How this plant manager plans to fix gaps in his financial strategy

Known for his aggressive investments directly in stocks and small- and mid-cap mutual funds, Kumar is now seeking a more balanced and goal-oriented portfolio.

“During the pandemic, my stock portfolio took a significant hit, and some of the stocks never fully recovered. I don’t want to face such a situation again as I work towards my long-term goals,” Kumar said.

To avoid future challenges, he has sought expert advice to review and adjust his high-risk investments, strengthen his insurance coverage, and align his financial strategy with his family’s long-term goals, including retirement and his daughter’s future.

High equity exposure

Kumar’s investment strategy is notably aggressive, with 90% of his portfolio allocated to equities. Of this, nearly one-third is invested in direct stocks. Additionally, one-third of his mutual fund portfolio is allocated to small-cap schemes. The remaining 10% of his portfolio is allocated to debt, primarily through his employee provident fund.

“When we assessed Kumar’s risk profile against his portfolio, we found a mismatch. The portfolio was heavily skewed towards equity and within that high-risk return categories. However, his risk tolerance didn’t align with that level of equity exposure,” said Suresh Sadagopan, founder of Ladder7 Wealth Planners.

To achieve a more balanced investment approach, Kumar has been advised to diversify his portfolio. The recommended strategy includes allocating 75% to equities, 20% to debt, and the remaining portion to gold through sovereign gold bonds.

Additionally, to build up his debt exposure, he was advised to start making incremental investments in debt mutual funds. For his direct stock investments, Kumar said he will hold onto these investments for at least a year to benefit from long-term capital gains taxation before switching these investments to mutual funds.

“As I work in a plant, our work schedule doesn’t allow much time to track and analyse individual companies and their fundamentals. Hence, my adviser has suggested that I make the switch to mutual funds entirely, which I also think is the right approach,” Kumar said.

He has also been advised to gradually exit his small-cap fund exposure and reallocate those investments to flexi-cap and large-cap funds.

Funding future objectives

Kumar has been working towards building his retirement corpus, but has so far achieved only 14% of his target. Besides, he is also planning to allocate funds specifically for his daughter’s higher education and wedding expenses.

Considering that these are long-term objectives, he is primarily investing in equities to meet the funding requirements.

Kumar has also been advised to fund the family’s biannual leisure trips, mostly within India, by parking the required amount separately in an arbitrage fund.

Addressing insurance shortfalls

Kumar currently has a term life insurance policy of ₹50 lakh. His adviser has recommended increasing this coverage by an additional ₹1.4 crore to ensure adequate protection throughout his extended income-earning years.

Additionally, considering Kumar’s role in a manufacturing unit, he has been advised to secure accident insurance with ₹1 crore coverage for total permanent disability, and ₹15 lakh for total temporary disability.

For health insurance, Kumar has a ₹5 lakh personal family floater policy and an additional ₹3 lakh floater cover from his employer. His adviser has asked him to increase his coverage by adding a ₹20 lakh super top-up to his personal policy, which comes with a ₹5 lakh deductible.

Deductible is the amount that must be paid out-of-pocket before the super top-up coverage kicks in.

Strategic adjustments

Kumar has closed his car loan, following his adviser’s recommendations. “It didn’t make sense for him to continue making interest payments on a depreciating asset like a car,” said Prateek Patani, senior manager-investment advisory, Ladder7 Wealth Planners.

The funds that were previously being allocated to pay the car loan EMIs are now being redirected to increase his mutual fund systematic investment plans (SIPs) to support his financial goals.

Kumar, who had been investing in mutual funds through regular plans, has also been advised to gradually switch to direct plans to save on commission payments.

Although Kumar has an ongoing housing loan for his primary residence, his adviser has left it to him to decide whether to continue with the loan or work towards closing it. “Right now, I am okay with the home loan as I get tax deductions on the home loan-related repayments,” he said.

Additionally, he has been advised to build a contingency fund, which now includes three months’ worth of household expenses in a combination of bank savings and debt mutual funds.

Reflecting on his revised investment strategy, Kumar acknowledges a shift in his approach and his wife’s perspective following the sessions with his investment advisers.

“I now plan to take a more diversified and balanced approach to investing. My wife, who was more keen on physical assets, such as real estate, for new investments, is now more open to equities as an asset class,” he added.