Financial Planning and Wealth Management: Lessons & reflection from Covid lockdown.

Today one thing is certain that the current pandemic has led us to uncertain times at a supersonic speed. This widespread crisis may bring many nations to bankruptcy and if not managed well it may severely impact even your financial health. In this article, I will share my reflections & lessons learned from the current lock-down which may help improve the immunity of your portfolio. Let us get straight to the point and get started:

1.  Nothing is permanent: Like most things on this planet, your wealth is also subject to destruction or erosion. Over the past couple of months, we have seen that most have eroded their wealth be it the common man or a billionaire. However, some have succeeded to grow their wealth even in these difficult times.

2.  Earning losses are for real: Earning losses, business closure and job losses are for real but it is not the end of the road. If you plan carefully you can always bounce back.

3.  Cash is king: In uncertain times, having cash (read liquidity) is a virtue. Spend it carefully and maintain liquidity equal to 18-24 months of expenditure. Discuss with your financial planner about the instrument and method of investing this cash before you act.

 4.  Old is gold: Fully leverage old world scheme for yourself and family e.g. PPF, NPS, increased contribution in PF, Post office deposit, Sukanya Samriddhi Yojana etc. One can also consider deploying returns received from these schemes in mutual funds SIP to multiply its growth in safe and capital protecting manner.

5.  The Bouquet is better than a flower: Asset allocation is a saviour. Diversify your assets and create a bouquet. Heavily investing your wealth in one asset class like real estate, equity, gold, fixed deposit or debt is not a great idea. Preserving wealth is as important as growing it. Not having the right asset allocation is like putting all eggs in one basket. Having a diversified portfolio that strikes the right balance between liquidity and growth is critical to stay afloat. Remember in unpredictable times best of the assets may sheen out their value for example today when equity and real estate are down gold is shining. Hence proper asset allocation not only keeps your fund flow intact for an emergency but also arrests a steep decline of your portfolio valuation.

 6.  Entry and exit timings are critical: It is said that time in the market is more important than timing the market. Exiting your portfolio after a 40% erosion may not be a wise strategy. The fact that you need to exit your portfolio after such an erosion indicates that your asset allocation was not proper. To fund the need after such erosion one can always take a loan against FD by paying a nominal 1% interest to bridge the requirement. Once normalcy is restored one can always pay back the loan and return to growth.

 7.  Rule of 5: You may be approached by a friend, acquaintance, relative or an unsolicited email to join pyramid or Ponzi schemes promising jaw-dropping returns, similarly you may get phishing emails promising large sum transfer to your account. This is the time when greed takes over. Here you need to apply the rule of 5 i.e. discuss these emails or schemes with minimum 5 people and ask for their opinion before making a decision. These 5 people could include your financial advisor, your Chartered account or person helping you filing returns, your HR heads and CFO. Please remember if someone promises you getting- rich- faster then current normal rate of market growth than be aware of high probability of a trap. 

 8.  Going direct: It is quite tempting to make money in the stocks and commodities market. We often listen to success stories of people around us picking multibagger stocks and making tons of money however no one talks of loss. Going direct without proper knowledge or research could be a wealth destroyer. I come across several such stories where people took bets and failed miserably. Today when you trade you are bombarded with tips and they are perfect traps for gullible investors. If you can't invest time in training and research leave the job to professional fund managers. Consult your financial advisor before taking any step in this direction. Churning your MF portfolio regularly is not a great strategy. Choose your financial planner/ advisor who helps you go direct in MF and charges for helping you.

 9.  Mutual Fund hai to Sahi hai: Mutual funds offer various schemes, choose them correctly according to your risk profile, financial objectives and as advised by your financial advisor. For common investors, a key option could be investing in Large Cap fund, Balanced fund, various index funds and/or combination thereof. If you are a retail investor consider SIP or break your investment into smaller chunks rather than investing a lump sum. I would like to draw your attention to the fact that in Feb’2000 nifty high was around 1732 points and in 2020 peak it was approx. 12300 and now it is around 9500 points or so thus in this period of 20 years peak to peak CAGR return is 10.3% and peak to low is 8.9%. This is one of the highest in large economies. Please note that while ignoring this kind of compounding would not be prudent for one’s financial health however it is extremely important to consult your financial planner/advisor before taking any step in this direction.

 10. Taxation Vs Inflation: While planning for your future income or retirement do consider   investment avenues that are tax- friendly or reduce tax liability. Given the inclusion of dividend under to purview of marginal rate of tax (earlier it was exempt up to 10 Lcs.), one needs to plan very carefully and not only consider inflation but also the impact of taxation in long term planning. Tax will have much more impact on your future income than inflation hence consider tax free income like insurance scheme pay-outs, for effective planning. Consider taking education loans from PSU banks for the professional education of children as they offer lower interest rates and a tax advantage. In my view, in the long run, taxation is going to impact you more than inflation.

 11. Borrow with pride: Borrowing is counter-intuitive, I classify debt in three categories:

a. Good debt (Housing loan or education loan).

b. Bad debt (borrowed for expenditures like travel, white goods, car etc.) and

c. Hot or dangerous debt (taken from credit card, money lander or taken for equity investing)

 It would be prudent to manage expenses rather than managing debt. All debt should be taken only after considering cash-flows. Debt repayment should not exceed more than 40% of your income and debt -asset ratio should not be more than 30:70 i.e. 30% of your assets. Philosophically all debt should be used for creative non-speculative assets only.

12. Portfolio Liquidity is key to sailing smoothly: In a widespread crisis like Covid I learnt the hard-way that the liquidity of the portfolio is a virtue and the single most important indicators of portfolio elasticity & health. Investing in assets classes like land, real estate and exotic possessions like paintings, sculptures, wine, diamonds etc. is a great idea but it may affect liquidity and valuation during difficult times making you an asset rich and cash poor. Hence ensure to retain emergency fund and plan for proper asset allocation as discussed in this article earlier.

13. Family comes first: Family not only provides emotional support but also makes economic sense. Consider some ideas like increasing spouse’s wealth by depositing money in her PPF account, buying her property (to reduce stamp duty), gifting money to children and book FD’s with their joint name, opening HUF, gifting money to old retired parents (if the family relations are not an issue-exercise caution) and divert some income on their name, you can also open PPF account for your major or minor children, spouse, parents. These actions can certainly reduce your tax outgo and spread the risk while boosting returns.

14. Passing the baton: Teaching how to manage and grow money to your spouse and children is more important than leaving an estate (read money & investment) behind for them. For example, the following sample questions could help (assuming you have grown up children’s): Do they know

a)     What is PPF, Mutual fund, various post office schemes or NPS?

b)     What are inflation and income tax?

c)     What is a will?

d)     What is HUF (if applicable)?

e)     What is the difference between Life Insurance and General Insurance?

f)      What is a SIP in a mutual fund?

g)     How to deal with a broker and lease your second house and process thereof?

Today your children may not be of the right age but help them to develop an understanding over a period of time and eventually they can develop expertise.

15. Rapid-fire round: I would now like to share some insights which have emerged after    witnessing 1991, 2001,2008 and current slowdown:

a. Invest a small portion in gold and have it in both forms i.e. electronic and physical.

b. Be extremely careful while investing in a private company’s FD as capital protection is more important than capital growth. Don’t get lured by that additional 1-2% interest.

c. Banks can fail or get in trouble hence diversify bank accounts in PSU and Private banks.

d. Don’t put all FD’s in one bank and take abundant precaution while considering private companies FD or placing them in cooperative banks. I will fully avoid them.

e. Complete 10-year Provident Fund (PF) membership as this makes you entitled to family pension. PF withdrawal should be the last option even while changing jobs.

f. Insurance: Buy all three type of insurances and factor in the following:

- Medical Insurance: Medical expenses could be financially devastating. Take additional combo plan personally i.e. combination of main policy and top up as this is very cost-effective. Don't rely on employer's medical cover only even if you are working for government or armed forces.

- Life Insurance: Take term plan (which are very cost-efficient) for life insurance with adequate cover for self. The sum total of cover and your net worth (Assets- Liability+Payment obligations*) should be sufficient for the family to maintain current standards of living if you are not around.

- Accident insurance: Accident insurance plans with PSU companies are quite affordable. These plans cover for loss of earning capacity, reimbursement and home modifications required due to disability as this is not covered by Life or medical insurance.

Never hide any information like medical history from your insurer as this will most certainly lead to claim rejection.

g. Have an updated and active will (preferably registered) for self. Do help parents/ in-laws to draft one.

h. Retirement planning is another extremely critical action. NPS and combination of defined benefit and defined contribution pension plans should be taken the day you start earning.

i. Agricultural land with clear title is a virtue. If you are blessed with it take an active interest in it and maintain land records well. Resolve family disputes or bifurcation matters when parents are around and enjoy the fruits of your land.

j. Give serious consideration before investing in the second/third house unless you are sure, that you are going to use it as Managing tenants after the age of 65 is a big challenge.

k. Be socially active, stay well networked, give back to society and contribute to charity.

l. Invest your time in staying updated and track the latest developments in the field of taxation and economy as it will improve the quality of discussion with your financial planner.

m. Keep your spouse fully informed and updated of your assets and liabilities if you don’t enjoy his/her confidence then god bless you.

n. Develop a habit of keeping good documentation and records of your investments and payment obligations like a loan,pension contribution, annual fees etc.One extra set of photocopies/scanned copies should always be handy.

o. Don’t procrastinate Income tax-related investment till the last date. Always keep your chequebook and other documents handy. In case of scrutiny you may need old records.

p. Planning to retire early ? If yes please go through my article on early retirement inventory here on LinkedIn and confirm if you are ready for an early retirement.

 p. Think 10 times before being a guarantor for someone's loan or lending money. Lend money only if you can afford to lose it. As it is often said that you lend like a king and recover like a beggar.

 q. On-line shopping is a great idea but don’t ignore neighborhood kirana (grocery) store.

 r. Buy Made in India items as much as you can. My experience is that most domestic companies would stand with the nation in times of crisis.

Finally, good health, fitness and healthy relationships are core to sound financial health. All the strategies and actions discussed are for tomorrow as it is said, “Remember, today is the tomorrow you worried about yesterday”. So, don’t forget to enjoy the present with family & friends and have lots of fun. Ultimately, it is about continuously trying to strike the perfect balance while enjoying the journey called Life.

Best Wishes and Stay safe.....

Disclaimer: This article is not on investment advice or a recommendation but my reflections. They may or may not apply to your circumstances or financial priorities. Please consider taking advice from your financial advisor before taking any action. Credits & Image courtesy: Abha Samant, Alka Sheopurkar, Dibyendu Roy, Kewal Doshi, Sanghamitra Dev Roy, Image -HDFC Life