Reader Query: If corpus is ample, buy a larger house earlier :: Business Line

I am aged 28 and my wife is 26. My wife is employed with a Government department and I work in a private sector bank. Our total monthly take-home salary is Rs 78,000. We have one son who is 4 years.

Expenses: My monthly household expense is Rs 10,000. I had bought a single bedroom flat by taking a loan of Rs 5 lakh and my EMI is Rs 9,100. 

Savings: We are investing Rs 38,000 in SIPs in diversified equity funds and our current fund value is Rs 3.5 lakh. Recently we started a recurring deposit for Rs 10,000 for three years at 9.5 per cent interest. I take direct exposure to equity blue-chip stocks and invest Rs 10,000 monthly. My current portfolio is Rs 3 lakh.

I hold SBI Bonds worth of Rs 50,000 and corporate deposits for Rs 1 lakh.

Assets: I own a flat worth Rs 10 lakh and in a Tier-2 city. I own three plots worth of Rs 10 lakh. I also have a parental house worth Rs 25 lakh and agriculture land valued around Rs 10 lakh.

Insurance: We have two term insurance policies for Rs 50 lakh and Rs 20 lakh. We are now enhancing the cover to Rs 1 crore for me and Rs 50 lakh for my wife. With enhanced cover, our premium outgo would be Rs 14,000. We are planning to meet the premium with other income.

Medical: From my bank my family is covered for Rs 2 lakh; and from her organisation we are covered for the actual expenses incurred.

Goals: Within the next five years, I am planning to buy a house worth of Rs 40 lakh. For my retirement and for my son's education (Rs 8 lakh present value) I need to save Rs 1 crore. From my salary Rs 2,450 is deducted every month towards employee provident fund. From my wife's salary Rs 3,500 is deducted. I would also like to buy a mid-sized sedan worth Rs 5-6 lakh in the next five years.

Our current household expense may increase significantly as we move up the ladder in our careers. Please let me know if my current savings is sufficient. What should be the quantum of my retirement fund?

— Chaithu Kiran

It is nice to know that you have such control over your expenses and have used your surplus to build a reasonable corpus with good asset allocation. However, instead of rushing to buy a single bedroom house, you could have give yourself a few more years and build a bigger corpus for buying a larger home.

Given the growth rate of real estate in Tier-2 cities, the cost of flats there is likely to go up. If 40-50 per cent of the upfront cost is accumulated from your savings, it is better to freeze the opportunity to buy a larger flat rather than waiting. As you have sufficient investments in real estate, you can ignore this asset class while building corpus for other goals.

House: If you wish, buy the house entirely from your savings in another five years. To reach the target of Rs 40 lakh, you ought to save Rs 49,000 a month and it should earn a return of 12 per cent. But if you wish to avail loan for just 40 per cent of the cost, then you ought to save Rs 29,400 a month and it should earn 12 per cent return (same return is assumed for all the calculations).

Higher education: The present cost of Rs 8 lakh at an inflation of 7 per cent will be Rs 19 lakh when your son turns 17. To reach the target you ought to save Rs 5,100 every month.

Car: If your current accumulation in mutual funds is allowed to grow at 10 per cent for the next five years, it will help you fund 90 per cent of the cost. So earmark the investment for this goal.

Retirement: You have stated that as your income increases, your standard of living too is likely to go up. If your current monthly expenses double in five years, the annual living cost of Rs 2.4 lakh when you are 33 will be Rs 13 lakh at retirement, if the inflation continues to average at 7 per cent. To meet the annual living expenses of Rs 13 lakh at retirement, you should have a corpus of Rs 2.29 crore and it should earn inflation adjusted return of 2 per cent.

We assume that your wife's and your current provident fund contributions would grow at the rate of 5 per cent. Together with your employer's contribution, at retirement, your provident fund accumulation will be Rs 2.15 crore. Also, the employee provident fund should continue to pay interest at the rate of 8.5 per cent.

Hence, the shortfall for your retirement will be minimal. Even if you plan to buy a house with a home loan, you will have sufficient surplus to meet all your goals.

All the calculations we have done is based on your current standard of living. It is advisable to review your investment at least once every six months. The current term insurance is sufficient to meet any untoward happenings.

IGNORE THE DRAGON AT YOUR OWN PERIL By Ruma Dubey

China’s growth rate for the third quarter ended 30^th Sept 2011 was at 9.1% and the unemployment rate in US also stood, coincidentally, at 9.1%. Call it a quirk of life or meaningless statistics but there is no denying the way things currently stands at two ends of the globe. It is a stark reminder of the situation in two of the biggest economies of the world. 

According to The Associated Press' latest quarterly Global Economy Tracker, in the quarter April to June 2011, China was the fastest growing economy in the world and only Argentina, which can hold no lamp to the sheer size of China, grew at 9.5%. The U.S. economy grew at a 1.3% in the April-June quarter, before expanding 2.5% in the July-September period.

But the heat of keeping up with the fast paced growth seems to be catching up with China. According to the China Federation of Logistics and Purchasing (CFLP) which compiles the index on behalf of the National Bureau of Statistics, China's official PMI recorded its lowest reading since February 2009, coming in at 50.4 for October compared with September's 51.2.

What does this mean? Is China slowing down or more importantly, can the world afford to have a slowing Chinese economy when it is on the verge of recovery?  Analysts in China are of the opinion, not surprisingly, that this slowdown is just a ‘seasonal’ factor. Europe is China’s biggest market and when that entire region is sluggish, naturally, China is taking some hit. Being mainly an export driven economy, unlike India’s domestic driven, Chinese new export orders for Oct dropped to 48.6 from 50.9. But with Europe not expected to bounce back immediately, the sluggish growth for China on the export front and thus the economy cannot be ruled out. The humorous part is that many are predicting a “soft landing’ for China at 9.1%. So where does that put the rest of the world - “hard hitting landing”?

There are many who question the veracity of the Chinese economic data. With so much control over all information, doubts are raised time and again about the information itself being meted out. Transparency is a bad word in China and human resource simply means hands which produce goods. Despite all this, China continues to draw one and all like a magnet. Everyone worth their name in salt has set up shop in China or has outsourced manufacturing to China. Every single piece of data which comes out is dissected and debated and usually, makes it to the front page of every business newspaper around the world.  Is it the draw of its US$3.3 trillion forex reserve, the sheer panache with which it delivered the Beijing Olympics or its infrastructure wonders like Three Gorges Dam, the world's highest railway line to Lhasa, the Beijing-Shanghai high-speed rail link; the list is endless. Did you know that five of the world's top 10 contractors, in terms of revenue, are now Chinese?

Thus if we look at this logically, we cannot ignore China as it looms large over the globe today simply because it so humungous; towering like the Mt. Everest. Like mountaineers vying to climb the Everest, with unpredictability threatening at every step despite years of experience, China too is an enigma. No one, not even the best brains at Goldman or Moody’s or GE or Apple, are able to lay a finger on the exact working of its development model. Forming alliances with some of the most dangerous and authoritarian countries in the world, while signing the dotted lines with developed countries, one cannot really fathom what really lies beneath.

Coming to the basic question – can the world today cope with a ‘soft landing’ China? Well, it will hurt; there is no beating around the bush there. If the fastest growing economy slows down, which are like wheels of an automobile, naturally, if one or two wheels develop a puncture, slowdown is certain. A few years ago, one could have never ever imagined China becoming what it is today. But that is how the changed equation of the global economies stands today.

Seen the disaster movie ‘2012’ where the world comes to an end? That movie to a large extent depicts the global scenario – it was an Indian scientist at NASA who predicts the end of the world but it is China which is assigned the task by USA to build a huge structure which will withstand the disaster and thus save a few human beings after the entire earth is destroyed.  One can shrug this off as movie fiction but it is the perception which is a learning. Thus that’s the way things stand – India can be the grey cells to the world but it will neither earn enough moolah nor will it help save the world. But it is China which the rest of the world thinks is capable enough to build infrastructure of mammoth proportions. Huge and strong enough to save the world. “Made in China” anyone?