A couple of days ago the Economic Times published an article by Shiv, and it is a different kind of article in the sense that it was really a financial plan that Shiv made for Mr. Gopalan who is 47 years old, married with a child, and has assets of about Rs. 1 crore.
I thought this was a very good article go gain ideas about how to go about your own financial plan and the type of things to consider.
The thing that struck me most about this was how Mr. Gopalan or anyone reacts when they say they have assets of Rs. 1 crore which is not a trivial amount, and then hear from the planner that well, you need to do a lot better.
If you see the article, then the recommendation to diversify is really obvious, but I was a bit surprised to see that even with these assets, and what looked like a modest level of expenses, they weren’t on track to meet their goals, and will have to make a few changes to achieve what look like fairly simple goals that perhaps every family has.
You can read the whole article here:Â Family finances: Gopalans need to diversify to get financial plan back on track
I would like to have your valuable comments on few things:-
1) There is no plan for emergency fund for meeting some contingent situations. (if they utilise Rs 30000 cash over fulfilling the inadequate health insurance.)
2) Taking inflation of 10% into consideration, household and education expenses would increase over the time.
3) Looking at the past historical performance of mutual funds, the 12% p.a return over a short duration of 4 years seems little difficult.
Hi anonymous,
1) Mr. Gopalan has been sent the comprehensive financial plan in which I have advised Mr. Gopalan to increase the contingency fund equivalent to 3-4 months of household expenses and increase the health insurance to at least Rs. 4 lakhs.
2) I have taken these assumptions in the plan – Average Inflation @ 6% p.a., Increase in Education Expenses @ 8% p.a. and Average Salary Increment @ 8% p.a., among other assumptions.
3) In stock market, nobody can ever predict how it is going to move in the next 4 years, based on the historical movement. I think nobody expected markets to become 7 times (or rise 700%) between 2003 and beginning 2008.
While framing financial plan, the planner needs to assume certain things and that is what I do when I plan for my clients. Follow-up is done to make changes in the plan, if required.
Nice observation Manshu. This case of Mr. Gopalan seems to me a fast forward of the financial future of many youngsters who have taken houses on EMIs for 20-25 years period. While, they perceive they have accumulated wealth in form of real estate (looking at cost appreciation which has taken place) , they fall short on having a good monthly cash flow to take care of a lot of future responsibilities.
I think cash flow is a really important topic to understand and a lot of people struggle with it. A good corpus is good of course, nothing like it, but you need to have a good handle of actual cash going in and out every month to plan well.
Interesting that he never took the real estate into account for their retirement corpus.
Any suggestion on Health Insurance companies and the plan for individuals? I am not sure if your have done a post earlier.
I feel it’s a bit hard to include RE as part of the corpus unless you have a clear idea of how much cash that can bring in. I mean if you’re going to live in the house, well then how do you calculate the value, it could be 10L or 1 cr.
There is a post on health insurance here written by Mahavir Chopra of MediManage and he’s usually pretty good at answering questions. My knowledge on individual health insurance is very limited.
http://www.onemint.com/2012/03/22/how-to-buy-health-insurance-in-india/
Hi harinee… Actually Mr. Gopalan has 2 properties – they are living in one of those and the other one is there as an investment and has been rented out. I consider I had the option to use the investment property for his retirement corpus. But, as he would be able to easily meet the retirement corpus with the surplus savings and channelising those savings into various investments, I was not required to do that. In case of any contingency, the properties are always there.
I am a regular reader of Economic Times Wealth.
This Monday i was very happy to see the article from Shiv (and also got the opportunity to see his photo.) 🙂
Few comments:
1. Though Mr Gopalan has 1.66L in Equity, it is not appearing in the pie chart for Existing Asset Allocation (probably mistakenly shown as Gold).
2. EPF and PPF have not been considered while calculating the Net Worth of the Gopalans.
3. The recommendation of Equity Funds is biased towards to HDFC MF.
4. Though Shiv recommend Gopalans to invest in debt mutual funds, the recommendations are missing under “RECOMMENDATIONS” section.
Hi Amlan… Probably you never visited my LinkedIn profile – http://in.linkedin.com/pub/shiv-kukreja/19/a19/2a0
It is ok, you were never supposed to do that… 🙂
Thank you for your observations! All your observations are bang on:
1. It should have been “3% as Equity” instead of “3% as Gold”. It is probably a printing mistake but small mistakes happen in a big financial plan.
2. EPF accumulated figure was not mentioned in the Plan Questionnaire; probably Mr. Gopalan himself was not aware of this figure. But, his & the employer’s monthly contributions were there. So from that, I calculated the retirement contribution. PPF figure is included in the FDs amount in the Net Worth calculation.
3. If I am to select the best ever 11 ODI Cricket players, I think half of them would be from Australia – Ricky Ponting, Adam Gilchrist, Shane Warne, Michael Bevan and Glenn McGrath. I’m not any Cricket expert but, for Equity mutual funds, I personally prefer many HDFC funds as the long term performance is on their side. It is like Samir Arora never sells HDFC Bank shares.
4. Debt fund and Gold fund recommendations are there in the comprehensive financial plan which has been sent to Mr. Gopalan.