Why Indians Need to Stop Shying Away from Financial Planners

The need of the hour is to start, and the sooner, the better

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In 2017, the Aviva Life Insurance company commissioned an interesting survey to gauge the financial literacy of Indians households in eight cities. This survey included the following two key metrics.

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Dream Index – Do Indians dream of certain financial goals? Are they aware of their specific financials goals?

Plan Index - Do they actually have a plan to achieve their dreams?

The gap between the two was mind-boggling. While 61% were aware of their dreams and goals, only 24% had any concrete plans to achieve it.

This woeful lack of financial planning included some disturbing metrics, including 81% of Indian parents not knowing the future cost of their children’s education, and 89% of health care spending being done directly out of their pockets.

Financial Planning: The Clock is Ticking

The urgent need to embrace financial planning (and financial planners) could not have been painted more clearly.  Psychologically speaking, the lack of planning, also stemmed from a lack of willingness to trust outside experts for financial advice (60% of Indian urban households said that they trusted self or friend and family over outside experts, *SEBI survey of urban households 2015).

This contrasts with developed markets where the level of customer education is a lot higher, with much higher percentage of assets being held in diversified pool of assets. For example, a whopping 60% of Americans have equity exposure, as compared to the meagre no. here in India.

The need of the hour is to start, and the sooner, the better. Here are four ways, financial planners can help individuals towards their ‘dream’ financial goals.

1.  Help an Individual Diversify Investments

Indian households have near total concentration of household assets in fixed deposit and insurance products, (95% had FD investments compared to less than 10% for equity / MF and debentures or commodities, as per SEBI). The golden rule of investment is to never put all your eggs into a single basket. Diversification with the help of a financial planner will lead to lower potential risks as well as higher portfolio returns.

2.  Help an Individual Optimize Tax on Fixed Income Products

Currently individuals pay tax as per income slab, on fixed deposit and insurance products, however depending on tenure of holding, individuals can optimize on tax by investment in Debt Mutual Funds or even Equity Arbitrage Funds.

Note: For holdings above three years, the tax on Debt Mutual Funds is negligible and for shorter term holdings, Equity Arbitrage Funds have only 10% short-term capital gains tax.

3.  Help Individuals Achieve Real Financial Goals

As evidenced by the Aviva study, most Indians don’t have a concrete plan to execute their financial goals. Financial planners can create a structured plan that can help individuals achieve their specific goals including house purchase, higher education for offsprings, and retirement.  To achieve these financial goals, a higher investment yield might be required and a simple fixed deposit or insurance rate might not be enough.

For a longer-term investment horizon, systematic investments in Equity Mutual Funds or Portfolio Managers have given high double-digit returns with limited downside potential. In fact, for a 20 year period between Jan 1995 to Dec 2016, in case systematic investments were made and held for more than 10 years, the probability of losing money was zero with average returns of 15.2% (source * Mintwalk).

4. Rise of Robo Advisors

A big global trend emerging is the rise of the robo advisor who are using artificial intelligence to provide customized investment advice. This phenomenon is not just restricted to fintech startups. Large fund houses and banks are embracing this change as well. This has made financial planning accessible at scale.  As per a Business Insider Intelligence forecast, by 2020, as much USD 1 trillion dollars will be managed globally by Robo Advisors.

While this phenomenon has yet to pick up pace in India, going forward we will be seeing this service being used more often, especially by the younger millennial.

Indradeep Khan

Written By

Indradeep Khan is a post graduate from XLRI (2003 batch), where he was a top rank holder and an Economics Graduate from St. Xavier’s College, Kolkata (2001 batch). He has 12 years experience in the Financial Industry and Capital Markets across APAC,  inclusive of 6 years at JP Morgan and 3 years at Deutsche Bank, where he was a Director, responsible for Rate markets. At present, he heads India operations at Kristal.ai, An AI-enabled Digital Asset Management Platform, and is responsible for the AUM on the platform and all related business development.