In the days of yore, homemakers would save every penny and used ‘bucket’ style of investing to ensure that there is sufficient money for every important occasion or financial goal. This happened even before the tools of financial planning and risk management were in vogue.
Today, women perform various roles and are very independent in their lifestyle and financial management. The framework of money management should be: first, identify the needs and goals; second, the time horizon for the goal; third, the liquidity needs of the goal, and lastly, the risk appetite.
Insurance and risk management
Just like the five fingers, having the five mantras in place and following the framework is the way forward. Each of the element plays an important role and is linked to one another. Risk management is the key that binds all of them. It guides on the asset allocation and the risk-return tradeoff, which ultimately plays an important role in setting the goals and reaching the milestones.
One of the most important aspects of risk management is life and health insurance, especially if one is a single mother. In a life cover, if your husband is taking the cover, do ensure that its under the Married Women’s Property Act (MWPA). This is a trust created along with the policy, which ensures that the proceeds are received by you only as a spouse and cannot be assigned to anyone else. With increasing life expectancy, it is expected you that you will live longer and health costs are spiralling. Do buy an adequate health cover. Once the ring-fencing of the health is set up, the investing part of the financial management needs to be put in place.
Having an Investment Policy Statement (IPS) at the beginning of the investing process will help set the investing framework and the action plan when volatility and price movements come in play. The mistake most do is to go with the latest performing asset class, ignoring the fact that what is good to your friend need not suit your risk appetite and goals. The most important part in framing an investment strategy is to understand the asset classes which you will invest.
With the push towards financial assets such as equity and fixed income instruments, it is important that you try to become more comfortable with it and get to know how the asset works. It is myth that higher the risk, higher is the return. Equity as an asset class, if invested with prudence, has enabled investors to meet their financial goals. You need to typically have an investing horizon over three to five years.
Traditionally, bank fixed deposits are considered a popular mode of investments in debt space. Look at short debt mutual funds to invest up to two years. However, there are categories as in liquid, duration, accrual products in debt funds and you need to know what exactly you need. One can start with liquid mutual funds and then understand the other products in the debt fund category. This will ensure that you will not lose much if credit or interest rate risks strike.
Do have a will, especially if you are a single mother. Once the plan and risk mitigants are in place, do monitor your portfolio every quarter. Do take the support of experts if required. Listen to them, but act and execute only if you understand the plan or the product.
The writer is managing partner, BellWether Advisors LLP