The Abundance Problem in Your Financial Portfolio

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Vishal Dhawan, Certified Financial Planner and Founder of Plan Ahead Wealth Advisors, said a clutter of financial products means one is not focused on the end goal. “What invariably happens is that when you actually sit down to clean it, you’re not rational anymore and tend to throw everything out and start from scratch, which is a wasted effort,” Dhawan said. So there is a perfect number of each financial product that one should hold? Not always. But there is a way to ensure multiple products don’t get in the way of a healthy financial life. We explain how Marie Kondo your financial life. Read more

Mutual fund

When it comes to mutual funds, understand that having too little exposure means being too focused and having too many schemes means being over-diversified. Sanjiv Singhal, founder of Scripbox, an online mutual fund platform, said too many mutual funds in an individual’s portfolio is a common occurrence as investors approach investing as buying mutual funds rather than analyzing their financial objective. “Sometimes investors justify holding many funds in the name of diversification. But most people forget that a mutual fund is already diversified on its own. Having too many different funds doing the same job is not going to help your wallet,” Singhal added. Understand that over-diversification could make it difficult to keep tabs on plan performance and therefore you may not realize when financial planners suggest investing in no more than six to seven schemes. “Because the stratagems’ underlying securities are a performance driver, too many stratagems could lead to large title overlaps,” Dhawan said.

The right way to plan your mutual fund investments is to start with a goal and, based on your risk appetite and time horizon, build the portfolio. “Having two large-cap and multi-cap equity mutual funds should cover most long-term goals. For those with larger portfolios, an addition of mid-cap funds and international funds can be considered,” Singhal said. For short-term goals and emergency needs, investing in two or three liquid debt funds is a good idea. Keep in mind that over-diversification could prevent your candidate from mastering things in your absence. Each fund house has a slightly different process for passing on assets and an applicant must navigate it. This is a fair amount of paperwork, it is advisable to only stick to the number of funds you really need and make sure your applicants are aware of this.

DF and bank accounts

Having too many fixed deposits (FD) is commonplace. But having multiple FDs means multiple due dates, which could become difficult to track. This could result in late FDs and not earning interest. “It is also common to forget to declare FDs when filing taxes, which could lead to under-reporting of taxes, as withholding tax (TDS) on deposits may only cover a part of the interest tax due,” Dhawan said. Understand that it makes sense to save in a FD if you’re in the 20% tax bracket, but beyond that you’d lose a big chunk in taxes.

Shweta Jain, CEO and founder of Investography, a financial planning company, said applicants are usually unaware of all deposits due to improper documentation and are unable to claim them when needed. Dhawan said another problem with multiple FDs is remembering the renewal date.

The same goes for bank accounts. The more bank accounts you have, the more money you keep locked up in those accounts. Most banks require a minimum balance requirement from an account holder and failure to maintain could result in a penalty (read more about this here)

Term packages

It’s just not the investment universe. The insurance portfolio of many also seems cluttered, with many bundled plans that were purchased to save taxes or term plans to increase coverage. Mint recommends separating your insurance and investment needs. So, in terms of insurance alone, how many policies should one have?

Financial planners suggest you have coverage equal to at least 12 to 15 times your annual expenses or 8 to 10 times your annual income. But that doesn’t mean you buy multi-term plans. Assess your insurance needs and fill the gap with another policy. Review it every few years as your income and assets grow.

Indraneel Chatterjee, co-founder and chief executive of RenewBuy.com, an online insurance marketplace, said term plans should be viewed with flexibility. “Most term plans are purchased at an earlier age, when one has fewer responsibilities, and therefore the sum insured purchased is low. With expanding family, assets and liabilities, term coverage can be short. It’s always better to buy plans that offer flexibility in changing the sum insured,” Chatterjee said.

The duration of these plans should be such that as the responsibilities decrease, you should be able to reduce the duration. “Ideally, two or three term plans are sufficient so that premiums can be stopped as wealth grows and compensates for the void the insurance was filling,” Dhawan said. “Often when the insured dies, the family is unaware of the payments made and benefits accrued. They then end up being harmed while the insured may have paid many premiums over the years,” Chatterjee said.

In addition, several plans from different companies may expose your family to different rules for each insurer. “It’s always better to fully understand the rules of two or three companies and buy from them than to buy policies where those terms and conditions aren’t clear to the candidate,” Chatterjee said.

Health insurance

Regular health policies are normally indemnity policies that pay for hospitalization. As with other financial products, keep your health policies to a minimum. Apart from what your employer offers, it is advisable to opt for personal health insurance and buy a great add-on to complete the coverage in an affordable way. However, multiple health insurance plans will only create confusion when filing a claim, as it can be a pain to make a claim from multiple policies. “The paperwork will have to be submitted to several insurers and you will have to answer multiple queries, which in itself is a huge task. Each policy may also have different conditions and restrictions. Keeping up with all of this might be difficult,” Jain said.

Note that if you have two policies with a face amount of 3,000,000 and 2 lakh and have an approved claim of 4 lakh you can use 3 lakh of the first policy and the balance 1 lakh on the other. The paperwork required will be cumbersome, but it is possible. “It is advisable to have a separate health plan other than the one provided by your employer, as insurance regulations allow you to use the second policy in case you run out of coverage from the first,” said Chatterjee. Plus, it would ensure that you are covered when transitioning from job to job or out of work. Another pitfall of having multiple health policies is that it forces you to remember different renewal dates.

While it’s good to have a mix of necessary financial products, having too much could hurt your financial life and make it harder for your nominees after you die. If you think you have more than you need, understand how and what you can eliminate. If you feel unable to determine what should stay and what should go, consult a financial planner.

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