A monthly series in The Finapolis where we talk to a diverse set of families to understand their attitude towards fi nancial planning. Our in-house fi nancial advisor offers his suggestions for a more robust portfolio. If you’d like to talk to us and be featured, write in to: feedback@thefi napolis.com

Monish Selvadia, 32, was born and raised in Mumbai. The family is into the business of trading and manufacturing of diamonds and diamond jewellery. He joined into family business 15 years ago while studying his B.Com degree. His wife Jeenal, 29 delivered twin boys (Mitansh and Tarush) 14 months ago. Jeenal worked in the human resource department at a private company but quit after the children were born. Currently, Monish is only sole income earner in the family, and looks after the business along with his uncle.

INVESTMENTS

Being into family business, Monish’s income varies through the year, but on an average, he takes home about Rs 10-12 lakh per annum. His monthly expense on an average in last three to four months was Rs 50,000 to 70,000 and monthly savings is between Rs 25,000 to 35,000. He is an aggressive investor and has allocated most of his savings into stocks. The current investments in stocks is Rs 15 lakh, bank fixed deposit is Rs 2.5 lakh and Rs 50,000 in infrastructure bonds.

Monish’s asset allocation strategy is to invest 50% of savings into A and B group stocks which gives regular dividend income also has potential to grow and remaining 50% is invested into midcap stocks for long term growth. He does his own research while investing in stocks and tracks the performance of overall portfolio. He expects returns of 20-24% per annum from his overall portfolio.

His contingency fund includes fixed deposits and balance in bank savings account which is equivalent to three months of expenses. Health insurance coverage for his family is of Rs 5 lakh through the family floater policy (excluding parents). He has endowment insurance policy to cover his life with sum assured of Rs 20 lakh. His financial goals are to build a corpus of Rs 1 crore for each of his sons by the time they are 18, and have a retirement kitty of Rs 1.5 crore when he hangs up his boots at the age of 60.

EXPERT TAKE

“If we are facing the right direction, all we have to do is keep on walking,” goes a Buddhist proverb. The benefits of being on the right side of 30s is that we become more serious about our hard earned money and want to plan for future financial goals however the adrenaline rush of 20s which don’t die with growing age, somehow pursue us to take unreasonable risk. Before we create a roadmap for Mr. Selvadia’s financial future, we want to caution him that thinking independently and doing own research carries behaviour biases which may harm the portfolio return, in addition as Sir John Templeton said ‘’The market will tell you are perpetually wrong ‘’ by proving time and again about the wrong selection in equities. We believe that for building wealth involves allocating resources across diversified assets in a systematic manner and constantly rebalancing the mix. For taking care of any emergency we suggest Mr. Slevadia to use Arbitrage funds which are more liquid and tax efficient than Fixed deposit and carry very low risk. As for the amount of contingency fund, they can be saved and invest equivalent of six month of expenses, considering the fluctuation in his monthly business income.

Further, he needs to buy a term insurance policy, at least for a cover of one crore rupees by diverting the premium of his endowment policy into buying the term insurance policy. We strongly believe that insurance policies like endowment or money back can be avoided as they are just a saving cum insurance tool which in many case provide less return than saving account. He also need to step up his medical coverage to 100% which will adequately cover his whole family. To foolproof any negative unforeseen event we advise Monish to take a critical illness and accidental policy upto Rs 50 lakh.

Coming to his asset allocation, it is necessary for Mr. Selvadia to rebalance his portfolio according to his financial goals. As he don’t have any near term goals, he has done the right thing by putting majority of his saving into equity which provide superior long term return than any other asset class. While the dividend yield strategy in stocks provide regular stream of income, we advise him to reinvest the dividend till his working life so that the size of portfolio will increase over the period of time. For his children’s higher education and marriage Mr. Selvadia wants to accumulate a corpus of one crore rupees for each child in today’s rate in next 17 year, which, if accounted for inflation (assuming: 6%) the same corpus will be close to Rs 2.7 crore for each child. Mr. Selvadia is very astute in investing in equity, however investing systematically in equity mutual fund will eventually take him one step closer to his goals and at the same time provide discipline in investment. Through Mutual funds, many of his financial goals can be linked. He can maintain the investment in Fixed deposit however upon maturity, the same can be transferred to income funds which in most cases provide slightly higher return.

Concluding remark: More than knowledge or skill or luck it is the behaviour which determine the success in investment. the father of value investment, Prof. Benjamin Graham, who was Warren Buffett’s mentor, said “The investor’s chief problem—and even his worst enemy—is likely to be himself.” In other words don’t let your emotions in the way of smart investment moves.

Beside this, reviewing the portfolio periodically and rebalancing it with changing times and needs, help individual to avoid any losses.

Written By: Team Finapolis