At Personalfn our client interactions throw up the most interesting case studies, some of which we often share (of course, without disclosing the identity of our client) with visitors on our website. One such interaction involved a client (in his mid-thirties) who had a disproportionately high allocation of his wealth to shares of a technology company. Not surprisingly, we had to redraw his financial plan to give it a more diversified look. In this way, we gave adequate weightage to important investment objectives like planning for child’s future and retirement planning.

To begin with, we have mentioned below the client’s cash flow breakup and the members in his family.

1. Salary – Rs 80,000 (in hand), after accounting for incentives this number works out to Rs 100,000 on an average.

2. Expenses – Rs 30,000 (monthly).

3. The client’s wife is a homemaker.

4. He has a 3 year old daughter.

5. His parents are retired. They draw a monthly pension of Rs 9,000.

His investments are as follows:

1. He has about Rs 10 m (Rs 1 cr) worth of shares in a single technology company; options for another Rs 10 m worth of shares (exercise value Rs 4 m). Options will vest over next 2 – 3 years.

2. He has a ULIP with an annual premium of Rs 500,000.

3. He has invested Rs 12,000 annually (approximately) in a mutual fund to provide for his daughter’s future.

4. He has invested Rs 20,000 in mutual funds towards long term savings.

5. In addition to the above, he has no other mutual fund investments.

(Asset weightage as percentage to total wealth) 

One glance at the client’s investments and assets details and two points come out very strongly:

1. Unduly high investments in a single technology company.

2. Unduly high investments in property.

This is clearly a case of lopsided asset allocation. This means that the client has disproportionate money in an asset class; to correct this anomaly he needs to redeem money from that asset so as to maintain a balanced portfolio.

While investments in assets like equities and property are important, especially for an individual in our client’s age group, they are disproportionately high in this case. By investing in a single company, that too a technology company, the client has deprived himself of the benefits of diversification across stocks and sectors. We do not wish to revisit the horrors of the tech crash (in the year 2000), but visitors will recall that then most investors were undone by heavy allocations to technology/media/telecom. So the top priority for the investor is

• To dilute his stock investments in the technology company. That money can then be invested in other avenues within equities like well-diversified equity funds with established track records. Since our client is a professional and can spare limited time for making informed investment decisions, mutual funds are an ideal investment option.

• Avoid further investments in property. The client already has two properties (in addition to his own house) so adding more property will make his portfolio even more property-heavy.

• Planning for daughter’s future (while the client has made investments for the same, they are clearly out of sync with today’s spiraling cost of education).

• Planning for retirement. This is particularly important for the client as his is a single income family (wife is a housewife). Moreover, he is in the higher income category so maintaining such a lifestyle post-retirement can be a demanding task.

Now retirement planning is a slightly more demanding task than planning for child’s future, because you have a slightly extended investment time frame (in our client’s case more than 30 years), which means your investments have to be good enough to stand the test of time. However, that should not bog you down, help is at hand. As we have outlined, the client’s rather lopsided portfolio can be rectified quite easily by pursuing a prudent asset allocation that gives appropriate weightage to various assets with the aim of fulfilling critical investment objectives. Of course, this is just the first step; you must find a qualified investment advisor to help you with the right investment plan to achieve those objectives. Thankfully for the client, he did not face a problem on this front!

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