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If
the term 'financial planning' makes you yawn, you've probably heard
it in the context of parking funds in a menu of investment options
and then waiting hands-folded for value appreciation. But what if
it were the other way round-with you setting your goals first, and
then drawing on the requisite expertise to fulfil them?
That is the big difference. ''Financial planning
for a retail investor is as important as a guide map to a traveller,''
says Rajiv Bajaj, Director, Bajaj Capital. ''It directs hard-earned
financial resources.'' Most critically, it permits genuine customisation.
For, your needs differ from your neighbour's. So does your risk
appetite.
| The Financial planning Process... |
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Cash flow and budgeting
Analysis of your income, expenses, assets and liabilities,
to see how to reach your financial goals.
»
Insurance planning
Selection of insurance products, both life and general insurance,
to guard against unforeseen disaster.
»
Goal funding
Identification of your goals (children's education, home purchase
et al), plus cash-need schedule.
»
Tax planning
Arranging your portfolio to maximise tax benefits, and making
a realistic assessment of future tax policies.
»
Retirement planning
Organising future cash inflows, in the form of returns on
assets (which needn't be liquidated), to maintain the same
standard of living.
»
Investments
Finally, making appropriate investments to meet all the objectives
outlined by the above process.
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And with all the complexity, it has become an
expert's job. ''With more and more financial products in the marketplace,''
adds Sanjay Sachdev, CEO, IDBI Principal Mutual Fund, ''the retail
investor is confused. Hence, we started need-based selling of the
lifecycle fund (modelled on the Bankers Trust).''
The market is more volatile than ever, and
even a lifespan perspective requires frequent decisions on portfolio
diversification and asset re-allocation. It's an uncertain world,
after all. And 'expectation' is defined as the sum gained in case
the bet comes good, multiplied by the probability of success, minus
the staked sum multiplied by the risk of failure. It's the ever-changing
probability assessments that befuddle most retail investors.
Sector-specific funds, for example, were a
rage in 1999-2000, with 'tech' in the lead. But when the entire
sector started sputtering in late 2000, tech-only investors were
choked. Today, such funds are recommended to risk-happy 22-year-olds,
not family-supporting 45-year-olds.
That's where a financial planner comes in:
deciphering what's appropriate for you. A word of caution, though:
you must ensure that your advisor's interests are not at odds with
yours. Beware getting wooed into financial products that reward
your advisor. It may even be a good idea to have somebody else (other
than your financial planner) execute the actual trades.
| Something Official
About It |
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Does
the thought of all financial advisors getting into a shadowy
huddle worry you? It shouldn't, really, if we're talking about
the little-known Association of Financial Planners (AFP).
A non-profit professional organisation formed in April 2001
with the avowed aim of promoting the cause of unbiased financial
advice to the Indian public, it is part of a global assembly
of financial planning associations-the 1990-established International
Certified Financial Planners Council.
The charter members of AFP include IDBI
Principal Mutual Fund, HDFC Mutual Fund, HSBC, ICICI Prudential,
Franklin Templeton Mutual Fund, and Alliance Mutual Fund,
amongst other prominent players in India. AFP currently offers
a 24-month financial planning course that qualifies a person
as a 'Certified Financial Planner'. The idea is to make this
a career option.
The institution also helps practicing
planners keep their skills sharpened. As a discipline, it
still needs to work at winning clients' trust. India is afflicted
by high levels of scepticism, and not without reason.
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