Have you checked your personal finance portfolio recently? If not, I strongly recommend you do so at the earliest. Perhaps your portfolio contains:
Ø Investments in Initial Public Offers (IPO), the market price of these shares today are way below the issue price;
Ø Investments in Mutual Fund units recommended by your agent, the net asset value (NAV) of these units is way below your purchase price of these units;
Ø Endowment plans on which you pay large sums as premium every year.
Does this in any way resemble your portfolio? If so, you are in the right place. In the next few pages, I will show how you can manage your personal finances- in a better manner.
Please note that information provided in this article will not make you a personal finance expert. However, it will provide you with sufficient information to pose the right questions to your mutual fund advisor or insurance agent, the next time they try to “sell” a particular mutual fund scheme or insurance plan to you.
Remember, your future and that of your family, depends on how well planned are your finances today. It is important to put it in order. You need to invest so that you have sufficient funds – when you retire or for your children’s education or for their marriage, or to buy that dream house or a car or even the dream holiday.
This can only be achieved by aligning your funds with your financial goals, keeping track of what you should be investing or divesting. This is why you should monitor your personal finance portfolio on a regular basis and get rid of the bad investments. This would give the returns on your investments a boost. I agree-this is easier said than done.
You should ask yourselves the following questions, before you reviewing your finance portfolio:
Ø Do you have firm grip over your personal finance portfolio?
Ø Do you remember the dates of the maturity of your fixed deposits?
Ø Do you forget to pay your insurance premium even though you received the premium notice on time?
Most problems arise due to the tendency to do more than what is required. Indeed, investing is the biggest myth put forth in such a colourful manner that you fill your portfolio with garbage. For instance, you change jobs and move on to a new one. You now have two salary accounts of different banks. These banks also try and sell you their credit cards and you dump it in your wallet, as it is free for life.
At the time of tax season you tend to buy new insurance policies or invest in mutual funds, which have a lower Net Asset Value (NAV) than others. The end result is that you clutter your portfolio with too many financial products- with very low concentration in any one. You should “spring clean” your portfolio on a regular basis and keep it to a manageable size.
Let us look at some specific financial products:
Life Insurance
I have seen that Life Insurance is generally bought in the tax season without assessing the life cover needed. Quite often, one tends to mix insurance with investment and invest into insurance products that will yield returns at the end of the term. We ignore the fact that insurance is a risk mitigation tool and should not be a means of investment. If you are keen on returns at the end of a specific period, you are better off investing in equity shares or mutual funds, where the returns are higher than on insurance products.
In my view, a life insurance should be taken only as a pure term cover. You should asses your insurance needs, based on how much money will be required by your dependants to survive the rest of their life- without taking any liability-if you were to die today. This amount will always be very high. So the insurance taken should be a pure term cover.
Ideally, you should have not more than 3 to 4 insurance plans in your portfolio. You may buy the first plan at the beginning of your career, the second at the time of your marriage and the third or fourth plan should be when you start your family. The second and the third insurance plans will be of a higher cover.
General Insurance
We tend to take general insurance very lightly. If your current employer is providing med claim to you and your family, generally you avoid taking mediclaim insurance on your own. You do not realize that once you switch jobs, the new company may provide mediclaim insurance only for yourself. In such cases, you may be in trouble if any of your dear ones, needs to be hospitalized.
Also note that employers provide mediclaim insurance till the time, you are in service. Once you retire, you have to fend for yourself and your family. It is at this stage of life after retirement that medical expenses are at its peak. Unfortunately very few general insurance companies will provide mediclaim at this stage of your life. Remember, that as you grow older, the cost or premium on insurance will be very high and the sum assured will be very low.
You should buy mediclaim insurance on your own, apart from being insured by your employer. As in case of life insurance, you should take medical insurance at the beginning of your career, and at the time of getting married and later you start your family. This will take care of medical exigencies that are bound to occur at the post retirement stage of your life.
Mutual Funds
In my view, too much accumulation of Mutual Fund Schemes also leads to a mess. While you may accumulate as many schemes as you like, do note that this does not lead to risk diversification.
You may think that investing in a New Fund Offer (NFO) at a Rs. 10 NAV is cheaper than the current prevailing funds. This thinking is not right, as a scheme with a NAV or Rs. 25 may give the same returns as the Rs. 10 NAV scheme. The more important point here is that at what market level you are investing, rather than the NAV of the scheme.
One tends to take this rule of low NAV into effect and invest in many schemes. While owning just one scheme is risky; two or more reduces risk considerably. But after having 6 to 7 schemes in the portfolio, risk hardly reduces regardless of as many schemes the investor accumulates.
In my view, the ideal fund investment strategy could be as follows:
Category | No of Schemes | % of Portfolio |
Large Cap | 3 | 50% |
Mid Cap | 2 | 25% |
Small Cap / Sectoral / Thematic | 1 | 15% |
Debt / Bond / Liquid | 1 | 10% |
Ideally, a Mutual Fund portfolio needs to be reviewed every 2-3 years. This will give you an opportunity to rebalance your portfolio, in line with your financial goals.
Stocks
“My broker has given me tips on some shares,” or “I have shares of 30 companies in my demat account; so I am well diversified”.
These are the general statements of any lay investor. He does not know which stock he is buying, the reasons for buying the stock and what is the time horizon for which he has bought. Investors tend to invests in equity shares through Initial Public Offering (IPO). The market price of most of the stocks in the portfolio would be less than the purchase price. Yet he would not accumulate the same stock again, but would go for a new share.
An ideal portfolio would consist of not more than 7-8 stocks. Even if there is imbalance in the portfolio, it will be easily managed and tracked. Also an investor should have only one demat account as it entails annual charges; multiple accounts will increase your expenses.
Real Estate
People have started looking at real estate property as an investment opportunity, due to the high rise in the property prices. In my view, an investor should firstly buy a property for self use and then look at investment in the property market.
This is because real estate is a very illiquid asset and exiting is also not easy. Also property sold attracts capital gains tax either long term (where the holding period of the asset is more than 36 months), or short term (where the holding period is less than 36 months), depending on the time of purchase and sale of the flat. The long term gain is taxed at 10% (without indexation) and 20% (with indexation). The short term gain is added to the income of the investor and taxed according to his income slabs.
It is very important to look into the pros and cons before looking to buy a property as an investment. An ideal situation would be that one person should not have more than one property.
Loans
The availability of consumer loans at affordable interest rates has led to a consumer goods buying spree. This has pushed the credit market to its peak. The last six years has been extremely good for the banks and the housing finance companies as the credit off-take has been at the highest levels. Even though we are witnessing a slow-down in the off-take, on a longer term basis, the credit market is going to be very good for the country. The flip side is that we are today a nation heavily leveraged on debt.
These days, people are going for multiple loans for buying a house, car or for higher education. They are on the lookout for fresh lines of credit. This does not reflect sound financial discipline. Loans should not be more than 30 to 40 percent of your monthly take home salary. You should not take a loan unless it is very important.
Remember that Borrowing is Spending Future Uncertain Unearned Income Today.
Credit Cards
It is said that credit cards are the best friend and the worst enemy of a person. If the credit card is used properly and dues are paid on time, then it is your best friend; but if it is not, then it becomes your worst enemy.
It is due to the retail revolution that a person is found with more than one credit card. It is also a fancy to keep multiple cards in your wallet. As most of the cards are free for life, people are lured to keep them. But they do not know how to use them properly –leading to a huge debt trap. This leads to defaults which adversely affects your credit profile. This may reduce your chances of obtaining a fresh credit in future.
Ideally, one should not have more than two credit cards. A Visa and may be a Master Card these two would be sufficient. Special credit cards are also being sold; such as a bank tying up with an airliner. If you are a frequent flyer you may possess this card as it will give you a lot of reward points and you can redeem those points for airline tickets.
Remember, if you wish to surrender a card because of bad services, then you should utilize all the reward points before surrendering.
Conclusion
You need to keep abreast with your investments. Compare your investments with the benchmark indices. List out the underperforming assets and shift it to better or consistent performers. Review your portfolio regularly and prune it down to a manageable size.
Above all, you should engage a financial planner to prepare a financial plan in line with your financial goals. I strongly recommend you get in touch with a Certified Financial Planner-TODAY.
Disclaimer: The information provided in this article is for educational purposes only. Readers are requested to contact a certified financial planner before taking any taking decision with regard to their personal finances.
Vivek Mallick, CFPCM
E-mail: vivek.mallick@finessecapital.com
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