Financial planners very often have to deal with the problem of plenty. When clients first meet them with their portfolio, in most cases, they have too much of one or more financial products. A few planners Mint spoke with said multiple bank accounts, an overdose of mutual fund investments and excessive number of insurance policies is quite common. You may think that having multiple products signifies a healthy diversification , but it could also compound to confusion in terms of keeping a track. Too many investments, especially of the same nature, often is the result of fuzzy goals or last minute rush to save taxes but keep in mind that too much of anything is never a good idea.
Vishal Dhawan, certified financial planner and founder, Plan Ahead Wealth Advisors said, a clutter of financial products means one is unfocused on the end objective. “What invariably happens is when you actually sit down to clean it up, you are no more rational and tend to eliminate everything and start from the scratch, which is a wasted effort," said Dhawan. So is there a perfect number of every financial product that one must hold? Not always. But there’s a way to ensure multiple products don’t come in the way of a healthy financial life. We tell you how to Marie Kondo your money life. Read on
When it comes to mutual funds, understand that having too little exposure means being too concentrated and having too many schemes means being over-diversified. Sanjiv Singhal, founder, Scripbox, an online mutual funds platform said that too many mutual funds in an individual’s portfolio is a common phenomenon as investors approach investing as buying mutual funds rather than analysing their financial objective. “Sometimes, investors justify holding many funds in the name of diversification. But most people forget that a mutual fund is already diversified in itself. Having too many different funds that do the same job is not going to help your portfolio," added Singhal. Understand that over-diversification could make it difficult to keep a tab on how the schemes are performing and, hence, you may not realise when to exit the ones underperforming. Financial planners suggest investing in not more than six to seven schemes. “Since the underlying securities in the schemes are a driver of performance, too many schemes could result in large overlaps of securities," said Dhawan.
The right way to plan your mutual fund investments is to start with a goal and depending on your risk appetite and time horizon, build the portfolio. “Having two each of large-cap and multi-cap equity mutual funds should cover most long-term goals. For those with larger portfolios, an addition of mid-cap funds and international funds may be considered," said Singhal. For short-term goals and emergency needs, investing in two or three liquid debt funds is a good idea. Also, keep in mind that over-diversification could make it difficult for your nominee to get a grip of things in your absence. Each fund house has a slightly different process for transmission of assets and a nominee has to navigate through this. It’s a fair amount of paperwork, said Singhal. It’s advisable to stick to only as many funds as you really need and ensure your nominees are aware about them.
FDs and bank accounts
Having too many fixed deposts (FDs) is commonplace. But having multiple FDs means multiple maturity dates, which could get difficult to track. This could result in FDs becoming overdue and not earning interest. “It is also common to forget reporting the FDs during tax filing, which could result in underreporting of taxes as the tax deducted at source (TDS) on deposits may only cover for a part of the tax due on the interest," said Dhawan. Understand that it makes sense to save in an FD if you are within the 20% tax slab but beyond that, you would lose a big chunk in the form of tax.
Shweta Jain, chief executive officer and founder, Investography, a financial planning firm, said that nominees usually are unaware of all the deposits because of improper documentation and are not able to claim it when required. Dhawan said another problem with having multiple FDs is remembering the renewal date.
Same goes with bank accounts too. The more bank accounts you hold, the more money you keep locked in those accounts. Most banks demand a minimum balance requirement from an account holder and non-maintenance could attract penalty (read more about it here)
It’s just not the investment universe. Insurance portfolio of many appears cluttered, too, with many bundled plans that were purchased to save taxes or term plans in order to increase the cover. Mint recommends unbundling your insurance and investment needs. So in terms of insurance alone, how many policies should one have?
Financial planners suggest you have a cover equal to at least 12-15 times your annual expenses or eight to 10 times your annual income. But this does not mean you buy multiple term plans. Assess your insurance needs and plug the gap with another policy. Review this every few years as your income and assets increase.
Indraneel Chatterjee, co-founder and principal officer, RenewBuy.com, an online insurance marketplace, said that term plans should be looked at with flexibility. “Most term plans are bought at an earlier age when one has fewer responsibilities, and therefore, sum assured bought is low. With an expansion of family, assets and liabilities, the term cover may fall short. It is always preferable to buy plans which provide flexibility with changing the sum assured," said Chatterjee.
The tenures of these plans should be such that as the responsibilities reduce, you should be able to reduce the term. “Ideally, two to three term plans are adequate so that the premiums can be stopped as wealth increases and makes up for the gap that insurance was filling," said Dhawan. “Often, on the demise of the policyholder, the family is unaware of the payments made and benefits accrued. They then end up being short-changed while the policyholder might have paid many premiums over the years," said Chatterjee.
Also, multiple plans from different companies can expose your family to different rules for each insurer. “It is always best to understand the rules of two or three companies completely and purchase from them rather than buying policies where these terms and conditions are unclear to the nominee," said Chatterjee.
Regular health policies are normally indemnity policies that pay for hospitalisation. Like other financial products, keep your health policies to a minimum. Other than what your employer offers, it’s advisable to go for a personal health insurance plan and buy a super top-up to supplement the cover in an affordable manner. However, multiple health insurance plans will only create confusion at the time of filing a claim as you may find it painful to raise a claim from multiple policies. “Paperwork will have to be submitted to multiple insurers and you’ll have to respond to multiple queries, which by itself is a huge task. Every policy could have different conditions and restrictions too. Tracking all this could be difficult,"said Jain.
Note that if you have two policies with sum insured of ₹3 lakh and ₹2 lakh and have an approved claim of ₹4 lakh, you can use ₹3 lakh from the first policy and the balance ₹1 lakh from the other one. The paperwork required will be cumbersome but this is possible. “It is advisable to have a separate health plan other than what your employer provides as insurance regulations allow you to use the second policy in case you exhaust the cover on the first one," said Chatterjee. Also, this would ensure that you’re covered while transitioning from one job to another or not working. Another pitfall of having multiple health policies is that it requires you to remember different renewal dates.
While it’s good to have a mixed bag of necessary financial products, having too much could harm your money life and complicate the lives of your nominees after you die. If you think you have more than what you require, comprehend on how and what you can eliminate. If you feel you’re unable to figure out what must stay and what must go, consult a financial planner.