People concentrate too much on Buying the Excellent Mutual Fund? May be people do not understand meaning of “Best Mutual Fund”. So let me declare what is meant by best Mutual fund: The best mutual fund for you is the Fund which suits your requirement and has ability to help you to achieve your Financial Goals without risking your money.

If you are planning for your Retirement and saving a decent amount of money every month then all you need to do is to see the ultimate return that is close to 12-15% CAGR, which is achievable in long term if you just invest in mutual funds through SIPs. In that case how does it matter if you invest in higher rating as “Five star″ Mutual fund or lower rating as “One star″ mutual fund? I am not saying that you should not try to find good Mutual funds but shift your focus from “buying the best mutual fund” to “Buying a Mutual fund which will help you achieve your goals”.

investment

I have seen many people pinging me about their investment plans or decisions to take Term Insurance or Investment plan through mutual funds for next 10 yrs through SIP. Perhaps they’ve done a good job of building a portfolio of mutual funds. I would like to congratulate them on their decision and action. They are ahead of most of the other people.

But is it enough? Is that all? Is that the initial step everyone should take? The answer is NO!!  Though, they are investing regularly but without any objective and it leads to unplanned investment.

Unplanned Investment

Let’s take a scenario, Sunil starts a SIP with a mutual fund and now he is happy that he has been investing finally. He invests for 2 yrs and markets have gone up and down and at the end his investments are at same place where he started. So there is no appreciation in value. He decides to take half the money out of his investments and uses in buying a car which was his plan from many years. A market finally starts recovering, but as usual he realizes very late that this is the time to put money in markets (as all the general public realize this very late).

He starts his SIP again and now continues this for some years. He periodically takes money out of his investments on many occasions e.g. to meet unexpected expenses, for his vacation and his child education costs and so on…

What is wrong with this approach?

He started an investment which was a good idea but Sunil jumped on the second step of the ladder. He had no predefined goals and hence no clarity on investment plans- No idea of how investment should be divided for different financial commitments and not investment as per risk-appetite and goal’s importance.

Like Sunil, a lot of people have gone directly to the second level and skipped the very first basic level, which is Planning!

What is Planning?

Planning your finances can be boring, but it’s vital and most crucial part of financial planning. A person who gives much time to planning things has higher chances of achieving it. Make investment is second step. So, the first step was to plan for things. Investing is part of financial planning, but it’s not even the most important part.

Planning things in advance reduces doubts about certain things, provides clarity in financial life and hence reduces a lot of issues.

Financial planning is about helping you to figure out how to make all of the pieces of your financial life work together to meet your goals.  Knowing your goals is the first plan that why are you investing; what is the goal associated with your investment; Is it buying home?        Buying Car? Vacation after 3 years, Retirement, Child marriage? etc..

Planned Investment

This time, Sunil knows “Planning is everything” and has to plan how to make proportionate investments for his financial commitments. He identifies his goals and how much money he would need for each. If he needs to save 10 lacs for his Daughter’s Education in the next 20 yrs. He can invest Rs 2,000 every month through SIP in some good mutual funds which has good track record over long term. He can try PPF + Equity Diversified funds OR he can try Mixed of Balanced Funds if he is not big risk taker. In this case, he has to do just follow the Plan, Just invest 2k every month consistently and review his Fund performance once every year. If he starts getting bad, shift to some other good fund. Just imagine how easy and comfortable this situation is! If he can little more risk he can do that but not too much.

 Now he exactly knows that, there will be no distraction in between by equity markets going up and down or any other factors because in the beginning itself he has factored in all the possibilities. In short, now he has a clear path and he knows how fast or slow he has to walk on it. At the end if he keeps on walking on it the way he planned Success is guaranteed.

Conclusion

It is evident that Financial Planning is not all about getting great returns and about finding the best Insurance and mutual fund for yourself. But in reality they are small components of Financial planning and the core of it is something else. It’s a personal thing and totally relevant to you and to your needs and your Financial Goals. It’s about having a predetermined plan or strategy to make use of whatever money you have in a hassle free way. Getting great returns or doing just better than average and just investing are not a very significant part of Financial Planning but achieving goals while taken proper steps as envisaged under proper guidance of a Financial Planner.

The first step not making investments but planning for everything and then executing it.

This article got published in Hindi at Dainik Bhaskar on 16-02-2016

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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