Is Personal Financial Planning Just About Mutual Fund Returns?

Are you also one of those investors who keep reading blogs and have accumulated tens of mutual funds to date? If yes, this article is especially for you. Personal financial planning is just not about mutual funds returns.

Personal financial planning is much more than that. As a matter of fact, take a look at these queries I come across on a daily basis and I have no answers for these queries.

1. Which is the best equity mutual fund for long-term investment in India?
2. Should I invest in small caps since it offers better returns?
3. I have invested in this and that mutual fund, should I continue?

I have no answer because these questions are just about returns.

Now, here’s a story to help you understand better about personal financial planning.

Ramesh has been working in a private company for the last 7 years. Despite getting a good salary along with additional perks, he’s not happy with the company. The reason being that he did not get the promotion last year which he thought he should have got. One day, Ramesh received a call from Suresh who introduced himself as a job consultant. Suresh told Ramesh that he had found his resume on IIMjobs and asked whether he wanted a job change. Ramesh replied ‘YES’ and said that he was looking for a job change. Upon hearing the reply, Suresh explained the job profile to Ramesh without disclosing the company’s name.

Ramesh liked the profile very much and these were the first few questions which he asked immediately:

1. Can you tell me the name of the company?
2. Where is the company exactly located?
3. What is the package/hike that the company is offering?

As you can see, this commonly happens with most of the people. The pattern of the first 2 questions clearly shows that you prioritize security over returns as it’s of greater importance. Would you go with a company which you have never heard about? Even if such company gives you a 60% salary hike, the chances would still be less (though exceptions are there).

The same happens with personal financial planning but we fail to understand that. Instead, we run around returns without covering our basics i.e. without having a proper security cover.

What is Personal Financial Planning in India?

Personal financial planning in India is all about managing money and meeting individual monetary goals. It could be planning for retirement, saving for children’s higher education, accumulating funds for daughter’s marriage, and so on.

In no way am I denying the significance of getting good returns from mutual funds but there is something more important than that.

Defining Your Goals.

It doesn’t matter whether you achieve these goals through equity mutual funds or debt instruments like FD, PPF, PF, etc.

So, the most important step in personal financial planning is to define your goals. However, the majority of people don’t do that. Whereas there are some people who do but then they don’t define the required time and amount. For example, I want to provide some amount for my child`s education after 15 years. How much amount, there is no clarity

Process and Basics of Planning

Once financial goals have been defined, there can be two options.

1. Would my family be able to achieve these goals if I am not around?
2. How would I invest my money if I survive to achieve those goals?

Now, let us consider both these options one by one.

What If I am not around?

Here, I won’t be giving the same Gyan (advice) that buy term insurance, health insurance, personal accidental policy, etc. The reason being that it is a basic necessity. Nevertheless, people have started buying these products too. Let’s see where most of the people fail.

• Buying term insurance cover of 1 Crore for their family which may not even work for the next 10 years. Irrespective of that, people are still stuck with the magic figure of 1 Crore.
• Not buying health insurance since it is covered by their employer or buying for a peanut value of 5 Lakhs. Why not go for a super top-up plan of 25/30/50 Lakhs? If you’re scared of premiums, there are a lot of options for you. For example, Liberty and Max Bupa offer such plans to family floaters at a paltry premium of 5,000 per annum. Give it a try, after all, 5,000 is a very meager amount for security.
• People think that these plans will always work and that they cannot get incapacitated. There always remains a big evident gap between term insurance and health insurance. To give an instance, what if I do not die in an accident but get permanently disabled? Yes, health insurance will pay as long as I am in hospital but term insurance will not. How will I sustain in future? What about my monthly income?

Also Read : Is 1 Crore Term Insurance Enough

Also Read : Best Super Top Up Health Insurance Plans in India

What If am around?

How would even the best mutual fund help if your goal is to buy a car in 3 years? The equity mutual fund may be offering a return of 15% but that isn’t the question. The question is can you take the risk and invest in it for achieving your car purchase goal? I need to make an investment in debt funds or FD to reach that goal.

That’s precisely the reason why I stated at the beginning that financial planning isn’t just about mutual fund returns. It is all about your financial goals.

Now, when do equity mutual funds come into play? Equity mutual funds come into play when my goals are long term.

Now, suppose I have a goal of saving money for child education which is like 12 years away. I’d definitely like to invest my lump sum amount or SIP in equity/debt mutual funds in the ratio 60:40 or 50:50. But that is still not 100% assured.

Assuming that my retirement is 25 years away, I would definitely invest in equity mutual funds. Again, there is no surety that I will get the same type of returns. Most essentially, the best mutual funds can turn into the worst during that particular point of time.

This takes us to another aspect of  financial planning.

Review of Your Financial Plan

Suppose a mutual fund is offering returns of 15% for 1 year. Whereas the other in the same category is giving 13% returns, upon seeing which you rushed and started your SIP. Next year, you purchased another mutual fund which was offering 15% returns. That is the way, people usually accumulate funds. After accumulating up to 15-20 funds, you have no idea how to review it though it’s your portfolio now. You’re unsure as to whether you would be able to achieve your goals with this portfolio or not. But ok, at least I am investing.

Conclusion

Now that you guys have reached towards the end of this article, I have an advice for you:

Instead of running behind returns, define your goals. Besides, you should have a moderate expectation of 10% returns from equity and 6%-7% from debt and plan your investment accordingly. This will help you to achieve your goal which is actually the gist of personal financial planning.

But first have a proper coverage of term insurance, health insurance and personal accidental policy.

Till then, happy investing.