Diversification is one of the basic tenets of investing and a simple idea but, in his quest for diversification, Chennai-based Om Prakash has explored many investment options, leading to a situation that makes it a case of overdiversification. He has his money in savings, insurance, real estate and land, along with investments in stocks and mutual funds. The result: he has several overlaps in his investments, with some investments actually not aligning with his overall financial goals. What is evident from his finances is that he has not really thought it through for his finances to work optimally for him.
At the same time, credit is due to him for having understood that savings alone will not help him build the desired corpus to reach his financial goals. Each month, after his mandatory expenses and payments towards servicing loans, Prakash is left with only Rs5,600. Dig deeper and you realise that currently, almost 70 per cent of what he earns goes towards his household expenses. This is a relatively higher figure than one would be comfortable with. It is a must for Prakash to prepare a monthly budget to keep track of where the money goes to be able to focus on how to optimise his finances. This exercise will help achieve two things for him: Prakash will have better control over his finances and he will be able to cut costs wherever he can to save more than what he is doing at present.
Bringing order
Prakash is the sole earner with three other dependents yet he has not considered adequate insurance for his family. Considering his wife had a major illness recently, he should look to create a corpus aside from medical insurance to meet emergencies. He should have Rs3.5 lakh easily accessible to meet about six month’s household expenses, including loan repayment. He also needs to be adequately insured given the many loans that he is servicing. What this means is that Prakash should take adequate life and health insurance cover to build a financial cushion, were something to happen to him. He should also rescale some of his goals, including retirement. At 45, he is in that phase of life when demands outweigh promises. Not that he needs to cut corners, but what he needs to ensure is that he avoids making any mistakes at this stage. Hence, it may be a better move to build his own house on the land that he owns than buying something new. Likewise, he needs to rework on his current investments. At the moment, he has investments in 17 different funds and 29 different stocks; too high in number and something best avoided. Not only does this cause difficulty in maintaining and evaluating the performance of the investments, it also does not achieve much with overlap in exposure to stocks through direct investments and mutual funds. The lesson here is to invest in as many funds and stocks that one can manage and which follow an overall asset allocation.
The way out for Prakash is to consolidate his holdings to a manageable number, invest regularly and evaluate the performance of his investments at least once a year to ascertain its progress. This way, he will be much more aware about his investments and also be able to exit underperformers and stay invested with those that are faring well. With this prescription in hand, all he needs now is to put the suggested changes in place and ensure that he reviews his plan once a year. With his finances broken into smaller parts, which can be handled conveniently, Prakash will have a better grip on his emotional and financial well-being, and also of those around him.
Advertisement
Just one email a week