If you are not taking help from a professional, it is important that you are doubly careful.
Many people prefer bypassing financial advisors and undertaking the financial planning themselves. This is partly due to the explosive growth of airtime and column space devoted to personal finance and partly due to the poor experience that individuals or their acquaintances have had with agents masquerading as advisors.
Some may denounce this trend saying that it is similar to indulging in self-medication after reading a few articles on medicine. However, it is not a bad trend and may actually gather more momentum in future, buoyed by technology and increased information dissemination.
But remember, that you must embark on this endeavour only if you believe that you are truly competent and not just because you are frustrated with your current advisor or want to avoid paying their fees. Remember, that a poorly conceived or executed plan can cause you considerable financial harm in the long-term. Yet, should one believe himself to be as good as the professionals, then it is vital to go beyond mere skimming of the surface. Here are a few macro and micro points to help you out with the process:
Goals dictate your investments: Planning is more about process and less about products. Therefore, first jot down your goals, sort them time-wise and rank them according to priority. You should then match the appropriate investment to the appropriate goal so that you reduce the scope for disappointment.
For instance, if you intend to pay your child’s school fees in June 2012, you could end up facing a shortfall if you choose to invest in equity mutual funds and the stock market continues to move lower over the next one year. Instruments like bank fixed deposits or short-term debt funds are more suitable for goals crystallising within one year, as they are less volatile as compared to equity funds. Similarly equity funds may be more suitable to meet a goal which is ten years away as time helps to smoothen out the market volatility and potentially generate returns superior to that of fixed income products. Remember, no investment is intrinsically good or bad but it surely could be unsuitable for you if not aligned properly with your goals.
Its not just about investing: Investments are just one building block in the entire financial planning structure. In one to create a holistic plan you cannot ignore other equally pressing requirements such as cash flow management, insurance, estate planning etc.
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Take help if required: Despite our confidence, we should be prepared to take the help of professionals such as lawyers for certain aspects of our plan.
Review it periodically: Financial planning is a dynamic process. Hence a well drafted and executed plan is necessary but not a definite formula for success. Periodic review and housekeeping to weed out underperformers (and products which have outlived their usefulness) is equally important. Also, it is vital to keep yourself abreast of various changes in the financial landscape.
Do not get enamoured by headline interest rate figures : While investing in debt instruments, take tax and inflation into account and then compare the various options on a post tax and inflation-adjusted basis. Also, nowadays a few banks are offering relatively higher interest rates on savings accounts. Read the small print carefully before opting for them as they may contain certain restrictive clauses which your present bank may not be insisting on.
Purchase “adequate” insurance: While purchasing life insurance do not rely merely on thumb rules (like insurance equal to ten times your income). Take into account the value of your existing marketable assets too. Otherwise you may end up overinsuring yourself. This is nearly as bad as underinsurance. Also, unlike benefit policies, it is not essential to purchase several reimbursement policies (health, home contents) from various insurers to cover the same risk. As the “contribution clause” ensures that you don’t benefit through claims.
Choosing mutual funds: Do so after a careful evaluation of the fund manager’s investment process, adherence to the declared mandate and risk-adjusted performance over a market cycle. Also, compare schemes with similar attributes. Don’t get swayed by the schemes’ ratings or by its recent performance.
These are only a few points, but if you are already feeling daunted by the task ahead it may be a good idea to enlist the help of experts.
The writer is vice president, Parag Parikh Financial Advisory Services