Investments and goals: Why you need the guidance of a financial adviser
Investments and goals: Why you need the guidance of a financial adviser
There is a lot of narrative around how managing your own money is quite simple, but that’s not the case really. Financial planning is not only investment planning. It includes liability management, risk management, goal-based planning, estate planning, tax planning, etc. How many of us can confidently say that they have adequate life insurance and health cover? Most would be under-insured and worst; not insured at all.How do you know if you have selected the right investment management product? You won’t know till you actually face adversity; till then, the cheaper plan will look good. Does the family know how to settle any obligations or property claims after your death? While the number of insured in India is just 5%, only 0.5% in the country actually has a will.Most of India is under-invested because they have no idea of how much should they invest for their goals. In the rush to generate better returns, people make investing mistakes and can’t achieve simple possible goals.
The investing puzzle
How many of us understand the right asset allocation to have in accordance with our risk profiles, time to the goal, liquidity needs and return expectations?India has more than 1,500 mutual fund schemes, over 400 portfolio management services (PMS) providers, 200-plus alternative investment funds (AIFs), more than 500 non-convertible debentures (NCDs) and bonds, over 100 fixed deposit options and thousands of other investment products. How does one decide which ones to invest in and which ones to avoid?
The problem does not stop at deciding the right asset class or product category, but also zeroing in on specific funds, asset management companies and fund managers.For example, in the last three years, the worst-performing small cap fund gave 27.5% annualized return, but the best gave 47.7% annualized returns. The difference is of a staggering 20 percentage points. So, you can see anywhere between 27.5% and 47.7% returns, depending on your ability to pick the right fund.Forget about the 20-percentage-point difference, even if the difference is three percentage points, the outcome is hugely different. For example, ₹50,000 monthly SIP (systematic investment plan in mutual funds) for 25 years, at 12% annualized returns, will become ₹8.5 crore. The same ₹50,000 SIP for 25 years at 15% will become ₹13.7 crore, a difference of a whopping ₹5.2 crore.
You will now say, okay I will invest in Index! That still does not solve your problem, unless you can get the right asset allocation. There are hundreds of index and exchange traded funds (ETFs). Most don’t even know that ETFs are mutual funds, that’s unfortunately the level of financial literacy among Indian investors today.
Behavioural issues
Let’s say you know it all, but remember wealth management is less of investment management and more of behavioural management.Will you hold your investments for 25 years? I keep hearing stories around how had I bought ₹10,000 of this stock, it would be worth ₹100 crore now, but how many of us have really held on for so long?
Investing is not as simple as it looks.
Managing risks
Risk management is a crucial element of financial planning that most investors tend to ignore. Having adequate life insurance cover can ensure that your family’s needs and goals are taken care after your death. An adequate health cover can ensure that you don’t have to take a significant hit on your savings and investments in case of a medical emergency.
These risk-mitigating instruments are what can set the foundations of your entire financial journey. However, you need a financial adviser to tell you how much insurance cover you need to take care of your family’s current and future goals. Also, what health cover you need to ensure that your medical costs are covered even after accounting for medical inflation.So, you often need a friend, philosopher and a guide to help you through the journey. Here is where a Sebi-registered investment adviser and a competent financial planner can play an important role in your investment journey.Source- Livemint