Thursday, April 14, 2011

Ask Mint Money | Personal loans should be taken only in extreme scenarios

I am 27 years old and my monthly net income is Rs. 52,000. I pay an equated monthly instalment (EMI) of Rs. 10,500 for an education loan of Rs. 5 lakh and an EMI of Rs. 4,200 for a personal loan of Rs. 1.20 lakh. I spend Rs. 15,000 per month. I plan to buy a car next year and a house in three-four years. I would also require liquid cash for my marriage and any contingency. I have invested Rs. 30,000 in tax-saving mutual funds and have savings of another Rs. 30,000. I have a health cover for Rs. 2 lakh. I need an investment strategy to take care of my goals and maximize wealth.
—Rohit Banerjee

I am assuming you have taken the personal loan for a critical cause. We strongly believe that personal loans should be taken only in extreme scenarios.

As per the savings available, net of your expenses (including your EMIs), you can save Rs. 22,000 per month. You will also have additional savings when your EMIs get over. With enhancement of your education skills, the prospects of a better job and higher income also becomes bright.

We recommend you defer buying a car to four years, which is also the time we have assumed you will get married. The rationale is to conserve and invest in early years for buying a house as well as providing funds for your marriage.

The house to be purchased is assumed at a value of Rs. 25 lakh and the loan amount Rs. 20 lakh. It is assumed that the EMIs will come out from the amount you use to pay your existing EMIs. This means that the property should be purchased after you are through with your existing loans. You may need to top the home loan EMI but that can be funded with your increased salary; that seems possible with better qualification.
The car purchase cost is taken at Rs. 3 lakh and with inflation assumed at 7%, the value of the car will be Rs. 5.24 lakh. Similarly, the marriage expense is provided at Rs. 5 lakh when you turn 30 years; again inflation rate has been considered at 7%.

However, to make all this possible you need to start saving; the saving is assumed to grow by 8% year-on-year. As most of the funds get consumed within the first few years, the risk-taking ability comes down and you need to consider options that are safe and, more importantly, liquid.

Consider options such as fixed maturity plans, dynamic debt, monthly income plans with an equity exposure of 10-25% and hybrid funds. The existing funds can also be gradually shifted to these asset classes.

Your health cover is adequate. When you are married, get a life cover for yourself as well as your spouse (if she is working). At that point, you can increase your health cover and opt for a floater policy. Hopefully, portability will be implemented by that time.

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