To be sure, financial planning and advice are taken much more seriously globally, while Indians are slowly opening up to it.
Ahead of Word Financial Planning Day, which falls on 4 October this year, Mint spoke with a Bengaluru-based family about their decision to opt for a financial planner and how their 10-year financial plan helped them achieve their goals.
Financial crisis
Sreekumar, 50, who works in the information technology (IT) sector, says the wake-up call for his family came when his father fell ill suddenly. “He was admitted to the intensive care unit of an hospital and the treatment lasted more than three months. The recovery was short and, eventually, my father died, in 2012,” he recalls.
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Sreekumar and his two sisters had employer insurance that covered their father’s treatment as well, but even the combined limits of these health covers were not enough to meet the treatment costs. This led to a significant depletion of family finances.
Around the same time, Lovaii Navlakhi, a Sebi-registered investment advisor (RIA) and chief executive officer of International Money Matters, told him about the financial planning services offered by his company. “It helped that Navlakhi was a neighbour,” Sreekumar says. “Until then, we did some bit of financial planning by ourselves. But we were also looking for a structured approach to our finances and wanted to make sure that we had enough funds set aside for contingencies,” he adds.
Shock absorbers
Navlakhi’s first piece of advice for Sreekumar was to buy a separate medical cover for the family. “The employer insurance covers back then were not adequate. So, we immediately agreed and purchased a family floater cover,” Sreekumar says.
A family floater is a health insurance plan that covers all family members of the policyholder. This policy, which covered his wife Cynthia and his daughter, who was nine years old then, has a sum assured of ₹50 lakh.
Navlakhi also asked Sreekumar to get adequate life cover through a term plan to meet his family goals, lifestyle expenses and liabilities during any contingency.
Navlakhi’s firm reviews the family’s goals, expenses, liabilities and liquid assets every year and recommends additional cover in case of a shortfall. Sreekumar has been enhancing the term cover intermittently. At present, he has a term plan that provides ₹90 lakh coverage and an income benefit rider that will take care of his financial goals in case of accidents resulting in any disability.
Sreekumar has also put in place a separate contingency fund on Navlakhi’s advice. The fund can be used to draw up to three months of expenses.
Sreekumar’s 84-year-old mother has moved in with one of his sisters now. “My mother now has a medical cover of ₹10 lakh as part of the health insurance coverage provided by my employer,” he says.
Getting the asset mix right
Sreekumar and his wife, both IT professionals, underwent a risk profiling exercise to determine their risk tolerance.
Sreekumar was identified as a slightly aggressive investor, while his wife fell in the conservative-to-moderately aggressive category.
However, the family’s existing investments were highly conservative, with 97% of their portfolio invested in debt instruments. The debt portfolio included bank fixed deposits, some cash in savings accounts and employee provident funds. Only 3% of their portfolio was exposed to equity.
After the first review in 2013, Navlakhi decided it was time for the family to move slowly to a more balanced portfolio. For the first two years, they were asked to put in place all risk-mitigating measures such as medical cover, life cover and contingency fund. Over the next three years, their asset allocation was changed, to 57% investments in equity and 43% in debt.
“As the family didn’t have much experience with equity, we also didn’t want to rush them into it. So, we let them gradually build their equity exposure through systematic investment plans,” says Navlakhi.
Changing goals
When Sreekumar contacted Navlakhi and his team, he already had a home loan. While Sreekumar wanted to close the loan as soon as possible, he was advised to route his monthly surplus towards long-term investments for goals such as retirement and his daughter’s education.
“We got good advice and were told to continue with the home loan as its tenor was ending soon and the interest component had largely been paid off over the years,” Sreekumar recalls.
However, the corpus for some financial goals has increased significantly over the years. For example, Sreekumar’s daughter, who is 19 years now, enrolled at a foreign university last year. Sreekumar and his wife had set aside funds for their daughter’s graduation in India and postgraduation abroad. “But our education counsellor suggested it would be better if she does an undergrad course in liberal arts from a foreign university, given her academic record and acumen. She got admission in a university in the UK,” he says proudly.
Although the costs are high for a four-year undergrad programme— ₹25-30 lakh per annum, Sreekumar says he has used investments linked to another goal (buying a new house) to fund his daughter’s education. “We were again given timely advice to avoid taking education loans for at least the initial years. So far, we have easily managed her first two years of the undergrad programme,” he says.
The goal of buying a new house was added back later. The tweaked financial plan now requires the family to make higher investments so that there is a sizeable corpus that can still partially fund the house purchase. Sreekumar and his wife want to avoid a home loan this time as they are closing in on their retirement. At a later point, they could consider selling their existing house but still want to fund the initial payments of the new home from their investments.
For now, the family’s allocation to equity has reduced due to recent withdrawals. Their portfolio comprises assets in the following proportion: equity-35%, international stocks -5%, debt-57%, and sovereign gold bond -3% . The global equity exposure includes international funds and shares of the multinational company where his wife works. “Four-five years back, Cynthia was allowed to structure her salary in a way that part of it was used to buy stocks of her company,” he says.
The couple’s retirement plan remains intact. Although the corpus requirement has increased a bit over the years, Sreekumar says we are already halfway there in terms of the required corpus. “It is important that there is enough corpus to fall back on when regular income stops,” he says.
The retirement corpus is expected to cover the couple’s living, travel and medical expenses post-retirement. Sreekumar is confident that by the age of 60, he and his wife would be comfortable stepping into their retired life.
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