How you can build a goal-driven portfolio

Karthik (42) and Meera (41) have two kids -- a 14-year-old son and a 10-year-old daughter. Karthik is working with a financial services company and would like to move to a part-time job with better work-life balance when he turns 50. Meera is a homemaker.

Karthik’s take-home salary is ₹22 lakh. He saves 40 per cent (₹ 9.6 lakh for the current year) of his salary.

Of all the asset classes, he understands real estate better. No wonder, he owns a house and has invested in two plots of land. He has also inherited two plots of land. His total real estate investment is ₹2.35 crore excluding his primary residence.

When it comes to investing in other asset classes, he is proactive but has limited knowledge. On the life insurance side, he has invested in multiple endowment, money back and whole life products with a total sum assured for ₹1.28 crore. He has recently started putting money into equity through mutual funds and has invested about ₹ 10 lakh. He also has company stock options worth ₹10.5 lakh and fixed deposits worth ₹10 lakh.

While Karthik had delved into multiple asset classes, he was not sure whether his investment decisions are right. He wanted to get it reviewed by a financial adviser and make his investments smarter. That’s when he reached out to us.

During the engagement, we made sure that not only Karthik but Meera was also involved in all the discussions. This has a hidden advantage of bringing the spouse up to speed on the family finances and readying them both to manage their finances in case one of them is not able to give it due attention.

Shortfall in the current plan

From initial discussion with them, a few important findings came out. Risk profiling was not done. There was no good basis for asset selection and allocation. They had very high exposure (88 per cent) to real estate. Their life insurance investments were more for the returns than for risk coverage, but were getting a meagre return in the range of 6-6.5 per cent. Their exposure to debt and equity asset class at 4 per cent and 8 per cent, respectively, was very low.

The good thing was that they understood the importance of equity as an asset class and had started investing in it. The challenge was that all the investments were ad hoc and not aligned to any goal.

Goal-based investments

We profiled the risk of Karthik and Meera, and found that they can take moderate risk. We worked with them to capture their financial goals, existing assets and the expected income till retirement.

We used conservative estimates for inflation and return so that they do not run out of money in the twilight years of their life.

Based on the due date of the goals, we selected a combination of investment asset classes. For the goals in the near future, conservative investments options (e.g. debt investments) with more predictable returns were chosen. For goals sometime away, a mix of hybrid funds were recommended. For goals far in the future, aggressive investments with higher return potential were chosen, such as equity.

The majority of their goals were due in the coming 10 years. Their liquid assets were only 12 per cent, insufficient to fund their goals. We suggested the sale of two plots of land in two years to provide the liquidity for goals in the immediate future. In addition, Karthik’s annual savings (₹9.6 lakh for the year 2020) will be used to fund the goals.

Karthik plans to retire by 2027 and would need ₹5.13 crore to sustain himself with a life expectancy of 90 years. This requirement will be primarily funded by his PF contribution (current corpus ₹17 lakh), life insurance investments and the two remaining real estate assets.

From the operational perspective, they were advised to create joint accounts, update nominees for all their investments and draw up a Will.

Karthik and Meera understood the importance of the financial plan and were quick to implement the key recommendations. They plan to implement all the suggestions by the end of the year and put the implementation mostly in the auto-execution mode with minimal interventions and oversight.

The writer is a SEBI-registered adviser and founder of finmyn