Divide your investments properly for self-consumption, growth and income. Life will be simpler. It is a common malaise. Most people keep a mental account of their wealth. And, with each rise in the stocks they own or in the value of the house they live in, they feel richer. For instance, Jitendra Sharma, who stays in an office-provided accommodation and has rented out his flat in the Mumbai suburbs.
Every time he meets his tenant, he tells him/her about the latest price of his residence. “I bought this flat 20 years ago at Rs 3 lakh. Today, it costs Rs 50 lakh,” he says, with a sense of pride.
Nearing retirement, Sharma, decided to sell his flat and buy a two bedroom-hall-kitchen (two-BHK) flat in the same area. His budget: Rs 65-70 lakh. But after visiting several brokers, he realised that a two-BHK in the same area was costing close to Rs 80 lakh. Especially, since it was a new building.
To pay another Rs 10 lakh he would have had to sell all his stock and mutual fund holdings and even take a small home loan. At 58 years of age, banks were unwilling to give him a longer tenure loan.
Older buildings in the same area were closer to his budget, but they were not in the best of condition. Sharma was unwilling to move from the locality because he had his friends in the area. In addition, every amenity such as, hospitals, malls and family doctor were nearby. Finally, he went for a single-BHK in a new building for Rs 55 lakh.
There are many like Sharma who are consistently telling themselves that since they are staying in a house that costs a crore or more, they will be able to leverage it when they want. Reality strikes them when they realise that maintaining the same lifestyle or purchasing a similar property in the same area can be a costly affair.
Similarly, a rise in value of jewellery worn by family members or long-term investment products like insurance schemes or employee provident fund (EPF) or public provident fund (PPF) should give you comfort. But they are not a part of your wealth that can/should be liquidated easily.
As Gaurav Mashruwala, financial planner, says, “There are certain investments for self-consumption, some others for long-term planning, yet others that can be liquidated. All investors need to differentiate between these.”
Typically, a home, gold jewellery and car are made for self-consumption. So, an investor is unlikely to sell these for returns. “Even if the prices/returns on these investments are going up, one can seldom sell them. A house, for instance, has to be replaced immediately,” adds Mashruwala.
Then, there are long-term retirement instruments such as pension plans, endowment plans, unit-linked insurance plans, long-term fixed deposits (FDs), EPF and PPF, which cannot be liquidated immediately. They are investments for growth. Of course, one can take loans on some of these. But they have a lock-in period, making them quite illiquid.
Also, dipping into your retirement kitty too often can hurt badly. After retirement, you will need that money, when there won’t be a steady income stream.
Finally, there are stocks, mutual funds, short-term FDs and cash in the bank, which form the liquid part of your portfolio. This part of your portfolio is supposed to provide you money in a jiffy for incurring some expenditure such as travel abroad or buying that expensive television. These are investments for income.
An important part of financial planning is goal-based investment planning. For one, it ensures you are aware the reason for which a certain investment is being made. Two, the investible surplus is divided among short-term and long-term goals.
Follow some simple rules to ensure that investments are being regularly made for funding goals. And, things will fall into place.
