The below piece will help you understand how most of us save intelligently but invest roughly.
Every one of us is a doctor in our view, just as we all are financial planners. We rely on self-medication when we are physically down or act as a medical assistant when our family members are hit by minor medical emergencies. Similarly, we also assume that we are a good financial planner, who can plan finances very well. We believe that investments that are risky, give higher returns. We judge an investment product depending upon its past performance, current status and reviews given by friends or relatives.
Also, it is commonly seen that most people follow the investment advice meant originally for their friends or colleagues. They usually do not think that this advice could be applicable to their friends, but may not be suitable for them. Such an attitude may land them in a huge financial mess.
We all keep aside a portion of our monthly income as savings, however, we go with the wrong notion that higher risk means more profit, and invest in risk-averse products. This shows we are a good saver, but a bad investor. Our obsession with guaranteed returns is so high that we end-up earning insufficient returns. Due to inflation, we lose the balance between risk and return.
How do we generally save?
Our financial planning, usually involves keeping aside excess money in an account. This amount saved could be used for the various needs creeping in. The saving account usually consists of FDs, PPF, long-term bonds, stocks, insurance policies and Post Office Monthly Income Scheme, etc. Additionally, we also prefer gold, plots and other property for investment.
Who manages that amount we save?
Our investments or savings are generally managed by three people, besides ourselves. The first being investment advisor, who advises on the schemes you should invest in. The second comes the insurance agent, who is usually a family friend or a relative. The third being loan processing officer, who helps in getting a loan.
The three set of managers
Insurance Agent:
The first person is the insurance agent, who suggests child plans for our kid’s future, which means their education and marriage; plans for retirement ; money back policies for our different goals , and at times even ULIPS. The agent suggests these products keeping in mind the tax benefits these schemes provide to the investors. However, at the end, we pay higher in the form of premium and other fees, and get illiquid and low-return products. Since, ULIPS come with heavy front loaded charges and lower returns.
The Investment Advisor:
The investment advisor suggests the investor to put in their money in various products like bonds, stocks, MFs and FDs. Here, if two different clients approach an advisor for different goals like buying a luxurious home and saving for kid’s future, the advisor is likely to suggest similar products to both of them.
The investment advisor is simply concerned by his fee and interest, rather than the end use of the client. Investment advisors generally provide suggestions without considering client’s assets, liabilities, goals, responsibilities and cash flow. Now you can imagine the situation and end result!
Loan processing agent:
The officer processes our income documents to give us an idea on our maximum loan eligibility. In most cases, we end up taking full loan amount as per the approval, without doing an analysis on the benefits we’ll earn after paying for the property.
Comprehensive Financial Planner :
The above three parties do not interact with each other, this results in meaningless and inefficient financial planning, which may cause losses to the investor. Therefore, it is wise to be financially alert and make sound investment decisions, rather than completely relying on different investment advisors and agents.
If you are planning to outsource your personal finance management to someone, then choose a comprehensive financial planner who will do in depth and do more than what these 3 parties are delivering you so far. Comprehensive financial planner understands your big picture. He knows all your goals, investments, risk appetite, expected future income and expenses.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
