Russel Coelho, 35, started investing in mutual funds in 2015. For him investing meant putting money in four or five mutual funds without clarity of any goals. After he approached a planner, Coelho got his goals clearly defined in monetary terms and realized investing mistakes. “I had no defined goals. There was no planned asset allocation. I was just investing a particular sum in a few mutual funds. I was not sure if they were the right funds for me. I didn’t know when to exit a fund,” said Coelho, who is working as chief officer at a merchant navy ship.
“I always knew one needs a planner, as sadly our education system doesn’t teach us much about managing money or personal finance. However, I was always waiting for the right time. During the pandemic, when I was at home unemployed for six-eight months, even though I was confident that I will soon start working again, I realised that was the right time to get a planner,” said Coelho.
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He approached Melvin Joseph, a Sebi-registered investment adviser and founder of Finvin Financial Planners, in June this year.
Investing without a planner led Coelho to make some of the common mistakes.
“Investing without having clearly defined goals is like a football game without goal post. Though Coelho knew about most of the financial goals, he was not investing adequately for each of his goals. Once the goals were quantified, he started investing properly,” said Joseph.
Coelho’s only goal was saving for retirement. He has two sons—Ziaan, who is four years old and Isaac, who is one year old. “I did not think about goals such as kids’ education and their marriage. My planner helped me quantify other goals as well,” said Coelho.
Another mistake Coelho did was mixing up insurance with investment. He bought a few endowment plans for tax-saving purposes. He had term insurance, but it was expensive. Also, the sum assured was highly inadequate given the fact that he is the sole bread earner of the family. His wife, Maegal Coelho, 31, is a homemaker.
Buying any insurance is meaningless unless it is of the right amount. Having adequate life insurance cover is a very critical part of financial planning, as the sole purpose of life insurance is to take care of the financial responsibilities of the person in case something untoward happens to him or her.
“I suggested to him a low-cost online term policy for the adequate value as per the expense replacement method,” said Joseph. Under replacement method life cover is determined on the basis of future expected income of the insured.
Joseph also advised him to get rid of some of the endowment policies. “Endowment policies are a bad idea for investments. However, it is not possible to exit all of them immediately as this may result in huge losses due to low surrender value. Some policies have provisions where bonus is only paid after 10 years, in such cases surrendering them immediately may not be a good idea. So, I advised him to continue holding them while surrendering others,” said Joseph.
Another mistake that he was doing is investing irregularly in mutual funds. Though he had investments in equity funds, he was not investing on a regular basis. I suggested mutual fund SIPs in direct plans,” said Joseph.
On the debt side, the only investment that Coelho had was in the form of public provident fund (PPF). As Coelho’s job requires him to stay out of the country, he is considered as a non-resident Indian (NRI) for taxation purposes. Joseph suggested him to invest in non-resident external (NRE) account offered by banks as the interest earned on them is tax free. NRE deposits offer interest in line with bank deposits. As they are tax free, the returns for NRIs are at par or better than debt funds, which are taxable. Short-term capital gains (exiting debt funds before three years) are taxed at slab rates while long-term capital gains (exiting debt funds after three years) are taxed at 20% with indexation.
What worked in favour of Coelho was that he didn’t have any debt. He had repaid his home loan by 2015. Also, his current cash flows are enough to meet his goals. Also, mutual funds he had invested in intermittently were good funds. Even after a market crash during the pandemic he didn’t suffer huge losses as well.
However, Coelho agrees that he would have been in a much better position financially if he had consulted a planner and started investing towards his goals earlier.
Coelho learned that investing without goals is meaningless.