Why You Need To Be Your Own Wealth Manager ?

Realign planning for possible medical contingencies During this period, it is common for medical ailments like those related to heart and diabetes to get detected. As your family’s wealth manager, you may need to modify your contingency planning.

Prepare for approaching life goals During your 40s and early 50s which are characterised by your upcoming financial goals your children’s higher education. This involves seeking gains from long term growth investments like equity mutual funds and equity-oriented hybrid mutual funds in the run up to these goals.

Play dual roles of accumulator and harvester At this stage, you may need to harvest the investments seeded/invested in the past and earmarked for your approaching goals. This must be done to meet lump sum needs such as upfront fee payments to higher education institutions for your child as well as regular income needs for regular expenses like hostel fees to name a few. At the same time, for distant needs like retirement, you need to stay invested and continue investing in possible high growth investments. But before investing in such investments kindly consider your risk appetite and the Scheme characteristics.

Identify and manage risks to potential wealth: As always, risks to investments will be at work and as a wealth manager you will need to manage them. This means risks from periods of high volatility for equity and equity oriented investments and risks from interest rate movements, repayment defaults, besides risks related to reinvestments and inflation, for debt investments.

As a wealth manager you need to control the volatility in growth investments and aim to ensure their consistent growth. You also need to secure long term gains and capital of investments earmarked for approaching goals. For short term needs, you will need to seek to ensure sufficient income and liquidity.

Your Wealth Management Action Plan

Contingency planning: To be prepared for the changing nature of contingencies, consider enhancing health insurance coverage. Also, depending on changing needs, consider increasing the size of emergency funds from 3 months to 6-9 months of expenses.

Budget for increased cashflow You will need to keep a tab on expenses with the help of a home budget and aim to increase the cashflows. The increased cashflows can then be deployed for investments for remaining major goals. You can cap hikes in discretionary expenses like dining out, to say, for eg. 10% annually.

To get the balance of meeting present and future needs right, use the thumb rule of keeping for eg. 15% of overall investments in liquid and income bearing investments like liquid funds and short term debt mutual funds. Rest can be invested in existing and new growth investments like equity mutual funds.There are some other ways of increasing cashflows for investments:

Retire outstanding loans Consider using periodic lump sums such as commissions, increments and bonuses to part-prepay or fully repay outstanding loans. Start with the most expensive loans like personal loans and outstanding credit card balances, followed by home loans. A key objective at this stage of life is to be debt free. The EMI amounts of retired loans can be directed towards regular investments in mutual funds through Systematic Investment Plans (SIP). (Consult your financial advisor before investing.)

Invest lump sums and pay hikes Periodic lumps sums as well as incomes like rent, dividends, interest, and coupon payments typically create excess cashflow and often seem like an idle surplus. These cashflows can supplement existing growth investments.

As before, lump sum investments can be made in mutual funds with the help of Systematic Transfer Plan (STP) facility. Here, the lump sum is first parked in a liquid fund or a short term debt mutual fund. Thereafter, it is regularly invested in equity mutual funds and equity-oriented hybrid funds.

Realign investment approach You can consider a three bucket approach to investments. The first bucket consists of liquid investments like liquid funds and short term debt mutual funds, which, like before, can constitute the emergency fund.

The second bucket can consist of short term investments for needs arising in up to 2-3 years. These can be short term investment plans like short term debt mutual funds, fixed income debt mutual funds and arbitrage funds. However, please note that the investment approach depends on an individuals risk appetite and also his financials hence please consult your financial advisor before investing

Seek to Secure long term gains The second bucket also needs to have the money required for approaching goals like child’s upfront college fee payment and monthly hostel fees. To fill up the bucket, start a de-risking process of investments, securing gains from growth investments over the long term besides capital, 2-3 years before the money is needed. This can be done using the Systematic Transfer Plan (STP) facility where the money moves regularly from higher risk equity mutual funds and hybrid funds to lower risk debt mutual funds.

For meeting regular expenses, consider Systematic Withdrawal Plan (SWP) facility in a fixed income debt mutual fund which generates regular income with regular liquidation of units. The required investment amount can be determined using a SWP calculator, easily available online.

Aim for consistent growth The third bucket of investments consists of growth investments, namely equity and equity-oriented investments for needs expected to arise in 8-10 years or more. At this life stage, a key aspect of growth investments is focus on lower volatility for consistent long term growth. This approach helps you eventually save more and typically ensures returns stay ahead of inflation.

You can achieve this objective with investments such as in index funds and large cap mutual funds besides equity oriented hybrid mutual funds like balanced advantage fund and multi asset allocation fund but please note that the risk associated with these funds is very high. You also need to gradually exit from higher risk investments like mid cap mutual funds, small cap mutual funds besides thematic and sector funds.

Index funds based on large cap index like Nifty 50 and Nifty 100 are not only lower risk equity funds, but their low fund management costs have a lower impact on returns. Investors also benefit from the periodic rebalancing that happens in them and realigning the fund to the index after entry and exits of select stocks. On the other hand, hybrid funds like balanced advantage funds help in getting the best both equity and debt investments. Here, the fund managers are empowered to nimbly change the mix of investments across asset classes and keep the risks in check.

Contrary to the misconception of some people, making wealth grow after a certain stage is not about stumbling upon a new investment option, strategy, or formula. It continues to be about sticking to the basics in a disciplined way. Of course, as your own wealth manager, you get to customise your finances for changing and emerging needs.