moving towards a bigger three bedroom flat With their two kids is something that Gurgaon-based IT professionals Keshav Prasad and Mohini Latha were planning for a long time. Some of the proceeds from the sale of their old flat, along with a home loan, helped them achieve this- they moved into their new home in 2015.
Creating a corpus for their retirement and their children’s education are two major long-term goals of the 45-year-old couple. Keeping this in mind, they are investing largely in debt products and to a lesser extent in equities. However, there has been some change in their risk perception financial advisor for the last eight years. From zero risk a few years back, equities are now 10% of his current portfolio.
Mint got in touch with the couple and their financial guide, Amit Kukreja, a SEBI registered investment advisor, to understand their personal finance journey.
financing a new home
“We have seen that most of our friends use all the money they get from selling their old flats to buy a new one. This leaves nothing to invest for the future,” says Prasad. Based on Kukreja’s advice, Prasad and Lata used only a part of the sale proceeds from their old flat to buy a new one in Gurgaon. felt this was necessary, especially considering that both have private sector jobs. Also, taking a loan for partial financing for the purchase of their flat is helping them claim each deduction 2 lakh for the interest paid on the home loan. According to Kukreja, given this tax benefit and interest rates increase only by 30-35 bps so far, he is not recommending them to pre-pay the loan yet.
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Following Kukreja’s advice, Prasad and Latha also opted for a home loan interest savings account, which they have found useful for holding any surplus and, in turn, reducing their interest burden. With this facility, interest is calculated on the current account balance less the outstanding loan amount. Also, one has the facility to withdraw money when needed. But, the rate of interest can generally be 50 bps higher than for a home loan without interest savings account.
Currently, the couple is paying off two home loans, one taken in 2013 (before they met Kukreja) and the other in 2015. The first one was used to buy a flat in his hometown in Andhra Pradesh.
building safety nets
The IT couple has kept money as their contingency amount along with some debt fund investments in the home loan interest savings account. It covers them for nine months of expenses. Generally, people park their contingencies in fixed deposits and debt funds.
Apart from this, both have taken a life insurance cover and a family floater health policy. The latter is in addition to the health cover provided by their employers. “Amit insisted on getting insurance first and then focused on building a corpus for our long-term goals,” says Prasad. Instead buy term plans. He guided them on how insurance products were not designed to be used as investments for long and short term goals.
Prasad feels that with the two home loans that he has to repay, and the fact that his corporate health cover will only last as long as he has a job, having adequate life and health cover makes a lot of sense.
diversification, tax efficiency
Portfolio-wise, while their allocation is still debt-heavy, the couple has moved from investing only in fixed deposits to debt mutual funds (direct plans), making their portfolio more tax efficient. Long-term capital gains (period of three years or more) from debt funds are taxed at 20% with indexation benefit versus fixed deposit interest income, which is taxed at the income tax slab rate of an individual. Prasad and Latha no longer have any fixed deposits and their loan portfolio includes investments in Employees’ Provident Fund (EPF), Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY), apart from debt funds. Both are specifically about making your PPF and SSY investments to earn the maximum possible interest at the beginning of the financial year.
His equity investments (only 10% of his portfolio) are spread across Large Cap, Equity Linked Savings Schemes (ELSS) and Multi-Cap Funds and National Pension System (NPS). “While we want our investments to grow and beat inflation, we don’t want to risk losing our principal,” Prasad concluded.