My son and his wife are software professionals and earn about 76 L per year at Bangalore. Since they have no issues, they save half of the above amount. We purchased one house for them from my own savings. They made a loan of 1.5 crores and purchased another house. They expect to repay the loan in about four years since they are thrifty . They don't have any other savings. Both of them are about 35 years of age. In emergency we can also help them since I am getting reasonably good pension at Government rate. In future they will inherit half of our property which is expected to be about two crores. My question is whether they are investing correctly? What is your advice to them?

Ans: Your son and his wife are doing well financially, earning Rs. 76 lakhs per year. They save half of their income, which is excellent. They have purchased a house with your help and have taken a loan of Rs. 1.5 crores for another house. They aim to repay this loan in about four years. Both are around 35 years old and have a bright financial future ahead.

Compliments on Financial Discipline

First, let’s appreciate their disciplined approach to savings. Saving half of their income shows remarkable financial prudence and commitment. Their goal to repay a substantial loan in four years is ambitious and commendable. It demonstrates their strong financial planning and determination.

Assessment of Current Investments

1. Real Estate Investments:
They have invested heavily in real estate. While owning property provides a sense of security and potential appreciation, it also ties up a significant amount of capital. Real estate investments can be less liquid and may not offer the same growth potential as other investments. It's important to diversify beyond real estate to balance the risk.

Disadvantages of Real Estate as an Investment:

Illiquid: Real estate is not easy to convert to cash quickly.
No Easy Entry and Exit: Buying and selling property involves significant time and effort.
No 100% White Transaction: Real estate transactions often involve a component of black money.
No Partial Withdrawal: You cannot sell a part of the property if you need a small amount of cash.
Given these disadvantages, it’s crucial to look beyond real estate for a well-rounded investment strategy.

2. Lack of Diversification:
Currently, they don't have other savings or investments. Relying solely on real estate can be risky. Diversification is key to managing risk and achieving long-term financial goals. They should consider other investment options to create a balanced and robust portfolio.

Advice for Diversified Investment Strategy

1. Mutual Funds:
Mutual funds are an excellent way to diversify investments. They offer professional management, diversification, and the potential for higher returns. Here’s how they can approach mutual fund investments:

a. Equity Mutual Funds:
Equity mutual funds invest in stocks and have the potential for high returns over the long term. These funds are suitable for their age and risk appetite. They should diversify across large-cap, mid-cap, and small-cap funds to manage risk and maximize returns.

b. Debt Mutual Funds:
Debt mutual funds invest in fixed-income securities and provide stability and regular income. These funds are less volatile than equity funds and offer better returns than traditional fixed deposits. Including debt mutual funds will balance their portfolio and provide liquidity.

c. Hybrid Mutual Funds:
Hybrid funds combine equity and debt investments, offering a balanced approach. These funds provide both capital appreciation and regular income. Hybrid funds are suitable for investors looking for moderate risk and steady growth.

Advantages of Mutual Funds:

Diversification: Spreads risk across various securities.
Professional Management: Fund managers with expertise manage investments.
Liquidity: Easy to buy and sell mutual fund units.
Power of Compounding: Reinvesting returns can significantly grow their investment over time.
2. Systematic Investment Plan (SIP):
Starting a SIP allows them to invest a fixed amount regularly in mutual funds. This disciplined approach helps in averaging the cost of investment and reduces market timing risks. They can start with a comfortable amount and gradually increase it. SIPs are ideal for building a substantial corpus over the long term.

3. Emergency Fund:
Maintaining an emergency fund is crucial for unexpected financial challenges. They should set aside 6-12 months of expenses in a liquid and easily accessible form, like a savings account or liquid mutual funds. This fund provides a safety net and ensures they don’t dip into their investments during emergencies.

4. Life Insurance:
Adequate life insurance coverage is essential to protect their family in case of an unfortunate event. Term insurance is the most cost-effective option, providing a high sum assured at a low premium. They should review their existing policies and enhance coverage if needed.

5. Health Insurance:
Comprehensive health insurance is vital to cover medical expenses. They should opt for a family floater plan that covers their entire family. Reviewing and enhancing their health insurance coverage is necessary considering rising healthcare costs.

6. Retirement Planning:
Planning for retirement should start early to build a sufficient corpus. They should estimate their retirement corpus considering factors like inflation, life expectancy, and desired monthly income. Investing in a mix of equity, debt, and hybrid mutual funds can help them achieve their retirement goals.

7. Children's Education Fund:
If they plan to have children in the future, creating a dedicated education fund is important. This fund should grow over time to meet future education expenses. They can use a mix of equity and debt investments to build this fund.

8. Estate Planning:
Planning for the distribution of their assets ensures their family's financial security. Creating a will specifies how their assets should be distributed among heirs. Setting up trusts can help in managing and protecting their wealth.

Disadvantages of Index Funds and Benefits of Actively Managed Funds

They might have heard about index funds, but there are certain disadvantages to consider. Index funds simply track the market index and do not aim to outperform it. They might not provide the best returns in different market conditions. Actively managed funds, on the other hand, have professional fund managers who strive to outperform the market. They adjust the portfolio based on market trends, providing potential for higher returns.

Disadvantages of Direct Funds and Benefits of Regular Funds Investing Through MFD with CFP Credential

Direct funds might seem appealing due to lower expense ratios, but they come with their own set of challenges. Managing direct funds requires significant time, effort, and expertise. Regular funds, invested through a Mutual Fund Distributor (MFD) with a Certified Financial Planner (CFP) credential, offer professional guidance and management. The extra cost is justified by the value of expert advice, regular monitoring, and portfolio adjustments.

Final Insights

Your son and his wife are on a strong financial path with good income and savings habits. However, they need to diversify their investments beyond real estate. Here’s a summary of the key steps they should take:

Diversify investments into mutual funds for better returns and risk management.
Start SIPs for disciplined and regular investments.
Maintain an emergency fund for unexpected challenges.
Ensure adequate life and health insurance coverage.
Plan for retirement early to build a sufficient corpus.
Create a dedicated education fund for future children’s education.
Plan their estate to secure their family's financial future.
Avoid index funds and direct funds; prefer actively managed funds and regular funds through MFD with CFP credential.
By following these steps and regularly reviewing their financial plan with a Certified Financial Planner, they can achieve a secure and prosperous financial future. Their disciplined savings and proactive approach will help them build a strong foundation for the future.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in