Expert advice

Oct 25, 2011,13.44 IST

Be prepared and cover your risks!

By Lovaii Navlakhi, CFP

I was a Boy Scout in my younger days, and our motto was "Be Prepared." As I awoke to the tragic news of the Mangalore air crash last weekend, I realized that these words could well have been a financial plannerís motto. After all, our job is to protect against risks; we believe that returns will follow. What we guard against is taking risks more than that are necessary. (It is also equally true that we recommend taking of some risks, especially when goals are 3 to 5 years and more away. I cannot think of anyone who has got the timing perfect on both sides: what I mean is that those who exited equities in time for the 2008 stock market crash, may not have entered in time to take the full benefit of the 2009 rise.) Let us examine some of the risks we run while we plan our investments, and I am not considering market risks here.

Depending on Rental Income

Individuals do not like cluttering their finances. So we find people telling us that their monthly expenses are Rs. 30,000 per month, and ďnot to worry, we have rental income of Rs. 32,000 per month to take care of thatĒ. A few questions to ponder on: What happens if the tenant decides to move on, and the landlord cannot find a replacement? Yes, even if itís for a couple of months. What happens if, like 2008, rentals have to be reduced to protect against the risk of keeping the property untenanted? Most importantly, monthly expenses can be managed from liquid, short-term and debt funds (which have lower risks), and the rental income invested in a systematic investment plan in equity funds, if it can help meet long-term goals. In case the rental income stops, all that one needs to do is to stop the SIP.

Joint vs Single Holding

Normally, one member of the family handles the finances. Do make sure that your bank accounts are in joint names (at least), and have a nominee in place. If you have a single bank account, but suffer an illness or injury that prevents you from signing your cheques, you could have wealth but no liquidity. Similar is the case in mutual funds. A joint holding is recommended along with a nomination in this case too.

The Difference between Nomination and a Will

You need to back up your nominations with a will. After all, after the death of the investor, the nominee receives the amount as a trustee of the estate of the deceased. The AMC (Asset Management Company) or the mutual fund is discharged from its duties by transferring the units of the deceased to the nominee, but the other heirs of the deceased can certainly make a claim on the proceeds.

In this day of increasing uncertainties, it is certainly advisable to pay attention to these small but critical aspects of your investments.

Email: lovaii@immpl.com
(The author is the Managing Director and Chief Financial Planner of International Money Matters Pvt. Ltd. You could visit us at www.immpl.com)

Video Tutorials

Harsh Roongta

Planning to invest in mutual funds? Here's help

Pankaj Mathpal

Here are a few fund options to invest your money

more

Take a mf iq test

New to Mutual Funds?

Take a test and get a Badge

Take a Test

New to Mutual Funds?

Take a test and get a Badge

Take a Test

New to Mutual Funds?

Take a test and get a Badge

Take a Test