Check your risk appetite, increase awareness before you invest

For savings, determine the amount available: surplus of income over expenditure becomes your savings corpus


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I have recently gone through a divorce by mutual consent and have received Rs30 lakh from selling the assets I and my ex-husband jointly owned. I’m 36 years old and have no kids and earn around Rs80,000 per month. I had never saved anything for myself. I had just bought a term plan, where my ex-husband was the nominee. I pay an annual premium of Rs20,000. Kindly help me with a financial plan for my retirement and to start a non-government organisation (NGO) in the next 10 years with a startup cost of Rs20 lakh. I don’t own a house.

—R. Suman

It is important for you to understand and plan for savings and insurances. It is equally important to convert the savings into investments in accordance with the financial goals. Starting with insurances first, you currently have a term insurance plan. As you don’t have any dependents or loans or liabilities, you actually don’t need term insurance.

However, you may hold the term insurance till it comes due for renewal and this would also make you decide whether you need to continue with it. At the same time, you need medical insurance. Even if your company is providing you a health cover, it will still be prudent to get an additional cover as the company cover may not suffice and will leave you without medical insurance cover when you leave the company.

For savings, determine the amount available: surplus of income over expenditure becomes your savings corpus. Currently, you have two goals: creating a corpus for your NGO and retirement planning. Buying a house could be another goal you could have, unless you already have an arrangement, for instance, to stay with your parents and would like to continue with the same or are comfortable staying on rent.

You should know the difference between buying a house for own residence, as against investment. Logically this should be a goal, if you plan for your own residence and not as an investment. What you should know is that this goal will actually put pressure on your overall investments.

You need to start monthly investments with the surplus amount. This amount should be invested for the long term, as your targeted goals are all long term. And to decide the asset allocation, you should check your risk profile—understanding how much risk you can take. This test—answering questions to determine the risk tolerance level—will help in determining the asset mix.

Questions like ‘how will you react if your portfolio value goes down by 20% within 6 months of your investing,’ will help in figuring out the risk quotient. There are many websites that can help you in determining the risk appetite.

Also important is the level of financial literacy—the more you start understanding investments, the risk taking ability goes up. One way to increase it is to start reading more about investments. It is recommended to do investments as per your risk appetite but it is also recommended that you have equity as an asset class in your portfolio. And as your investments would be long term and with age also on your side, it makes all the more sense to have equity as an asset class having a larger base in your holding.

As your investments can be done regularly on a monthly basis, you should start with systematic investment plans. The equity exposure can be built through a combination of large-cap funds, multi-cap funds and mid-cap funds. In addition, hybrid funds, which are a combination of equity and debt where equity is a minimum of 65%, can also be part of the portfolio. Likewise, debt investments can also be created in a similar fashion: a combination of short- and medium-term debt funds, including dynamic bonds, can be used to create a debt portfolio. These investments would require periodic check-up, once in 6 months, to ensure their performance is as per the benchmark and only in the case of consistent underperformance would require a change.

Lastly, you need to plan for estate planning: providing for adequate nominations in your investments, making a Will.

Surya Bhatia is managing partner, Asset Managers.

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