Publication: DNA Mumbai; Date: Sep 25, 2006; Section: Personal Finance; Page: 24
People have time to plan their vacations, birthday parties, picnics, but seem to have very little time to plan their finances. Weekends are even busier, and I see some business owners and executives on the phone during weekend dinners, as well. Whatever be the case, most of us lead such busy lives these days that we do not seem to have time for the most important thing in our lives.
Besides work, there is so much to do in life, such as spending time with family, socialising, vacationing and participating in spiritual activities so you are left with hardly any time to plan your finances. Then, there are some, who are continuously glued to news channel tracking each market movement, read all investment journals, seek advice from several brokers and have premier relationships with banks and brokerage houses.
Ram Chandani, a family friend and business owner, was one such person who sought my advice. I conducted a financial fitness check-up.
Financial goals
Ram was able to set the following goals:• Corpus of Rs 40 lakh for his sons Harvard MBA education in 2008• Post-tax income of Rs 200,000 per month starting 2009• Corpus of Rs 2 crore for funding a trust providing education and health care benefits to underprivileged people• Earn a return of around 8% on his portfolio.
Current situation
Rams cash flow statement looked like this
Cash inflows (In Rs)
A detailed assessment of his current cash flow and net worth statements revealed the following.• Ram had the majority of his investments in equity and real estate.• There was no correlation between his portfolio, goals and tolerance to risk. Though he was a balanced investor and needed just an 8% return on his portfolio, he had sizeable exposure to equity considering his time horizon, risk tolerance and current situation. • His portfolio was completely scattered, with several people keeping an eye on only the portion of the portfolio entrusted to them. To give a fitness analogy, he was trying to grow the biceps without due respect to the paunch or trying to do upper body exercises without exercising the lower body or cardio.• There were periods when there was significant cash accumulation and the money would be lying in the savings accounts for extended periods of time earning a paltry 3.5%.
After a detailed review of his current situation and analysis, we decided on the following.
Investment strategy• Ram would be easily able to fund most of the goals set by him as he was deriving substantial income from rents and dividends. • Exit most of the ULIPs. Utilise the proceeds of ULIPs, mutual funds and stocks and invest in a fixed-maturity plan for 13 months to fund sons education. • Increase the short-term debt component through floating rate funds and medium-term debt through fixed-maturity plans, monthly income schemes of mutual funds and balanced funds. The idea is to scale up debt in a systematic manner so as to increase this to 40% in the next two years.• Trim the portfolio to 10 stocks, 5 equity mutual funds, 2 balanced mutual funds, PPF, 2 monthly income plans and 2 fixed-maturity plans.
Estate planning
Being a business owner, the biggest issue that he faced was that of succession planning. We interacted with Rams CA, attorney and crafted a succession planning strategy, put a will and relevant power of attorneys in place.
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