Wealth For The Masters Of Health - II : Prescriptions For Portfolios And Goals
Continuing the discussion regarding financial guidelines for doctors which began last time with a discussion on the principles of creating financial plans for doctors (linked here - Wealth For The Masters Of Health - I : Financial Health Checklist), the focus now shifts to designing goal based investment portfolios for doctors. When designing investment portfolios for doctors, there are two major on ground realities which they face that must be kept in mind. Firstly, the fact that doctors begin earning a stable income slightly later compared to most other individuals means that they would have relatively lesser time available in which to achieve their goals.
Also, in the case of self employed doctors, the fact that they would be financially responsible for both their household and their practice would mean that they can only afford to take a low to moderate degree of risk in their investment portfolios. This means that all their major financial goals must be achieved in relatively lesser time and with a moderate risk strategy. And achieving a balance between these two aspects is the major challenge when designing investment portfolios for doctors. So today I'm going to focus on the strategies and approaches that work around these constraints when designing investment portfolios for doctors.
As in the case of any other individual doctors must first bifurcate their goals into essential goals (such as retirement, children’s education or marriage and so on) and aspirational goals (such as buying a new home, a new car, creating a legacy corpus and so on).
Essential goals are predominantly long term in nature and are meant to be achieved over a span of 10-15 years if not more. Aspirational goals are generally more short term in nature and are typically achieved over a relatively shorter span of time, say 5-7 years.
Essential goals must naturally be given priority over aspirational goals. This is because essential goals are tied to basic financial needs for stability and security. Aspirational goals on the other hand only focus on improving the standard of living of the individual. They can therefore be put off in favour of focusing more on essential goals. And all these factors must be taken into account when designing portfolios for each goal.
Given the real world constraints that doctors face it is clear that doctors cannot afford to own portfolios that are heavily skewed towards a particular investment product or asset class. Therefore a portfolio consisting of multiple asset classes aligned to a clear asset allocation strategy would be the best way to go. The asset allocation and mix of products under each asset class would heavily depend on the nature of employment and income of the doctor for whom the portfolio is being designed. A representative comparison of the income profiles of a doctor who is an employee as against that of one who is an entrepreneur/self employed is given in the graphic that follows.
Given this stark contrast in the nature of the income profiles of both groups, it is clear that doctors who are employed enjoy a lot more stability in their income as compared to self employed doctors. This means that they can afford to take a relatively higher degree of risk in their investment portfolios. Therefore they can afford to have a high proportion of market linked equity instruments in portfolios for their long term financial goals. The portfolio allocation to equity for essential long term goals must ideally be limited to between 60% and 70% of the portfolio for each essential long term goal. The remaining portion can be allocated to debt and fixed income instruments.
Portfolios for shorter term goals would need to switch the allocations between both asset classes (60-70% in debt, and the rest in equity). Ideal product choices for employed doctors within equity would include large cap index funds and stocks of well established companies in the sectors of medicine and healthcare, since they would be able to understand the businesses these companies carry on quite easily. A few examples of listed healthcare companies in India are given in the graphic that follows.
Ideal product choices for short term goals within the debt and fixed income space include liquid mutual funds, ultra short term bond funds, and liquid cash.
Ideal fixed income options for long term goals include Public Provident Fund (PPF), National Pension System (NPS), corporate bond funds, gilt funds and so on.
These products are better options than traditional bank deposits both from the standpoint of returns and taxability. They provide the benefit of tax deferral, tax exemption or both and hence increase returns in the hands of investors.
In the case of doctors who employ themselves, the approach to investing and portfolio construction needs to be significantly different. The fact that they run their own practice means that they already take on enough risk and must therefore take on a significantly lower degree of risk in their investment portfolios. The asset mix for their essential long term financial goals must always ensure an almost equal balance between equity and debt (effectively close to 50% each). But this constraint is balanced out by the fact that self employed doctors enjoy significant and sustained growth in income once their practice survives the initial few years. Therefore they can afford to significantly increase the amounts they invest at regular intervals.
The majority of a self employed doctor's equity exposure should come by way of reinvesting in their own practice. This is because equity essentially represents business ownership. And for a self employed doctor, the practice they set up and build is effectively a business that they own. If the need for exposure to market linked equity is felt, such exposure in my opinion must strictly be limited to large cap index mutual funds.
As far as the debt portion of their portfolios is concerned, self employed doctors must look for options that ensure both liquidity and tax efficiency. Liquid cash, liquid mutual funds and ultra short term bond funds therefore represent ideal options to meet these needs. Also, shorter term aspirational goals must be ignored until the doctor’s practice has survived the initial years and significant progress has been made towards the achievement of any essential goals that the doctor may have. Asset allocation strategies and product choices for short term goals would largely remain similar to those for long term goals.
Rebalancing portfolios at regular intervals (say once every 18 to 24 months) is a must for both employed and self employed doctors. In case of portfolios for long term goals, it is essential to reduce the equity allocation in the portfolio at regular intervals (at least once every 5 years). This further helps manage portfolio risk and reduces the impact of a sudden drop in the value of the portfolio close to the time the goal falls due. Doctors who find it hard to construct and rebalance portfolios themselves may enlist the help of a professional financial planner. Keeping all of these aspects in mind when constructing investment portfolios would help doctors invest their money effectively and maintain equal focus on both health and wealth.