The Indian consumer has never had it so good. Gone are the days when you had just two choices -- either a Fiat or an Ambassador. Now you are spoilt for choice. With various international brands entering the market, there is no dearth of options. Car buying is also becoming cheaper due to launch of small cars by many players. In fact, by October this year, we are going to see the launch of the Tata Nano with a price of just Rs one lakh in the Indian market.
However, while cars are becoming cheaper, the fuel cost keep on going up. The crude oil has already touched $100. And there is news that the petroleum ministry is also likely to take the hard decision of hiking petrol and diesel prices soon. Obviously, buying the car is not job done but you also need to consider other costs like car running and maintenance costs. As a rule of thumb, the total expense on a car is divided between price of the car (one third) and operating costs (two third).
Let us understand this better with an example. Considering that you have a petrol car for Rs 500,000. This car gives a mileage of 10 kms per litre and you run it for 30 kms per day. Assuming that the cost of petrol to be Rs 50 per litre, the daily cost of running the car is Rs 150.
On a monthly basis, this translates into Rs 4,500 per month. Add to that several other expenses such as periodic servicing and maintenance, along with denting and painting for the little scratches and dents and there would another expenditure of Rs 10,000 a year. Then, there are average insurance costs of Rs 7,000 a year.
And finally, road taxes and registration charges could cost you another Rs 4,000-to Rs 5,000 a year. The grand total: Rs 75,000 a year. And if you want to be chauffeur-driven, then your expenses could go up to Rs.1,30,000 to Rs1,50,000 a year. And in a five year period, this expense will easily cross the price of the car itself.
Thus, given the high costs of running and maintaining a car, it would certainly help if you properly plan the total cost of purchasing a new car
and replacing it periodically thereafter. This is especially true for such expenses that need to be incurred after retirement.
Suppose you are 25 and completely funding the first car, which costs around Rs 500,000. Also, you want to keep on replacing it with a new one (inflation is taken at 6 per cent) every five years till the age of 65. However, you do not want to go through the headache of finding sources of funds for this every time. In this case, you should start by including the car buying as a part of your financial goal.
Considering you are not married and have lesser financial commitments, you can invest more towards this goal initially. The figure should keep on dropping every five years, since other financial responsibilities will arise. If you invest aggressively in the initial years then you are going to have lesser financial burden in the coming years. And as you will see (Funding your dream car), you can actually keep on investing for your car till 45 and reap the benefits till 65. That is, by 45 you would have saved enough to keep on replacing the old car till the 65.
To achieve this, you have to be very aggressive in your risk profile and invest up to 75 per cent of your funds in diversified equity funds. The balance should be in fixed income instruments. Even if you get returns of 11 per cent a year from your portfolio till 45 and shift your corpus to fixed income giving 8 per cent a year, it would be enough to help you keep on purchasing a new car every five years. The price of the car is expected to rise by 6 per cent every year and by selling the old car, you will get 35 per cent of the cost of your old car.
The investments made for this purpose will have to be aggressive in the initial years. As we can see from the table, by investing Rs 2,21,770 a year in the first five years, Rs 1,42,430 in the next five, Rs 1,02,887 and Rs 77,168 a year in the last two five year periods, you can keep on purchasing new cars in every half a decade. Yes, a little planning and foresight can make this long drive, a smooth one indeed.
The writer is director, Touchstone Wealth Planners
