Portfolio Management In case of irregular income

The views and opinions expressed are of Mr. Arun Thukral, MD & CEO, Axis Securities.

It is often said that money makes the world go round. Given the role that money plays in fulfilling our life goals, we all strive hard to make just enough money throughout our lifetime. Over a period of time, we all have come to a realization that a good earning is not a guarantee to the comfortable life that we aspire for. It requires smart money management and investments as well to get closer to our life goals. While the salaried class can plan and execute its investment well because of regular cash inflows, Businessmen and Professionals find this exercise difficult due to their irregular income. 

Money management has known to be challenging for businessmen and professionals. We often come across examples where even the best sportsperson have been humbled due to financial ruin. Take the example of Mike Tyson for instance. He earned more than $400 million in his career yet he was declared bankrupt when he retired in 2003. Similarly, Diego Maradona, one of the best soccer players of all time had unpaid taxes of $50 million. Similar financial hardships were encountered by artists like O. P. Nayyar, the famous music director, and Parveen Babi, the celebrated Bollywood actress who went riches to rags because of improper financial planning and lot of extravagant expenses. Even in my associations, my good friend, who is one of the renowned doctors in the city, has a habit of not giving due importance to his investments. He keeps his money either in a savings account or makes a hefty investment which is not right for his age, financial goal or risk profile. 

This laid-back tendency amongst professionals and businessmen when it comes to money management is because they seldom understand the importance of financial planning until they face a crisis situation. As long as constant professional assignments flow in, bringing good fees for their efforts, they seldom prepare for a future where the work may dry up. In many cases, these professionals and businessmen taste success at a very young age. They have little or no idea of the risks that they could encounter professionally when they grow old. Due to this lack of foresight, they fail to make proper provisions for rainy days. For these working groups, saving for the future is generally not in a priority, and if you belong to either of these categories, financial planning is highly crucial for you if you want to strike a balance between sustaining a certain lifestyle and achieving financial security. 

Let us take few examples and see how different strategies would work for different categories. 

Businessman – Take the case of small business owners or retail shop owners who earn more during certain months of the year or particular days of the week. To substantiate, a bookshop owner selling academic books will earn more in the month of April as this is the month when schools/ colleges start their new sessions. For rest of the year, this businessman will make sporadic earnings. Similarly, a food joint owner will have higher sales during the weekend when customers splurge money to enjoy with their friends and families. Now if you fall into this category, my advice to you would be – 

1.    Create a proper financial plan - It should include both the professional goals, like funds for further expansion of your business, as well as your personal goals, like education, marriage, house, retirement etc. Work out the sum you require for each goal and then plan accordingly. 

2.    Save more - As a professional with irregular and varying income, you must invest in products or avenues that will give you a recurring regular stream of income while creating long-term wealth at the same time. Say if you earn Rs. 60,000 per month for 9 months and Rs. 3 lakh per month for 3 months, then you must direct whatever is left after deducting cost incurred per month to your savings. If your cost is Rs. 40,000 per month then you must save Rs. 20,000 per month for 9 months and Rs. 2, 60,000 per month for 3 months accumulating the total savings to Rs. 9, 60,000. “Pay yourself first”, a Warren Buffet investment axiom should be your personal mantra. When you receive your paycheck after a gap, the desire to indulge and meet pending expenses would be high. But remember to spend only after setting aside savings from your income for smarter money management. 

3.    Invest more – Now if you have penned down your financial goals and started saving more, you need to invest more too. Equity has historically given the best returns among all the asset class. Sensex has given more than 100% returns in last 10 years. Bifurcate your goals as long–term and short–term goals and invest in Equity/ Equity based mutual funds as per your goals to achieve them within the set timeframe. 

Professionals – Barring few sportspersons and celebrities, professionals largely have a very short career span. They earn more during the career peak and later on it shrinks. Although the above advice holds true for professionals too, however, in their case, the financial planning can be a little more complicated.  

1.  Target a corpus – It’s advisable to target a corpus and then work towards it during the working years. For example, if one assumes that her/his professional career will not be more than 15 years, then a target corpus needs to be built so that the same corpus is able to sustain her/him as well as the family for the rest of life. If a 22-year-old sports professional assumes that his career won’t last beyond 37 years then he needs to build a corpus which will support him for the next say 40 years, by the time he turns 77. While building that corpus it will be prudent to consider current expenditure per annum, future expenses when he will have a family and future family’s expenses e.g. child’s education, marriage or other goals like house, car, vacation etc. Although it sounds a difficult task to accomplish, if done in consultation with an expert and considering other aspects like risk profiling and the right asset allocation, it is possible to build the desired corpus through disciplined investments.  

2.    Systematic Withdrawal Plan (SWP) from your corpus: It’s relatively a new concept in India but beneficial for those who have to depend on a corpus for the latter half of their lives. When the income is regular, the advice is to invest in SIPs or Systematic Investment Planning. SWP is just the opposite of SIP.  In a SIP, investors can invest a pre-defined amount on a regular basis, while in a SWP, investors can withdraw pre-defined money from the scheme they have invested in, on a regular basis. The prime role of the SWP is to generate an additional cash flow without the need for liquidating your entire investment. So, when income is lump-sum in nature, like fees received by professionals from their performances, this can be invested in mutual funds and withdrawn through SWP, providing the assurance of getting a fixed amount at a pre-determined time frequency.

3.    Emergency Fund: Once cash flows are taken care of, the next step should be to set up an emergency fund to take care of any setback to your earning capacity. Since behind the coveted life there lies a lot of uncertainty, it is critical to contribute a certain amount of income generated towards the emergency fund. The aim should be to have three to six months' worth of living expenses as the emergency funds. Having an emergency fund can relieve the stress in face of unanticipated situations, enabling you to focus on your craft and pursue your passions.

Being a professional is all about being an independent business person. Here, the product or the brand is an 'Individual.’ While it is crucial that you invest in yourself for sharpening your skill-set, it is equally important for you to manage your money well. With smart money management, you can generate alternative streams of revenues to pursue your interests without worrying about your financial security.