Rebuilding Wealth After a Financial Crisis [A Case Study]

Meet Rahul, who is putting his efforts into rebuilding wealth. He is a successful entrepreneur who had amassed a decent fortune worth several crores of INR over the years. It was the result of his hard work, dedication, and perseverance. However, a sudden turn of events led him to lose 99% of his wealth. As of today, he is left with just his final one crore INR.

Despite the setback, Rahul refuses to give up and is determined to rebuild his wealth from scratch. With his resilience and determination, Rahul is an inspiration for anyone who has faced adversity and seeks to regain their financial footing.

In this article, we will explore the concept of rebuilding wealth and provide insights on how one can get started on the path to financial recovery.

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State of Mind

Rahul’s state of mind after losing 99% of his wealth is a mix of emotions – sadness, fear, and restlessness. He is grappling with the reality of losing almost everything he had worked for. The thought of starting from scratch can be daunting.

However, amidst all the chaos, Rahul is determined to rebuild his wealth and is focusing on the opportunities that lie ahead. He understands that this is not going to be an easy task, and it’ll require a lot of hard work, and patience henceforth.

Rahul’s thought process is centered on rebuilding his wealth. He is looking at this situation as a chance to start anew and create something more stable than before.

This time Rahul wants to play around with his area of expertise, which is investment know-how. His focus will be to build streams of passive income that will eventually make him financially independent. He doesn’t want to land in this situation again.

Presently, his priority is to use this remaining wealth to generate a regular income stream. It will give his family some kind of stability.

Priority: Generating A Regular Income Stream

For Rahul, the priority of rebuilding his wealth is to create a regular income stream for his family. He understands that having a steady source of income is crucial for their financial stability and security.

He cannot afford to go aggressive at this stage of his life. After experiencing a significant setback his priority has shifted from growth to stability.

Rahul is exploring different investment options that can generate a reliable income, such as bonds, fixed deposits, and dividend-paying stocks & mutual funds. He is also considering real estate investments that can generate rental income.

Rahul is aware that creating a significantly large regular income stream will take time. He is willing to be patient and make informed investment decisions that align with his long-term financial goals.

For him, the key is to build a diversified portfolio that balances risk and reward while providing a stable source of income for his family’s future.

Dilemma: Capital Crunch

Rahul is facing a dilemma as he has only one crore INR left to invest, and he cannot afford to make multiple investments.

He understands that he needs to focus on the best option that will provide a combination of fixed-income generation, high yield, and decent income growth.

Rahul is aware that choosing the right investment option is critical, as it will determine the future of his financial well-being. He is weighing different investment options, analyzing their risk and return profiles, and evaluating how they align with his financial goals.

The Investment

In such a scenario, the default and intuitive investment alternative that comes to mind is a rental property. But in this case, Rahul’s careful choice was a Balanced Mutual Fund (Dividend Plan). It meets his criteria for fixed income generation, high yield, and decent income growth. His specific pick was HDFC and ABSL’s Balance Advantage Fund (Dividend Plan).

The equity portion of the fund provides growth potential. The fixed-income securities provide stability and steady income.

Rahul is attracted to this investment option because it provides a diversified portfolio that balances risk and reward. Moreover, the mutual fund is managed by experienced professionals who have a track record of generating consistent returns over the long term.

Rahul is confident that this investment option aligns with his priority of rebuilding a reliable source of income for his family.

Regular Income

Generally speaking, the dividend payouts that Rahul is expecting from his investment of one crore INR is about 4% per annum (0.33% every month). This way, he can expect a monthly payout of around Rs. 33,000.

A dividend payout ratio of 4% per annum (0.33% per month) means that the mutual fund will distribute Rs.4 per share (Rs.0.33 per share per month) as a dividend payout for every Rs.100 invested.

Therefore, for a one crore INR investment, Rahul can expect a dividend payout of Rs.4 lakh annually, which translates to a monthly payout of around Rs.33,000.

Balanced Mutual Funds – Two Options

Rahul could find two establish balanced advantage funds with dividend plans, the first was from HDFC, and the second from Aditya Birla Sun Life (ABSL).

Rahul’s studying the dividend distribution patterns of both funds for the past 2.5 years. He observed that both schemes have paid consistent dividends. He also analyzed the dividend yield of both schemes. HDFC was yielding a higher monthly dividend of 0.75% and ABSL was at 0.45%

Rebuilding wealth - HDFC vs ABSL Balanced Advantage Fund

At these rates, Rahul can expect a monthly dividend payout of Rs.75,000 per month out of the HDFC fund and Rs.45,000 per month out of the ABSL fund.

For the sake of diversification, Rahul thought to invest 65% of his capital in the HDFC Fund and the balance 35% in the ABSL fund. But he was going to add one more investment here. Keep reading.

Rebuilding wealth - HDFC vs ABSL Balance Fund (6535)

Rental Property vs Balance Advantage Fund (Dividend Plan)

Rental property and balanced advantage funds are two different investment options with different risk and return profiles.

  • Rental property can generate quick cash flow. But it requires a significant upfront investment. But in Rahul’s case, as the investment amount is one crore INR, this limitation is not valid. Furthermore, rental properties come with the responsibility of managing the property.
  • Balanced advantage funds invest in a mix of equity and debt instruments. They dynamically adjust the allocation between the two based on market conditions. Hence, they offer better risk-adjusted returns and flexibility to move money into bonds when markets get expensive.

Generally, people assume rental properties to be more reliable monthly income generators. Hence, Rahul also faced this hesitation. Let’s check how he did his analysis and drew his conclusion.

Monthly Income Yield Maximization

Physical rental property investment was Rahul’s third preference. There were two main drawbacks of investing in a physical rental property. First, compared to the balance advantage funds, its monthly yield was low. Second, there are “additional expenses” to manage a physical property like maintenance and property tax. This further reduces the yield of a physical property.

Rahul also considered REITs as another investment alternative to generate monthly income. A REIT looked much better investment option than a physical property. Check this table for more clarity.

DescriptionHDFC Balanced Advantage Fund (Dividend Plan)Rental PropertyEmbassy REITs
Monthly Income YieldRs. 65,000Rs. 27,500Rs. 50,000
Annual Rental Yield7.8% p.a.3.3% p.a.6% p.a.
Monthly Rental Yield0.75% p.m.0.275% p.m.0.5% p.m.
Investment HorizonLong-termLong-termLong-term
RiskMarket riskMarket risk, property riskMarket risk
LiquidityHighLowHigh
Upfront InvestmentRs. 1,00,00,000Rs. 1,00,00,000Rs. 1,00,00,000
Additional ExpensesNoneProperty taxes, maintenance costs, insurance.None

Conclusion

Rahul’s priority is to bring some income stability to his life by rebuilding wealth. The way he has lost 99% wealth, his mindset is extremely defensive. But he cannot compromise a lot on the investment yield. Hence, for him, a physical real estate property is not looking attractive. After considering all costs of managing a physical property, his rental yield is falling below 3.3%.

A Balance Advantage Fund (Dividend Plan) can fetch him about Rs.64,500 per month in income upon an investment of one crore INR. This is amounting to an annual yield of about 7.8% per annum.

REITs are also looking attractive. Their payout is also reliable and yields a decent 6% per annum.

The final conclusion of Rahul was to spread his one crore INR into three parts. He wanted to include REITs (real estate) in the portfolio to make it even better diversified than balanced mutual fund schemes.

He decided a portfolio break-up between mutual fund and REITs. He will invest 60% in HDFC Balance Advantage Fund (D), 10% in ABSL Balance Advantage Fund (D), and the balance 30% in Embassy Office REITs. This distribution will eventually fetch him an average monthly income of about Rs.64,500 per month.

Rebuilding wealth - HDFC vs ABSL Balance Fund, REITs (601030)

Have a happy investing.

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MANI

Manish Choudhary (Mani), a mechanical engineer turned finance blogger and investor, founded GetMoneyRich.com to empower individuals on their journeys to financial independence. With over 16+ years of experience as a financial blogger, value investor, and developer of stock analysis algorithm, Manish leverages his knowledge and real-world experience (including building a stock analysis algorithm) to create insightful content and tools to help readers navigate the complexities of the financial world...read more about Mani

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