How to make financial plan for a goal — a sample calculation

Lets assume we are making a financial plan for education of a child

Lets assume the age of the child is 5 years

1. Goal = Finance Bachelors Degree for a 5 year old kid
2. Cost of target course as of today = 70 Lakhs INR (This is the approximate cost for MBBS Degree from Manipal University)

Expected inflation rate = 8%

Expected rate of return = 10%

1. Expected Cost in 13 years, when child turns 18 = 1.08¹³ x 70 Lakh = ~1.91 Cr INR

Required investments to achieve 1.91 Cr in 13 years

Lets assume the Existing investment for financial goal = 10 Lakh INR

1. Future Value of Existing investment = 1.1¹³ x 10 Lakh = 34.52 Lakh INR
2. Shortfall = 1.91 Cr — 34.52 Lakh = 1.56 Cr
3. Monthly SIP needed to reach 1.56 Cr in 13 years = 49,000 INR

You may argue that 10% rate of return and 8% inflation rate is extremely conservative. It is better to be conservative in our estimates of returns for future goals as it affords us a margin of error.

You may use this goal planner to change and adjust figures for your calculation https://cleartax.in/s/goal-planner

How to invest 49000 INR every month to reach the goal?

Ideally you should be using a mix of Fixed income + Equity MF such as Sukanya Samriddhi Yojana/PPF scheme + Equity Mutual Funds

49K per month investment can be split as shown below

SSY/PPF : 13K per month (~1.5 L annually)

1 Flexi Cap fund (like PPFAS LTE) : 12K per month

1 Small Cap fund (like SBI Small Cap) : 12K per month

1 Large and Mid cap / Multi cap fund (like Quant Active) : 12K per month

SSY/PPF is tax free at withdrawal while the Equity MF would attract a 10% capital gain tax on gain above 1 Lakh. The post tax blended rate of return from these investments should be roughly ~10%+ and that should be sufficient to achieve the target.

Read this post and more on my Typeshare Social Blog