Things to know before investing Part IV: Financial Planning Case Study

This post is last in the series of “Things to know before investing” – the earlier posts are as follows:

Understanding asset classes

Risk profile, Asset Selection and Allocation, Portfolio re-balancing

Right way to create an investment plan

Today I will take up a sample case study that resembles cases I come across and let’s look at how best to apply the investment principles discussed in previous posts and chalk out a strategy:


Family background:

Vijay is a 30s something person employed in an IT company. He has a small 2 year kid and his wife is a homemaker. The couple has no responsibility for dependent parents and live in their own house.

Monthly income-expense pattern:

Vijay earns a monthly take home of Rs. 55K and the family’s household expenses are Rs. 25K. The monthly investment consists of LIC premium and MF SIP Rs. 5K each and rest is retained in Bank account.


His LIC policies offer him an overall insurance cover of Rs. 5 lac.


He has till date invested randomly in LIC policies (total investment till date: Rs. 1.8 lacs). He has Rs. 1 lac in bank account and Rs. Rs. 30k in gold (bar form).

Financial goal:

The couple wants to plan for his college education in systematic manner. Also they have a short term goal of setting up wife’s home based art and craft venture, which will require Rs. 1 lac in next 2 years.


Risk profile:

First we will assess the risk profile of the family, through an understanding of family history, income pattern, responsibilities and knowledge of financial markets. This will help us in deciding the “Asset Allocation”

Following are some important points for deciding on risk profile:

  • No responsibilities of parents etc.
  • Salaried income in an MNC – relatively safe
  • Both husband and wife are professionals
  • Couple has no loan burden – they stay in their own house
  • Some investments in equities through SIP mode etc.

Basis the interactions, we decide that the couple falls in “Moderate” category. As and when they get comfortably in equity investing, they can come up the curve as “Aggressive” and equity allocation can be increased….

Cash flow pattern analysis

First let us assess the monthly cash flow pattern to find out how much can be invested for financial goal:

Income      = Rs. 55,000

Expenses   = Rs. 25,000

Balance     = Rs. 30,000

Investments= Rs. 10,000

Net Balance = Rs. 20,000

Contingency fund + Insurance coverage

Before planning where to invest, first we have to fix this one.

On contingency fund front, the couple must have a min. 6 months of expenses (Rs. 25K*6 = Rs. 1.5 lacs) as contingency fund. As against that, we see that there is already some money (Rs. 1 lac) is lying in bank account – we will tag it to “contingency fund” goal.  For the deficit of Rs. 50K (Rs. 1.5 lac –Rs. 1 lac), we will create a savings plan and close this out first.

As we see, the monthly net surplus is Rs. 20K. So, in 3 months, additional fund Rs. 20K*3 = Rs. 60 K can be created to fill this gap.  

Now, note that this corpus of Rs. 1.6 lacs cannot be lying idle in bank account since it will earn very little interest – so what we will do is to keep an amount up to Rs. 60K in bank account and transfer Rs. 1 lac in a good fixed deposit/ debt mutual fund.

Coming to insurance covers, comments are as follows:

So, Vijay should first give him first 6 months into meeting these obligations and proofing his family’s future from various risks, before planning for financial goals.

Short term goal: Art venture

Now, only once the above is taken care of, that we can come to planning for financial goals – now, goals can be short term or long term. As we discussed earlier, if long term goal planning has to be a success, we have to first plan out the short term ones.

So, first we will plan out the “Art Venture” goal. We need Rs. 1 lac in 2 years time. Since time horizon is low, the asset class that we will have to select is……yes, you guessed it right – “debt”.

The couple can choose to invest Rs. 20K every month for 10 months to build this corpus and then keep it in a fixed deposit till the requirement arises. This plans our short term goal.

Long term goal: Child’s college education

Now, we took 6 months for contingency + insurance piece, and 10 months to plan out for short term goal. Once that period of 16 months is over, we are free to focus on child education goal.

Now, first we have to decide an asset allocation for this goal. Since investor is falling in “moderate” category, we can look at an asset allocation in equity: debt: gold in ratio of 60: 30: 10.

So, if the couple decides to invest an amount of Rs. 5K for this goal, they can distribute the amount in following manner:

  • SIP of large-cap equity MF: Rs. 5,000*60 = Rs. 3,000
  • Monthly investment in PPF: Rs. 5,000*30 = Rs.1,500
  • Gold ETF/ SIP in Gold fund: Rs. 5,000*10 = Rs. 500

So, this is how the couple can systematically plan to invest for this goal.

However, it does not end here.

Every year, they should look at what is the asset allocation ratio of the fund value. So, in case the allocation changes to 40:40:20, 10% of debt and 10% of gold should be sold off to buy 20% of equity. This will bring the asset allocation again to 60:30:10. This is what we understood as “asset allocation and portfolio re-balancing”

Now, since it is a 20 year goal, since the asset allocation need to be modified to decrease the amount of equity and increase the amount of debt as the time to goal approaches.

So, the asset allocation can be worked out as follows:

  • Year 1-5: 60:30:10
  • Year 6-10: 50: 40: 10
  • Year 11-15: 40: 50: 10
  • Year 16-17: 30: 60: 10 
  • Year 18: 20: 70:10
  • Year 19: 10: 90: 0
  • Year 20: 0:100:0

So, you see, as goal approaches, we systematically reduce the equity portion and increase the debt portion. By the end of year 20, full amount is invested in “debt” asset class, to ensure no loss of capital.

 I hope I have made a small effort in helping you understand how to create a good financial plan, in this post. I am most willing to help you out in case you have any queries. Please do write in “comments” section.