Abhijit Rao, 36, started investing in mutual funds in 2016 but soon realized that his investments were not in line with his goals. This was also the time when his son Advait, now four, was born and he didn’t want to invest haphazardly or take unwanted risks. So in 2017, Rao approached a “financial planner” who was not a Sebi-registered investment adviser. The “planner” constantly pushed Rao to invest in mutual funds through his own website, which he wasn’t quite comfortable with. He stopped working with the planner in 2018. “For the longest time, I was invested in debt instruments such as Public Provident Fund (PPF). But I was also a regular reader of personal finance articles, which helped me understand why financial planning is important,” said Rao, a Bengaluru-based software engineer.
About three months ago, Rao and his wife Sneha met Bengaluru-based Sebi-registered investment adviser Basavaraj Tonagatti to seek clarity on their money journey. “After meeting Tonagatti, I understood that every investment must be linked with a specific goal. My investments were debt-heavy, which wouldn’t give me the required return; so, I needed to tweak them. The biggest takeaway for me was that if your investment is not linked to a goal, it is as good as not investing at all,” said Rao.
Being raised in a middle-class household, the Raos understood the importance of money quite early on in life. They knew that planning played an important role in living a debt-free life. Initially, the couple chose investments based on their risk capacity. They went with debt instruments as they come with low risk but what they didn’t understand was that taking a certain amount of risk while you’re still young can help you achieve your goals.
Besides saving enough for their own retirement, the couple wants to ensure they save enough for their child’s education, including his higher education. Their short-term goals include buying a car. “With the current financial plan, we aim to achieve these goals through a good mix of equity and debt mutual funds as well as instruments such as PPF,” said Rao.
The first thing Tonagatti did was streamline their investments. The couple also learnt that having high exposure to real estate isn’t a great idea as it may not be easy to liquidate it.
When the Raos first met the planner, 60% of their investments were in real estate, 24% in debt (PPF, recurring deposits and traditional insurance plans), and 13% in equities. But now the couple has been asked to stop investing in real estate and gradually increase their equity allocation in order to achieve their goals. Though they invested in mutual funds even before meeting the planner, their asset allocation wasn’t right; so the planner helped them rejig that as well.
“Since most of their goals are more than 10 years away, I suggested an asset allocation of 60:40 between debt and equity. At the same time, I’ve stressed on the importance of building an emergency corpus since both the husband and wife work in the private sector and there’s no job security as such or any provision for pension,” said Tonagatti.
Rao said his biggest learning was how to prioritize goals. While it’s important to plan your future in terms of retirement, it’s equally important to plan for any untoward event such as a medical emergency or a job loss. “I feel more confident now because I know I am working towards leading a financially worry-free life. I’m also educating my family on how to go about sorting our finances in my absence,” said Rao.
Now that the couple has a strong financial plan in place, they’ve begun to believe in the power of compounding. “It’s important to understand your finances from the start of your career. Also, saving before spending is a good habit to live by as this helps one become financially independent quite early on in life,” said Rao.
The planner also found that the couple was underinsured; so they were asked to increase their term insurance cover to at least 10 times their annual income. For medical insurance, the couple has taken a family floater plan as well as a top-up policy. In addition, Rao also gets corporate coverage from his employer for health and life.
Tonagatti said the couple’s spending habit is within the limit, which he appreciates. The process of financial planning has given them more clarity and helped them understand the importance of goal-based planning.