In Olympics there are two kinds of races. There is 100 meter sprint and there is marathon. Both are followed with equal enthusiasm.
While sprint is all about speed, marathon is all about who can survive the longest and run the stretch of 42 km to win the race.
Obviously training/coaching for both these races is totally different. If a marathon runner is trained to run like a 100 meter sprint runner than s/he will not be able to complete the race as s/he will get exhausted before reaching the final destination.
In the marathon the aim is not to be fastest in a short time but to survive till the end.
Financial planning is also similar. The aim of the financial planner is to ensure her/his clients reach their financial goals. It is about optimising client's financial resources judiciously and not maximising them.
If a client has Rs 5 lakhs today and needs Rs 10 lakhs after 10 years for her/his daughter's marriage, s/he needs to generate 7.18 per cent returns per annum.
Investing simply in Public Provident Fund (PPF) or National Saving Certificate (NSC) or few other debt instruments can generate this. There is no need to invest the corpus in equity where risks are higher.
Mumbai to Pune: Time vs risks
Let's look at this in a new perspective.
The distance between Mumbai and Pune is 180 km. If we want to reach Pune by 11:30 am, then we should leave from Mumbai at 8:30 am. By driving at a speed of 80 km per hour we will be able to reach Pune by 11:30 am.
This is after keeping in mind the traffic congestion in both the cities plus the time for breakdown contingencies, if any. Maximum possible speed of the car could be 220 km per hour. However we do not drive at 220 km. This is because we know that by stepping up the speed we are also increasing the risk of an accident.
Similarly, if a client needs only 7.18 per cent returns per annum then the financial planner should recommend investments that will generate these kind of returns - currently debt--based products are generating these kinds of returns. By recommending exposure to equity to this client the adviser is unnecessarily exposing her/him to higher risks. Isn't s/he?
Make a list of your financial goals
Most of us do not have a clear idea about our financial goals. Check out how many of us have written down our financial goals those responsibilities and dreams in life for which we are saving money today.
It is not good enough to have them at the back of one's mind. It is important to have them written down. If we do not have our list, then we are wandering in the dark. If we don't know where we want to go, then how is our financial planner going to help us reach our destination.
Another shortcoming of not having "OUR" financial goals' list is that in the absence of it, we try to imitate others.
I know of an individual who used to invest in only those mutual fund schemes where his boss invested. Later he found that his boss was saving money for his daughter's marriage, while this individual was not even married!
Financial planning is all about channelising 'OUR' financial resources towards 'OUR' financial goals. It is about making optimum use of our financial resources.
In the race between the tortoise and hare, tortoise wins not by maximising speed but by optimising it. If we want to reach our financial goals then we your financial planner and you - should optimise our resources and not unnecessarily attempt at maximising them.
Maximisation comes with additional and at times undue risks.
Gaurav Mashruwala is a certified financial planner. The author can be reached at gmashruwala@gmail.com
