The Biggest Money Blunder Committed by most families in India & why they need an Advisor
1) While they think of themselves as being very smart and conservative, most people in India unknowingly mess up their finances
2) Diversification to them is not in terms of value but rather in terms of asset types
3) According to most of them, “Some money will go to gold (jewellery), some to Equity, some to mutual funds, quite a bit to Bank FDs and perhaps the biggest chunk to real estate (one big house to stay and another smaller one as Investment and perhaps rental income)
4) This makes them feel well diversified
6) The reality in terms of ASSET VALUE, paints a very different picture
7) Usually the real estate value of this diversification would be at least 60% of their total net worth – their logic ; emotional purchase, touch & feel, physical asset, good to own etc
8) About 25 % in FD – Their logic “safe” and “secure”
9) About 10% – Gold in jewellery form – Their logic “traditional”, “safe”, etc
10) About 5% in Equity and MF ; Their logic : It is very risky but friends are strongly recommending so let us put some money here and hope it does well
11) Now let us examine their Blunder
PART A (INCOME GENERATION)
12) The home in which they stay is not an asset. At the most it is an emergency fund because one can’t sell the house one stays in. Think before buying a house which is beyond your needs because you are killing your golden egg bearing hen by doing this
13) The second real estate of 40 lac will generate 2% % to 4% rental yield
14) Both real estates are highly Illiquid and in case of an emergency will yield 70% of expected market. Huge loss of asset value in emergency.
15) Gold in Jewellery form loses value on making charges and also it is not easy to sell gold if quantity is large. It does not earn any passive income whatsoever
16) The FD earns 3.5% abysmal post tax returns
17) The little equity in the portfolio which perhaps may provide 9% to 10% returns represents only 5% of the overall portfolio and so it’s contribution to the Portfolio returns is just .5%
18) So if the Portfolio value is let’s say Rs 2 Cr, the 2 houses would be together Rs 1.2 Cr
19) Let’s say the house in which the person stays is worth 80 lac. This amount cannot be part of the asset and so we deduct this from the overall 2 Cr value. Thus Net asset is just Rs 1.2 Cr. Obviously this does not generate any income
20) The Rs 40 lac house on rent generates @ 2% growth generates Rs 0.8 lac per year
21) The FD of around 50 lac generates approx Rs 1.75 lac per year
22) Gold of Rs 20 lac generates nothing other than emotional happiness
23) Rs 5 lac worth of MF generating let’s say Rs .5 lac
24) Total NETWORTH of Rs 2 Cr thus generating about Rs 3 lac per year
25) Total Portfolio Returns of approx 1.5%
PART B ( ASSET VALUE)
26) Out of Rs 2 Cr of his Net Worth only Rs 1.2 Cr are his Net Assets
27) Of the Rs 1.2 Cr net assets only Rs 80 lac is liquid because Rs 40 lac is the second house
28) Of Rs 80 lac liquid Rs 20 lac is Gold jewellery which will remain behind the doors of the Bank Locker
29) Only Rs 60 lac is Quick liquid money
30) The Rs 1.2 Cr real estate in case of a Emergency Sale would fetch only 70% of expected value which is just Rs 84 lac with Rs 36 lac having got wiped out
31) So this person who represents lacs of Indians has only Rs 1.64 Cr. Of Assets and earns an yield of Rs 3 lac per year at 1.5% returns
32) The blame clearly is not on the Assets. It lies squarely on the shoulders of his mentality, Illetracy in personal finance
33) A good investor could easily have made
an yield of Rs 12 lac to 15 lac per year and a quick liquid asset value of Rs 1.9 cr
