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Why over-engineering your personal finances won’t make you wealthier

Complicating your financial life with many products only makes keeping track of the portfolio an arduous task

October 04, 2021 / 02:32 PM IST

“Investing is simple, but not easy,” said Warren Buffet. Yet, we make it so complicated by overdoing it. With all the choices available these days, it is easy to do so! Take the case of Nina, for whom the COVID-19 pandemic has been tragic. She lost her brother in the second wave. Seeing his family struggling financially pushed her into having a deep relook at her own finances.

Re-evaluating money matters

Nina has Rs 5 lakh health insurance cover from her employer and is considering a Rs 1 crore cover, having seen a Rs 25 lakh bill incurred for her brother’s treatment. The fear factor associated with the pandemic is certainly pushing the sales of high sum-insured policies. Pre-COVID, people used to think of health insurance as an unnecessary expense, but now there is high demand for the Rs 1 crore policy. But is it really required? These covers generally reimburse only hospital bills and a majority cover treatment in India. The cost of treating serious illnesses such as Cancer is in the range of Rs 15-25 lakh. A Rs 15-20 lakh cover is quite sufficient as Rs 50 lakh bills are incurred only in a few exceptional cases such as transplants. A base cover of Rs 5 lakh, with a super top up of Rs 20 lakh will be a cheaper option and should suffice. Of course, one needs to decide based on the number of dependents and medical history. Do not overdo health covers as they do not provide any additional benefit. Nina would be better off investing the additional amount in building a health corpus.

Post the second wave, the importance of emergency funds has gained prominence. Nina, too, was evaluating investment options for the same. A friend had suggested her to consider conservative hybrid funds based on higher debt holding and good near-term performance. There are some goals for which return maximization shouldn’t be sought and the emergency fund is one of them. It is best to go for liquid/ultra-short duration funds or fixed deposits which can be easily liquidated. Nina had thought of gold for the emergency fund, but most people end up taking loan on gold rather than selling it due to emotional attachment and loss in value while selling.

Investment choices

Multiple exciting investment choices are leading to over diversification. Nina was investing via weekly SIPs in seven funds to average out the NAV and risk. She was assessing investing in international stocks, given all the brouhaha about owning the likes of Apple and Tesla. Over-engineering investments doesn’t increase returns. The difference in returns in daily, weekly or monthly SIPs is insignificant and it only adds to your burden while filing tax returns. Instead, you should focus on choosing a consistently performing fund with good risk-adjusted returns and remain invested for the long term. Investing in international stocks means additional tax compliance. Complicating your financial life with many products only makes keeping track of the portfolio an arduous task.

Also read: Life stage financial planning: How to manage money in your 20s

The most frequently asked questions in my sessions are on ways to reduce tax outgo. The queries typically are: “Should I invest in the name of family member who falls under a lower tax bracket?” “Should I take a loan to get a tax benefit?” “Should I pay rent to parents and claim HRA?”

These days, however, the common query is on how to save the tax outgo on capital gains on equities. The idea is to keep the capital gains below Rs 1 lakh so that no tax has to be paid. But the maximum that can be saved by this tax harvesting strategy is Rs 10,000 and there is reinvestment risk. The long-term capital gains tax on equities is 10 percent plus surcharge and is not a high tax to pay. Investors reaping benefits from equities shouldn’t mind paying these taxes, given their returns.

Over-engineering finances only ends up making financial life a burden rather than actually growing wealth. Keep it simple, but significant. That’s the only way to have a good financial life.
Mrin Agarwal Financial Educator, Money Mentor and Founder of Finsafe India
first published: Oct 4, 2021 09:49 am