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Till about a few months ago, Bhavana Mittal, 46, worked at large corporates—ones that came with a decent pay-cheque at the end of the month. She knew the importance of saving and invested in fixed deposits and real estate based on suggestions by family and friends.

But back in 2016, Mittal realized that return on her investments post-taxation is not even beating inflation. “I wasn’t married then, doing decently well in my career and not many EMI obligations Most of my investments at that time were in products/policies offering tax benefits but may not have been efficient in terms of returns" Mittal said. 

It was then that she decided to take the help of a financial planner and approached Anupama Aggarwal, senior vice president - Advisory at International Money Matters Private Ltd. 

Based on this risk profiling, it was decided that Mittal was a moderate investor and could have about 45% of portfolio exposure in growth assets (scope for capital appreciation with relatively higher risk).

Financial plan

Mittal’s financial goals included retirement/financial freedom at the age of 50 years, an annual vacation, and purchasing a car every five years.

Prior to this, 50% of Mittal’s assets were in real estate. And, most of the financial assets were in stable assets (no risk of capital loss) such as Employees’ Provident Fund (EPF), Public Provident Fund (PPF), fixed deposits (FDs), and bank balances. She also had availed of home loans against some of the properties.

For contingency fund & insurance, Aggarwal suggested Mittal to maintain adequate liquidity for a contingency fund (equivalent to 6 months of expenses) and short-term immediate goals. In terms of life insurance, Aggarwal felt that Mittal didn’t need any as her mother (only family member then) was financially comfortable. However, Aggarwal insisted Mittal to take a health insurance cover of 10 lakh at the earliest, in addition to the health coverage provided by the company Mittal was working in earlier. Over time, the sum insured was increased to 15 lakh with HDFC Ergo optima restore with better features.

Portfolio rejig

Aggarwal suggested diversification of assets to reduce exposure to the real asset class.

“We recommended that she let out the property lying idle to make it income-generating and lighten her real estate base by selling off some land properties which she didn’t have any objective for in the future," Aggarwal said. Accordingly, in 2018, one property was sold off and the proceeds were reinvested.

“Proceeds from breaking a few-low return fixed deposits and surrender of some of the insurance policies were reinvested into equity mutual funds to build exposure towards growth assets, and monthly SIPs started towards long-term growth," said Agarwal. The restricted stock units (RSUs), issued as part of salary, held by Mittal were also made part of the growth assets, as per Aggarwal.

Change in plans

The financial plan has to be reviewed periodically to reflect  changing needs.

Accordingly, after working for 21 years, in 2019, Mittal decided to take a break from work. “I checked with my advisor if I could actually afford to be on a break without dismissing my financial goals including retirement," said Mittal. “She told me that I can take a break from work for up to two years and still achieve my long-term financial goals, with some delay in near-term milestones," added Mittal.

At that time, Aggarwal suggested Mittal to stop her SIPs since it was from her monthly salary; prepared systematic withdrawal plan (SWP) for monthly withdrawals in lieu of her salary to ensure that she is comfortable during the sabbatical.

Mittal joined work after a break of three months. “With the comfort of knowing that I am covered for two years, it was a well-planned decision," said Mittal.

Mittal recently got married, quit her job and joined as an executive director and chief growth officer in an early stage company, Bert Labs, which her husband had founded.

“Since her financial priorities may change now, we are maintaining  status quo and giving her time to figure out her preferences, including retirement," said Aggarwal.

Mittal’s portfolio is well-diversified now, says Aggarwal. “Financial assets consist of 50% in growth assets (mutual funds) across market space. It includes international funds in her portfolio for dollar exposure – 4%. Index funds – Nifty Next 50 and Midcap 150 along with other active funds were also considered. Hybrid allocation built from 10% to 18% of portfolio. Debt MF investments are mostly over 3 years in both long term and short-term funds but only with high paper quality," as per Aggarwal.

Room for error

Good financial planning helps in creating long-term wealth and achieving financial freedom. But, due to market conditions or errors in human judgment, the investments made may not deliver desired returns. 

For example, it was a mutual decision of Mittal and Aggarwal to invest in Franklin Templeton Credit Risk Fund. But, the scheme was frozen for redemptions since April 2020. “The invested funds were recovered over the course of the year as and when the scheme paid out," said Aggarwal.

Besides, an investment by Mittal in a debt arbitrage fund under a portfolio management services (PMS) did not deliver expected returns. Therefore, they decided to exit the PMS.

Thus, enough buffer needs to be maintained and diversify the portfolio to cushion the financial loss.

 

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