Every year on the first Wednesday of October, the World Financial Planning Day is held to raise awareness about the importance of financial planning. World Financial Planning Day falls on October 5 this year. It is a part of World Investor Week and is sponsored by the International Organization of Securities Commissions. The day is observed to help raise awareness of the importance of financial planning, the need to always have a financial plan in place, and to seek the guidance of a financial planner who is ethical and competent.
As a retail investor, this occasion can be seen as an opportunity to gauge where you stand in the financial planning front and reboot and recalibrate if need be. For those who are yet to start their tryst with financial planning, the occasion can be a chance to ponder over their current approach to finances and make up their mind to start on a plan at the earliest.
Why is financial planning important?
We often see the term ‘financial planning’ floating around us in advertisements on various mediums. But what does financial planning entail? In the simplest of terms, financial planning is a process by which individuals either with the help of experts or by themselves lay down a roadmap for meeting their monetary goals. Financial planning plays a crucial role in maintaining clarity with respect to life goals and also equips you with resilience to sail through difficult circumstances. Besides, a financial apparatus that runs like a well-oiled machine can spare you from a lot of hassles whenever life throws a curveball at you.
A dedicated financial plan can help you manage your money in the best possible way and lead to an increase in overall retained earnings. Besides it lends direction to your goal, helps you stay on track, and also helps you understand how a particular goal affects other areas of your finances. You are better prepared for emergencies and are secured against unforeseen circumstances because building a corpus for rainy days is one of the most critical aspects of a solid financial plan.
Preeti Zende, a SEBI registered investment advisor and the founder of Apna Dhan Financial Services says, “Financial planning works primarily through the identification of key goals and putting in place an action plan to realign the finances to meet those goals. It is a holistic approach that considers the existing financial positions, evaluates the future needs, puts a process to fund the needs, and reviews the process.”
The lacunae in financial planning in India
Despite India’s enviable economic growth trajectory in the last few decades, financial planning in India is yet to become an intrinsic characteristic of the collective financial attitudes of the population. While there is a growing acknowledgment of the need to strive toward financial freedom, there remains a lot of room for change when it comes to perceptions about money management.
Outdated notions of investment techniques and asset classes keep many people eons away from having financial stability throughout their lives. To put things into context, the All India Debt and Investment Survey 2019 conducted by the National Statistical Office revealed that less than 10 percent of households use their financial assets for saving and investment needs, and largely rely on investments in physical assets such as land and building, machinery, and transport equipment.
Low levels of financial literacy and inadequate thrust in our educational ecosystems on imparting financial skills also deter people from managing finances efficiently. The importance of financial planning only dawns in adulthood and the process is often a painful one marked by numerous losses incurred through hits and trials with myriad investment instruments. According to a report published by the Asian Development Bank in March 2022, only 27% of Indian adults – and 24% of women – meet the minimum level of financial literacy as defined by the Reserve Bank of India.
Confusion and misconceptions about investment methods and asset classes push many to follow investment courses that may be completely unsuitable for them. This is especially true in the case of investing for long-term goals such as retirement where financial planning remains erroneously limited to a favoured few investment avenues. In fact, a survey conducted by the Household Finance Committee said, “The Indian household finance landscape is distinctive through the near total absence of pension wealth. Pension accounts and investment-linked life insurance products exist, but they are only used frequently by households located in a small viii ix group of states, while in most other states, the contribution of pensions wealth to household wealth is negligible.”
Making room for change
In the age of digital innovations, financial planning need not be shrouded in an air of mystery. Last mile internet connectivity and the advent of numerous portals dedicated to financial planning have made it easier for investors to develop their knowledge about different financial products and how and if they can benefit from them.
The gamut of financial planning is showing encouraging trends too. Younger investors are confidently embracing asset classes that were shunned by the previous generations. Financial planning is no longer being solely seen as an investment amalgamation of a handful of low-risk asset classes. There is growing cognizance that asset classes that carry risks are crucial for wealth creation in the long run and that the cookie-cutter approach to financial planning is detrimental. Parallelly, conversations about the importance of insurance coverage, tax planning, and estate planning are becoming a more common phenomenon. More and more are people realizing a multi-dimensional and well-rounded approach is essential for maintaining financial health.
Among investment classes that are being increasingly sought by investors for their financial planning objectives are mutual funds. A survey conducted by CASHe, an AI-driven financial wellness platform revealed that there is a growing realization about responsible investing among millennial investors with over 47% of respondents favouring SIP investments in mutual funds.
They are myriad reasons behind the mutual fund bandwagon attracting more investors – investors can redeem the units whenever they want, the ability to choose from a mix of securities which helps portfolio diversification, the benefit of professionals managing the fund, and the flexibility to invest in smaller amounts.
Zende says, “ Mutual Funds are suitable to all types of investors having ultra-short, short and long term horizon. It offers proper diversification of the risk as well as provides all benefits of the equity and debt asset class. You can use liquid funds, ultra-short debt funds, arbitrage, and money market funds for short-term financial goals. Hybrid equity mutual funds and balanced funds can be used for midterm financial goals and index fund, flexicap and mid and small caps can be used for long-term goals.”
Action points
- If you are yet to start or if you feel stuck in your financial planning endeavours, seeking help from experts can give you much-needed clarity as to how you can proceed. Random experiments with your finances can cause significant losses.
- The journey of financial planning is an ongoing one and keeping yourself updated with the latest developments in the personal finance space can help you avoid a lot of bad decisions in the long run.
This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.
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