2014 at 1:06 am
              Author

            Pls tell me what is your gross income per month?
            and IT paid pm

    • anshul gaur on January 25, 2014 at 4:33 am
    • Reply

    Sir,
    1. Thank you for such a prompt response.
    2. Have a few more quarries, will be troubling u soon.

    Anshul

    PS : Have bought “The intelligent investor “. Can’t wait to go through it. Also, have done an SIP with PPFAS. Jaana info me that u r plg an initiative with them this yr end for the faujis. Is that correct sir? Can’t wait to hear the detls .

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