Can you recollect the day in your life, when you handled cash for the first time? It can be at age 10, when you got pocket money from your father! Now think about till what age, you will be handling money? Till you live an active life.
Yes, except for the first 10 years, all of us handle money for almost the entire life. But are we getting any training on how to handle money? No. Personal finance is a neglected subject in our country. We learn the money management from our parents. But a lot has been changed here from the past generation.
Where we invest?
Financial illiteracy is a major concern in India. We prefer bank deposit and postal schemes. These products offer low returns and will not even beat inflation. We invest in real estate which is an illiquid asset. The other option is Gold, where we have a natural attraction. The amount of Gold held by Indian house hold is estimated at 25000 tonnes worth around 50 Lakhs Crores. The amount invested by Indians in Bank deposit is estimated at 85Lakhs Crores. The amount invested in Mutual Fund is 12 Lakhs Crores and out of this only 3.6 Lakh Crores in Equity Mutual Funds. In the long term equities have given better returns than any other asset class. Are we investing in good products?
Financial Products are complicated
Most of the financial products are confusing to the investors and can mislead them. Many brokers are giving tips and investors are losing their money. Margin trading, Futures & options etc are dangerous.
In mutual funds, there are thousands of funds to choose from! Fund houses are launching new funds to attract more investors with the Rs. 10 NAV trick. The investors feel the fund with low NAV is better compared to a fund with an NAV of 400. It is wrong. Agents sell these because they earn more commission on NFOs. Monthly Income Scheme (MIP) of mutual fund is another misleading concept because there is no guarantee of monthly income.
Life insurance is sold as investment which is offering returns in the range of 4 -5%. Such Policies are of no use in case of death of the policy holder. What a widow can do with an insurance amount of 5 lakhs in case of death of her husband?
Investors lost their money in the ULIP boom of 2003-2010. Later IRDAI came out with strict rules to control this. But enough damage was done by selling ULIPs to people who don’t know about equity market.
People are not interested in Term Policies, where the insurance money is payable only in case of death of the policy holder during the policy term. In fact this is the best form of insurance, where you can insure your life for a big amount with a small premium. By paying around 12,000 per year, you can insure your life for 1 Crore. Your family need such policy.
We were having health policies which denied renewal after age 60. Many policies used to load the premium in case of any claim under the policy. Health insurance products are complicated and it is very difficult to choose the right policy.
Financial products are distributor friendly
Financial products offer attractive commission to the distributors. If you are paying 1.2 lakhs as annual premium for 25 years in a policy, your agent is getting around 1.86 lakhs as commission. The mutual fund agents are getting trail commission on the accumulated amount every year. If you are investing 10,000 per month in an SIP for 25 years, the agent will be getting a trail commission of around 7.28 lakhs assuming a return of 12%.
In Life insurance, you can buy online term policies at a lesser cost. In mutual funds, there is direct plan option if you can buy directly from the fund house. But you should get correct guidance to do so.
What is the role of a financial planner?
When you are sick, will you go to a chemist and buy medicines? No. You will consult a reliable doctor and then buy medicines. The role of a financial planner is like your family doctor. Financial planner will help in identifying your financial goals in life, prioritize them and plan to accumulate money for those goals by investing in the most appropriate products. He will charge a fee for this service. He will recommend the best suited products for you and guide you in buying them. Since he is not selling any products, you can expect unbiased recommendations from him. Go for a fee only financial planner, registered with SEBI as Investment Advisor with CFP qualification.
Challenges in financial planning
We used to get free advice for financial products. We have the neighbourhood insurance agent, postal agent etc as adviser cum distributors. We never pay them any fee and are happy with them. But how much we are losing from our investment? As explained above, they are getting huge commission from our investments and we are getting poor returns on our investment.
When you are engaging a financial planner, you should pay fee to the planner. The fee in the first year can vary from 10,000 – 25, 000. The renewal fee can be in the range of 3000- 10,000. By paying this fee, you are engaging a specialist, who will protect your interest. It makes sense to approach a planner, because in the long run, you will stand to gain.
Financial Planning to the salary class
Salaried people require financial planning as top priority because most of them are not having any assured pension. Retired life will be miserable, if we don’t plan for our long retired life. A Financial Planner on your side will protect your interest like your family doctor. So, stop going to the chemist and go through doctor.