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Protecting your wealth

nce you have made an assessment of your current financial situation and decided on your financial goals, it is time to develop and deploy strategies to achieve them.

Risk Mitigation A business / financial proposition becomes risky, when one cannot predict the outcome of a decision. However, by careful analysis and preparation the risk can be mitigated. Protection Asset protection or wealth protection essentially means safeguarding its financial value. Let us see a corporate example to understand both sides of a coin : Example An IT company, primarily in software development has been affected by the strengthening of the rupee. The earnings of the company has dipped. To protect itself from future fluctuations in exchange rate, it quickly decides to diversify to closely related areas of business that it is already into. Besides doing software development initiative, they have quickly spread their boundaries with a view to reducing their risk and protecting their incomes. Decrease outflow This is a more passive conservative way by which wealth could be protected. Suppose you have Rs. 10,000 as your budget for the month. You can blow it up in a party by spending it once or twice or you decide to spend not more than Rs. 300 a day and more importantly on the essentials first and luxurious later. Increase inflows This is a more aggressive approach to wealth protection. A good example would be a B.Com student, simultaneously studying for CA. During the student days, they build on their experience and earn minimally to support their pocket money. This way, they armor themselves with a thorough preparation for higher education and have learnt to manage personal finances. In the context of financial planning, we are concerned only with pure risks.

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Types of Pure Risks

Pure risks that can cause financial insecurity can be categorized as below:

Let us look at these in more detail. Personal Risks Personal risks are those risks that directly affect an individual. They cause financial insecurity because they usually result in reduction or stoppage of income, increase in expenses and depletion of financial resources. Some of the major personal risks are: Risk of premature death Risk of poor health Risk of temporary or permanent disability Risk of insufficient income during retirement Property Risks Persons owning property face the risk of having that property damaged or destroyed or lost due to different causes. They cause financial insecurity because they affect the income streams being produced from usage of the property. They also increase expenses because the damaged/destroyed/lost assets need to be repaired/replaced. Property risks can cause loss in two major ways: Direct Loss Indirect or Consequential Loss Direct Loss A direct loss results from physical damage, destruction or theft of property. For example, if your house is damaged due to earthquake, the amount of loss is known as direct loss. Indirect or Consequential Loss An indirect loss results from the consequences of a direct loss. For example, if your house is destroyed in an earthquake, you may have to live in a rented house till your house is repaired. The rent that you pay is the indirect loss. Liability Risks Liability risks arise from the possibility of being held legally liable for the loss to another person. If a person commits a mistake or because of negligence, causes bodily harm or injury to another person, a court of law can order that individual to pay damages to the injured party. Liability risks can be categorized into:

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Statutory Liability eg. Third Party Liability in M.V. Act, I.D. Act, W.C.Act, P.I. Under Common Law eg. Libel and Slander Under Contract eg. Contractual Obligations These liabilities may arise in personal or professional capacity. Personal Liability Personal liability arises when a person acts negligently or carelessly during the course of his personal life and causes harm to another. For example, if you hit a pedestrian with your car due to jumping traffic lights, you may be asked to bear the treatment expenses and pay damages to the victim. Professional Liability Professional liability arises when a person harms another while performing as a professional. For example, a doctor who causes harm due to a wrong diagnosis can be held professionally liable to pay damages to the patient. Liability risks cause financial insecurity because they result in depletion of existing financial resources. Let us consider, Keshav who is running an industrial unit at Vapi, near Surat. His company manufactures heavy machinery to handle equipments that are used in construction activities. He has employed a full time work force of 10 workers and part time contractual workers, another 10 in number. Contractual workers balance out the cost as well as the requirement needs during peak season. His work force risks the possibility of permanent or temporary disability while at work. What category of risk does this fall under? Solution : This is a professional liability. Some of the equipment is old and doesnt function properly. During peak season, to make up for the capacity, Keshav has to hire additional machinery to cover for the productivity loss due to his old equipment. What kind of loss is this? Solution : This is an Indirect loss. Chapter Review

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