Financial freedom is like freedom of speech: You may choose not to exercise it, but you must still give yourself the choice

OTHER RELATED STORIES

Shelf Watch Stocks

Risk Pays

A working woman, by definition, is financially independent, right? Wrong. Drawing a salary and maintaining a bank balance does not amount to financial freedom. That is, at best, an enabling condition. And like freedom of speech, it's one of those musts. You may choose not to exercise it, but you must still give yourself the choice. So, what actually is it? Use this simple test: if you were to think of fulfilling your life's dreams all on your own, would money be a constraint?

If 'no', feel free to send us the story of how you managed to do it. If 'yes', well, read on. This article should help you get close to 'no'.

Remember, while jewellery can come in handy for some contingency, it can hardly get you through the test outlined above. Grandma's days are gone. In any case, you may have to look after your own finances at some stage of life or the other. Typically, the female outlives the male by seven-odd years. She often has a shorter earning-span as well, after accounting for time devoted to maternity and child-rearing. Family-related career interruptions can drag your earning trajectory down too, further reducing the total sum you'd earn over your worklife.

But, as they say, forewarned is forearmed. Smart planning can more than make up for all of that. If free is what you want your life to be, you have to start saving and investing money straightaway.

Financial Fitness

"The first step women should take towards finance is awareness," says Zankana Shah, Head, Money Care Financial Planner, "I see a lot of women doing very well professionally, but don't have the knowledge or the inclination to know finance." Just a couple of hours every year is good enough, she adds. Even so, putting money aside is just the beginning. "In anticipation of a mid-career break for family needs, every woman should set aside six months' income as a fund, which she can draw from in the break period if needed," says Veer Sardesai, Managing Director, Sardesai Finance, a certified financial planner. He also recommends disability insurance and medical cover. In the initial years of a career, you should pad up your Public Provident Fund (PPF) account, which you can draw on after the seventh year. It helps, meanwhile, to read up as much as you can on investment, taxation and retirement planning.

Make a habit of committing sums to paper. This gives you a snapshot of your financial shape. Compare your income with expenses on one sheet, and see how much you're saving every month. On another sheet, list your 'assets' (house, jewellery, investments, cash and so on) and 'liabilities' (loans, credit card debt and all that you owe), and see how much wealth you have. If your income exceeds your expenses, and your assets are more than liabilities, you're doing fine. If not, you can always work towards getting into good shape. The point is to be aware of your financial fitness.

Get Asset Savvy

The composition of your investment portfolio could make the big difference to your wealth level, and thus freedom to pursue the life you desire. "For a portfolio to perform well," says Rajiv Anand, Head (Investments), Standard Chartered Mutual Fund, "asset allocation is the key." What to invest in depends on your investment horizon (long if you're young) and your risk appetite. But by and large, a mix of bonds and shares (debt and equity, in investment parlance) would be recommended for all. Well-rated bonds are seen as secure, and they deliver fixed returns. This is good from the safety perspective, but fixed returns tend to be rather low, and get 'eaten away' by inflation. Shares, however, beat inflation because they offer a share of corporate profit-rising when business is good and falling when bad. "Given inflation and the returns on fixed-rate instruments," advises Shah, "women should invest in equities, starting with mutual funds."

Mutual funds, which pool investors' money to make collective investments, are a good way to access the returns of both bonds and shares without getting into details. Among equity funds, the plain vanilla kind would be an 'index fund', buying which amounts to buying the basket of stocks that compose some stockmarket index-such as the Sensex of the Bombay Stock Exchange. "Index funds are a good option since they keep pace with overall stockmarket movement," says Sardesai, "As a long-term investor, you need not be bothered about the daily ups and downs of the market with this fund." The management fee is also lower, as active decisions are not being taken.

For debt, liquid funds are good, offering better returns than bank deposits while also being tax-efficient. Of course, there's life beyond debt and equity. "Indian art has tremendous potential," says Anand, "it can generate mind-boggling returns over a longer holding period. But you need to know enough on the subject and do adequate research to find the right price."

No matter what assets you pick, don't fail to do a periodic review of your portfolio to realign assets with any change in circumstances. But the key variable in making choices is always how much risk you're prepared to take in getting what you want.

Safety Pinned

If you've already got your life nicely in order, after all these years of work, and if your search for financial freedom is mostly a just-in-case issue (the 'insurance' need), it's quite likely your emphasis will be on stability. Keeping what you've got going strong, that is. Your optimal strategy, in this case, is to play safe.

If you own property, then it might be the biggest item on your asset portfolio. Leaving real estate aside, an appropriately conservative portfolio would have 60 per cent of its value invested in high-safety debt. Apart from PPF and fixed deposits, your options include government bonds, postal savings and floating rate funds (which bear minimal inflation-rate risk). The rest can be split equally between jewellery and shares. Accessing returns on shares is best done through mutual funds, of which index and balanced funds would suit your needs best. Over time, you could shift funds from any of these assets to real estate in a location that is sure to see value appreciation.

Risk a la Mode

If you're aiming for larger assets than you currently have, consider freedom a conscious need, and are open to moderate levels of risk to achieve it, your main priority should be portfolio growth. You ought to have around 30 per cent of your total invested in debt. Apart from the regular high-safety bonds and deposits detailed earlier, you could try high-return corporate bonds as well. Shares, meanwhile, could make up 60 per cent-split equally between index funds, other equity schemes and self-chosen stocks (familiar well-researched blue chips only).

"I was overwhelmed to see the money grow," says Paramjeet Devadhia, 40, explaining her fondness of equity, "Now I regularly invest the profits from my clothes business in mutual funds as long-term investments." The remaining 10 per cent of the portfolio could go into gold and other precious ornamental objects (perhaps art as well).

If you have real estate, that would alter the overall ratio. And if you don't, you may well want to work towards buying a house.

Freedom Or Bust

If you've got your sights set really high, have a long way to go, give liberty a lead role in shaping your innermost thoughts, and dare to do what it takes to attain the unattainable, you already have the instincts of a cutting-edge investor. Moderate growth won't do; you need breakthroughs. Becoming investment savvy, however, could take quite some effort. Daunted? You shouldn't be.

A recommended portfolio would have just 20 per cent of your money invested in debt, as a cushion (so opt for safety here). Some 60 per cent would be in equity, your active area. You could opt for a portfolio management scheme-run professionally, or you could do it yourself, splitting it half between mutual funds (growth funds, midcap funds, sectoral funds or any other) and self-picked stocks.

Needless to say, selecting shares takes a lot of analysis and effort, so you would have to pay serious attention to this exercise. Go by corporate fundamentals to pick shares that could see appreciation (or give out fat dividends); and you may even want to use 'technical analysis' (see BT's September 12, 2004 issue) to get your 'buy' and 'sell' timing right. With sufficient background data and some practice, you could be as sharp an equity player as any. "Most of the stocks I have picked are when the market was in panic, and nobody recommended buying," says Priti Bhargav, 41, who has made much money playing the contrarian.

The rest of the portfolio-20 per cent-could be devoted to rare artefacts and art, an investment avenue that could prove a real winner if you have an earnest interest in things valued only by people of rare sensibilities. Art is rather risky, no doubt. But if you have a fine sense of what goes on in the cryptic crevices of artists' heads, and can estimate how many more people would come to be interested, you could try spotting upcoming talent. If freedom, and the trauma of negotiating its limits, is a state of mind you empathise with, you have half your art appreciation job done. To secure your own liberty, capitalise on it. Start now.