Nowadays, I have noticed that a section of the populace is keen on bypassing advisors and undertaking the Financial Planning process themselves. This is partly due to the explosive growth of airtime and column space devoted to personal finance, and partly due to the poor experience that they or their acquaintances have had with agents masquerading as advisors.
While some denounce this trend saying that it is similar to indulging in self-medication after reading a few articles on medicine, I believe that per se this trend is not bad and may actually gather more momentum in the future, buoyed by technology and increased information dissemination.
However, if believe that you are as good as the professional advisors, it is vital that you go beyond merely skimming the surface. This is because the devil lies in the details and, therefore, awareness of certain nuances is vital.
Hence for all those seeking to undertake this effort, here are a few macro and micro points which are you may not be aware of. Even if you are, it is worth recounting them, because personal finance is all about reinforcing rather than reinventing :
Why do you want to do it yourself? Think twice before you embark on this endeavour. Do it only if you believe you are competent and not just because you are frustrated with your current advisor or want to avoid paying their fees. Remember, that a poorly conceived or executed plan can cause you considerable financial harm in the long term.
Goals dictate your investments: Planning is more about process and less about products. Therefore, first jot down your goals, sort them time-wise and rank them according to priority. You should then match the appropriate investment to the appropriate goal so that you reduce the scope for disappointment.
For instance, if you intend to pay your child's school fees in June 2017, you could end up facing a shortfall if you choose to invest in equity mutual funds and stockmarket moves lower over the next one year. Instruments like bank fixed deposits or short-term debt funds are more suitable for goals crystallising within one year, as they are less volatile as compared to equity funds. Similarly equity funds may be more suitable to meet a goal which is five years away as time helps to smoothen out their volatility and potentially generate returns superior to that of fixed income products. Remember, no investment is intrinsically good or bad but it surely could be unsuitable to you if not aligned properly with your goals.
Its not just about investing : Investments are just one building block in the entire financial planning structure. In one to create a holistic plan you cannot ignore other equally pressing requirements such as cash flow management, insurance, estate planning etc.
Take help if required : Despite our confidence, we should be prepared to take the help of professionals such as lawyers for certain aspects of our Plan.
Review it periodically : Financial Planning is a dynamic process. Hence a well drafted and executed plan is a necessary but not sufficient condition for success. Periodic review and housekeeping to weed out underperformers (and products which have outlived their usefulness) is equally important. Also, it is vital to keep yourself abreast of various changes in the financial landscape.
A few other useful micro-pointers:
1. Do not get enamoured by headline interest rate figures : While investing in debt instruments, take tax and inflation into account and then compare the various options on a post tax and inflation-adjusted basis.
Also, nowadays a few banks are offering relatively higher interest rates on savings accounts. Read the small print carefully before opting for them as they may contain certain restrictive clauses which your present bank may not be insisting on.
2. Purchase “adequate” insurance : While purchasing life insurance do not rely merely on thumb rules (like insurance equal to ten times your income) but also take into account the value of your existing marketable assets too. Otherwise you may end up overinsuring yourself. This is nearly as bad as underinsurance.
Also, unlike benefit policies, it is not essential to purchase several reimbursement policies (health, home contents) from various insurers to cover the same risk as the “Contribution Clause” will ensure that you do not benefit excessively whenever you make a claim.
3. Choose mutual funds based on your evaluation of the fund manager's investment process, adherence to the declared mandate and risk-adjusted performance over a market cycle. While comparing schemes, take care to compare schemes with similar attributes. Do not get swayed by the number of stars that a scheme is awarded, nor merely by its recent performance.
These are only a few points, but if you are already feeling daunted by the task ahead it may be preferable to hire a reputable Certified Financial Planner and outsource it to him or her.