Pass your financial knowledge too, not just your investments


Mr. Sharma was a smart man. He made sure that his family did not have to make any compromises even if something were to happen to him. He had bought a term insurance cover of Rs 1 crore. Additionally, over the years, he had built up an investment portfolio of Rs 70 lacs. Of his total investments (Rs 70 lacs), 70% was in equity mutual funds to provide for his children’s education and marriage and his retirement while the remaining was invested in debt products (PPF, EPF, fixed deposits, and liquid funds). After his sudden demise, his wife got the insurance proceeds and his entire investment portfolio. Apart from his wife, Mr. Sharma was survived by a 14 year old daughter and a 12 year old son.

Mr. and Mrs. Sharma had taken a joint home loan of Rs 60 lacs to purchase a house. At the time of his demise, the house loan outstanding was Rs 40 lacs. Though Mr. Sharma is a working professional herself, her monthly income is not sufficient to cover EMIs. Mr. Sharma was aware of this and he had planned that, in the event of his demise, the insurance proceeds would be used to prepay (entire or part) the home loan. Returns from the remaining funds (after prepayment of home loans) and his other investments and his wife’s monthly income would be sufficient to provide for both short term and long term needs of his family.

What Mrs. Sharma should do?

Mrs. Sharma should use part proceeds from insurance to prepay home loan. Subsequently, rebalance the portfolio (remaining insurance proceeds, Mr. Sharma’s other investments and her own investments) to maintain a healthy mix of equity and debt. Invest in equity mutual funds (through systematic investment plans) for her long term needs (child education and in debt products for her short term goals and liquidity needs. Purchase an adequate life and health cover.

What Mrs. Sharma did?

On the advice of an insurance agent, she used the entire investment proceeds and liquidated her husband’s debt portfolio to purchase a single premium unit linked insurance plan. Such products provide sub-optimal returns, expose the investor to high market risk due to one-time nature of investment and can leave the investor/policy holder under-insured. Equity markets were doing very well at the time. She was taken by the grand projections by the agent, who used past performance of the scheme to forecast future performance of her investments.

At the time of making the investment, little did Mrs. Sharma realize that these plans did not provide any liquidity for 5 years. She did not prepay the loan. Since her monthly income was not enough to cover home loan EMI and other monthly expenses including children education, she had to continually liquidate her other investments (including his husband’s equity investments) to provide for monthly expenses. To rub salt into the wounds, equity markets corrected subsequently. Not only was her investment in ULIP down, she had to liquidate more of her husband’s equity assets to meet monthly expenditure. Mr. Sharma’s meticulous financial planning had gone awry.

What went wrong?

Though Mrs. Sharma was a working professional too, she had limited her investment knowledge and experience to public provident fund (PPF) and fixed deposits. She had never attempted to understand the nature of equity markets. Though she was aware of all the investments made by Mr. Sharma, she had never made any effort to understand rationale behind those investment decisions. This happens in most cases. Though people keep their spouses updated about their investments, they never equip them to make investment decisions themselves. Mr. Sharma made this mistake. All his meticulous financial planning went awry since his wife never developed the skills to manage his investments. Most of us get influenced by the sales pitch during the purchase of any financial product and do not bother to look beyond the best case scenarios thrown at us by the intermediaries. Mrs. Sharma fell for this trap too.

How to avoid such mistakes?

It may be difficult to imbibe same level of financial knowledge in your spouse because that depends on individual preferences, educational background and work experience. However, if you keep at it, you can help your spouse become better at personal finance. Here are a few things you can do:

  1. Encourage your spouse to read regular personal finance sections in daily newspapers and watch personal finance shows on televisions.
  2. Include your spouse in your investment decisions and discuss your investments with him/her regularly.
  3. Keep telling your spouse about the basic do’s and don’ts of investments. Do’s include investing in equity funds through SIPs and invest in equity funds for long term goals. Don’ts include investing in equity or equity mutual funds for very short term needs, purchase of high cost insurance products for investments, investing on hot tips etc.
  4. Discuss with your spouse how you want life insurance proceeds to be used and the rationale behind your decision

We understand discussion on topics such as demise of a family member evokes an emotional response and hence such topics are generally avoided in families. But then, it is always advised to keep emotions out from your financial decisions. Discussion on investment rationale is extremely important too. This will help your spouse develop investment logic and he/she will be in a better position to understand pros and cons of any financial product.

It is important to create enough assets to take care of your family’s well being even after you are gone. However, it is equally important to develop ability and discipline in your spouse/family members so that your investments work for your family as you planned.

 Deepesh is Founder,

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Deepesh Raghaw

Deepesh is a SEBI Registered Investment Adviser and an alumnus of IIM Lucknow. Deepesh provides customized Financial Planning and Investment solutions to his clients. Deepesh is passionate about personal finance and contributes regularly to leading Business Newspapers. Deepesh appears regularly on personal finance shows on Business Television.

6 Responses to Pass your financial knowledge too, not just your investments

  1. Karthik Rajeshwaran says:

    Truly wise post. thanks for writing this.

  2. Rajiv Kumar says:

    Couldn’t agree more.
    A fine job you are doing sir. Keep i up.

  3. MK says:

    Excellent information.
    Have applied a few, and will apply others immediately.

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