Every time we see someone saving and investing millions, we assume the role of a personal finance manager in the game. But do we really need a personal finance manager to tell us how to save and invest our money? The answer to this question depends on how you view your financial goals in the long run.
Many Indians rely on their friends, peers and relatives for financial advice. This leaves only a small percentage of the country’s population to rely on the expertise of people who lend a professional outlook to financial matters. This is because not many Indians have warmed up to the idea of seeking personal finance advice as willingly as they look out for medical or legal advice. There is also the misconception that personal finance advisors serve only the rich though the truth of the statement cannot be completely negated owing to the high fees charged by some top-notch finance professionals.
Suresh Sadagopan, Founder, of Ladder7 Financial Advisories, says, “In the beginning, the needs may itself be simple and the money available with them may be small. Hence, they need basic guidance to get them on the right path rather than full-fledged financial planning help.”
Managing finances on your own
It is not difficult to manage your finances on your own till you realize how money can be earned, saved and used to earn more money. Wealth begets wealth, which means that you must not first lose focus on your earnings or working capital.
The old equation taught to us in schools
Income – Expenses = Savings |
must be rewritten and understood as
Income – Savings = Expenses |
The equation remains the same though its implied meaning changes. You cannot invest unless you save, which means that you must prioritize your savings and investments before yielding to your urge to spend.
Different people have different financial goals depending on their outlook on money and life. Also, the responsibilities they bear have a direct bearing on their risk appetite and the kind of corpus they would like to accumulate in future.
Raj Khosla, founder and managing director, MyMoneyMantra says, “Investments are subjective to one’s income, periodic expenses and upcoming monetary requirements. Individuals should certainly aim to minimise debts, filter out the investments that are well within their risk-taking capacities and always try to allocate a sizable portion of income towards an emergency fund that should be made up of liquid assets.
A little-to-moderate exposure to risk-free securities, fixed-income instruments and safe-haven assets, including term deposits with a bank, AAA-rated debt instruments with easy terms of premature withdrawals and gold, substantially cushions you from market-wide volatility.”
Choosing between investment options
If you are not keen to hire a financial planner in the near future, you can start by deciding on your investments depending on your financial goals which must also include your retirement planning as well.
Putting money in debt and money market instruments will get you fixed returns but may not increase your wealth prospects. Among the debt instruments, you may choose between a public provident fund (PPF) with a lock-in period of 15 years, an employee provident fund (EPF) with a revised interest rate of 8.1 per cent, fixed deposits that do not yield much but are preferred for their safety net, recurring deposits offering meagre interest rates and, last but not the least, liquid funds that offer moderate returns in return for a low-risk factor.
However, there are some hybrid or balanced funds in the market also that allow you the benefit of both equity and debt depending on your willingness to take risks.
To see your money growing, you must park your earnings in equity instruments. You can start by identifying sectors with potential growth prospects after which you can select the stocks that you want to buy. However, if you do not have time or the aptitude to analyse stocks or study their fundamentals and technical, you may as well list mutual funds with portfolios that you identify with.
You can list the various wealth builder funds, aggressive growth funds, steady income funds, capital preservation funds or the best tax saver funds to start with. Study the mutual funds under each category, the absolute returns over the past three to five years, average returns earned since inception, their expense ratios, lock-in periods if any, their respective fund managers and their assets under management. Investors apprehensive of mutual funds actively managed by a fund manager can opt for index funds since they mirror the returns of the stock market, which means that they are passively managed.
Exchange-traded funds (ETFs) are another aspect of investments that investors must choose depending on the volume and liquidity of the ETFs they choose. Investors can choose between gold and real estate depending on the returns they are looking for and how frequently they would like to churn their investments.
Eyes fixed on your financial goals
A goal-based financial plan is a must to achieve considerable financial outcomes. Irrespective of who tells you what, you must have your eyes fixate on your financial goals to ensure that you do not sway midway or resort to mindless expenditure in a huff.
Sadagopan says, “Once the income flow becomes robust and the saving potential becomes significant one may need the services of a financial advisor. Also, when one has a family and needs to plan for multiple goals to be achieved over life, a financial advisor would be able to greatly help.”
However, if you think that you would need a financial advisor in your life who could give you well-meant advice, you may decide between
- Fee-based personal finance managers
- Performance-based personal finance managers
Viral Bhatt, Founder and Owner of Money Mantra says, “In my opinion, experience is most important while choosing the personal finance manager, and what I feel is your personal finance manager should not be product-focused, he or she should be process approached manager, talk to you on process than product, do your risk profiling and focused more goals rather than returns.”
Procuring professional services
Having a personal finance manager who can gauge your financial needs in future based on how much you earn today and your potential earnings has its perks. Some of them charge heftily, which is why many investors misconstrue them as unavailable. This is where performance-based managers come to the rescue where they do not charge you upfront but charge you on the returns they earn for you from your investments. This is not only an incentive to promise you the best service but also saves you considerable money on paying their fees at the beginning of your financial journey.