One needs to have adequate health and life cover, so that his/her dependents are not financially burdened. Further, it is also important to have a will in place which is updated regularly so that assets are transferred to persons whom one intends to transfer. It is a common mindset that we are not rich enough or we are not ill or old to have a will in place and since I have a nominee in all my investments, I do not require a will. However, whatever assets one has created, it needs to be preserved and transferred to the dependents.

 

Also, as per law, assets are transferred to a legal heir and not to a nominee who is just a custodian, and hence having just a nominee only will not serve the purpose. While one can assume that families will not have many issues on legal heirs, the entire process of getting everything in order is very tedious and burdensome for the family, when they are least prepared to deal with it.

 

Now, assuming one has taken care of all the above, family needs to prepare a financial plan post the demise of the bread earner. This plan is dependent on the risk profile, liquidity requirements, time horizon and other goals which one needs to plan for. Since this will require a regular income from the portfolio, we typically suggest having at least 3 years of cash flow requirement in debt-oriented investments, so that any volatility in equity markets do not affect the short-term cashflow requirement. This also needs to consider the tax bracket one will fall into, as while FDs and Bonds may be attractive pre-tax rate, but a high rate of taxation may reduce the return. One can look for arbitrage funds and debt funds as well for 3+ year horizon.

 

Similarly, while equity funds returns may look attractive from a long term horizon, they tend to witness significant volatility in the short to medium term and one needs to be comfortable with such volatility and hence assessing your risk profile and investing in line with that appetite is very important. A typical risk profile assessment will tell us how much to invest into debt-oriented, equity-oriented and alternate assets so that portfolio volatility is in line with investors’ risk appetite.

 

Further, goals also need to be identified and investments can be planned to meet such goals. For example, say a family wants to buy a house after 2-3 years, then the investment required for the same can be invested into debt-oriented investments so that volatility is low. Another case may be to plan for kids’ education abroad after 10 years, then investing into offshore funds to hedge for currency depreciation can also be considered to build the financial plan.

 

To summarise, we would prefer to keep cash flow requirement of the first 3 years into fixed-income investments with low volatility. The remaining corpus can be invested into various asset classes depending on risk profile, investment horizon and goals of the family.

 

Once we build this plan, it needs to be reviewed on regular basis and necessary changes should be made so that the objectives of the family are achieved.