Find out how and why you save intelligently but invest poorly.
Illustration: Uttam Ghosh/Rediff.com
Most of us assume we are good financial planners, who can plan finances 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.
Mostly people follow investment advice meant originally for their friends or colleagues. They usually think that advice applicable to their friends is suitable for them too. Such an attitude lands people in a huge financial mess.
You keep aside portion of your monthly income as savings; however, you go with the wrong notion that higher risk means more profit, and invest in risk-averse products. This shows you are good savers, but bad investors.
Your obsession with guaranteed returns is so high that you end-up earning insufficient returns. Due to inflation, you lose the balance between risk and return.
How do you generally save?
Your financial planning, usually involves keeping aside excess money in a bank account. This amount saved is used for various needs from time to time. The saving account usually consists of FDs, PPF, long-term bonds, stocks, insurance policies and Post Office Monthly Income Scheme, etc. Additionally, you also prefer gold, plots and other property for investment.
Who manages that amount you save?
Your investments or savings are generally managed by three people, besides you. The first being investment advisor, who recommends 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 you in getting a loan.
The three set of managers
The first person is the insurance agent, who suggests child plans for your kids’ future, which means their education and marriage; plans for retirement; money back policies for and at times even ULIPS.
The agent suggests these products keeping in mind the tax benefits these schemes offer the investors. However, at the end, you pay more in the form of premium and other fees, and get illiquid and low-return products.
ULIPS come with heavy front loaded charges and lower returns.
The investment advisor
The investment advisor suggests you put your 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 kids' future, the advisor is likely to suggest similar products to both of them.
The investment advisor is simply concerned about his fee and interest, rather than the client's benefit. Investment advisors generally provide suggestions without considering clients' assets, liabilities, goals, responsibilities and cash flows. Now you can imagine the situation and the end result!
Loan processing agent
The officer processes your income documents to give you an idea on maximum loan eligibility. In most cases, you end up taking full loan amount as per the approval, without doing an analysis on the benefits you will earn after paying for the property.
Comprehensive financial planner
The above three parties do not interact with each other, and this results in meaningless and inefficient financial planning, causing 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 research about your financial needs and goals and do more than what these 3 parties deliver to you.
Comprehensive financial planners understand the big picture. They know all your goals, investments, risk appetite, expected future income and expenses.
Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading financial planning and wealth management company