Here is one of a conversation between myself (as a Financial Advisor) and my client Mr. I (an investor).

Me – “Now when we are clear about your financial goals in terms of how much you need when, let’s start towards execution”.

Mr. I – “Yeah. Let’s start it from next month”.

Me (After a month) – “As per our plan, we are supposed to start investment from this month. We will be investing 40K / month in Equity Mutual Funds for your long-term goals.”

Mr. I – “Is Equity investment safe? I have never invested before.”

Me – “I would be wrong to say that Equity investment is not risky. There is definitely risk involved in the same, but the risk gets mitigated if you are investing for long term. It further gets reduced if you invest via SIP (Systematic Investment Plan)”.

Mr. I – “Let’s start it with 20K/month and once I get confidence, I will increase it by 20K after couple of years.”

Me – “While I understand your concerns, I would still like to help you with a concept called COST OF DELAY and you can take decide post that”.

Mr. I – “What is that?”

Me – “In short, it is the cost or penalty one has to pay for delaying his/her investment decision. Let me try to explain you considering one of your goals in mind. You are planning to accumulate 80 Lakhs for Rudra’s graduation. (Rudra is Mr. I’s one year old son). For that I have suggested you start monthly SIP of 12K in Equity Mutual Fund. Now let’s assume that as you are not confident about the mutual fund investment, you start SIP of 6K and then after 2 years you increase it by 6K. With this, any idea on how much you would have accumulated in 17 years?”

Mr. I – “Definitely something less than what I would have if I would have started with 12K. If I calculate, I would have done lesser investment of 6K for 2 years which is 1.44L. With my understanding, I guess I would have accumulated approximately 2L lesser.”

Me (smiling) – “Wish the calculations were such straightforward.”

Mr. I – “Ok. If not 2L, then may be max 2.5L.”

Me – “You would have accumulated only 70.35L by delaying the SIP by 2 years. So overall, you would have accumulated 9.65L lesser and hence your cost of delay is 8.21L which is 9.65L – 1.44L.”

Mr. I – “Oh man!!!’

Me – “And in case if you still wanted to meet the 80L goal, the new SIP amount would have been 8K for all next 15 years. So, the cost of delay would be 3.6L which is 15 (years) X 12 (months) X 2K (additional SIP amount)”.

Ek lambi khamoshi… 🙂

Me – “Equity investment has a risk involved but the best risk mitigation strategy is giving time to your investment. Time is more than money when it comes to investing. Do not shy away from investing in equity and especially do not delay your investments. The COST OF DELAY.”

Mr. I – “IS TOO HIGH”.

Me (laughing) – “So, should we start with 20K?”.

Mr. I – “No. No. Let’s start with 40K. I cannot afford the cost of delay as it would be much higher with delaying investment of 20K per month”.

Me (shaking hands with Mr. I) – “Welcome to the World of Wealth Creation!!!”.

Disclaimer - Mutual Fund investment is subject to market risks. Please read the offer document carefully before investing. 
The rate of returns on mutual funds are not guaranteed. It is assumed @12% for the calculations purpose.

I am associated with financial sector for more than 12 years now. Often I see, when it comes to financial planning, people tend to focus on tax planning, investment and wealth creation. But as a result of this, they miss out on equally important aspect of it, which is Wealth Protection.

Risk Management is very important aspect of financial planning which can be done by having proper insurance, asset allocation, contingency planning etc.

We all know that we have different risks in our lives at different life stages. For example, while learning to ride the cycle we are at risk to fall. We avoid this risk by having side wheels to our cycle. By having an invertor we mitigate the risk of power failures. So in our day to day life we mitigate various risks by having an alternate or back up plan. We need to have same strategy when it comes to personal finance. Only when we witness events like Covid, natural disaster or any such unfortunate event, we get its seriousness.

To fulfill our dreams, we not only depend on the current earning but also on the potential earning. If you are planning to build a corpus for your child’s education, you would need to save/invest for another 10 years. So, the plans/dreams/goals are dependent on the bread winner. Every earning member of the family has a Human Life Value (HLV) which is the present value of all the future income you could expect him/her to earn for the family.

With the earning the breadwinner has for the family, he/she is able to help his/her family live life at certain lifestyle level (as shown in the figure below).

 

 

Now unfortunately if something happens to him/her, the family will have emotional and financial losses. Emotional loss is something which cannot be recovered by any means but if there are ways by which the financial losses can be made up. Life insurance is the best way to address these financial losses. In case of lack of life insurance, the family may have to compromise on their lifestyle as well as dreams (as shown below).

 

 

Life insurance actually helps to replace the HLV of the breadwinner to provide a financial platform to the family. This helps them to keep the same lifestyle as well as to fulfill the dreams they have seen (as shown below)

 

 

When it comes to life Insurance, Term Insurance is the purest form of life insurance.

Taking life insurance is nothing but a transfer of risk to insurance company which pays to recover the financial loss in case of unfortunate event like Death. There are thousands and lakhs of people who pay premium to insurance company. They are not at loss even if they have to pay one death claim as other people will pay the premium. But imagine the situation of family who have lost the breadwinner, they are 100% at loss.

Recommendation

Every individual should have these three polices from Risk Planning perspective.

1) Term insurance which cover risk of death

2) Health Insurance which covers the hospitalization and medical expenses

3) Personal Accident policy which covers the disability or loss of income due to an accident.