As part of series of Case Studies of Clients ( Names Have been changed) ;

I am sharing a case of a client whose portfolio was anything but diversified. And this wasn’t his only problem. To make matters worse, he seemed to have contravened every basic tenet of wealth planning, making his portfolio an ideal candidate for a makeover.

The facts of the case:
• Mr. Sonpal is 41 years of age, and his wife Malati are both earning members.
• His sons are, Keval- aged 9 and Amul- Aged -4 respectively
• He is employed with a multinational corporation, and his salary income more than makes up for his expenses i.e. the monthly cash inflows outweigh outflows

Mr. Sonpal investments/financials are as follows:
• He has invested in 3 properties (including the one in which he resides), which account for 68.5% of his assets
• Traditional Insurance Policies, Bank FD and Debt investments account for 31% of assets
• The balance (1%) is held in cash/savings bank accounts
• He has opted for 2 child ULIPs (unit linked insurance plans), the total annual premium for which is Rs. 130,000
• On the liabilities front, he has an outstanding home loan and also a loan against his mutual fund investment

As can be seen, property i.e. real estate as an asset class accounts for a disproportionately high portion of the asset portfolio. Furthermore, all the properties are in the same city, depriving the client of any diversification opportunity. While it is important to have property in one portfolio, it certainly should not account for such a high proportion. Also given that property as an asset class tends to be rather illiquid (a distress sale when liquidity needs are urgent could lead to a loss-making proposition), only accentuates the unenviable situation. A downturn in property prices could spell disaster for the client.

The remedy for this situation lies in introducing other assets like equities into the portfolio and thereby converting the portfolio into a more balanced one. Studies have shown that equities as an asset class (if invested smartly) can outperform others like real estate, gold and fixed income instruments over longer time frames. Considering that the client needs (planning for retirement and providing for children education) are long-term in nature, the presence of a higher equity component should be treated as vital.

The present solution should be to put on hold any plans to buy more property. It is always recommended that each individual should be invested in property to the extent that it can provide for inheritance. With 3 properties, the client has adequately taken care of that.

The surplus cash inflows should now be utilized to beef up the portfolio equity component. But the same needs to be done in a planned manner. Sadly, the client has not even set himself any concrete objective in terms of planning for retirement or providing for children education. In other words, it is yet another case of investing randomly without setting any objectives. To complicate matters, the client has erred investing in bank FD and Traditional Policies yielding negative real rate of returns.The solution – set objectives (in monetary terms) and then invests in well managed equity funds in a disciplined manner for achieving the same. This well help on various levels.

First, the enhanced equity component will ensure that the portfolio become well-diversified across asset classes.
Second, it will make the equity investments diversified across multiple schemes. Finally, it will aid in gainfully utilizing the surplus monies.
The liability side could do with some rework as well. While the home loan can aid in tax-planning (interest and principal repayments qualify for deduction from gross total income), we are not quite convinced about the loan against mutual fund investment. The client is sufficiently does not need to shoulder the burden of a redundant loan repayment. He would be better off paying off the loan at the earliest.

The client financial status and condition make rather interesting reading. On the surface, we have an individual, whose income streams more than make up for his expenses, whose asset portfolio seems rather well-stocked. In other words, it is a seemingly picture perfect situation. But scratch the surface, and a radically different picture emerges.

The investments are lop-sided in favour of a single asset class (i. e. property). Despite the needs being long-term in nature, the client is virtually unprepared to meet those needs; in fact, he has not even quantified his needs – which should be the starting point for the exercise. He does not have an adequate insurance cover and has in his books avoidance liabilities.

The case only underscores the difference between having finances and being financially sound. And missing out on the latter could well mean that one is headed for a financial disaster.