As a race, we are renowned foodies. At any gathering, you can be sure that the talk will ultimately end up in food, whether it’s cooking techniques or ingredients or taste. Sadly, as a nation, we are equally known for our lack of understanding of family finances.
Over the ages, we might have produced ministers who could balance the budgets of large kingdoms, but when it comes to our own earnings, we are quite happy to stash the cash under the bed — or in a savings account, its modern equivalent.
|EQUITIES: Like proteins build muscle, they add strength to your portfolio|
|FIXED INCOME: As healthy as fibre, these are the best option for secure returns|
|REAL ESTATE: These carbohydrates lay the foundation for your finances|
|INSURANCE: Misjudged by many, but for financial security don’t ignore fats|
|ALTERNATIVE: An occasional sweet indulgence can give spectacular returns|
This was possibly the only thing to do till a few decades ago. But now, with a zillion investment opportunities available, it’s criminal to let money rot away. Frankly, it’s time we became as knowledgeable about personal finance as we are about food. It’s amazing how much we can learn about financial management — especially the core of it, asset allocation — from food.
Imagine that your portfolio is a living creature. Just as the body needs its daily allowance of proteins, carbohydrates, fats, fibres, vitamins and the like, so too does your portfolio need its regular quota of nutrients to stay healthy. As you grow older, your appetite changes.
You might, for instance, find that your palate does not any longer crave for fried food, or your doctor has warned you off it. It’s like your appetite for risk. You start off ready to bet your shirt on any tip. As your responsibilities grow, you are less ready to risk your finances.
From the financial perspective, there are five ages of man — the 20s, 30s, 40s, 50s, and the 60s and after. No matter what your age group, it’s good to know what you can expect or what mistakes you might have made in the past. What we have tried to draw up is basically your ideal financial diet across ages.
Before we get there, let’s take a look at the major food groups and their financial equivalents. Proteins, which literally means “of prime importance”, are the food equivalent of equities. Sufficient protein in your diet helps the body grow. That is what equities — direct or through equity mutual funds — provide to your portfolio. Then, there’s energy, which largely comes from carbohydrates. The asset we chose to represent carbohydrates is real estate, the biggest component of most Indian’s networth.
Real estate is necessary to give shape and structure to your portfolio, as well as add value to it. It’s like your staple grain — wheat or rice, depending on which part of the country you come from.
Debt is the closest financial equivalent to fibre, which aids digestion. Like fibre, you tend to need more debt instruments as you age.
Every diet needs its quota of fat. Before the diet conscious begin ranting, let us hasten to add that fat per se is not bad. You need it to provide energy. Also, the fat that’s not burned serves as a cushion when you fall. That’s exactly what insurance does to your portfolio. Insurance, with pension plans and annuities, acts as your cushion in times of need and as you grow older.
Loans that aid in asset creation — as home loans, for instance — or which help further your career (car loans might do that) are more assets than liabilities over the long term. Like trace minerals or vitamin supplements, they are good for you in small amounts. Too much could lead to unpleasant repercussions.
We all need to indulge our craving for desserts or fine wines sometimes. You know the risks of over-indulging, but the occasional binge is fine. It’s like investing in art or jewellery. They are good add-ons but can never be the main course.
No matter how right you eat, exercise is vital. In fact, if you’re physically active, you can play around with your diet and get away with eating food suited to someone half your age. Exercise your portfolio too — review it at specific intervals, re-balance it, rebuild it if you see fit. And if you think your risk appetite is that of a younger person, there’s no real reason for you to stick to the safe path.
All of what we’ve said and all that we will be saying is merely to be used as a tool. These are broad guidelines and should not take the place of specific, individualised financial planning.
Your ideal diet: Small and systematic
If you start investing Rs 2,000 every month in equities when you are 25, your corpus will be Rs 1.7 crore when you turn 60 (assuming an annualised return of 15%). Start 10 years later, when you’re 35, and even if you double the investment amount to Rs 4,000 a month, you will end up with only Rs 1.09 crore. The power of compounding works best when you are young. Its multiplier effect reduces with age.
For fitness' sake, don’t...
• Buy insurance when you don’t have dependents
Plan expenses according to basic salary. Include reimbursements in investment planning. You will always meet targets.
You’re young, you’ve just started earning. Eating right really doesn’t bother you; you’re more involved in eating well. Of course diet charts figure large in your scheme of things, but more as a fad. Don’t let us stop you. If you can’t be footloose in your 20s, there’s no age you can. But always remember that indiscriminate bingeing now can have disastrous consequences later.
But that does not mean you must live a Spartan life. This is the age when you can really go heavy on proteins — in the form of steaks or baked beans. Financially, this means equities. Load your portfolio with equities of all types — blue chips, large-caps, small- or mid-caps — that give you at least 15% annualised returns.
The BSE Sensex has given almost 20% annualised returns since its inception in 1986. Invest directly in the stock market for better returns and an added rush. Otherwise take the equity mutual funds route. But invest in equities with a very long-term perspective of at least 15-20 years for maximum benefit.
You know that fats can be good. And you need some in your diet to give you energy. In financial terms, you need the protection that only insurance can provide. But, and this is the major qualifier, don’t just take insurance as a tax-saving tool.
Insurance is, first and foremost, meant to provide for your financial dependents in the case of your death. If you anticipate a future with no dependents, do not take insurance. If you do take it simply because an agent has been persistent, it’s the food equivalent of loading up on “bad” fats. (For more on how much and what insurance to take, read our Insurance Special, dated 18 October. Also available on http://www.moneytoday.in/) Like fats, insurance is easier to take when you’re young. The older you get, the more expensive it gets.
Akshdeep Singh, 28, Mumbai
|Income: Rs 28,000 a month|
|What's on his plate:|
Equities 90% | Debt 3% | Real estate 0% | Cash and near-cash 7%
• Saves more than 30% of post-tax income
• Combines tax and financial planning by investing in ELSS funds
• Hasn't bought insurance because he has no dependents
• Should consider adding real estate to his investment portfolio
• Should consider buying a Ulip, which combines investment and insurance
|"I am considering buying a house. I am now studying the market to understand what's available"|
Though retirement seems years away, it is a good idea to have a rough estimate of your retirement corpus. This helps focus your investments and you can make the best use of the power of compounding to build a sizeable nest egg.
Fibre is not just the isabgol that your grand-uncle takes every night. Raw vegetables are a rich source of fibre, which is necessary for the digestive process. Like fibre, you do need some fixed-income options to keep your portfolio healthy.
Not much, but there’s no reason to ignore these entirely despite the low returns they give. In fact, these instruments are your best bet to meet short-term goals when you cannot afford the risk of losing your capital to a dip in the markets, however temporary.
And finally, a word of wisdom from your grandmother: never let food lie on your plate. It’s doing no good and once it gets cold and unappetising, there’s little you can do but junk it. It’s almost the same with a savings bank account.
Keep some cash in such an account. At the same time, it’s a good idea to invest around three months’ expenses in cash and near cash instruments, including liquid plus funds.
Your ideal diet: Invest long, borrow short
If you take a home loan of Rs 35 lakh for 20 years at 12%, the EMI would be Rs 38,538 and you will pay Rs 57.5 lakh in interest. If the loan was for 10 years, the EMI would be Rs 50,214 and the interest outgo would be less than half at Rs 25.3 lakh. Keep home loan tenure to the shortest you can afford.
For fitness' sake, don’t...
• Invest in balanced funds when you can afford risks
Ready to invest in a house but can’t find the right property? Till you do, be a pretend buyer. Put aside a fixed amount as if it is a home loan EMI. The savings will help when you make the down payment.
In several ways, turning 30 is seen as the beginning of a more responsible life. The carefree 20s must give way to a slightly more sober reflection of where you’re going and where you want to be. Marriage, kids, dependent parents…you’ll have to provide for all or any of these. It’s also that time of your life when you start taking a little more care of your health — you don’t want to end up as a statistic.
Colleagues your age might already be victims of lifestyle-related ailments. And so you begin to take a little more care about what goes into you. Are you doing the same with your portfolio?
Proteins (equities) are, of course, still necessary, particularly since you’ll need your portfolio to continue growing at some speed. But your risk appetite might have changed somewhat. You might find that investing directly in equities no longer gives you such a high; instead, an element of fear could creep in. And that’s why there are equity mutual funds. Your portfolio gets the protein it needs and you get some respite from the risks posed by market volatility.
If, however, your appetite for risk remains large, by all means continue investing directly in equities. Like in the 20s, don’t let its bad press put you off fats completely. Just as you would monitor your fat intake more closely now, take careful stock of your insurance requirements.
Sukanta Sahoo, 32, Noida
|Income: Rs 68,000 a month|
|What's on his plate:|
Equities 55% | Debt 38% | Real estate 0% | Gold/cash 7%
• Invests in equities directly, and through funds and Ulip
• Life cover of Rs 1.2 crore through term, Ulip and whole life plans
• Doesn’t own a house
• Invest in a house
• Can increase exposure to equities
• Could combine tax and financial planning by investing in ELSS
|"I realise that retirement planning is the weakest part of my investment strategy"|
Make sure that you aren’t under- or over-insured. It’s not quite as essential in your 30s as in, say, your 60s, but fibre must occupy a larger space on your plate than earlier, and not just for short-term goals. Start looking at fixedincome instruments to build a small safe haven in your portfolio.
This is necessary to give your finances some balance. Consider investing in near-cash options such as liquid funds instead of letting your money lie idle in a regular savings account.
This is the age when you should start thinking about taking loans, at least those that help in asset creation. For instance, consider taking a home loan. An investment in real estate will act as a solid base for the rest of your finances. Even a car loan is good if the acquisition of a vehicle helps build your job or business.
It might still be too early for you to get into alternative investments. However, if you find that you have surplus cash after accounting for all your savings and investments, you could consider a few unconventional avenues.
Make a small start by investing in art, for instance. Just be prepared for the risks associated with this; it’s pretty much the same as when you indulge in vintage wines. The point is to be aware that this is an occasional indulgence and cannot be your main diet or financial plan.
You must also begin planning for your retirement if you haven’t already started. It’s not too late to give compounding the chance to work its magic on your money. This is also the time to take stock of your overall health. If you lead a sedentary life, you must begin to exercise. Similarly, begin a regular review of your finances to see where you are. Making course corrections at this stage is far easier than realising your mistakes decades later.
Your ideal diet: Covering liabilities
Most Indians have the wrong or inadequate insurance cover. One way to overcome that in the 40s is to take a term plan for the maximum period. A plan that terminates in your 50s will not help. At that age, few insurers will sell you a new policy. Even if they do, it will cost a bomb. A pure term plan is the cheapest form of insurance.
For fitness' sake, don’t...
• Assume that insurance will cover all your liabilities
Invest in gold through exchange traded funds. They are easy to buy, pricing is transparent, there are no purity and security issues and the tax on profits is low.
The kids are in high school, college fees loom large on the horizon. But those years of slogging are showing up on your visiting card and in your bank account. Money is not the constraint it was 20 years ago, but expenses have more or less kept pace with your income. Hopefully, your investments have grown too.
As you grow older, chances are that your palate is changing. You prefer single malts to the beer you guzzled some years ago. You consciously eat healthy and avoid the more artery-clogging foods. And it’s more than likely that you’re treating your money with the same care you’re giving your body. So, you opt for relatively low risk instruments instead of the riskier direct equity route.
It’s true that at this age, most investors are averse to risk. But that does not mean you should eliminate proteins (equities) entirely from your diet. They are essential to keep your portfolio growing. But go light on direct equities. Instead, invest more in equity-diversified mutual funds. Balanced funds should enter your portfolio now, as they have a smaller exposure to equities.
At the same time, your need for fibre will go up. Savings avenues such as fixed deposits and NSCs, near-cash instruments like liquid funds and the like might hold more attraction than pure equities.
Om Beer, 45, Noida
|Income: Rs 65,000 a month|
|What's on his plate:|
Equities 3.5% | Debt 14.7% | Real estate 79% | Near cash 2.8%
• Small equity exposure
• Rs 40-lakh insurance not enough to cover Rs 17-lakh home loan and other liabilities
• Assured pension from employer on retirement
• Increase investments in equity mutual funds to up to 20% of portfolio
• Use ELSS funds for tax planning
• Take additional term insurance to cover home loan
|"I buy stocks of companies whose business I understand. No blind guesses"|
This is also the age when you see the need for a complete health checkup. Give your portfolio the same treatment.
Either get a professional financial planner to review it or do it yourself. This will tell you whether you’re investing right for your retirement and other long-term goals or whether you need to change direction.
It’s human nature: you get morbidly concerned about your fat intake immediately after a health check-up. In the case of your finances, take a look at your existing pension plans and annuity plans, and study your insurance needs as well.
If you find that you’re still under-insured, this is about the last chance you’ll have to take insurance at a premium that’s not ridiculously expensive. Also, if you don’t have it, it is a good idea to buy a health insurance cover now. This will ensure that medical costs are covered as you grow older.
Once you have a reasonably clear picture of where you’re headed, you can afford to indulge a little. Holidays abroad, a new car...whatever takes your fancy. But if you’ve got that little extra and don’t want to end up feeling guilty for having blown it all up on fripperies, take a look at alternative investment avenues. Just make sure you know the risks involved. If you’re able to stomach them, go for it.
Your ideal diet: FMP over FD
Fixed maturity plans of mutual funds offer higher liquidity and better returns than fixed deposits. Fixed deposit income is clubbed with your income and taxed at the applicable rate whereas after a year, FMP profits are taxed at 10% flat or at 20% after indexation. Debt funds are more tax efficient than FDs.
For fitness' sake, don’t...
• Ignore health insurance. It is vital because you can’t get it later
Assuming that your retirement corpus is earning 8% returns when inflation is 5%, a withdrawal of about 6% a year would completely deplete it in 24 years
You’re coming to the end of your working life and retirement beckons, whether you want it or not. Getting this close to retirement is what really makes you feel your age, isn’t it? Your expenses on dependents might have come down a bit if your kids have left home, but health-care costs need to be factored in from now on.
And then there is the big question: will you be able to sustain your current lifestyle even when you are not earning your current salary? Or will you have to curtail some of the expenses you take for granted?
This is the age when health begins to assume critical importance. You start obsessively counting the calories that enter your lunch plate and wonder if you have been eating right so far.
Ideally, subject your portfolio to the same scrutiny. Most people in this age group turn almost entirely into conservative investors, unwilling to stomach any risk. Of course your portfolio still needs equities.
In food terms, can you imagine a halfdecent meal without dal, meat or dairy products? But you shouldn’t overdo it or you could end up with indigestion. Stick to easy-to-digest options within equities.
This means that instead of direct equities, increase the portion of balanced mutual funds. But ensure that the total number of funds in your portfolio isn’t too high. Too many funds will make managing them difficult and that’s the last thing you want to worry about now.
Raghunath Chouhan, 51, Mumbai
|Income: Rs 12 lakh a month|
|What's on his plate:|
Equities 25% | Debt 27% | Real estate 45% | Cash/near cash 3%
• Has 25 mutual funds in portfolio
• No life insurance
• Invests in equities directly and through MFs
• Prune number of funds in portfolio to a handful of best performers
• Consider health insurance, particularly critical illness cover
|"My portfolio has shaped up exactly the way I wanted"|
Fats are no longer so essential in your diet. Your insurance needs ought to have been taken care of by now, and you will soon be burning up some of the fat that you had accumulated in the form of pension funds and annuities for your retirement.
Just make sure you have adequate health insurance; it may already prove next to impossible to get and even if you can get cover, it’s likely to cost you a packet.
It’s more than likely that what will substantially increase in your diet now is fibre. Debt and fixed-income investments, nearcash options...these are what will keep your portfolio healthy regardless of what the markets do.
This is also time for you to close your home loan and any other loans you had taken. This is definitely not the stage when you should be creating or building assets; this is when you should be making preparations to live off those assets you have already created.
Your palate may crave desserts, but your doctor has quite possibly warned you off them. Of course, the occasional binge is not likely to kill you, and might even do some good. Similarly, indulge in alternative investments only if you’re absolutely positive you have enough put away to take care of your retirement expenses, including health costs and any other emergency that might crop up.
One thing you must finalise now is your potential retirement corpus. Put pen to paper and figure out the exact value of your nest egg, factoring in all the investments you are likely to make till you retire. Figure out how much interest-income your investments will generate. If you had taken a pension plan or have a rental income source, make sure you include that in your calculations. In case you are falling short, this is your last chance to add some meat to your corpus.
Also, make sure you draw up a will and that all your nominations are up-to-date. After all, none of us is immortal, and why leave your heirs with a financial mess to sort out?
Your ideal diet: Risk-free and tax-free
Consider putting money in arbitrage funds, which invest in equities and derivatives in a way that you gain 8-9% a year irrespective of which way the market moves. Held for over a year, profits from these funds are tax free.
For fitness' sake, don’t...
• Believe a small nest egg can last your lifetime
A mix of short-, medium- and longterm bonds and fixed deposits can help to guard against interest rate risk. They will also optimise returns.
Allow us to share a rosy, albeit cliched, vision with you. Morning walks on the beach with the dogs, pottering around in the garden pruning the roses, lazy afternoons tinkering with your hi-fi, long convivial evenings spent raising a glass with your spouse and other friends....
And now, snap out of it. None of this will be possible if you haven’t already planned and saved for it. It’s as Utopian as expecting to be perfectly healthy after spending a lifetime stuffing yourself with junk food and cheap beer.
That’s why we’ve spent so long telling you that it’s as important to eat healthy as it is to maintain a healthy portfolio. If your nest egg is small, there’s no way you can hope to maintain your current lifestyle on it alone. But always remember, even if you have a healthy corpus stashed away, it’s important to maintain some healthy practices.
Just as you won’t spend your sunset years gorging on burgers and fries and slurping down sugary sodas, don’t be profligate with your money. You really don’t know how long you will live and whether your savings will stretch that long. Also, increasing health-care costs could eat into a large chunk of your savings.
For the large majority of retirees, investing in direct equity is definitely a bad idea. Of course, there are some investors in this age group who are able and willing to bet heavily on decades of experience in buying stocks. But if you are even a little shaky, stay away.
Ashok Upadhyay, 62, Jamshedpur
|What's on his plate:|
Equities 60% | Debt 10% | Real estate 28% | Near cash 2%
• High equity component and low diversification
• No life insurance premium payments
• Incremental investments in high-risk direct equity
• Prune exposure to equities by exiting some direct stocks
• Invest proceeds in a mix of diversified funds, balanced funds or monthly income plans
|"Even at this age, I prefer investing in stocks because they give the best returns"|
Instead, invest in monthly income plans that have an 80:20 debt to equity ratio. This combines fibre (fixed income) with proteins (equities), ensuring a balanced diet. In fact, this is when you might prefer to go heavy on fibre; you are likely to be far more comfortable with fixed-income instruments than with anything flavoured with equity. Security of returns should be your primary concern now.
This is also when all those EMIs you made to repay your home loan will begin to pay off. Real estate, now that it’s yours free and clear, is no longer a dammed up investment. In fact, with the recently launched reverse mortgage scheme, you can own your house and still generate a monthly income from it.
It’s a case of having your cake and being able to eat it too. All those regular investments in insurance plans, pension plans and annuities should start yielding fruit now. If you had invested in a pension plan or were a government employee, you ought to have enough coming in to meet day-to-day expenses.
Just don’t let the prospect of getting a regular income go to your head. Even if your monthly cash flow generates a surplus, be as prudent with your money as you are with your diet.
But all this does not mean you have to lead a life of obvious austerity. A little care is all that we are recommending. After all, you’ve spent the past half-a-century or so saving and investing just so you can relax during your sunset years. It would be a shame to waste all those years of restraint for the want of a little control, wouldn’t it?
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