Which do you think is more difficult, managing a business or an investment portfolio? It’s a no-brainer; the former is definitely tougher. Unless, of course, you are 29-yearold Jasminder Singh or 44-year-old Rajesh Somani. Singh is the proprietor of MS Electrical Works, a Jalandhar-based company that manufactures monoblock pumps, while Somani is a partner in a franchisee of Karvy Stock Broking in Dhanbad. They started their ventures seven and 11 years ago, respectively, and are content with the status of their business ledgers.
However, this is not true of their personal balance sheets. “I am the only earning member in my family and am apprehensive about their financial security. I don’t think I am taking the right steps in this direction,” says Somani. Similarly, Singh is worried that he is not making optimum use of his income.
If you had any doubts about the presence of entrepreneurial instinct, here’s evidence that it exists. Both Somani and Singh have guessed correctly—their finances need a complete overhaul. In fact, it doesn’t take instinct to realise this. Singh invested Rs 4.5 lakh in stocks in 2008 and is now sitting on a loss of nearly Rs 3.5 lakh. Somani requires a monthly investment of Rs 43,854 to meet his goals. Currently, his monthly investment is zilch, even as he stacks up a surplus of Rs 16,184 in bank accounts. While they ought to have read the writing on the wall a long time ago, the good thing is that both are eager to initiate damage control—another entrepreneurial trait.
The first step in the revamping of their portfolios is to understand that saving is not enough. Money should be invested if it is to grow at a pace that is faster than the inflation rate.
After deducting routine monthly expenses, two SIPs and the average insurance premium, Singh’s cash flow generates Rs 8,407 as surplus. Somani adds Rs 16,184 a month to his idling money pile. Neither can afford this inertia. Singh and Somani have irregular incomes, which means building an emergency fund is more important for them than for the salaried class. We suggest that they fix a corpus amount according to the degree of volatility in their income levels, and that it be at least equivalent to their expenses for six months. The money can be parked in bank accounts, sweep-in accounts and liquid funds. The surplus should be channelled towards meeting the goals.
These goals, in turn, need to be cut to size. It is difficult to predict the growth chart for an entrepreneur’s income. Nevertheless, by conservative estimates, Singh’s dream BMW may not become a reality in the next 10 years. Iris calculates that the monthly investment required to achieve this goal is Rs 36,692—336% of his current surplus. Also, there are other goals like his children’s education and marriages, which collectively demand Rs 17,819 as monthly investment. Therefore, downsizing his goals is inevitable.
For Somani, the verdict is equally harsh. He must invest Rs 43,854 a month to be able to meet his goals. This is about 2.5 times his current surplus. So, he too needs to postpone or scale down his goals. Luckily, both men need not worry about their retirement nest eggs as they can, and want to, work as long as health permits.
Singh and Somani maintain separate business and personal accounts. However, finding the future cost of their personal goals should help reset their business goals too. They now know that increasing their incomes is essential. As entrepreneurs, they are more empowered to do so and must exploit the opportunity.
While increasing the income takes time, they can reduce their outgoes immediately. As usual, the first on our hit list are insurance premiums. Somani has two expensive endowment policies that cover him for Rs 14 lakh, but cost Rs 1.66 lakh a year. One of these plans, bought in 2005, has an annual premium of Rs 1.46 lakh for a cover of Rs 10 lakh. This is too high. Iris suggests that he either surrender or convert both plans to fully paid-up policies. This will add Rs 13,816 to his portfolio. For life cover, he can opt for a term plan of Rs 30 lakh that will cost about Rs 30,000 a year.
Singh cannot beef up in this manner. He has four insurance policies, including a money-back plan and three Ulips, that jointly cover him for Rs 35 lakh. Two of the Ulips were bought in 2006 and have completed the pain period of high upfront costs. Iris suggests that he continue with the plans beyond the minimum premium paying term. If Singh wishes to increase his cover, he can opt for regular top-ups as a higher proportion of the premium is invested.
The third Ulip, bought this year, covers him for Rs 25 lakh in case of natural death. If he survives the 25-year term, he will receive the total premiums and the returns from their invested component. “This is better than some plans that offer you nothing if you survive the tenure,” says Singh referring to term plans. What he does not realise is that they offer a very high cover at very little cost.
With a term plan, Singh can get a cover of about Rs 30 lakh for Rs 8,888—Rs 5 lakh more than what he is getting now. If he has bought this Ulip only for insurance, Iris recommends that he exit the policy and forsake one instalment of the premium. Instead, he can buy the term plan suggested above. If he doesn’t want to do this, he could follow the same strategy as for the other two Ulips and continue paying the premium till at least onethird of the tenure is over.
As Singh and Somani have no loans and don’t have any plans for a big-ticket mortgage, they should be able to invest solely in equities, provided there exists a sizeable debt cushion. Somani qualifies as he has stacked up Rs 10 lakh in bonds, FDs and PPF. But Singh has not invested in any fixed-income instrument as he believes that the returns are far too low. “I am only interested in stocks, funds and Ulips,” he says.
This is financial suicide, especially for entrepreneurs who have volatile incomes. Besides, Singh has five dependants, including a widowed sister and her son. A 100% equity portfolio seems too risky.
If Singh is not convinced about buying pure debt instruments, he could choose balanced funds, such as HDFC Prudence, which offer a mix of equity and debt.
From his current fund basket, Iris suggests exiting Reliance Diversified Power and Reliance Natural Resources Retail. Singh has one sector fund, Tata Infrastructure, which offers sufficient exposure to this high-risk category. For a mid-cap fund, Reliance Growth is a good choice. However, investing just 17.2% of his portfolio in an equity diversified fund, JM Basic, is too little. Singh must make equity diversified funds the core of his investments as they are the safest route to equity exposure. Iris suggests that he invest via SIPs in HDFC Top 200, DSP ML Top 100 or Franklin India Bluechip.
Somani could have chosen better funds. Iris recommends exiting all five funds in his kitty. The Kotak Equity Fund of Funds is expensive, whereas DBS Chola Multi-cap and DBS Chola Small-cap and Franklin India Opportunities are very risky for him. Instead, Somani must focus on equity diversified funds for the same reasons that Singh should. Somani can take his pick from the funds Iris has recommended.
Singh should try to avoid stocks. He had bought eight stocks worth Rs 4.5 lakh in January 2008. Their current value is less than Rs 1 lakh. Singh has no idea about technical or fundamental analysis but has dabbled in the derivatives market. This is taking aggression too far. For someone with his investment acumen, mutual funds are the best bet. He will not be worse off for it as this will keep him from incurring heavier losses by buying stocks blindly.
Somani’s stock selection is no better. His collection of eight scrips reveals no investing pattern. He has not diversified his stock portfolio across sectors, holding on primarily to banking and infrastructure industries. Therefore, Iris suggests that he too give up on stocks as the results can be disastrous. “I made a lot of money through the franchise in the initial years but I lost most of it by buying wrong stocks,” says Somani. It seems he has not learnt from this mistake. At this juncture of his life, he cannot afford to take such risks.
Entrepreneurs do not enjoy the option of a health insurance policy bundled along with the salary package. Therefore, both Somani and Singh must immediately buy a family floater policy of Rs 5 lakh each to avoid unexpected medical costs upsetting their apple carts.
Clearly, Somani and Singh must do a lot to mop up the financial mess in their portfolios. In the short term, this will definitely result in some losses. However, it must not deter them as long as they are convinced of a profitable future. As entrepreneurs, they should know— any action will take some time to show results.