How Covid-19 losses prompted a plant manager to review his financial strategy

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

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

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

High exposure to equities

Kumar’s investment strategy is particularly aggressive: 90% of his portfolio is dedicated to equities, of which nearly a third is invested in direct stocks. In addition, a third of his mutual fund portfolio is dedicated to small-cap schemes and the remaining 10% to debt, mainly through his employee provident fund.

“When we assessed Kumar’s risk profile in relation to his portfolio, we found a mismatch. The portfolio was heavily skewed towards equities and within that, towards high-risk return categories. However, his risk tolerance did not align with that level of equity exposure,” said Suresh Sadagopan, Founder, 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 equity, 20% to debt and the rest to gold through sovereign gold bonds.

Further, to increase his debt exposure, he was advised to start making incremental investments in debt mutual funds. In case of his direct equity investments, Kumar said he will hold them for at least a year to benefit from long-term capital gains taxation before shifting them to mutual funds.

“Since I work in a factory, our work schedule doesn’t leave me much time to follow and analyse individual companies and their fundamental indicators. So, my advisor has suggested me to completely switch to mutual funds, which I also think is the right approach,” Kumar said.

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

Financing future goals

Kumar has been working on increasing his retirement fund, but has so far achieved only 14% of his goal. Moreover, he also plans to allocate funds specifically for his daughter’s higher education and wedding expenses.

Considering that these are long-term objectives, it invests mainly in stocks to cover financing needs.

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

How to address insurance shortfalls

Kumar currently has a term life insurance policy of ₹50 lakh. Your advisor has recommended increasing this cover by an additional amount. ₹1.4 crore to ensure adequate protection throughout their long income-generating years.

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

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

The deductible is the amount you must pay out-of-pocket before the super comprehensive additional coverage kicks in.

Strategic adjustments

Kumar has closed the loan for his car, following the advice of his advisor. “It didn’t make sense for him to continue paying interest on a depreciating asset like a car,” said Prateek Patani, senior manager, investment advisory, Ladder7 Wealth Planners.

Funds that were earlier earmarked to pay monthly car loan installments are now being redirected to augment your mutual fund systematic investment plans (SIPs) to support your financial goals.

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

Although Kumar has a mortgage loan in place on his primary residence, his advisor has left it up to him to decide whether to continue with the loan or work toward closing it. “Right now, I’m happy with the mortgage loan because I get tax deductions on the payments related to the mortgage loan,” he said.

She has also been advised to create a contingency fund, which now includes the equivalent of three months of household expenses in a combination of bank savings and debt mutual funds.

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

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