Do you worry about losing all your wealth while speculating in the market? It happens to people sometimes, and we have taken up such a case here
WHEN A busy doctor gets into derivatives trading and loses money, there is a need to call the surgeon – the financial surgeon in this case. Dr Meghraj is 40, and with wife Rupa a teacher at a local school is 34. Their two children are Rashmi (12) and Ankush (8).
When he approached us, he had already suffered severe losses in the market and is heavily into debt. He has not yet told his family.
Let me try to give the readers a brief glimpse of his present financials. He is paying an EMI of Rs. 1.20 Lakh per month on the personal loan front and the same will continue for the next 56 months. For credit card loan he is paying the minimum amount. (See tables)
As he is a practicing doctor, his earning doesn’t follow the uniform pattern of a salary earner.
Objectives The short term objectives are to finance his EMI of Rs 14.40 lakh. Settle off his credit card loan and manage his present house-hold needs.
The medium term objectives are to provide for his children’s higher education and save for his daughter’s marriage. The long term goal is to create a retirement fund. He would also want to create a safety net for the family for exigencies.
Recommendations The first task is to pull back his net earning to positive territory and here is a three-pronged strategy for that.
It will need his wife’s support and so he must share information with her
Repaying Loan Amount (Credit Card Loan immediately and at least Rs. 20 Lakh of his Personal Loan). He will have to sell the farm land to arrange for this Rs. 23 lakh and also use the bank FD and the rest by selling off the jewellery. The PPF too can be used but it must be the last option.
Negotiating with the bank for a better term of lending for the remaining amount based on joint guarantee with his wife
Cutting down his present living cost by at 10 per cent. These measures will help to save a maximum amount of monthly outgo as well as save tax, which was being paid on the interest on deposit.
1. The present stock portfolio has to be re-aligned by switching from small cap stocks to diversified mutual fund.
2. 50 per cent of the cash in the bank shall be invested in liquid fund. The fund is maintained in liquid form as 6 months buffer for any emergency.
3. For medium term objective, 50 per cent of the net surplus to be invested in a set of diversified Mutual Fund. The rest 50 per cent to be invested in the PPF account and Debt based MF equally.
4. At-least 50 per cent of the net sav- ings shall be invested in the same proportion as indicated above. The rest 50 per cent will be in- vested in developing the diagnos- tic business.
5. Parallel to his practice, if he can build up a strong brand for his di agnostic center business, it will have it’s own intrinsic value, which can be sold or leased out at the time of retirement.
6. All these recommended meas ures would help him to ward off the present difficulties and give a new direction to his wealth build ing potential.
7. However, post implementation, the performances have to be closely monitored for best and most effective result.
The author is a Certified Financial Planner and is working with IMS Learning Resources Pvt. Ltd.
The case study is meant for academic consumption and readers are advised to consults a CFP Certificant for customized planning. Queries to author may be directed to firstname.lastname@example.org Table 1 Item Amt in Lakh (Market Value) House Propety 50 (Owned) 5 Farm Land 3 Car – self owned 1.50 Stocks 20 PPF 10 Bank FD 7 Gold Jewelry 3.50 Bank Cash 100 Total Asset Personal Loan taken 37.30 to Service derivative trading losses * 3 Credit card loan 40.30 Total Liability 59.70 Net Worth (Total Asset – Total Liability) Table 2 Item Amt in Lakh (Market Value) Earning from medical 18 practice & related activity Other Income – including business of 8 a diagnostic center run from own home 26 Total Income 4 Income Tax House-hold Expenses 7 including Life style expenses & Insurance Expenses to run 5 professional practice & self development expenses Diagnostic center Expenses 4 20 Total Expenses 6 Total Surplus (Total Income – Total Expenses)
Inputs from HT Media