imgbd MasterMind

Real life case of Best PAD in action

Rajesh Chheda, Finance Factory, Panjim, Goa

In a nutshell

You see a double-income earning professional couple in their 40s with zero debt and all their money in bank deposits, and the first thought that will strike you is, "they need equity!" That's what their banker thought too, and talked to them about equity funds and showed them a returns track record of 20%+. Rather than exciting them, the sales pitch scared them off! That's when they were referred to Rajesh Chheda of Finance Factory, a SEBI registered RIA, and qualified financial planner. Rajesh recounts the case study of how he gently worked on this couple who started off as extremely equity averse and are now discussing not just equity funds, but direct equity investing too!

In our MasterMind columns, we discussed Best PAD: the new mantra for asset allocation. Here is a real life case study of Best PAD in action, from a seasoned and successful practitioner.

This is a case study of a doctor couple. Both professionals who settled down in India post their post graduation and work abroad. Age 48, referred to me five years ago by their CA.

They were approached by their bankers for mutual fund investments and they were pure fixed deposit and savings accounts persons, focussed in their profession. Just the very fact they were shown returns of schemes at 20% plus had initially scared them off and hence approached their CA who in turn suggested them to meet up with me, a CA but focussed in financial planning. At that time I was a Certified Financial Planner in practice and been in the financial services field since 1990.

First get adequate protection in place

So, in the first place, I needed the info and the first step I followed was to check out their risk covers. Which was in a pittance to their income earnings. Perhaps they had started with a few life policies in their initial years after which their incomes soared. I assessed their Human Life Value and the first thing to make them comfortable was in suggesting an equivalent of a fixed deposit savings scheme in the form of a basic endowment plan that had a risk cover as well as tax efficiency in the returns. Padded the same with a sufficient term cover. So, with this their new premium was more than their earlier risk cover!

To this, I enhanced upon their health insurances which were way below the appropriate limits. Earlier was a five lac cover which we upgraded then to four times higher and so with their professional indemnity cover on a similar scale.

Here, I would pause to note : Many a times, we come across such cases where they have initially started off in life with products that appeared sufficient and conveniently forgot about them. Somewhere in the recesses of their minds, they think they have adequacy, but with the passage of time and in a decade, the reality check is quite different. Inflation has been there, professional progress has been there, addition to family has taken place, parents are retired and now staying next to them, etc. This somehow is a long drawn process, but nonetheless worthwhile. Here is the opportunity to come across them as their own "family physician" who knows their pulse of their requirements, risk appetite, goals, dreams and aspirations.

Equity investments only after ensuring adequate protection

Since both were working, had their own bungalow, without any debt, their child in school, they apparently had a good amount of savings every month. So, this prompted me to suggest them on to a lumpsum investment (from a percentage of their existing fixed deposits) which matched to their long term goals like retirement and another over five years goal of their childs higher education needs. As there would be a regular salary, a fixed percentage of the salary was decided to start SIPs.

Having done their risk profiling and they didn't need to take any higher risks, the funds were mostly in hybrid equity oriented or diversified while SIPs had a couple of small and mid cap flavours.

Took profits, bought an annuity, added to SIPs

Now, last year in Jan 2015 was an interesting asset allocation done. Seeing their mutual funds assets grown by over 50% and keeping in view of the decreasing interest rates (my interpretation of 'achhe din' meant that home loans were expected to be in range of 5-7% over the next few years and thereby fixed deposit rates could be a few percentage points lower than the home loan rates), I suggested them to shave off a portion of their mutual funds portfolio into an annuity product with the simple logic that they didn't have a product that would guarantee them a fixed rate for the rest of their lives and since they did not require the annuity in their working years for another couple of decades, they could opt for the monthly annuity and channelise the same towards rebuilding their mutual fund corpus! Now, since it was more of a profit booking of the lumpsum and its diversion to annuity (they would not be getting pension from their employer hospital and hence could afford to buy an immediate pension), their risk appetite slightly increased. This was because we did an asset allocation into a fixed guaranteed annuity so its fruits (monthly instalments) could be diverted to equity mutual fund schemes.

Today, as luck would have it, they have benefited by the market swings and have been added to the funds over the past twelve months and the SIPs are double. Their earlier SIPs continue plus the SIPs generated out of annuities. Agreed, annuities are taxable, but so is the bank interest which they earlier had. Only thing is that it would be fixed for life. And with todays life expectancy statistics of a surviving spouse crossing 90 plus, this could be a 45 year guaranteed 7% plus! Ten years ago, this same annuity was about 11% when the banks were giving 12% and with international rates on the decline with USA at 0.5% and Europe towards zero or even negative, this allocation appeared attractive!

And now, we are talking about direct equity investing!

Now, recently with the downswings in the markets, in my last meeting, they were also keenly looking at direct equity! Maybe pick up a few blue chips and hold them for a long time. As the markets are dynamic. So are the risk appetites of persons I have experienced! But equally important is to understand that risk appetite increases with a favourable investing experience. We are often in a position to enable clients to get a favourable experience, without necessarily waiting for plan outcomes to fructify 10-20 years down the road. An equity-averse investor need not always remain that way. A lot depends on how we help them navigate through the journey and how we can use our creativity in asset allocation decisions, to make their journey a better one.

All content in MasterMind is created by Wealth Forum and should not be construed as an opinion of Sundaram Mutual Fund.

Share this article