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financial planner

A lot of people wonder “Why do I need a financial planner?” or “Why do I need a planner when all financial calculators are available online?”. Some people also think that “I cannot afford a financial planner as I do not have enough wealth!”. Many people who are not aware of the benefits of having a financial planner think this way. These thoughts and ideas are some of the myths that we shall address in this blog today.

With the abundance of information available online, the role of a financial planner becomes even more critical as every financial plan is customized to suit the needs and goals of the individual. A planner will give you a bird’s eye view of your financial situation because they are on the outside and can look at your finances holistically.

With the ever changing and dynamic global and domestic economic conditions and financial markets having a financial planner is of utmost importance. A prudent planner cannot predict, but will always guide you well to be prepared for global or domestic events which can have material impact on your financial goals.

A financial planner advises you on the following-

  • How much you need to save while you are earning?
  • How much would you need for retirement as per your lifestyle and nature of expenses?
  • What type of loans you should have or payoff?
  • How much and what type of insurance you need?
  • How much you should have as contingency funds?
  • How can you be more tax efficient in your investments?
  • How much returns should your investments generate in order to achieve your goals?
  • How inflation will affect your goals and finances? What projections and estimates are to be considered to account for inflation while planning for goals?

 

A financial planner helps you to organize your finances and assesses how prepared are you for your goals – for example – retirement. Professional financial planning goes far beyond just picking stocks or products. Hiring a planner arms you with the expertise and resources with which to approach planning your financial future.

 

A common misconception that people have when it comes to financial planners is that they will make you a millionaire overnight or advise you to invest in stocks which will give you multi-bagger returns. Financial planners help you to prioritise your financial goals and work with you to devise ways to achieve them.

 

A financial planner would be aware of appropriate financial opportunities and investments which will help you in taking wise financial decisions. Helping clients avoid ‘buy high and sell low’ is also one of the great benefits financial planning can bring. A planner will help you stay invested  in a bear market and at the same time will help you not get over-optimistic in a bull market.  A recent neuroscience experiment has proved that people with expert financial guidance are less stressed and better able to face challenges and absorb information relating to their own financial decisions.

 

So you may say that – “Why do you need a Financial Planner? I can do all this for myself”. For this you have to ask yourself these few questions-

  • How prepared are you to spend hours to assess the fundamentals of a mutual fund or company whose stock you are buying?
  • Can you spend hours analysing and building a portfolio that can give you retirement income and is tax efficient?
  • Can you analyse the complexities of different PMS products, mutual funds, insurance plans and annuity plans and determine the best mix for yourself?
  • Can you keep regular track of your goals and related investments?
  • Can you objectively assess your portfolio and keep emotions out of your financial decisions?

Usually we find the answers to most of the above lead to the need of seeking the professional help of a financial planner.

 

A financial planner possesses specialized training, knowledge, certifications and the requisite experience to handle all the above possible options. A financial planner is therefore better equipped to plan for you.

To put all of this in a nutshell, a financial planner helps you set your priorities and financial goals, helps understand the corpus needed for each of them and guides in devising customised ways and means to achieve your set goals.

Even in the busiest or most stressful times in your life – be it marriage, birth of a child or job change or any such transition, the financial planner is able to safeguard and nurture your wealth with sound advice and experience. In such situations of transition, a planner instils a kind of financial discipline and diligence which is much needed.

When you normally want to get a job done right, you usually hire an expert, so why should the same not hold true in the case of your finances? Talk to Plan Ahead Wealth Advisors today to know how a financial planner can help you.

 

 

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vector infographic car road timeline with pointers

 

As the media and dailies flash all the news and noise around the downgrade of debt securities of some of the IL&FS group companies and the ‘so called blood bath’ on the dalal street triggered by the sale of certain DHFL bonds, the average investor is obviously concerned about their investments. Spooked by these recent events and the volatility of both equity and debt markets investors are now wondering whether to continue their SIPs in mutual funds, buy stocks or just exit and hold cash? So what should you do?

There is no one size fits all solution to this problem. The answer lies in your long and short term objectives and whether you have a detailed drawn out financial plan. Situations like these (market volatility and uncertainty) truly highlight the need of a good weapon – your financial plan- your investment road map. When investors invest without a goal and financial plan in sight they do not know how much to invest, how long they should continue their investments and how close they are to their goals; thus how much volatility their portfolio can withstand.

 

Should you turn conservative?

Let’s assume that you have been been saving for the last 8 years for your child’s higher education and you have about 3 years left until you need the money. Now irrespective of whether the market is volatile or not, it is imperative that you re-balance your portfolio by moving your money in to conservative debt investments. This strategy should anyways have been a part of the financial plan to protect the corpus from short term market fluctuations and should be used only when you start approaching your goal.

If applied sooner than needed then you may run into the risk of falling short of the target amount. Also remember, getting closer to your goal is not the time to get speculative and increase your aggressive equity exposure.

 

How to deal with the amygdala hijack (the emotions and the panic)?

Turning conservative in tough market conditions is easy, staying focused on your goals and continuing your investments as you see the market giants come crashing down requires a lot of courage, focus and some science, data and rationale. Investors are believed to be irrational when it comes to dealing with money. When the markets are rallying investors want to be a part of it and they willingly invest. However as soon as they experience turbulence they drop their investments like hot potatoes in fact hurting their investments and networth. Market fluctuations affects a part of your brain called amygdala which induces fear. The fear leads to panic and the sell off frenzy begins.

At this point you have to go back to your financial plan and remind yourself what your goals are and follow your financial plan to avoid any knee jerk reaction. If your next milestone is 8-10 years away then the current volatility does not need you to act and also your portfolio can withstand this short term fluctuations.

 

How following your financial plan helps?

Staying on track with your financial plan and road map pays off in more than one way. Once you know your milestones and risk appetite through your plan:

  • You avoid taking unnecessary exits thereby saving unnecessary capital gain tax or any exit loads that may be applicable that could further reduce your profits.Money saved is money earned.
  • You stay invested (example SIPs) through a down cycle of the market , which actually helps you get a better value for your money invested. This over the long term can improve your portfolio returns and catapult corpus generation.
  • You may even get opportunities to start newer investments in good quality companies basis your risk profile and time horizon

An example to detail this : Sep 2008 is a period set in time; this is when the infamous Lehman brother crisis shook the global financial markets and sent the indices in India and across the world in a massive tailspin. It was a difficult time for investors, however the ones who persevered and continued their Sips reaped the benefits later.

Lets assume you had a plan and understood the corpus that you needed say in 2018 and started a simple SIP in a mutual fund. The chart below shows the trajectory of such an SIP of Rs 10,000 started in Oct 2008 in 3 different categories of funds.

SIP

SIP amount Total Amount invested in 10 yrs Current Value (Rs.) CAGR
Value Fund 10,000 12 lakhs 34.18 lakhs 18.26%
Multi Cap Fund 10,000 12 lakhs 28.80 lakhs 15.53%
Large Cap Fund 10,000 12 lakhs 28.43 lakhs 15.33%
Nifty 100 10,000 12 lakhs 25.98 lakhs 13.86%

 

Remember, in volatile times, people lose more money by fearing and holding back their investments and possibly denying themselves good opportunities that may present themselves in the form of a market downturn.

Markets will fluctuate and will be volatile, that is their inherent quality. Navigating these carefully is necessary for investors. A sound financial plan and the guidance of an independent and unbiased financial planner would help. In short, you need to stay on track and to follow your financial plan. This financial plan will be your guide and navigator during volatile markets.

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The Indian story is pretty simple and straight forward, as you grow you are told to study hard to find a good job. When you finally find that good job you work harder day in and day out trying to keep up with work pressure and your expenses. Then comes in Jack Ma announcing that he plans to retire early and says “I would rather die on a beach than in my office”. This one line is enough to reignite the dreams and fantasies to retire early and move to a quaint town away from the hustle and bustle of the big city. If this is your dream then read on to find out how you can retire early.

Rome was not built in a day and Jack Ma didn’t become a billionaire overnight. While you don’t have to wait to become a billionaire to retire early, you will need to save and create a substantial corpus to be able to take the plunge. This would require dedicated regular savings and beware, sacrifices will have to be made. You will have to try and save as much as possible which would mean spending less on your life style expenses, and trying to live a modest life.

  • List down all your goals-Just because you are going to retire early doesn’t mean you wouldn’t want to live a full life and realize you goals which could include travelling, sending kids overseas for higher education, buying your dream home etc. Yes you can achieve these goals and retire early too, but you will need a good plan which will take the cost of funding of these goals into account and adjust it against inflation.
  • Know your expenses-Most people especially the ones who live in a metro don’t know how much they spend on a monthly basis. Knowing your expenses is important for two reasons one it will help you know how big your retirement corpus needs to be and two you might need to cut down some unnecessary expenses to be able to save more. Take your life expectancy into consideration and your expenses till that time to calculate your corpus size.
  • Set the SIP for the 1stweek of the month- For most people the only investments that happen are either a minimum SIP started some time back or whatever is saved at the end of the month. This way you will never be able to retire, forget retiring early. Your savings and investments have to be planned and in line with the future goals that you have. So invest before you pay your bills. This is also what Robert Kiyosaki the author of “Rich Dad Poor Dad” believes is the secret to getting rich.
  • Ensure it’s not a one sided love story– Giving up a good lifestyle and a free hand on spending can take its toll. It can be very frustrating at times, that’s why its very important that your spouse supports this choice a 100% else you might find your self quite often at the receiving end which trust me is neither pleasant nor encouraging. From time to time you might need to remind yourself of your end goal and it should bring you back on track when you start to stray away. I would highly recommend not giving up on things that you love and keep aside some money for some indulgence every now and then if not regularly. Remember Jack Ma will retire at 55, so you will have to give yourself a considerable amount of time to prepare for the big shift.
  • Secure your self and you family-We can not stress enough on the importance of a sufficiently large personal life and health insurance. Its better to take one now while you are still young, this way the premiums will also be lower.

Albeit retiring early and getting away from the rat race and the pressures of the world, spending your days relaxing in a quaint house on the hills or by the side of a brook sounds so inviting, it can get boring and mundane after a while. Having spent so many years crossing one hurdle after the other throughout your life, doing nothing after a while doesn’t feel so enticing; so plan for a small business or some activity that would keep you busy in your free time or else you might find yourself missing and craving what you have left behind.

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Rakshabandhan is an auspicious day in India. The festival signifies love and affection between brothers and sisters. It is a time where brothers reaffirm their duty to protect and care for their sisters during their entire life.

Usually brothers gift cash and or gifts to their sisters as a sign of their love. But what if you could give them something that will truly be there in their life? A sound piece of contribution could end being a much more significant gesture in the long run, both personally as well as her financial future.

Sounds to good to be true? Well here are some options you can consider:

Systematic Investment Plan (SIP) Investments: An easy option, but not not many know it can be gifted or that it can be started with an amount as low as Rs 500 per month. Also, one can not only do SIPs into mutual funds (either equity or debt) but certain blue chip equity stocks as well. So forget those fancy gifts for once and gift your sister that will truly be there for her in the future

Systematic Withdrawal Plans (SWP): A rather new feature in the Indian Mutual Fund environment. Certain AMCs now allow you to initiate an SWP, which essentially is the opposite of SIP such that money flows from the mutual fund to your bank account at pre – specified periods and at specific amounts; but with the added benefit that you can chose your relatives to be the beneficiary of this inflow rather than yourself. Another benefit of such a SWP is that because this inflow would be considered a gift in the hands of your relative, there is no tax applicable to the receiver of this SWP. Perfect way to support your sister with cash flow needs!

Insurance Cover: Few things may convey that you truly care for your sister’s health than an adequate health insurance cover. Now more than ever, health insurance is the need of the hour with parallel rise in not only health costs but also increase in reports of lifestyle diseases and ailments. A health insurance cover will insure that your sister is never financially affected by these hurdles.

On the other hand, providing a term cover for your sister who may have her own financial dependants is a warm way of showing that you are there to share her responsibilities

Estate Planning: This almost always is a personal and complicated topic. But having a solid estate plan is as important as any other life decision. And as a brother you could be the trusted guide to helping her make this important decision.

Furthermore, you yourself can be a part of Estate Planning as a potential guardian to her underage children. Or possibly a trustee in case she needs to make a trust. Ensuring one’s hard earned assets are bequeathed as they intended to is a huge responsibility and who better than a brother to take this up

Gold: The yellow metal will protect her from any economic crisis and will act as hedge during volatile times.But not the cumbersome physical gold that comes with its own headaches and costs. Rather you should consider paper gold i.e. instruments that invest into gold themselves or track their prices. These instruments range from Gold ETFs to the Sovereign Gold Bonds

On this day brothers take a pledge to protect and take care of their sisters under all circumstances. We at Plan Ahead Wealth Advisors understand the enormity of this pledge. And through our experience of understanding the complexities of money and human emotions, we also pledge to help you ensure that your sister stays financially secure in her lifetime.

 

 

 

 

 

 

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bias

It is a well known fact that human cognitive abilities and emotions both have a huge say on how one goes about investing, both negative and positive. However it is the negative side of such aspects that come to front more often that not. Such obstacles are usually termed as “biases”.

This article looks to highlight and explain some of the common “biases” which tends to prove a hindrance to an investor from achieving his or her’s investment objective. As fundamental part of human nature, these biases can affect all types of investors. Therefore understanding them may help you to avoid such pitfalls.

  1. Overconfidence: It is common for people from all walks of life to see their abilities to be superior than the rest. But by definition of average, 50% of individuals would be lesser than average. Hence not everyone can be better off than others every single time. Whilst this high level of confidence can help in overcoming loss sooner, it also quite often leads to poor decision making. Examples: Taking too much risk in your strategies; Trading more often than what is required; Confusing luck for skill
  1. Anchoring Bias: This occurs when an investor is basing his decision to either buy or sell on arbitrary price levels. Example: An investor has bought a stock ‘X’ at Rs. 100 and has risen to Rs 140. However the stock price starts declining backed by deteriorating fundamentals. Here the investor holds on to the stock nonetheless in the belief that the stock will return to its previous price point of Rs 140, even though data may not back the case.
  1. Endowment Bias: Sometimes an investor adds an irrational premium to as asset that he/she is holding which would be higher than the amount they are willing to pay for that same asset if they had to acquire it. This usually happens for reasons such as familiarity/family value of the asset or simply to avoid transaction/tax cost. Example: Real estate owners often set the selling price of the property higher than the maximum prices they themselves would be willing to pay for it
  1. Problem of Inertia: The failure of a person to act on items, even those he has agreed on, is called Inertia. Inertia often acts as a barrier to effective investment and financial planning. This is usually caused from uncertainty on how to proceed forward and results in an individual taking the path of least resistance i.e. wait and watch approach. One way to bypass this is “Automation”. Putting your monthly investments on autopilot i.e. SIPs in case of mutual funds is a popular way of removing inertia and adding discipline to your investments
  1. Confirmation Bias: It is human nature for an individual to seek out views and information that support their own choices and thought process; and ignore those which do not. The same is often viewed amongst investors in their decisions.  While doing research, investors often find all sorts of positives while glossing over the red flags in trying to “confirm” the return potential of the investment.  As a result, this bias results in a poor, one-sided decision making process.

Whilst there are potentially more such biases that are identified, the above mentioned ones are the more common and frequent ones that should be actively avoided as far as possible. Human nature is such that there is no “remedy” for it. However by greater awareness and through taking professional advice from advisors, you could stand a higher chance of effectively navigating these hurdles.

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Today marked the 3rd Bi-Monthly policy statement by the RBI for the FY 2018-19 with members voting 5-1 in favor of a rate hike.

This was largely in line with market expectations and was already priced in, as post the release of the minutes of the monetary policy bond yields did not move much in either direction.

However, the MPC also continued to maintain a neutral stance, indicating that it is trying to play a delicate balance between inflation and growth, and decisions are being taken with the objective of achieving the medium term target for CPI at 4% within the range of +/- 2% and future data prints

The MPC mentioned that domestically various indicators suggest that economic activity has continued to be strong. Significant turn around in the production of capital goods and consumer durables, Progressive monsoon and increase in MSPs of Kharif crops are expected to boost rural demand by rising farmer’s income. Vehicle sales augur well for urban income growth.

Retail inflation i.e. CPI grew to 5% in June from 4.9% in May, driven by an uptick in inflation in fuel. Food inflation remained muted due to lower than usual seasonal uptick in prices of fruits and vegetables in summer months. Adjusting for the estimated impact of the 7th central pay commission’s house rent allowances (HRA), headline inflation increased from 4.5 per cent in May to 4.6 per cent in June. Low inflation continued in cereals, meat, milk, oil, spices and non-alcoholic beverages, and pulses and sugar prices remained in deflation. Factors mentioned above have resulted marginally downward revision in inflation projections for Q2 vis-à-vis the June statement. However, projections for Q3 onwards remain broadly unchanged on account of uptick of 20 bps in inflation expectation for 3 months and 1 year ahead horizon survey of households by RBI’s. RBI’s industrial outlook survey also reported higher input costs and selling prices in Quarter 1 of 2018-19. Input cost of companies polled in services PMI in June also stayed elevated. Farm and non farm input costs rose significantly in June.

The central government has decided to fix the minimum support prices (MSPs) of at least 150 per cent of the cost of production for all kharif crops for the sowing season of 2018-19. This increase in MSPs for kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and possible secondary impacts on headline inflation. Uncertainty around the full impact of MSP on inflation will only resolve in the next several months once the price support schemes are implemented and procurement by the government is visible.

Based on an assessment of the above-mentioned factors, inflation is projected at 4.6 per cent in Q2, 4.8 per cent in H2 of 2018-19 and 5.0 per cent in Q1:2019-20, with risks evenly balanced. Excluding the HRA impact, CPI inflation is projected at 4.4 per cent in Q2, 4.7-4.8 per cent in H2 and 5.0 per cent in Q1:2019-20.

The MPC notes that domestic economic activity has continued to sustain momentum and the output gap has virtually closed. However, uncertainty around domestic inflation needs to be carefully monitored in the coming months. In addition, recent global developments raise some concerns. Rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity. Geopolitical tensions and elevated oil prices continue to be the other sources of risk to global growth. On account of these risks, RBI governor stated that by keeping the neutral stance, the Monetary Policy Committee have kept the option of further rate increase or decrease open and dependent on future data.

With an election year upon us and possible fiscal risks emanating, along with global outflows on the back of higher US interest rates and a falling rupee, this may not be the last of the rate hikes in our view.

Your Investments

Financial markets have continued to be volatile and driven mainly by monetary policy stances in advanced and emerging economies and geopolitical tensions. Globally, equity markets have been volatile on trade tensions and uncertainty around Brexit negotiations. However, it also important that public finances do not crowd out private sector investment activity at this crucial juncture.

Capital flows to Emerging Economies declined in anticipation of monetary policy tightening in Advanced Economies. Also currency of Emerging economies have depreciated against the US dollar over the last month on account of strong USD supported by strong economic data.

Equities continue to remain overpriced from a price to earnings perspective in spite of recent corrections and a better growth outlook. However, good results so far by many companies, along with good growth expectations and better capacity utilisation bode well for earnings growth going forward.

Real rates continue to remain positive.The rising G-sec yield makes dynamic bonds and long term bond funds unattractive and the exposure to the same should be minimized. Bonds with a shorter duration of 3 months to 2 years are ideal in the given scenario. We therefore, continue to believe that investors should continue to have fixed income exposure through a combination of lower duration and short term strategies.

Your Loans

With an increase of 25 basis points by the RBI, the deposit rate of the banks could further increase which would be followed by lending rate hikes. Thus we suggest looking at prepaying or raising EMI amounts on your loans to negate the interest rate hike and future hikes that could follow.

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The-Beginner_s-Guide-to-Index-Investing

According to SPIVA India Year End Report 2017, S&P BSE 100 climbed 33.3% whilst S&P BSE MidCap rose by 49.9% for the calendar year 2017. Stellar returns! Question is, did your actively managed mutual fund do the same? As per the SPIVA report, 59.38% of large cap funds under performed their benchmark, whereas 72.09% of mid/small cap funds under performed their benchmarks.

We have started to notice a trend in Indian Equities where the actively managed funds are in the nascent stages of showing continuous under performance viz a viz their respective benchmarks. Even with a three-year time line, 53% of large cap funds have under performed whilst a whopping 80% of mid/small cap funds have under performed their benchmarks!

These data points certainly raise the question of whether passive managed investment strategies should be seriously considered now. Are funds and ETFs which passively just track a particular index the next big thing?

Two major reasons to consider a passive investment option into equity are

  1. Returns especially over long investment horizons and for those who wish to nullify fund manager bias; and
  2. Lower Costs

1

As you may notice, Index Funds/ETF’s can provide sufficient returns over long terms, though they are yet not on the same level as the top performing actively managed equity funds.

2

This is where passive managed strategies truly out do actively managed funds i.e. significantly lower costs.

Besides the above mentioned points, passively managed investments also provide added benefits such as (1) reducing fund manager bias, (2) a diversification strategy that can allow for less volatility, (3) passive funds are more favourable treated from a tax perspective when compared debt instruments.

One recent event that puts passive funds in a more positive light is the recent SEBI notification and the mutual fund recategorization. Due to the clear-cut guidelines for large cap funds i.e. can only invest into stock 1-100 as per market cap, it is likely that fund managers will find it increasingly difficult to generate favourable alpha considering the high costs associated with these funds. Therefore index funds that capture the Sensex or Nifty may find significant favor moving forward as an alternate to large cap funds.

However, they are certain limitations to Index Funds/ETFs in India, such as:

  1. Fewer options: They are not a ton of options available for the investor in the Index Funds/ETF space. Therefore one requires to do thorough research before choosing which instrument to select.
  2. Onus still on Active Managed Funds: The top quartile of actively managed equity funds, which also have most of the assets under management, continue to currently outperform their respective indices in certain time horizons, despite their higher costs. And this trend will not vanish over night.
  3. Inefficient Markets: Unlike Western Countries, where efficient markets negate the need for active management, the Indian Equity Market is still somewhat far from that state. Hence opportunities continue to remain which can be exploited by experienced fund managers/investors.
  4. Liquidity and Tracking Error: For ETFs, liquidity has been a major concern. Retail investors are often forced to hold onto their investments even when they would wish to redeem the same.

Furthermore, how well the fund/ETF tracks the relative index needs to be assessed. A lower tracking error would justify the inclusion of that instrument into your portfolio.

3

What should you do?

At Plan Ahead Wealth Advisors, we feel as an investor it is crucial to introduce passively managed instruments into your portfolio at this juncture. While the debate of active v/s passive will go on, it feels certain to us that a blend of strategies is the need of the hour. What instruments you choose and the allocation of them in your portfolio depends on your risk profile as well as your investment objectives and return expectations.

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