Financial Planning
Generic solutions don’t work well in financial planning

In order to be precise, the financial planning process needs to be more investigative. Generic solutions are easy to offer and implement but do not serve the purpose of long-term planning

Financial planning is gradually emerging as one of the most important and talked about professions in the Indian finance space. Financial planners are mushrooming left, right and centre and with them different concepts of financial planning are also emerging. Some extremely innovating, some very stale and most of them looking like “cut, copy, paste”, which makes you surprised at the homogeneity of these concepts. Talk to financial planners across India or read their thoughts in various newspapers and magazines, you will come across some standard answers in different types of personal financial planning prepared by the financial planners.  Sample of these standard prescriptions in financial planning  are as follows: “Equity is a must in the portfolio”, “mutual funds help in sustainable wealth creation”, “keep cash in bank or liquid funds up to three months’ expenditure”, “gold is a good hedge against price rise but the exposure in gold should not exceed 10%”, etc.

Why is it that there is so much homogeneity in the recommendations made by financial planners? Are these indicators of bankruptcy of ideas or these recommendations are the need of hour? A closer investigation of issues in financial planning reveal that some questions are so difficult to answer that most of the financial planners try to avoid the real answer and adopt a rather conservative approach in order to be safe. The lack of ability to offer quality suggestions to their clients comes from two aspects: 1) Some issues are too hot to handle, and 2) Being extremely rational in the approach may reveal chinks in the armour and expose the limitations of the financial planning as an approach.

Read other articles on financial planning.

Let us look at some of the intriguing issues that the financial planning process involves which can be described as follows:

Portfolio return must beat inflation, but which inflation and how?  The fact that portfolio return must beat inflation sounds very noble as an idea and logical at the face of it. If portfolio return does not beat inflation, the effective wealth creation does not happen. But this is easier said than done. Is it easy to identify the inflation that you want to beat? Is the inflation number measured by WPI (wholesale price index) or CPI (consumer price index) or is it some other number? Is the inflation having same impact for person having small income vis-à-vis a person having a fat source of income? Just dig deep into this aspect of financial planning. What are the assumptions considered by the financial planner in considering rate of inflation for a long period of twenty years when he recommends retirement planning to you? Also is the financial planner unnecessarily increasing risk exposure of your portfolio to beat inflation? Last but not the least, if the financial planning fails to beat inflation, what happens? What are the exigencies built into the process of financial planning to handle inflation?

Generally financial planners assume a rate of inflation and blindly apply it in the process of financial planning. But the complex question of inflation needs deeper analysis of the economy and economy-related events. Since very few financial planners have adequate knowledge about it, they try to be an escapist.

Read Financial planning: Choose carefully

Equities give return in long run which is better than all asset classes, but how long is long run? There is no doubt that one should invest in equities. Also, there is no doubt on the fact that equities generally outperform many asset classes by providing better returns. But some of the questions that remain unanswered are—what is long run in equity investment and what happens when equity fails to provide returns even during long run that we have seen post 2008 global recession? Since mutual funds are a recommended route of investment in equity for a retail investors, the obvious question that an individual needs to know is how to handle failed investments in mutual funds. Is blind reliance on mutual funds for investment requirements fine or there is a need for periodic review of the investments? The basic question that remains unanswered is how will an investor handle a mutual fund scheme which has failed to perform?  Also what is long run in the investment indicating as to how long one should wait for mutual funds to perform? If JM Keynes is to be believed, we are all dead in the long run.

The experience of the last five years in the Indian equity market has shattered what was assumed during the 2003-2007 period. Debt has outperformed equity substantially barring some good mutual fund schemes and selected stocks. What should an investor do in such a scenario if it again happens in future? This again shows that blind reliance on equities in all scenarios can be fatal for sustainable wealth creation. Portfolio churning should be designed in such a way so that it is able to handle the dynamics of market. Also, there should be due consideration given to the co-relation factor before investment decisions are made and executed.

Read Financial Planning: Simplicity works best

Exposure to an asset classes depends on risk appetite or age: How much exposure an investor should take in an asset class? Should a 25-year old person with a low savings go for equity exposure or a person, in his early fifties, with a substantial income have more equity exposure? The question that remains unanswered is what decides my exposure—my risk appetite or my age?  Ideally for a person who has lower income levels, exposure to equity should be restricted because he has not yet built a foundation for long-term wealth creation. While a person in his fifties with a healthy disposable income has a higher risk appetite and can go for equities in spite of the disadvantage of time on his side.

This shows that while deciding on exposure to any asset class, risk appetite of an investor cannot be ignored in spite of his age. So a generic prescription cannot be given for all categories of investors. Also, whether an investor should invest 10% of total corpus in gold or more cannot be standardized and will be decided based on ability to take risks.

In order to be precise in character the financial planning process needs to be more investigative. Generic solutions are easy to offer and implement but do not serve the purpose of long-term planning. In order to build a robust financial planning process, detailed homework is needed to be done these riddles.

(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)




5 years ago

More than anything else Financial Planning is just a selling tool.

Meticulous Financial Planning cannot guarantee end results, nothing can - because we simply do not know what the future holds. Investment results (whether from debt or equity) vary way too much from the estimates / expectations at the time of undertaking investments.

Allocating money to gold has caught fancy currently because of the way gold prices have been appreciating in the past decade. 10% allocation to gold may sound intelligent; whether it is wise to allocate 10% to gold only time will tell, especially given the prevailing high prices. An average investor has no business to dabble (speculate) in gold

Returns from equity: It is a mistake to believe that ‘under all conditions‘, equities give better returns in the longer term.
Irrespective of the investor’s risk appetite, it is recommended to have reduced exposure to equities (not more than 25%).
a) in the higher ranges (peak) of the bull market. (There can never be case for zero exposure to equity as the markets could keep on rising till the euphoria lasts.)
b) And when low risk debt instruments offer 10% per annum or more.
Even the world’s best and most successful investors do not know how their investments will behave in the future. Successful investing is about controlling the controllable. You can't control what the market does, but you can control what you do in response. In the long run, your returns depend less on whether you pick good investments than on whether you are a good investor.
Thus, when it comes to financial planning, even specific solutions may not work well or may work only as well as generic solutions.

A generic solution of investing only for the long term (5 years or more), asset allocation and periodic re-balancing may work as well or better than a specific financial planning solution.


240p FLV

In Reply to Nilesh KAMERKAR 5 years ago

Sound points, as usual from Mr Kamerkar

Market awaits further direction: Weekly Market Report

Medium term outlook shows a downward bias  

The Indian market settled marginally down in the holiday-shortened week on subdued global cues and with most of the companies coming out with not-so-impressive corporate results. The slowing economic growth—not only in India, but across the world—has raised fresh concerns, going ahead. Investors will continue to focus on earnings reports and will keep a watch on the Reserve Bank of India’s review of the monetary policy for the second quarter, due on 30th October.
The Sensex ended the week at 18,625, down 57 points (0.30%) and the Nifty finished 20 points (0.35%) down at 5664. The Market is in an indecisive zone. However, the bias is downward for the medium-term.
The market settled in the positive on Monday on a clutch of better-than-expected quarterly earnings from blue chips. However, selling pressure in heavyweights saw the benchmarks settling lower on Tuesday. Resuming after a day’s break, the market settled in the green on Thursday despite a high degree of volatility due to the F&O contracts expiry. The indices closed in the red on Friday on the back of disappointing earnings reports and global concerns.
The BSE Capital Goods index gained 2% while BSE Consumer Durables (down 4%) and BSE Fast Moving Consumer Goods (down 3%) were the main losers in the sectoral space.
The top gainers on the Sensex were Mahindra & Mahindra (up 7%), Larsen & Toubro (up 4%), ICICI Bank, TCS and NTPC (up 2% each). The losers were led by Jindal Steel & Power (down 5%), ITC, State Bank of India (down 4% each), Tata Motors and Hindustan Unilever (down 3% each).
The major gainers on the Nifty were M&M (up 7%), L&T (up 5%), IDFC (up 4%), BPCL and Axis Bank (up 2% each). Punjab National Bank (down 9%), Jindal Steel, Power Grid Corporation (down 5% each), Bank of Baroda, ITC (down 4% each) were the key losers on the benchmark in the week.
It is widely expected that the RBI, in its policy review next week, might keep all key rates unchanged on account of prevailing high inflation that stood at 7.81% in September. However, some analysts expect that the central bank may cut the cash reserve ratio (CRR), the proportion of deposits that banks have to keep with the RBI, by 25 basis points.
A reshuffle of the Union Cabinet is expected to take place on Sunday, 28th October. External affairs minister SM Krishna has tendered his resignation on Friday, which has been accepted by the prime minister. Information and broadcasting minister Ambika Soni, social justice and empowerment minister Mukul Wasnik, tourism minister Subodh Kant Sahai, MoS justice and empowerment Mahadev Khandela submitted their resignations on Saturday. The reshuffle of the Union Cabinet, which could be the last before 2014 Lok Sabha elections, is expected to see induction of new faces in the government.
In international news, the US economy reported a 2% annual growth in the third quarter of 2012 over 1.3% GDP growth in the previous quarter.  Also, consumer sentiment in the US rose to 82.6 in October, the highest level recorded in the last five years, according to the Thomson Reuters/University of Michigan's final reading on the overall index. However, US markets settled lower in the week on a clutch of weak earnings reports and nervousness ahead of the presidential elections in the world’s biggest economy.
In the Eurozone, policymakers on Thursday said that Greece would need an additional 30 billion euros ($39 billion) to make up for its deep recession and delay in overcoming deficit targets. 


Ambika Soni, Mukul Wasnik, Subodh Kant Sahai resign ahead of Cabinet reshuffle

Prominent new faces in the Cabinet could be actor-turned politician Chiranjeevi from Andhra Pradesh and AH Khan Chowdhry, from West Bengal, while younger ministers like Sachin Pilot, Milind Deora and Jyotiraditya Scindia are likely to be upgraded

New Delhi: Ahead of Sunday's reshuffle of the union council of ministers, three Cabinet Ministers and a Minister of State resigned on Saturday, saying they want to work for the party, reports PTI.
Information and Broadcasting Minister Ambika Soni, Social Justice and Empowerment Minister Mukul Wasnik and Tourism Minister Subodh Kant Sahai and MoS Justice and Empowerment Mahadev Khandela met Prime Minister Manmohan Singh and submitted their resignations. External Affairs Minister SM Krishna quit the government yesterday.
The ceremony for swearing-in of new ministers is scheduled at 11.30 hours at the Rashtrapati Bhavan tomorrow when a number of new faces are likely to be inducted.
Prominent among them are actor-turned politician Chiranjeevi from Andhra Pradesh and AH Khan Chowdhry, MP from West Bengal, who is also the brother of the late Ghani Khan Chowdhry.
The possible names of the successors in the External Affairs Ministry include Commerce Minister Anand Sharma
Sahai's name had cropped up in a controversy following media expose that he had recommended for allocation of coal block a company in Jharkhand in which his brother was a Director. 
Offering their resignation, Soni, Wasnik and Sahai said they will work for the party. Soni was Congress General Secretary for several years and was Political Secretary to Congress President Sonia Gandhi while Wasnik was handling the dual responsibility of Congress General Secretary as well as Union Minister.
Before meeting the prime minister, Sahai said yesterday that Congress President Sonia Gandhi called him to draft for party work.
"It is an honour to work for the party. I am offering my resignation to Prime Minister. Party President (Sonia Gandhi) and others want me to work for the party so I will be working to strengthen the party as the party is supreme.We are in the government because of the party. Party is supreme and will always be supreme," he said.
Soni said, "I have taken Prime Minister's permission to resign. It is not appropriate if I do it on my own so I have taken his permission and explained it to him".
Asked if she was willing to work for the party, she said, "I think it is an honour".
Wasnik said, "I have been working for the organisation for the last several years and I would like to work for the organisation".
The reshuffle of the Union Cabinet, which could be the last before 2014 Lok Sabha elections, is expected to see induction of new faces in the government.
Chiranjeevi is being rewarded for his help in ensuring stability of the Congress government in Andhra Pradesh by lending the support of 18 of his MLAs after the merger of his party PRP.
The other changes could include ministers holding dual portfolios shedding one of their responsibilities..
Younger ministers like Sachin Pilot, Milind Deora and Jyotiraditya Scindia are likely to be upgraded.
There have been berths vacated by DMK representatives A Raja and Dayanidhi Maran in the last two years after their names cropped in the 2G scam.
However, DMK President M Karunanidhi had recently made clear that his party will not not like to reclaim their lost berths.
Whether Rahul Gandhi would join the government is still a matter of conjecture even as the Prime Minister held consultations with Congress President Sonia Gandhi the day before yesterday, apparently to give final touches to the exercise.
There is speculation that some young faces, considered close to Rahul, like Manicka Tagore and Meenakshi Natarajan could be inducted into the council of ministers.




5 years ago

"inefficient" veterans like Krishna thrown out of the cabinet. What about the most inefficient MMS? Who will chuck him out?

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