Let me rephrase the question – What can a financial plan do
for you? You need to know the answer to
this, if you are engaging a financial planner.
Firstly, a financial plan is not an exercise to assist you
in getting amazing returns. It is a blueprint created for you to follow to
achieve your goals, with the available finances. The challenge for the planner is to find out
if multiple goals, which you may have mentioned, are possible to be achieved or
not. If one had been wildly throwing
around fancy dreams as one’s goals, the planner would come to know, when he
crunches the numbers. The planner will
be able to find if the goal can be achieved or not. This also puts to rest, the tussles that go on in a family about
whether a specific goal is desirable to have or not.
A goal need not be thrown out altogether too. In some cases,
due to multiple goals running concurrently, some goals may have to be postponed
rather than dropped. For instance, if
there are two goals – a foreign jaunt after 2 years costing Rs.5 Lakhs and a
car in three years costing Rs.7 Lakhs, calculations could show that one of
them, say, the car, has to be postponed.
Sometimes the goals may also have to be scaled down. For instance, if the client is willing to go
for a Rs.4 Lakh car after three years, the goal can be achieved after three
years, in the scaled down version.
A good financial plan can hence tell you if you are on course
to reaching your goals, as well as how to achieve them.
The next important thing a financial plan does is to assess
your risk and find out how much you and your family are exposed. The planner should be able to calculate & tell
you how much insurance you may require. Today, term insurance is available at
very low cost. Covering the loan
exposures, goal expenses as well as the cover required to take care of future
expenses, is essential. Replacing the
income may be an ideal goal, but is difficult to achieve, while providing life
cover.
Medical cover is even more essential. Based on the coverage from the employer ( if
in service ), the planner would suggest a suitable plan with appropriate
cover. Various factors like waiting
period for pre-existing conditions, domiciliary hospitalization, day care
procedure coverage etc. will have to be properly weighed in before the planner
will decide a suitable plan for you. Premium is just one of the considerations.
Atleast Rs.5 Lakhs is required for an
adult and Rs.3 Lakhs is required for a child. Further cover can be provided
through top-up insurance, to minimise premium outgo and maximize benefits.
The third important aspect would be asset allocation. Based
on the cash-flow requirements, number of years of working life, savings
potential and other factors, a correct asset-allocation will have to be decided
keeping in view the risk that can be assumed in the portfolio. Existing
investments have to be reviewed and appropriate cleanup & reallocation, needs
to be done. To build the portfolio, regularly
available products themselves would be able to round-up the portfolio.
The fourth vital aspect would be cash-flow management. Proper
provisioning for liquidity, contingency and building up the corpus for the
upcoming & long-term goals, needs to be planned. A good financial planner
would be able to manage the available cash-flows and deploy in a manner so as
to maximize the returns till the funds are needed, by choosing the right
instruments to invest into. Matching the cash-flow requirements over the period
requires one to consider the time when money would be required for the goals
and accordingly choose the investment vehicle considering liquidity, returns,
risk inherent in it, tenure, tax-efficiency and other considerations.
Finally, a good financial plan would offer actionable
recommendations. The recommendations need to be clear & specific. Also, you
would need to know why you are asked to do what you are asked to do. Easy to
understand & actionable recommendations, along with a lucid explanation
about the suggestions, give clarity on
the course of action to be taken and peace of mind that comes with knowing what
you are doing.
That is a good financial plan in a nutshell and it can offer
you the structure around which you can build your future. A good plan is
tailor-made for the family and will offer you clarity & peace of mind. Once
there is a proper plan in place, all you need to do is follow it diligently.
That should end in financial nirvana, god willing!
Authored by Suresh Sadagopan
www.ladder7.co.in and published
in Moneycontrol.com
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