How Women Should Go About Planning Their Investment & Insurance Needs

[Women and Financial Planning Series]

Session 4: How Women Should Go About Planning Their Investment & Insurance Needs

We are glad to have you with us for our 4th Session of Women & Financial Planning series, and that is

How Women Should Go About Planning Their Investment & Insurance Needs

Women are stepping out of the stereotypical roles with many of them making a living and shouldering family responsibilities as much as men. Although slowly, they've begun to invest; but given the fact that life expectancy of women is greater than of men, not all are making productive investments so as to live a comfortable retired life, and/or even meet intermediate financial goals viz. buying a house, planning for their children's future and so on. Likewise, many are sub-optimally insured as well.

Amid this backdrop, this session provides insights on how women should go about planning their investment and insurance needs.

Alright, so let's get started and understand...

A 10 point approach to handle investment needs

  1. Save at least 1/3rd of your monthly income – In fact go by the mantra shared by the legendary investor, Mr Warren Buffet, who wisely said, "Don't save what is left after spending, but spend what is left after saving." So endeavour to save more by rationalising your expenses and live within your means.

  2. Utilise the money saved to make productive investments – As you know, inflation erodes the purchasing power of your hard-earned money. Hence, it important to invest wisely in line with your investment objective and financial goals in productive investment avenues to yield an effective real rate of return (returns should be more than inflation). After all, you've got to make money work for you.

  3. But while you invest don't ignore asset allocation – Asset allocation is determined based on your: age, income, expenses, assets, liabilities, responsibilities shouldered, risk appetite, nearness to financial goals, amongst a host of other factors. It is subjective and a complex exercise; but to begin with you can use the thumb rule: 100 – current age. It will help you determine how to invest mainly in equity and debt, along with some portion in gold. So, if you're 30 years of age, 70% (i.e.100 - 30=70) of the investible surplus should be deployed in equity and rest in debt and gold. Asset allocation is dynamic and hence you need to timely rebalance your investment portfolio. You see, a well-thought asset allocation, acts as a shield of protection for your wealth during uncertain economic conditions and during market volatility.

  4. Likewise, diversification is a must –Diversifying across various investment avenues within respective asset classes – equity, debt, gold, -- helps reduce risk to your overall investment portfolio, and that's why it is one of the basic tenets of investing. But investing in an ad-hoc manner in different asset classes is not a prudent diversification as it may not add value to your overall investment portfolio. Also, any attempt to diversify is not worthy if it is does not follow disciplined portfolio rebalancing.

  5. You ought to invest in productive investment avenuesEquity as an asset class has proved effective in beating inflation. Hence based on your risk appetite, consider investing in equity mutual funds .

  6. Don't try to time the market–Instead, focus on your financial goals and adopt a systematic, holistic process to achieve them. Remember: a trader is only good until his last trade. One cannot always get the market timing right. So, don't get carried away by what friends and family say. On the contrary, focus on your financial goals and seek services of a financial advisor who can handhold you in your journey to achieve your financial goals.

  7. Follow a disciplined investment approachSIPs or Systematic Investment Plans enforce a disciplined approach, where you need not worry about timing the market – thanks to the benefit of rupee-cost averaging offered. Moreover, SIPs are: lighter on the wallet (i.e. facilitate investing in smaller denomination), offer the benefit of compounding, and aid in maintaining regularity in investing.

  8. Invest in line with your investment objectivesKnow why you want to invest - for capital appreciation or to preserve capital and earn a fixed return. Digressing from investment objectives can land you on the wrong track while you aspire to achieve financial goals.

  9. When you short-list investment avenues to match investment objectives, evaluate the cost of investing-- It refers to expenses associated with investing and holding the investments in your portfolio which could be in the form of fees, loads, demat account charges, bank locker charges in case you are investing in physical gold or any hidden charges levied by the issuer of respective investment instruments. Remember: your cost of investing should ideally be low to yield a better rate of return on your portfolio. Mutual funds in that sense are cost-efficient investment avenues to enable you to grow wealth.

  10. As far as possible, never dig into your savings and investments to handle exigencies. Build a contingency fund of 6 to 24 months of regular monthly expenses, including EMIs to plan for a rainy day. This can help handle events such as medical emergencies, loss of job, or any other eventuality you haven't planned for. Liquid funds, ultra short term debt funds and funds in a savings bank account can be considered to build a contingency corpus.

"Rome wasn't built in a day". Wealth creation is a journey involving process and prudence. Thus it's vital to track and review your investments regularly (say at least once a quarter) and take corrective action when need be. It takes patience and perseverance to create wealth as we all aspire to become rich one day.

Coming to insurance…

Today there are galore of options to cater to insurance needs – term plans, traditional endowment plans, money-back plans, pension plans, Unit-Linked Insurance Plans (ULIPs), etc. However the paramount objective of insurance, which is indemnification of risk to life, is often missed. Many women shoulder responsibilities much as the men today and therefore optimal insurance coverage is a must!

So, here's how should address your insurance needs…

Approach to address insurance needs

  1. Keep insurance and investment needs separate – Many individuals often commingle insurance and investment needs. Endowment plans, money-back plans, pension plans, Unit-Linked Insurance Plans (ULIPs), etc. are bought without recognising whether or not it really yields an efficient cost-to-benefit ratio.

  2. To indemnify risk to life (which is what life insurance is for) pure term plans are most appropriate-- For the premium paid, they offer a higher insurance coverage.

  3. But it is vital to insure optimally giving due importance to a scientific method called Human Life Value– HLV evaluates the need for insurance cover in terms of money required to sustain the same standard of living by the family in case something happens to the bread earner of the family. Various factors are taken into account: life expectancy of your spouse, number of children and their dependency period on you, monthly household expense of the family excluding your personal expense, cost of inflation, outstanding loans, amongst a host of others. And much as how an investment portfolio needs to be reviewed, even your insurance coverage needs to be reviewed; because every individual's need changes over a period of time.

  4. As a thumb rule, you can use this formula:

    Your Life Insurance Requirement = Your Monthly Income X12 Months X10 times

    You should at least have 10* times your annual income as a life insurance cover. If you don't have the life insurance cover, buy one immediately and protect the financial future of your family. And we believe, the prudent way to buy a life insurance cover is through term plans; because the sole objective in insurance is to indemnify risk.

  5. Likewise, amid times where medical / healthcare cost is rising, it is wise to have an optimal health insurance cover – An adequate health insurance cover reimburses the hospitalisation bills in case the insured has to be hospitalised for any illness. So it's always better to take a health insurance cover at an early age because as age increases, the chances of being diagnosed with some disease increases and if that happens then it may be difficult to get an adequate health insurance cover. Plus, the cost of medical treatment would otherwise drain out your savings and investments.

So to wrap our today's learning session, here are a few...

Points to Remember…
  • Save at least 1/3rd of your monthly income. Endeavour to save more by rationalising your expenses and live within your means

  • Invest the money saved to make productive investments while you aspire to meet long-term financial goals

  • Invest money wisely knowing your investment objective. It can help you clock an optimal real rate of return. Simply put, you can combat inflation better

  • Don't forget to diversify. It is one of the basic tenets of investing which can reduce the risk to the overall investment portfolio

  • Don't time the market. SIPs are a good mode of investing in mutual funds to meet your long-term financial goals; as they're lighter on the wallet, instil discipline, facilitate rupee-cost averaging (i.e. manage volatility) and power your portfolio with the benefit of compounding.

  • Don't forget to evaluate the cost of investing

  • Avoid digging into your savings to fund exigencies; instead build a contingency fund of 6 to 24 months of your regular expenses

  • Keep your insurance and investment needs separate. To indemnify risk to life, opt for pure term plans

  • For an optimal life insurance cover, preferably follow the Human Life Value method, which is a scientific approach

So to end our learning exercise today, we now invite you to test your learning by taking up this simple quiz (and win exciting prizes!)

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The Information contained in this video transcript is not a complete representation of every material fact and is for information purposes. All details are provided on a best effort basis. It is not to be used or considered to be an offer to sell or buy units of Franklin Templeton Mutual Fund schemes. This video transcript is for information purposes only, provided on an ‘as is’ basis. Nothing in it should be construed as personal financial advice. You are responsible for your own investment decisions and the recipient is advised to consult a professional financial advisor prior to arriving at any investment decision. The video transcript is for personal non-commercial use only and may not be copied, stored, redistributed or broadcast in any way. We recommend you read the complete Terms of Use of the website.

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