Financial planning tips every Indian woman should know

Financial planning for women for their 20s, 30s, 40s, 50s and beyond

Woman holding money in one hand and hour glass in the other.

Even in this age of gender parity, financial planning for women has to be slightly different from that of their male counterparts. This is not for the purpose of any discrimination but merely to take into account two factors that are particular to women. One, they could have ‘sabbaticals’ from a regular income owing to the fact that when they get married and go about setting up a family, they have to take a break from their jobs. Sometimes, this break can extend for quite a few years. Another factor that women must take into account when planning for their finances is that generally they tend to have a longer life span than men.

When you combine these two factors, it means that women must save more of their take-home salary than men. So for men if the rule of thumb is that they must save at least 30 per cent of their take-home salary, for women this figure should be 50 per cent.

Women [by and large, according to experienced financial planners] also tend to be conservative in their investment approach. However, if they are to meet their retirement savings goal, then they must eschew the conservative approach and invest a large portion of their retirement corpus in equities [which are known to give higher returns over the long term]. In view of their longer life span, even after retirement women should not shift their entire corpus to debt. Some portion of their corpus must remain in equities so that it is able to fight inflation over 25 years or more of their retired lives.

If you anticipate an investment horizon of seven years, you could invest in balanced funds that invest 65 – 80 per cent of their corpus in equities

Before you begin investing

Prior to any savings to meet your long-term financial goals, you must pay off all your high-cost debts, such as personal loans and credit card debts. Having paid off your debts, get into the habit of paying credit card bills at the end of each month, instead of paying interest on revolving credit.

Establish a contingency fund. This should equal 3 – 6 months of your living expenses, including child’s education fee and cost of insurance premium. This fund is meant to take care of temporary layoffs, prolonged illness or an accident that leads to temporary disability. Keep the contingency money in a savings account or a liquid fund [from a mutual fund house] where it is easily accessible. Next, let us discuss how you can go about meeting some of your most important financial goals:

Starting a family

Now suppose that from the day a woman starts working, she starts saving for the time when she will take a break from her job to start a family. She believes that she has an investment horizon of five years. A risk-averse individual should put her savings for this goal in fixed deposits while a non-conservative investor might consider putting her money in debt mutual funds.

A woman who anticipates that she has an investment horizon of seven years could invest in balanced funds that invest 65 – 80 per cent of their corpus in equities. It has been seen that the probability of negative returns from equity declines dramatically if the investment horizon is at least seven years.

Avoid branded children’s products either from insurance companies or mutual funds

Investing for child’s education

Working women, especially single parents, should begin planning for their child’s future by buying term insurance. This will ensure that even in case of the parent’s untimely demise, the child’s education doesn’t suffer. Women, as mentioned earlier, at times tend to be over-cautious in their investments. Many of them invest 100 per cent in debt even for long-term goals such as child’s education [where the typical investment horizon is 18 – 21 years]. Remember that the cost of education in India has historically grown at a faster pace than a broad measure of inflation such as the Wholesale Price Index [WPI]. The only hope you have of meeting this goal is if you have a considerable portion of the education corpus invested in equities [75 – 80 per cent].

Conservative investors may opt for balanced funds with 65 per cent equity allocation. Remember that liquidity becomes a very important factor at the time your child starts college education: you will need money at the time of admission and then continuously for the next few years. It will not help if your money is locked up in illiquid instruments that will mature at a later date. Do keep this very important factor in mind when saving for your child’s education.

Avoid branded children’s products either from insurance companies or mutual funds. Instead invest in high-quality diversified equity funds from mutual fund houses [these typically get more attention from the fund manager than child plans because they have a larger corpus and hence earn the fund house more money].

Three years before you approach your goal, start shifting your savings from equities to debt, so that a sudden downturn in the markets does not affect your child’s prospects.

Investing for retirement

Investing for retirement is also a long-term goal where the investment horizon is of 25 years or more. Only by investing in equities will your portfolio be able to counter the ravages of inflation. Women who have an appetite for risk may opt for a 100 per cent equity portfolio. Those who are risk averse may opt for a mix of 75 per cent equities, 20 per cent debt and 5 per cent gold.

Active or passive funds

Those who use the services of a financial planner or know how to choose the right mutual funds may opt for active funds in their retirement portfolio. If you invest in them, monitor their performance. If a fund’s performance falters, switch to another with a sound long-term track record. If you don’t want the hassle of monitoring the performance of active funds, opt for an index fund which will give you returns in line with that of the benchmark index upon which it is based.

Allocation by market cap

Of the total equity portion of your retirement portfolio, allocate 70 – 75 per cent to large-cap or large- and mid-cap funds. 25 – 30 per cent may be allocated to mid- and small-cap funds.

Allocation to debt

In a long-term portfolio, such as for retirement, meet your debt allocation by investing in Employee Provident Fund [if you are employed] or Public Provident Fund [PPF, if you are self-employed] or both.

Allocation to gold

In a retirement portfolio 5 – 8 per cent may be allocated to gold. This will give greater stability to your portfolio and also enable it to fight inflation.

As your retirement approaches, shift your corpus from equity to debt, especially if the corpus is small-sized and a decline in the market will affect retirement income. Very large corpuses can weather market volatility [in the sense that if the corpus size declines from 80 crore to 60 crore, it will not affect the retiree’s lifestyle]. Even after retirement have at least 20 – 25 per cent of your retirement corpus in equities so that it can continue to fight inflation over the quarter century of your retired life.

A version of this article first appeared in the March 2013 issue of Complete Wellbeing.

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