Financial Strategy: A Fallout of Investment Objectives

Extract of a question and answer appearing in Economic Times

Question: I am 42 years old and have two daughters, one studying in class 10 & other in 5. My wife is a home maker. I earn around Rs 6 lakh per annum. My investment details are as follows — PPF 15%, KVP 23%, shares 17%, diversified MF 40.9%, infrastructure bond 1.9%, NCD 0.44% & cash 1.7%, term policy - Rs 10 lakh, medical insurance - Rs 5 lakh (on behalf of the company). How can I invest better? — Rajesh Gupta

Answer: Returns are a fallout of the investments we make and investments are a fallout of the financial strategy and the financial strategy per se is a fallout of financial objectives. Broadly, the investment allocation you have is about 60% into higher return generating assets, i.e., stocks and MF while the other 40% is into fixed return generating assets. There is basically nothing wrong with your strategy.

In my view, your question should have been what modifications are needed to achieve financial objectives? Given this premise, there are two things you need to do. First, make an estimate of your financial objective — for example, let’s assume that you want to plan for your younger daughter’s wedding in about 15 years time. You will need about Rs 5 lakh for that, factoring inflation as well. Second, you need to do a bit of mathematics. You need to calculate how much you will need to reach 5 lakh in 15 years’ time.

If you have more money you can afford to be in safer instruments and if you are short on money you have to be invested with higher risk products. Just a word of caution; equity investments may be considered only for financial objectives of three years or more.

Your medical insurance level seems fair but your life insurance seems to be low. If you plan to increase your life insurance you may only consider term life type of policies and nothing else.