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For any person, investments should be planned in line with one’s risk profile, investment horizon, cash flow requirements, and any other client-specific constraints. For entrepreneurs, the major change, especially in the early stage, is, that he/she is taking a considerable risk in the business they are running, which may or may not be sufficient to sustain their ongoing expenses. Hence, they may need to withdraw some amount regularly from their investment portfolio to sustain the lifestyle requirements. For example, they may need to withdraw 1 lakh per month from their investment portfolio. Typically, we prefer to keep around 2-3-year cashflow requirements in debt-oriented strategies so that market volatility does not impact the cashflow pay-outs and hence in the above case, we will keep around 24-36 lakh in debt/arbitrage funds to manage the expenses. Also, it’s always advisable to keep some emergency funds, could be any Health-related for oneself or family members. (Hopefully, an entrepreneur beginning their journey should have health insurance and a term life insurance for any eventuality to take care of their family from the loss of future income.)
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Further, the business may also need some cashflows from time to time, and to that extent, they prefer to maintain sufficient liquidity in the portfolio. For example, if the business may need a INR 1 crore loan at any time, which one wants to manage from personal investments, they typically keep this INR 1 crore in liquid debt instruments, so money is available whenever required. Given that any new business may take two-three years to reach operational breakeven it needs to be funded with one’s savings or the loans from Friends and family. At the same time, one must maintain their lifestyle for day to day from investments. Because of these, typically the portfolio has higher debt allocation than what would have been otherwise. Further, at this stage, we prefer not to have significant exposure to close-ended funds as liquidity in the portfolio usually has the highest importance and hence exposure to PE/VCs is avoided as that risk is already taken through its venture.
Once business stabilizes and the cash flow starts coming, given the profitability, the salary starts accumulating or the dividends that are received. We recommend keeping personal investments separate from the company investments as Company is a different entity from the Individual and we often come across people mixing it and plowing all the funds back to the company as their own company may be giving high ROE.
We often face this dilemma amongst entrepreneurs, as to why should they have a separate investment portfolio when their own company gives a better return, and here one should be cognizant of the fact that with company may have some liabilities at any given point and hence important to keep Individual investment profile separate or maybe into safe debt instruments, but it’s important to demarcate the two.
We also witnessed that usually, the risk appetite becomes very high as the entrepreneurs have seen success and there is the tendency to invest in risky assets – unlisted companies, E/VC funds again ignoring the asset allocation and safety of assets. There we recommend following a framework of building an investment policy statement of capping exposure limits to control risks in the portfolio.