Dr Bhagwati Prasad Sharma, an ophthalmologist, lives with his wife Seema and son Abhishek. He has spent most of his life happily without any goal or profound objective in financial planning. However, both his vision and ideas were realigned in 2006 when he met Prateek Pitalia of Mudra Consultancy. During initial rounds of discussion, Dr Sharma revealed that, like most traditional savers, the majority of his investments were in real estate, with around 90 per cent net worth locked in physical assets. He admitted that emotions and peer pressure often clouded his decisions. He focused more on the news of potential appreciation while investing in property. However, liquidity often emerged as the most significant concern as converting a large-ticket property into cash to fund financial goals took time. The remaining part of his portfolio was ad hoc and without many objectives. His bank deposits and endowment insurance policies were not linked to any specific financial goals either.

As it emerged, his primary financial goals were to accumulate a corpus for his son’s education and marriage and save for his early retirement. With a little number crunching to define the goals objectively, Prateek and Dr Sharma quantified the required corpus with a broader time frame. Additionally, Prateek chalked out a prudent plan in favour of switching existing investments into suitable ones. Dr Sharma agreed to liquidate his traditional bank deposits and endowment plans. He shifted them to separate investment portfolios for respective goals. A part of his real estate investment was also liquidated over a reasonable period. Its proceeds were invested in debt funds.

Dr Sharma, as a new member of equity assets, was often worried about intermittent market volatility. This is a sign of a typical conservative or a moderate investor. As such, his portfolio was designed with a bias to debt funds. At the same time, equity funds were used for long-term financial goals. These investments were switched to safer ones as goals approached. Systematic Transfer Plans (STPs) were used for diverting lump sum proceeds into regular investing after Dr Sharms’s assets were liquidated, thus de-risking his investment portfolio.

With a conservative approach, assets were actively allocated in equities based on prevailing valuation metrics. It was decided that 10-40 per cent would be allocated in equity whereas 60-90 per cent in debt, depending upon their relative valuations. His current asset allocation is 20:80 for equity and debt. There have been times when Dr Sharma was disappointed with his portfolio returns and considered going back to his early approach of stable investment in bank deposits. Considering his client’s conservative strategy, Prateek shared a few other clients’ real-life stories from past economic cycles. Those data helped him set right expectations in his investment journey.

Prateek also showed him account statements of other clients, with masked names, and different investment behaviour during market corrections. It was easy to differentiate between investors who redeemed in a panic and those who did not. This helped Dr Sharma realise the value of staying invested through market turbulence. His investment experience was showcased as a stable journey with a Consolidated Net Worth Statement (CNWS), including his real estate, in assessing his portfolio’s worth. It served as the best antidote for his market fear and highlighted just how little of his net worth was exposed to market risks.

While Dr Sharma was reluctant to shift his investing approach radically, Prateek made his journey comfortable with suitable analogies.

Dr Sharma is sailing smoothly towards his financial goals at the desired pace. While he could get his financial vision structured well in time, other investors must keep their approach relevant to the markets and their goals.

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Dr Sharma’s Investment Experiences

• Prudent asset allocation is crucial: It is necessary to design a prudent asset allocation strategy that aims at an optimal allocation towards debt, equity and real estate. Similarly, staying overweight to real estate may not augur well from the point of view of liquidity and yields. It is also not considered wise to be asset rich and cash poor. One should select mutual funds, best suited for their financial goals, risk appetite, and investment horizon. Appropriate portfolios should be used to fund these goals. A conservative portfolio is better for high-priority, short-term goals. In contrast, an aggressive portfolio can be chosen for the long-term. In the end, goal-based investing is simply about using financial markets to achieve targets under real-world constraints.
• Set return expectations right: Along with investing, it is also essential to review portfolio performance with appropriate benchmarks. When one benchmarks portfolio against the right expectations, investment experience tends to be smooth and pleasant. Many investors benchmark their investments against the best performing funds. These benchmarks ultimately answer the wrong questions. The best measure is one’s own personalised financial goal.
• Plan transition across asset classes suitably: An optimal asset allocation aims to redistribute investment portfolios into different investment classes, the shift, however, must be well planned. One may be comfortable with real estate assets, its rental yields and stable property prices while, equity market volatility may shake confidence with regular fluctuations and inconsistent returns through dividend income. As such, it is vital to develop a deliberate and thoughtful investment process and stick to it.
• Role Of Financial Advisor Is Crucial: One should consult a financial advisor to guide through the journey. It not only helps an investor to objectively and regularly, review their portfolio but also allows them to reinforce trust in the markets when the ground is turbulent.

Disclaimer Financial Planning of Dr Bhagwati Prasad Sharma is based on the “personal opinion and experience” of Prateek Pitalia of Mudra Consultancy. It should not be considered professional financial investment advice. No one should make any investment decision without first consulting their advisor and conducting research and due diligence.

Prateek Pitalia, Mudra Consultancy