Stock Analysis, IPO, Mutual Funds, Bonds & More

This is how middle-class families can plan their finances better

Middle class - it is the stratum that builds our economy and resiliently works towards having a safe and secure future.

, ET Spotlight|
Last Updated: Dec 07, 2018, 10.53 AM IST
ET Spotlight
This is how middle-class families can plan their finances better
Tax Calculator
Middle class - it is the stratum that builds our economy and resiliently works towards having a safe and secure future. It has always been considered as the backbone of any economy, and plays a crucial role in India's growth and development. According to a report titled 'The Unprecedented Expansion of the Global Middle Class', India's middle class market is growing at an impressive pace and will soon overtake US to become the second-largest in the world. But who are these middle class people?

They enjoy the luxuries of life from time to time, but strive to build their family without worrying. Most average middle class homes in India enjoy the comfort of a private vehicle, live in residential complexes and seldom splurge on things. Investments for these middle class folks becomes an extremely crucial aspect of earning. Whether it is planning for the short term goals of buying a better car or saving for their retirement, financial planning plays a critical role in their lives. While the average income of a middle-class household has been consistently increasing, the means of investments are somewhat still the same.

Let's take the example of Anurag Sharma, a 35-year-old MBA graduate who lives in Mumbai with his wife Sanjana (34), two daughters, ten-year-old Mansi and six-year-old Sanvi, parents and grandfather. Anurag and Sanjana have a combined monthly income amounts to Rs 2 lakh, and struggle to choose the right financial planning tools. Their goals are simple, they want to meet all their current requirements and simultaneously build a safety net to prepare for long-term goals such as children's education and marriage, and their own retirement. Here's how they can plan their finances better.

The Sharmas, much like many middle-class families have avoided their financial planning till the last minute. The family is not protected by a life insurance cover, and the medical insurance only comes from the couple's workplaces - including a family floater of only Rs 10 lakh. These are just some of the issues they and most middle-class people face. With a fixed monthly income and a fluctuating expense pattern, there is only so much planning that we put our time into. However, there are simple instruments that can help us handle our finances better.

Choose the right instrument
The most important thing to remember while designing a financial plan is to set relevant financial goals. Whether we are looking to buy a bigger car in 5 years or save for our children's schooling, setting the right goal gives us an idea on the amount that we need to set aside today. Once this is done, the next step is fairly easy. We need to choose the right instrument that will help us in achieving these goals. While there are several long-term instruments like mutual funds, SIPs, etc; one investment instrument that has been gaining prominence is ULIPs (Unit Linked Insurance Plans).

The best bargain
One of the few well-known qualities of the middle class has to be getting the best deal or bargain in every front of life. ULIPs are undoubtedly one of the best financial instruments that not only grow your investment but also provides protection to your family. There are various plans that help you to plan your future in every aspect, all with a nominal investment. Plans like HDFC Life's CLICK 2 INVEST - ULIP (C2I) give you the option of 8 funds to invest in, based on your needs.

The go-to long-term Investment
The minimum investment period of 5 years works as a great positive of ULIPs, especially when it comes to becoming the choice of the middle class. Investing for a longer period of time is a habit that many have lost, and ULIPs allow us to continue with this traditional but healthy financial approach. Long-term investments also help us to get better and more stable returns. However, the choices of profitable long-term investments have come under scrutiny after the introduction of Long Term Capital Gains Tax (LTCG Tax) in Union Budget 2018, which is applicable to MFs, SIPs, etc. ULIPs being an insurance instrument has been exempt from this tax.

Let the numbers speak
Understanding the practicality of investing in ULIPs will make things more clear. Let's take the previous example of Mr & Mrs Sharma. Suppose they continue to follow their current financial plan and avoid investing in ULIPs or life insurance, they might find finances difficult in case an unfortunate event occurs and only one earning member is left in the family. On the other hand, if they choose to invest in a 5 year ULIP plan and a 20 year ULIP Plan, here is how their income or investment would differ.

ET Spotlight
*ULIPS are growing at the rate of 14.5% based on the rate of returns of Blue Chip Funds of HDFC Click2Invest, Annual Income is growing at a rate of 5%.

This graph shows that if Sharmas choose a 5 year ULIP plan, and invested 10% of their annual income (Rs 2,40,000) in this scheme, their payout at Year 5 will provide some amount of safety net during an uncertainty. However, if they choose to invest in the 20-year-plan, with a life insurance cover of Rs 1 crore, the Sharma family will have a much higher financial security even with one earning member. Moreover, investing in ULIPs for a longer period also provides added benefits like tax rebate slabs of section 80C and exemption for pay rolls under section 10D of the Income Tax Act, 1961.

The tax benefits, higher return rates and the liberty of choosing between different funds, all work in favor of ULIP as the go-to financial instrument for one and all. The lower-risk fund options makes it an easy choice, especially for the middle class. Making a calculated financial plan can be tricky, however, ULIPs are undoubtedly one of the best instruments to get started.

Click here for all the information and analysis you need for tax-saving this financial year
(This article is generated and published by ET Spotlight team. You can get in touch with them on etspotlight@timesinternet.in)

Also Read

KMC plans one-point nod for building plans

There is no ‘Plan B’ for 2020 Olympics

RIP: dividend plans in mutual funds?

Congress sceptical of disinvestment plan for LIC

Nalco to revisit expansion plans

Add Your Comments
Commenting feature is disabled in your country/region.

Other useful Links

Copyright © 2020 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service