How to build your portfolio when your income in uneven
Mr. Arun Thukral, MD & CEO, Axis Securities
Jul 31, 2018 | Source: ET
How to build your portfolio when your income in uneven
The importance of financial planning for achieving big life goals has been emphasized time and again. Every advice on financial planning highlights the need for regular savings and investments. Those who receive a fixed salary at the beginning of every month find it easier to apply this instruction as their predictable income stream allows them to set aside a certain sum of money for savings and investments on month on month basis. However, with a majority of youngsters pursuing passions such as sports, music and arts as a profession, the uncertainty of a steady paycheck makes regular investments challenging. For such special cases, it is crucial to customize the financial planning process to match their specific circumstances.
Pursuing a passion as a profession
All those pursuing their passion for sports, art, music, theatre and such special skills as a profession work on assignment basis making periodic and lump sum income. The fees they charge depends on their skill-set and their standing in their respective field. Few well-established professionals can make as much money in a single or in few years as an average salaried employee earns in a lifetime. While these professionals have a highly rewarding career at the peak of their performance, it has been observed that many of them struggle in later parts of their life for the want of money. This is primarily because of the limited lifespan of their career. As they fade in performance in the later years of their life, the professional assignments start disappearing. Unless they capitalize on their sunny days, the financial struggle in their advanced years become inevitable.
To give you a perspective, a typical sportspersons career lasts around 10-12 years, with only 5-7 of those spent at a peak level vis-à-vis a normal career of anywhere between 35-40 years for a regular employee. Being endowed with good health, which happens to be the bedrock of a good sports career, they have a longer lifespan. The expenses, in contrast, are regular, recurring and quite huge. A chunk of their expenses comprises of training and keeping fit. At the same time, they strive to maintain a certain lifestyle to project an image in their circle. When they experience success, they tend to enjoy the glory and fame, paying little attention to the risks/ uncertainty associated with their profession. This shortsightedness refrains them from making proper provisions for their rainy days as we have seen in several ‘rags to riches to rags’ stories.
If you belong to the category of professionals with an unpredictable income source, financial planning becomes all the more crucial for you to achieve a fine balance between sustaining a certain lifestyle and achieving financial security. By taking mindful steps in the following areas, you can make the dream of building financial prosperity a reality even with uneven income:
Savings: From the early stages to more successful phases of your career, maximizing savings is key to building future financial security. Saving first then spending is the crucial first step in your endeavor to build long-term security. 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 savings aside from your income for smarter money management.
Emergency Fund: In addition to savings, set a certain sum of money from every paycheck that you receive towards an emergency fund. Since behind the coveted life there lies a lot of uncertainty, the emergency fund will help you to take care of any setbacks to your earning capacity. 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.
Build a suitable Investment Portfolio: Building a substantial corpus of funds in a limited time makes it imperative for professionals to divert considerable funds to growth investment options such as equity and mutual funds. Few smart investment strategies would be:
Invest in balanced mutual funds - This option is ideal to regularize income for the future. Since balanced schemes invest in a mix of equity and debt, they are less volatile than pure equity schemes that invest the entire corpus in stocks. The debt part of the portfolio enables balance funds to contain volatility to a great extent. At the same time, the equity portion of the fund acts as a wealth building vehicle over the long-term. Investors also get the benefit of diversification, that is, exposure to two asset classes within one fund. The investor does not have to worry about rebalancing, which is handled by the fund manager. There is also the benefit of an expert changing the weight of equities and debt in the portfolio based on his view of their prospects. The disciplined rebalancing of assets in these funds has positive fallout on performance, generating better risk-adjusted returns in the long run.
Create assisted Portfolios through AxisDirect Wise Advisor: While customers understand their financial goals, their risk profile or even believe in ideas or trends, but when it comes to picking the right investment choices including stocks and Mutual funds, it is not everyone’s cup of tea. AxisDirect "Wise Advisor" is an automated tool which allows customers to invest based on their financial goals (like child’s education or retirement) or their risk profile (like conservative or aggressive) or in themes (like electric vehicles or rising rural demand) in a seamless manner at the click of a button. It combines AxisDirect’s research expertise with the power of technology to suggest tailor made investments in Equities as well as Mutual Funds. It’s takes into account various aspects from the customer’s point of view to suggest for optimal investments e.g. risk appetite, personal details, goals, time horizon etc. The ‘Wise Advisor’ solution enables the customer reach their financial goals with the power of technology in a hassle free and automated way via 3 key offerings Model Portfolio, Equity Smallcases and MF Advisor
Opt for Systematic Withdrawal Plan (SWP) - A relatively new concept in India is beneficial for those who have uneven income streams. SWP is just the opposite of SIP. In a SIP, investors can invest a pre-defined amount on a regular basis, while in an 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 for 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.
Invest in alternative businesses – There is a boom in the Indian start-up space. Investing in alternative businesses which aligns with your personal interests after due-diligence can help you to channelize and multiply your income. Also, investing in the start-up ecosystem, particularly in sectors such as education and healthcare, helps to create jobs and trigger change, thus adding a philanthropic touch.
Diversify - Distributing money across various asset classes helps to check unexpected risks. Explore NCDs (non-convertible debentures) with higher coupons, AIF (alternative investment funds) and PMS (portfolio management services) schemes depending on your inflows.
Making your passion your profession takes a lot of courage as it goes against the traditional ideas of a fixed, secured job. With more and more youngsters making this bold choice, it is important to modify the traditional approach towards financial planning, giving them the flexibility to chart their own financial journey. With smart money management, all professionals can generate alternative streams of revenues to pursue their interests without worrying about their financial security.