“Constitution is not mere a lawyer’s document, it is a vehicle of life
and its spirit is always the spirit of Age” – BR Ambedkar
A constitution primarily is a document
that details the rights, obligations, privileges, duties and responsibilities
of the people living within the corridors of, and leading that country. It details
the rule of governance. Without a constitution it will be difficult to live
like a civilised society. We would be living like in stone-age where “Might was
Right” and jungle raj prevailed all over.
Like a country, each individual
should also have his or his family’s own financial constitution detailing
various financial objectives and the process to achieve those financial
objectives, rules that will govern the way its finances will be managed etc. This
applies to all individuals without exception and is more popularly known as “Financial
Plan”.
Like a constitution your financial
plan should have a Preamble and different schedules.
Preamble - is a brief introduction to the main document. For
our purpose it should briefly explain that what financial objectives you would
like to achieve though this financial plan. For example, “The purpose of this
financial plan is to invest current and prospective funds so as to ensure that
the family have sufficient funds to maintain a well-deserved lifestyle, protect
financial interests of the family – present and future and ensure smooth
distribution of wealth among the family members.”
Schedules – Constitution of India have twelve schedules.
Ideally your financial constitution or the financial plan should contain
following ten schedules:
First Schedule – The first schedule should detail the territories
of the family. It will contain details of all the family members with respect
to their age, relation with head of the family, dependency on family funds etc.
Second Schedule – This will contain details of specific needs of
each individual member as well as the family – current and future. Specific individual
need will include needs like medical treatment, education etc. and family
needs would be like buying house or car or family vacation etc. Along with need
it should also have detail how much funds will be required to meet that
particular need.
Third Schedule – this will contain details of all the financial and
physical assets, current and prospective income & expenses and the
liabilities like loans. This will be required to prepare the net worth
statement and income & expenditure account of the family and design the
investment plan.
Fourth Schedule – This should contain detailed calculation of funds
that will be required to meet various needs as detailed in second schedule. It will
also contain data, logic and assumptions used for these calculations.
Fifth Schedule – This will address life insurance requirement for
head of the family and any other member of the family. Using human life value calculator
one would know, how much amount his or her family will need in the event of
untimely demise of the head of the family. Should your current investments
after some mark down, are more than the funds your family needs, it’s good
otherwise you need to buy life insurance cover on your life to the extent there
is shortfall.
Sixth Schedule – This will have details of all your general
insurance requirements like motor insurance cover for all the motor vehicles
that the family and its members own, health insurance for the family – a family
floater policy, fire and burglary insurance for your home & business and
other general insurance needs.
Seventh Schedule – This will contain your investment policy. It must
define your risk appetite and asset allocation. You may define range for the allocation
and list down the conditions for using or breaching the lower and the upper
limits of the range. The document will also define the interval & frequency
at which the investment allocations and the portfolio need to be reviewed and
rebalanced. It may further define the sub limits for individual investment
product.
Ideally one should list down all
of his financial objectives along the time line. It helps make good assessment of
how much and of what type of risk one should take.
Eighth Schedule – Basis your investment policy and depending on
your financial objectives and cash flow position, this schedule will have
detailed investment plan. It will derive information from third and fourth
schedule and devise an investment plan that will help you achieve the financial
objectives listed in the second schedule. Your investment portfolio must ensure
adequate diversification among and within different asset classes viz equity,
debt, real estate etc. Always bear in mind the taxation and entry/exit charges
of individual investment product.
Ninth Schedule – Make a list of all the assets you own, investments
you have made & loans you have outstanding. Also incorporate the details of
the contact person(s), who needs to be approached after you, to manage and get
transferred these assets & investments by your heir.
Tenth Schedule – This schedule will address the issue of wealth
distribution among the family members after you. Ensure that you have made nominations
to every investment/account wherever permitted. And even after nomination you
must create a will clearly marking which asset/investment will go to whom. In
the absence of nomination & will, it will be very difficult for your heir to
claim your wealth.
You have seen from the above how
important it is to write your own constitution. It not only brings discipline
in your investment but also helps smooth transfer of wealth to next generation.
You may write your own constitution or may take help of experience financial
planner. So when are you writing your Constitution?
Team InvestmentMitra wishes you “Happy Republic Day”!
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