Thursday, 3 November 2016

Investments and Us

My friend an investment specialist bowing to my entreaties has become a guest blogger on my blog to give some special investment advice...


Just the other day I was trying to help a friend with a serious medical condition he was diagnosed with. I was entrusted the job of finding a good but “decently priced” hospital for him. Just to get things cleared up, I asked his wife if he was medically insured. Being self employed, obviously, he had no company paid medical benefits to fall back upon. Fortunately, his wife knew that he had taken a medical insurance policy. When I asked how much medical insurance cover he had, she said he had a cover of Rs.2 lakhs. Seeing the look on my face, she thought maybe she was wrong and then corrected herself and said, “No, sorry, it’s 5 lakhs.” Clearly, she didn’t know how much it was. I asked her to show me the policy and she didn’t know where it was kept. With a figure between Rs.2 and 5 lakhs to work on, I was confused which hospital I should choose. Ultimately when she finally found it, it was neither of them. He was covered for Rs.3 lakhs.

My question is - how many of the ladies here have any knowledge of their husbands’ investments, his life insurance policies, his medical insurance etc etc? If not, one should take stock of it today itself. While we always hope for the best but one must be prepared for the worst. Please understand that, God forbid, if he’s unwell you will have to take charge of the situation. So, starting today, start taking interest in the financial future of the family as well.

By now you must be thinking, who I am. Well, to be short and precise, my name is Vikas Sharma and I’m a financial consultant. To give you a longer introduction, I was born to an army officer in the corps of Electrical and Mechanical Engineers (EME). Being the son of an engineer, like all children, my mindset too was the same that I also want to do what my father did i.e. become an engineer. So, I chose science subjects in my XI and XII. That was my biggest mistake. I wasn’t made for science and I couldn’t understand it one bit. And obviously, couldn’t qualify for any of the good engineering colleges. But good sense prevailed and I didn’t make it a bigger mistake by going into one of the second rung colleges. I did hotel management (it was a diploma back then) instead, worked for three years in a hotel and did my graduation by correspondence. B. Com this time. I wasted 7 years of my life for that one mistake.

Doing my B. Com was the beginning of life for me. Soon after that I went to Australia to pursue my MBA in finance. And when I did that and was studying the subject of investments, and portfolio management, and security analysis, I realized that this is what I was made for. I finished my MBA and came back to India and started my own financial consultancy business. It’s been 17 years now and I still love it. We help people plan out their financial future, suggest them a model portfolio of asset classes based on their life stage and their risk appetite.

Nirja, my friend, asked me to contribute to her blog by writing some articles for the readers of her blogs and I readily agreed. Though, I have my own blog too at http://www.sharma.es but that caters to an audience which is regularly investing in shares. Here I would be sharing my little knowledge in the form of simple, easy to understand articles. Meanwhile, I would also like to encourage you to post any questions in the comments that you might want me to elaborate on and I’d be happy to answer them. In case of more personal queries you can mail me at vikas@sharma.es.

Thank you, Nirja, for giving me an opportunity to write for your blog.
  
So, after I have introduced myself, it comes to how this blog will help you? Well, I would say, it is what you can take from it rather than what I can give. I believe that financial plans are like clothes. Like the same size of clothes doesn’t fit all, similarly, the same financial plan doesn’t fit all. It has to be tailor-made from individual to individual depending upon various factors. However, to keep this post general, I would just like to focus on a few thumb rules that I usually follow when I make a financial plan for anybody.

But before I can go into the details and the “nitty-gritties” of investments, I would like to classify investments as the following:
(a)    Secure investments: By secure, I mean ones who invest only in sovereign bonds like the RBI bonds, the Provident Fund etc. , which give you a very low rate of interest but give you a fixed rate of return, usually tax-free.
(b)   Safe investments: Are those which fetch you a decent rate of return but are still fixed and are considered safe investments like investments in the money markets, the bank fixed deposits etc. Such investments are usually taxable.
(c)    Medium risk investments: In such investments you get a higher rate of interest but are again taxable, such as company fixed deposits, and bonds issued by companies.
(d)   Risky investments: People who invest in the US dollar and precious metals like gold and silver are called risk takers, even though these investments are considered to be the safe havens for people who invest. They give you a higher rate of return, but the profits are again taxed.
(e)   Very risky investments: Investments in properties, in stocks, in equity linked mutual funds “can” give you phenomenal returns but are considered to be very risky as you can even depreciate your capital by investing in such products.

But in all of these, one should remember, that the riskier an investment is, the higher returns it can generate. But it’s not as easy as picking out what an investor needs, high returns or low risk? It has to maintain a fine balance between preservation of capital and high returns. Now, coming back to the thumb rules, it all comes down to calculating how risk averse an investor is. And it all boils down to how risk averse an investor is, or can be, which can depend on various factors:

  1. Individual preferences: It depends on how much risk a person is willing to take. What is of more importance to him? Higher returns or preservation of capital? Usually, my experience tells me that old people, and housewives value security more and don’t bother about the returns while younger people, especially DINKs (Double Income No Kids), don’t mind taking an extra amount of risk, because it can fetch them higher returns.
.  2.  Age bracket a person is in: I generally feel that not all your investments should be low risk or high risk but again it is a fine mix of both. And it usually depends on the age bracket a person is in. My thumb rule is that (100 minus the age) is the percentage that one can afford to invest in risky assets. Thus, a person who’s 30 years old must invest (100-30=) 70% of his money in risky assets and only 30% in low risk assets.
   3.  Family commitments and responsibilities: As I said, it’s not as easy as just seeing the age and applying the thumb rule. A 50 year old unmarried man with no family responsibilities can afford to take a lot more risk than a 50 year old man with four children who are yet to be married.

Anyway, there is a lot more to know and lies outside the scope of the article. As time goes by we’ll learn everything in greater detail but for now if anybody has any questions, you could just forward them to vikas@sharma.es or post your question in the comments section.

This series on the blog is designed to make the ladies and the housewives readers a lot more finance savvy and will help them take informed decisions and make them more financially independent.