Vijay, aged 37, approached us for his financial planning. He lives in Bengaluru with his wife Malini, who is 35, and their two kids; a daughter (12) and son (10).  He wants to build enough wealth to secure his family’s financial well-being. He is not averse to risk. Some of his investments failed and some paid off well. He thinks he is at an inflection point in his career and wants to focus on his career growth and leave investment management to a professional for reasonable risk-adjusted returns.

He has defined his goals as follows:

1.      One child will be pursuing medicine, preferably in the UK or Europe, costing around £50,000 per annum for a five-year course. Total current cost to be planned is ₹2.7 crore.

2.      The other one may study in the US, preferably, pure science. Vijay wants to set aside the same amount as for the first child.

3.      Vijay is willing to work as long as he can but would like to have enough funds to support his lifestyle if he decides to quit employment any time after 15 years from now.

4.      He intends to gift ₹1 crore each to his children when he turns 55.

5.       Malini received ₹40 lakh as family settlement from her parents recently and is looking at ideas for investments.

They both have a very aggressive risk profile and are keen to invest ₹25-30 lakh a year towards their wealth creation goals.

Review and recommendations

1.      The family has adequate liquidity to manage any emergency needs. They need to focus on wealth accumulation along with tax-efficient returns.

2.      They were advised to opt for term insurance for sum assured of ₹2 crore each immediately, in addition to the life insurance cover provided by the respective employers.

3.      They were adequately covered for health insurance through group medical insurance and personal family health insurance.

4.      They were advised to opt for home insurance for the residential property with an adequate sum insured to cover the structure against the perils of natural calamities and fire.

5.      They need ₹3.37 crore in the next 7 years and ₹3.85 crore in the next 9 years for undergraduate expenses for the children. This can be funded with the current MF portfolio and an additional investment of ₹1 crore with an expected return of 12 per cent CAGR. Additional investment may be sourced from the cash in hand with Malini, and fixed deposits.

6.      As they wanted to have an option to retire in the next 15 years, they have to accumulate ₹19.27 crore to support their current lifestyle.

7.      A further contribution of ₹62,000 per month in two EPF accounts and ₹3 lakh per annum in two PPF accounts would fetch ₹5.64 crore in the next 15 years. They can also expect ₹5.2 crore from stocks portfolio without any further contribution at 12 per cent expected growth in the next 15 years.

8.      This leaves a shortfall of ₹5.64 crore. They were advised to invest ₹1.12 lakh per month in an aggressive MF portfolio with an expected return of 12 per cent CAGR for the next 15 years.

9.      They were advised to invest the balance towards other needs in a flexible portfolio with an allocation of 70 per cent in equity, 20 per cent in fixed income, and 10 per cent in gold. If Vijay invests ₹1.5 lakh per month, they have a better chance of reaching ₹6.7 crore-₹8.5 crore in the next 15 years. This will help them to fund all other goals.

Though Vijay and Malini are r disciplined in investments, there were instances of loss of capital in their investment journey. They had no regrets as they understood the risky bets right in the beginning, and the results did not turn out good a few times. If the goal is to accumulate wealth, it is not necessary to assume high risks. High risks do not translate to high returns.

Looking back, they had generated 12-13 per cent returns on their entire portfolio accounting for the investment losses. The importance of not losing capital and the effect of consistent returns in the long term were explained to them. Asset allocation plays a key role in wealth creation.

If they can focus on their career and generate enough surplus, wealth creation would be much easier in the long term with simple products. Not losing capital is very important in the investment journey. There are enough highly regulated investment products in the Indian market that can help middle class families to build wealth. Disciplined investing needs to be guided to generate wealth.

It must be understood that high risk does not necessarily provide high returns. In fact, the uncertainty is high when you choose high-risk investments without completely understanding the nature of risk involved. Understanding when you are becoming greedy or fearful needs a perspective from a third person, at times! Getting professional help addresses this.

The author is a SEBI-registered Individual Investment Adviser. The article is provided only for educational purposes

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