The Definitive Guide to Financial Planning
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The Definitive Guide to Financial Planning

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    The Definitive Guide to Financial Planning The Definitive Guide to Financial Planning Presentation Transcript

    • Preface Pref eface Contents Money. Simplified. is 5 years old, but our efforts to give Money investors a simple, unbiased, and profitable view on how to The need for financial planning--------------------------------- ------ 3 Reasons why you must take up financial planning on priority. plan for their future is a lot older than that. Simplified I started Quantum Financial Services in 1990. By then, Indian How to get started ----------------------------------------------------------- 5 The definitive guide to Setting objectives is the first step in the financial planning process. investors had already experienced a few boom-bust cycles Financial Planning including: the blow-up of the IPOs of the non-bank financial Copyright: institutions (NBFCs) in 1987; the government-owned It’s all about your risk appetite ------------------------------------------ 8 financial institutions had entered the mutual fund industry in Invest based on your risk profile, not the expected return. 1988 and had launched what were to be the first disastrous schemes (they guaranteed returns from investing in the stock markets), and the corporate debt market had seen its share of Importance of Asset Allocation ---------------------------------------- 11 scandals in the Non-Convertible Debenture segment. It's important to distribute your money across avenues. Quantum Information Services Pvt. Ltd. In 1990 there was no regulator, the July 1991 path-breaking Executing the investment plan ----------------------------------------- 15 budget was still 18 months away, and the tussle between the Successful execution of your investment plan is critical. Websites: bull and the bear syndicates (commonly referred to as the www.personalfn.com "Harshad Mehta scandal") was still to blow up in April 1992. Why it pays to have a financial planner ------------------------------- 18 www.equitymaster.com Over the past five years, the Indian financial services industry It is crucial to connect with a competent and honest financial planner. has seen an unprecedented boom. Many of the factors driving Contact Information: the recent surge in the Indian economy and the rise in incomes Quantum Information and purchasing power are real and rest on a fundamentally Services Pvt. Ltd., solid base. However, every boom leads to mis-selling, to 404, Damji Shamji, advice that may be based on the need of the advisor and not Vidyavihar (W), necessarily on the need of the investor. Mumbai - 86, India All boom-bust cycles are due to passion and tips, and these Email: can only be countered by dispassionate decision-making, info@personalfn.com which is based on education. My philosophy, and of those who work at Quantum, has always been to educate investors and then give our clients and readers advice based on what is Contact No.: good for them rather than our bottom-line. And we keep the Download previous issues of Money Simplified. Click here! 022 - 6799 1234 advice simple. Click here for a complete investment solution! Fax No.: Money Simplified. continues to grow in popularity thanks Subscribe to FundSelect Plus, our portfolio recommendation service! 022 - 2202 8550 to your support. May you all continue to create wealth from your jobs and your businesses and invest intelligently to Content: preserve and enhance your wealth. DISCLAIMER Abhijit Shirke 25th July, 2007 This booklet a) is for Private Circulation only and not for sale. b) is only for information purposes and Quantum Information Services Dharmesh Chauhan Private Limited (Personalfn) is not providing any professional/investment advice through it and Personalfn disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this booklet, including without limitation the implied warranties Himanshu Srivastava Ajit Dayal of merchantability and fitness for a particular purpose. Personalfn will not be responsible for any loss or liability incurred by the user Irfan Husain Rupani as a consequence of his taking any investment decisions based on the contents of this booklet. Use of this booklet is at the user’s own Founder - Quantum Information Services Private Limited risk. The user must make his own investment decisions based on his specific investment objective and financial position and using Vicky Mehta such independent advisors as he believes necessary. Information contained in this Report is believed to be reliable but Personalfn does not warrant its completeness or accuracy. Rahul Goel Copyright: Quantum Information Services Private Limited. 1 visit us at www.personalfn.com visit us at www.personalfn.com 2
    • Why Financial Planning Why Financial Planning The need for financial planning Setting objectives, investing in line with In conclusion, it can be stated that one's risk appetite and asset allocation achieving financial nirvana isn't as Over the last few years, terms like Financial planning can ensure that one are some of the fundamental principles difficult as it is often made out to be. To financial planning and personal finance is equipped to deal with the impact of of financial planning. In this guide, these get there, all one needs to do is, stick to have emerged as buzzwords of sorts. inflation, especially in phases like principles have been dealt with in detail. the basics of financial planning. Newspapers, magazines, television retirement when expenses continue but channels and just about every one under income streams dry up. the sun seem to be talking about the IN A NUTSHELL importance of financial planning. So The second factor is changing lifestyles. Financial planning can aid in charting a roadmap to meet expected what is financial planning; more With higher disposable incomes, it is and unforeseen needs in life. importantly, does it merit the attention common for individuals to upgrade their Inflation i.e. a rise in the general price level is one of the major that it is being given? standard of living. For example, objects factors that necessitates financial planning. like cars that were considered luxuries Financial planning aids individuals both upgrade and maintain their ` Financial planning is a process through not too long ago, have become lifestyles. which an individual can chart a roadmap necessities today. Financial planning has Also financial planning helps meet contingencies like medical to meet expected and unforeseen needs a role to play in helping individuals both emergencies and unplanned expenditures. in life. Simply put, the intention is to take upgrade and maintain their lifestyle as Discipline and religious adherence to the principles of financial necessary steps to ensure that the well. planning can help in achieving financial goals. individual is equipped to accomplish what he has set out to achieve and is Finally, there are contingencies like prepared to deal with contingencies as medical emergencies or unplanned well. expenditures that an individual might have to cope with. Sound financial And yes, the importance of financial planning can enable him to easily planning (especially in the present mitigate such situations, without scenario) cannot be overstated. Among straining his finances. others, two factors are responsible for the same i.e. inflation and changing Principles of financial planning lifestyles. At its core, financial planning is not a very difficult task. All it takes is discipline Inflation is a situation where too much and religious adherence to the principles money chases a limited number of of financial planning. goods. This leads to a fall in the value of money. It is also expressed as a rise in Discipline has a part to play at every the general price level. For example, a stage, from setting objectives to actually product that costs Rs 100 at present executing the plans that are meant to would cost Rs 105 a year from today, achieve those objectives. In fact, an assuming that prices rise at 5%. This is adhoc approach while dealing with one's the impact of rising prices over one year; finances is one of the major reasons for over a 30-Yr period, assuming that the financial distress that individuals inflation continues to rise at 5%, the find themselves in. same product will be available at Rs 432! 3 visit us at www.personalfn.com visit us at www.personalfn.com 4
    • Setting ITCetting Objectives S Setting Objectives How to get started How to get there 23,003 respectively. Finally, if the Having discussed, how to set investments yield a return of 17% pa, Cliché - Unless you know where you individual with a 5-Yr old child and are objectives, let's now take a look at how then you need to invest Rs 1,197 per are headed, you won't get there. yet to own a house property or provide you should go about achieving those month or Rs 15,445 pa. for your retirement. In this case, objectives. Becoming a crorepati (Rs 1 Fact - Unless you know where you are providing for the child's education, crore is Rs 10 million) is often viewed Clearly, becoming a crorepati isn't as headed, you won't get there. accumulating a corpus for buying a as the pinnacle of affluence. Let's difficult as it is made out to be. All you house property and retirement planning assume that you are a 30-Yr old need is a well-defined investment Anyway you look at it, knowing where are some of the pertinent objectives on individual who wishes to retire at the objective and a plan to get there. Of you want to be is the all-important first hand. Now what you need to do is - age of 60 years; this gives you an course, your investment advisor/ step, and the rest follows. To draw a prioritise. Start off with the objective that investment horizon of 30 years. financial planner will have a vital role to parallel in the world of financial planning, is most pressing and then provide for Furthermore, you have decided that you play in helping you make investments you first need to decide what you wish the others. need a retirement kitty of a crore to take and ensuring that the investments to achieve. Put simply, you need to begin care of your post-retirement expenses. deliver the results expected of them. In the financial planning process by setting Secondly, you are likely to find yourself Here's how you can achieve your fact, he can even help you in quantifying objectives. The objectives could range in a situation, wherein despite the investment objective. your investment objectives. For example, from buying a car, setting aside money presence of clearly-laid out objectives, if the investment objective is to provide for children's education to providing for you lack the means to provide for all of We shall assume 3 scenarios, wherein for your child's education 15 years from your retirement. Typically, there will be them. In other words, you may not have investments made to achieve the stated now, he can help you with the multiple objectives, which can range sufficient funds to meet all the objective (becoming a crorepati), yield computations to determine how much from short-term to long-term ones. objectives. A typical reaction (which can returns of 12% pa, 15% pa and 17% pa. money you will need to provide for the prove costly in the long run) is to objective. The trouble is that most individuals tend postpone investing and "wait for an As can be seen in the table, if your to ignore the "What" part i.e. what do opportune time". Our advice - never investments yield a return of 12% pa, In conclusion, getting your objectives you want to achieve? Instead, they start delay investing. Instead, the key lies in then you need to invest Rs 3,277 per right and having the necessary off with the "How" part i.e. how will you starting off as early as possible and month or Rs 41,437 pa (over 30 years). If investment plans in place will ensure that achieve the same? This in turn, leads to giving yourself adequate time; begin you take on higher risk and the you are on a sound footing to achieve an adhoc and directionless investment with the investible funds that you have investments yield a return of 15% pa, your goals - and that's a fact, not just a pattern that may not yield the desired and make up for the shortfall at a later then the required monthly and annual cliché. results. The right approach is to decide date when hopefully you will have more investments drop to Rs 1,796 and Rs on the "What" i.e. objective and then funds at your disposal. Become a crorepati follow it up with the "How" i.e. a Objective (Rs) 10,000,000 dedicated investment plan. Finally, setting objectives is a very personalised activity, i.e. it has to be right Tenure (years) 30 There are some pointers that must be for you. The activity should not be Case 1 Case 2 Case 3 borne in mind, when you are setting influenced by external factors like your Rate of return (%) 12 15 17 objectives: friends, relatives or peers. This is vital Annual investment required (Rs) 41,437 23,002 15,445 since what you set out to achieve is what Monthly investment required (Rs) 3,277 1,796 1,197 Firstly, at any point in time, you are likely you will eventually land up with. Ensure to face multiple objectives. For example, that you put in adequate thought before assume that you are a 35-Yr old arriving at the objectives. 5 visit us at www.personalfn.com visit us at www.personalfn.com 6
    • Setting Objectives Interview Risk Appetite IN A NUTSHELL It's all about your risk appetite Setting objectives is the first step in the financial planning process. Each objective must be backed by a dedicated investment plan. For a lot of investors, investing can be a all three parties - the service provider The investment advisor has an important role to play in quantifying pretty simple activity. It involves that launches the investment the objectives. keeping oneself updated through opportunity, media that cannot seem to When faced with multiple objectives, prioritise and start off with numerous magazines, newspapers and hype enough about it and the investor the most pressing one. news channels about the latest, most who is led to believe that it's the best Don't delay the investment process on account of shortage of funds. touted investment opportunities. The thing to happen to him in a long time. Start early and make up for any deficit at a later stage. next step is obvious - invest in these And that small detail that is overlooked Setting objectives is a personalised activity; ensure that the objectives opportunities to the hilt in the hope of is the risk of investing in the 'hot are right for you. making some easy money. And if opportunity'. everything goes right, investors would have made a neat packet all because But how does the investor go about they were quick to seize upon these assessing his risk appetite? If an great investment opportunities. investor can afford to lose significant amount of money on his principal before We are sure the 'investment process' we it can generate a return, then his risk have outlined will strike a chord with appetite is high. Put bluntly, risk is the many an investor. We are not saying this amount of money that the investor can is how all investors are investing, but it afford to lose, in the interim, in his quest is a disturbingly familiar sight. As more for a certain return on his investment. If and more newspapers, news channels, an investor can afford to lose only a magazines, personal finance initiatives moderate amount of money, then his risk get launched, media hype around these appetite is on the lower side. so-called investment opportunities builds up even more rapidly, which in Our grouse with the media hype over a turn feeds investor interest. This particular investment opportunity and escalates to a point where investors investor enthusiasm for the same, is that believe that since everyone is investing rarely, if ever, is the risk of investing in in the 'hot' investment opportunity, the opportunity highlighted. It's always prudence demands that they adopt the about how rewarding the opportunity same course of action, because not can prove to be and never about how doing so will entail a great opportunity much the investor can stand to lose (i.e. loss. risk) if the opportunity does not quite blossom like it's meant to. In other We could write an entire note on how words, the investor gets half-baked, this whole rigmarole is a prefect recipe incomplete information. As a matter of for disaster and that investors should fact, in the absence of information take the media hype with a bagful of salt. related to risk, information isn't just Over here we wish to highlight incomplete, it's downright misleading. something critical that is overlooked by 7 visit us at www.personalfn.com visit us at www.personalfn.com 8
    • Risk Appetite Risk Appetite In our view, any discussion on an equities) for instance. The idea is to real estate and gold to cite a few. could be one of those investors who investment avenue is incomplete unless make your risk appetite and not the cannot tolerate more than a 10% drop in it underlines the risk along with the investment opportunity, as the reference 4) Another strange aspect of risk is his investments (refer Point 1), in which (probable) return on it. To that end, point. Most investment disasters are that it decreases with time. Certain case a 70% equity investment is a clear investors must pay as much attention fashioned when investors use the market-linked investments like equities invitation to disaster. On the same lines to the risk of investing in an asset as the investment as a reference point and then appear very risky prima facie. While this a 60-Yr old investor may have return on it. While it is difficult to try to mould their risk appetite risk is clear and present, it's important considerable appetite for equities (at quantify your appetite for risk, there are accordingly. to recognise that this risk is amplified Personalfn we have investors in this ways through which you can get a fairly over the short-term (less than 3 years). category) and may want to invest more good idea about how much risk you can 3) The risk associated with an investment Over the long-term, the risk of investing than the 40% that the formula permits take on in your quest for a return. We has a lot to do with the investment in equities reduces. As a prominent him. have highlighted some of the key points timing. One reason why a lot of investors fund manager observed equities are the to keep in mind while evaluating your burn their fingers (and portfolios) with riskiest asset over the short-term and 6) The above point does not mean that own risk appetite: the hot investment opportunities is not the safest asset over the long-term. there is absolutely no link between risk because the opportunity was a dud or That is why where equities are appetite and age. While it may not be 1) Risk can be loosely defined as the because the media reported it all wrong; concerned it pays to have a really long- true in every case, investor appetite for money you can afford to lose in the it's mainly because by the time they term investment horizon. risk does decline with an increase in age. interim period until you achieve the invested in the opportunity, it had This is because a) as investors age, they return you have in mind. If you can afford already run its course and had peaked. 5) Contrary to popular expert opinion, really can't tolerate sharp dips in their to see significant erosion in your In other words, it was a bubble waiting risk appetite for equities is not '100 investments; it upsets them and makes investments (say upto 50% of to burst. And since all good things must minus the investor's age'. So if an them nervous. And b) at an advanced investments) in order to achieve the come to an end, the investment investor is 30 years old, it does not age, investors are usually most target return then that makes you a high opportunity soon embarks on its (sharp) necessarily imply that he must have 70% concerned about planning for retirement. risk investor. If you are the type, who decline hurting investors who came in of assets in equities (according to the Since equities can be volatile over the can tolerate a dip in your investments towards the end, the most. These 'formula' it does). Apart from the fact short-term it is advisable to shift a only upto a certain level (say upto 10%), investors either lose a lot of money or that this is skewed asset allocation, the majority of assets from equity to debt, as then you are low risk investor. While make so little of it that it's not worth the investor may just not have the risk the investor approaches retirement age. the fall in the investment value (10% and effort (and hype). appetite for a 70% equity allocation. He 50%) is only indicative, we are sure you get the drift. So the next time you hear/read of the next big opportunity in the media, ask IN A NUTSHELL 2) Your choice of investments must flow yourself a simple question - is it possible Always evaluate the risk in an investment opportunity before the from your risk. If you can take a 50% that since this hot opportunity is return. Invest in line with your risk appetite, not the expected drop in your investments then high risk yesterday's news it has already run up return. investments like technology stocks/ more than it should and if I enter in it If you can afford to lose a lot of money in your quest for a higher funds or aggressively managed funds today I may either lose money or make return then you have a high risk appetite. like mid cap funds could suit your very little money? A lot of investors, who Market linked investments like equities get less risky with the passage appetite. If you cannot tolerate too much if they had asked themselves this of time. volatility, then you must opt for lower question, would not have been hurt in Risk is a very personal thing there is no formula to calculate it. risk investments like balanced funds the hot investment opportunities of yore Often at an advanced age, risk appetite declines. (which invest about 65% of assets in like technology/media stocks, mid caps, 9 visit us at www.personalfn.com visit us at www.personalfn.com 10
    • Asset Allocation Interview Asset Allocation importance of asset allocation. In fact, negative for stocks in the short-term, Importance of Asset Allocation you may even feel that asset allocation could actually lead to a rise in gold prices is a hindrance as having all money in (as investors move from currency Too often financial planning is made out estate, gold and cash. The answer to the equities is a smarter way to ride the stock denominated assets to 'real' assets). to be simpler than it is. Of course, at a second question - 'how much of each market rally. It usually takes an adversity level financial planning is relatively asset should you own' is a little tricky, (in this case, a sharp fall in stock markets) So what can asset allocation offer uncomplicated. But that does not mean because it will vary from investor to to fully appreciate that having more than investors? Plenty, if executed correctly. that it's only about identifying investor. An honest and experienced one asset in your portfolio can be a big The advantage of having different investment objectives and outlining an financial planner will certainly play an bonus assets in the portfolio is that a decline investment plan that will help you get important role in helping you determine in any one asset can be partially offset there. It does involve both these how much each asset must contribute Assets have varying cycles; put simply, with the presence of other assets, which elements of course, but there is an to your investment plan. these are the ups and downs in the are not witnessing the same trend (in equally important element that is often assets' fortunes. Not all assets move in this case a decline). This is what ignored - asset allocation. A place for every asset the same direction at the same time, in diversifying across assets can do for To be sure, every asset has a role to play fact, that is a rare phenomenon. This you. If it weren't for asset allocation, you Now asset allocation may sound like a in your portfolio. And equally important means that if stock markets are would be a sitting duck every time there complicated concept, but isn't. As the is the allocation of each asset. Put simply, witnessing a prolonged rally, then it is was a decline in the prices of stocks or word suggests, it means distributing an investor who can take risk will unlikely (except in very rare cases) that real estate or whichever asset dominates your money across various investment appreciate that he must include equities other assets like gold and property will the portfolio and if you aren't adequately avenues or assets so that the poor in his portfolio. But that is just half the also witness a sharp upturn at the same 'covered' with investments in any other performance of any one avenue/asset story; the other important half is about time. On the same lines, if stock markets asset. Now you know why a Swiss army does not jeopardise the entire how much equities the investor must are in the midst of a prolonged bear knife (as opposed to a simple knife) can investment plan. As logical as that own in order to achieve his investment phase, (again in very rare cases) other be such a handy tool outdoors, because sounds, it is one of the rarest traits in a objectives effectively. assets are unlikely to be in the same it can do so many things for you. financial plan, but more on that later. situation. Bottom line is since you do Once he resolves this query he must not know which asset is going to be at As we have mentioned, asset allocation To better appreciate how the right asset move on to the next asset, say fixed which stage at a particular point of time, is done best by the investor with his allocation can add value to an investment income (or debt). The same question its best to invest in more than one asset financial planner sitting across the table plan, let's first understand what it's all surfaces - how much fixed income? Then so as to improve your chances of after giving due weightage to the about. When you look at the investment how much real estate and so on. Piece achieving your long-term goals with investor's risk profile and investment landscape there are a lot of assets (which all these assets (along with their minimal turbulence. loosely refers to investment avenues) allocations) together and you have what Asset Allocation for Kumar and Vivek and as an investor you really don't know is commonly known as an asset The reason why a) which asset must form part of your allocation plan. Kumar Vivek having more than one investment plan and b) if it must, then asset can work in your Fixed Income 10% 20% how much of it should you own. Why asset allocation favour over the long- Equities 30% 20% When you diversify across assets you term is because The answers to these questions are give yourself a lot of leeway to counter Property 50% 50% different assets react simple, yet not so simple. To the first market uncertainties. Till the time an differently to the same Gold 5% 5% query - ‘which asset must you own’ asset market like the stock markets for set of factors. For Cash 5% 5% most investors would qualify to own all instance, are progressing well, you instance, inflation the key assets viz. equities, debt, real probably cannot appreciate the which can be a Allocation is a percentage of Kumar and Vivek’s portfolios 11 visit us at www.personalfn.com visit us at www.personalfn.com 12
    • Asset Allocation Asset Allocation objectives. To give an idea, let us recommend an asset allocation that combination of several factors; one is happen. When the rally (in the asset) consider two individuals Kumar and accurately reflects your risk appetite and the rally in the asset itself, other factors fizzles out, the retail investor is usually Vivek. Kumar is a 30-Yr male who is is geared to achieve your investment are greedy intermediaries and media the biggest loser since he is the last to married, no children. Vivek on the other objectives. hype. The intermediary (from get out. This could have been averted hand is 55 years old, married with commissions) and media (from very easily if he were prudently children who are on their own. Also, asset allocation is not a one-time advertisements) make their money from diversified across assets with no single According to the Personalfn's Asset process; rather it must be pursued on all the hype, but the retail investor is asset occupying a larger-than-necessary Allocation Review, their asset allocation an ongoing basis. This is because with sitting on a disaster that is waiting to share of his investment plan. should be as follows: the exception of cash, all assets (like equities, debt) are market-linked. With Since Kumar is young and has appetite the passage of time, the allocations to IN A NUTSHELL for risk, he should invest in stocks/ these assets will shift from the original Asset allocation is all about diversifying your money across investment equity funds (30% of assets) as equities allocations. For instance, it is possible avenues in a particular proportion. can add considerable value to the that after a rally in stock markets your With a well-balanced asset allocation you can tide over a decline portfolio over the long-term. His equity allocation has increased in a particular asset market. investment in fixed deposits/bonds considerably from what it was before the Asset allocation is not one-time, it must be reviewed regularly especially (10%) is on the lower side, mainly to rally. However, your risk appetite is the after a rally in a particular asset. provide stability to the portfolio. His same; to reflect this reality, you must re- Asset allocation at the end is a reflection of the investor's risk property (50%), although accounting for adjust the higher equity allocation by appetite. the highest proportion of the portfolio, selling the excess equity and increasing is largely for residential purpose and not allocations to other assets. The investment objective is that over a period of time, . you must be as close to your original asset allocation as possible. The balance is in gold (5%) for diversification (since gold is a hedge Any financial plan that aims at realising against inflation) and in a savings bank pre-determined investment objectives account (5%) to meet emergencies. without diversifying across asset classes is doomed to fail. We aren't Compared to Kumar, Vivek's asset talking theories over here, this is reality. allocation plan reflects his advanced age Every time there is a rally in a particular and lower risk appetite. To that end, he market, investors flock to it ignoring the has 20% (of assets) in equities and 20% basics of financial planning. A rally in in fixed income. His allocation to technology stocks often means property (50%), gold (5%) and savings investing only in technology companies. account (5%) is the same as that of An upturn in real estate means ignoring Kumar. other assets for the lure of real estate (or real estate stocks). A surge in gold The asset allocations must be treated as prices, means buying gold to the indicative. An honest and competent exclusion of other assets. financial planner is best equipped to Of course, this kind of investing is a 13 visit us at www.personalfn.com visit us at www.personalfn.com 14
    • Interview Execution Execution Executing the investment plan Step 2: Reviewing Step 3: Making changes to the plan Undoubtedly investing in instruments Although you may not be prepared for Once you have an ideal asset allocation outlined by your investment plan is a this, sometimes you may need to make and competence must be beyond plan in place with help from your financial critical first step. But to ensure that you some changes (even critical ones) to reproach. planner, half the battle is over. The other stay the course, a regular review of the your investment plan. This could be for half involves setting the asset allocation investment plan is necessary. Again, a variety of reasons. For instance, due Below we have outlined the most critical plan in motion. Once again, your financial this will be done under the guidance of to a financial crunch you may not be steps involved in the execution process. planner can be expected to play a critical your financial planner. able to contribute as much as you had role in this process. Step 1: Investing projected for your new 2-bedroom There could be several reasons why your house in an upmarket locality. However, After preparing the investment plan, Financial planning is not a theoretical investment plan may have to be revised since owning property is crucial you your financial planner will help you subject. Its results are rooted in practical at regularly (like every year for instance). can't obviously abandon this plan execute it. This involves, for instance, applications like planning for your child's This is mainly because since a lot of your altogether. What you can do is invest opting for the child plan for your child's education, retirement planning, buying investments are market-linked, you will whatever you can towards the house education/marriage, or the diversified a house to cite a few investment have to adjust for market changes. For and instead of the 2-bedroom house in equity funds for your retirement plan or objectives. Therefore a financial plan instance if equity markets run up sharply, an upmarket locality settle either for a the balanced fund for your new house. once outlined must be executed carefully; your equity allocation will be a lot higher smaller house or a downmarket locality You must invest in all the investment the successful execution of the plan is than what you had initially projected. and insurance options that your the key to the house you are planning to Obviously your risk appetite has not The idea is that at all times treat your financial planner has outlined for you buy or the engineering degree you wish changed with the higher equity objectives as sacred, don't compromise while drawing up the investment plan. for your child. allocation. To account for this on them. Lower your sights if necessary, Of course, you must question your misallocation, you should lower your but don't abandon contributing for them financial planner on all his As a process, executing the financial plan equity allocations by selling a portion altogether. Also do not borrow from one recommendations. Remember, it's your involves a series of steps. A lot of these of your equity investments; the same portfolio to provide for the other. For money that is being invested. steps are repetitive; to borrow a cliché, should be reinvested in other avenues instance, if there is a shortfall looming your financial planner and you have to based on the investment plan. in your 'new house portfolio', do not Your financial planner will help you with be on the ball all the time to ensure that the formalities, but it pays to be borrow from your retirement portfolio. the investment plan is on track. Actually Stock markets are more volatile compared Instead, as suggested earlier make personally involved upto a level. For you, more than your financial planner, to say debt markets. It is therefore likely adjustments in the new house portfolio instance, to the extent possible fill the must be concerned about the investment that every time you review your asset by settling for a smaller house. application forms yourself so you learn plan, because your investment allocation, you may feel the need to about the relevant details. While filling objectives are on the line not his. You correct the change that may have Step 4: Finishing touches the insurance application form, for will notice that we mention the financial occurred. However, this may not be As you approach the milestone (child's instance, you have to give a true and planner all the time while discussing the wise. In our view, you should review engineering admission or marriage), you fair picture of your medical history as execution of the financial plan. His active your portfolio say once every three must gradually redeem risky investments an inaccurate representation could lead involvement is critical because a) he is months; but you should reallocate your like equities since they can be very to rejection of claim at a later date. an expert in executing investment plans assets say once a year, or maybe even volatile over the short-term. That money Likewise, appointing a nominee is and b) his inputs are necessary every longer (every time you reallocate assets, should be reinvested in low-risk common in mutual funds and life time the investment plan is reviewed. That you incur a cost). Of course, if the asset investments like short-term debt. The insurance, so ensure you have those is why you must be careful while allocation changes dramatically in a idea is that when you are so close to details correctly filled in. selecting a financial planner; his honesty shorter period, then you may need to realising your objectives you do not act sooner. want to take undue risks. 15 visit us at www.personalfn.com visit us at www.personalfn.com 16
    • Execution Interview Planner Financial IN A NUTSHELL Why it pays to have a financial planner Your financial planner plays an important role in the successful execution of your investment plan, so his honesty and competence On many occasions in this guide, we Bid adieu to the agent must be beyond reproach. have mentioned that financial planning Convention suggests that the local You must review your plan at regular intervals. isn't necessarily as difficult as it is made 'agent' is the man for the job. And why If you are not able to contribute to your plan as expected, contribute out to be. All you have to do is, stick to not? He has been servicing your family's whatever you can instead of abandoning the plan altogether. the basics and there's a more than a fair investment and insurance needs for As you approach your milestone de-risk your plan by reducing the chance that you will do well for yourself. ages. He helps you with all the paper equity component. You might be tempted to believe that if work and delivers all documents to your the aforementioned is true, then there residence. In some cases, he goes a step should ideally be no need to engage the further and even offers a commission services of a financial planner. In other i.e. rewards you for the investment by words, financial planning is just another, parting with a portion of his earnings. "do it yourself" task. However, that's not To put it mildly, that investment style is quite the case. passé. The financial planner has a vital role to An agent whose forte is his ability to play in aiding you achieve your desired ensure that your tax-saving investments financial goals. And rest assured, the (i.e. NSC and PPF), are duly made is presence of a competent, experienced about as useful as the proverbial cat in and honest financial planner can ensure a toy mouse factory. The modern that the financial process becomes an investment scenario is way too complex easy task. for a conventional agent to handle. So why does one need a financial To be fair to agents, they have done their planner? To begin with, to help you sift bit to acclimatise to the new conditions. through the vast (and ever-expanding) They have tried hard to masquerade as list of investment avenues on offer and financial planners. For example, now select the one that is right for you. A agents are armed with laptops which are financial plan would typically involve used to display fancy PowerPoint adding avenues like equities, mutual presentations. Also, coloured print outs funds, fixed income instruments and showing illustrations along with graphs insurance, among others, to the portfolio. and pie-charts are the norm. But scratch There are multiple offerings within each the surface (i.e. ask a few pointed and avenue vying for your attention (your non-standard questions) and the gloss wallet, actually). Tracking each of these peels off, exposing the same old agent. offerings and selecting the right ones is a full-time job. That's where the financial What makes a financial planner planner enters the picture. Having discussed the failings of an agent, now let's take a look at what a financial planner can offer. A financial 17 visit us at www.personalfn.com visit us at www.personalfn.com 18
    • Financial Planner Financial Planner planner is someone who is equipped to is common to hear of investors being IN A NUTSHELL 'advice' you on a range of investment misguided into investing in avenues that The conventional agent whose offering is restricted to delivering avenues. He will have an informed view were completely unsuitable for them, but forms and collecting cheques is inept to deal with the modern on the economy, interest rates and right for their financial planner (because investment scenario. markets. He is someone who can of the high commissions). Also regular The financial planner has an important role to play in aiding investors accurately read the events in the churning of the portfolio i.e. exiting a achieve their financial goals. economy and educate you about their mutual fund scheme and getting invested He must prepare the investment plans and ensure that the impact on various investment avenues. in another with a view to make higher investments stay on course to achieve the predetermined objectives. commission earnings are common The financial planner's forte should be his ability to offer unbiased Secondly, he can devise an investment occurrences. and personalised advice. plan that is right for 'you'. The concept Always stay actively involved in the investment process. of 'one size fits all' doesn't work while Mission impossible investing. Investment avenues that are Finding a financial planner, who is apt for say, your friend can be grossly competent, experienced and honest, unsuited for you. The financial planner's might seem like an uphill task, a mission skill sets will enable him to accurately impossible of sorts. Well, it's not. All you quantify your investment objectives; need is patience to stay put for the right also, he will construct a plan that will financial planner and willingness to help you achieve your investment shoulder responsibility in the financial objectives without compromising your planning process. Before engaging the risk profile. services of any financial planner, ask for references and have his credentials The financial planner will monitor the verified. Ask relevant questions about investments and ensure that you stay how he intends to help you achieve your on course to achieve your targets. He goals, question his recommendations, will incorporate necessary changes to ask for alternatives and back-up plans, if the investment plan in line with changes his plan fails to deliver as expected. in the investment scenario and other factors like your risk appetite. This is More importantly, stay actively involved where his experience and skills will come in the investment process. There is a fine into play. line which divides having confidence in the financial planner's abilities and Finally, an honest financial planner can having blind faith in him. Never cross bring a lot of value to the table. Now over to the latter. why should honesty feature so prominently? Simply because, here is the In conclusion, the financial planner's role individual you trust your finances with. in helping you achieve your financial Hence, it is pertinent that, at all times, he goals is undisputed. And you would do is looking out for your interests and not well to take due care before engaging the his own. In fact, his gains should be the services of one. result of your targets being achieved. It 19 visit us at www.personalfn.com visit us at www.personalfn.com 20
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