Goal Based Financial Planning Helps Individuals Structure Their Finances Better: Mrin Agarwal, Founder, Finsafe India
What are some of your suggestions to Millennial for their Retirement Planning? Do you think that millennial are doing enough to save for their retirement?
Millennials should start investing for retirement early on simply because the compounding effect of investing for the long term will help them build a good retirement corpus. In my sessions, I see that millennials are saving less than 10% of their salary and this amount too gets invested for shorter term goals . Hence there is no or little retirement planning being done by millennials.
Why do you recommend Goal-Based Financial Planning for individuals? How does it help?
Goal Based Financial Planning helps individuals structure their finances better. If one invests based on a goal, one knows what is the amount to be saved for the goal as well. Otherwise, investments are made in an adhoc manner without choosing the right investments for the goal period. For example, people invest for children’s education, which may be 15 years away, in a 5-year fixed deposit. Further, people do not take into account inflation. Let’s say a person wants Rs 10 lakhs after 10 years. The value of Rs 10 lakhs assuming 6% inflation would be Rs 18 lakhs in 10 years. With goal-based planning, investors know how much they need to invest taking into account inflation and other factors.
What behavioral traps are retail investors most susceptible to in times like these? How can they circumvent these traps?
The biggest bias is recency bias, which is buying a scheme based on recent performance. Investors also have herd mentality bias which is investing into assets which others are investing into without assessing the risks involved. Loss Aversion bias is still very prevalent in India, wherein investors want to stay away from risky investments due to high chance of loss. Confirmation bias, which is investing as per one’s beliefs like real estate is the best investment or mutual funds do not give good returns.
To circumvent these traps, investors will need to firstly educate themselves on investment products and how they work. They will also have to analyse why they made losses and learn from their mistakes. Finally building in accountability, i.e. Having someone to play devils advocate to the investor’s investment decisions will help in getting alternate views.
Equities are capitulating and debt markets have been marred by recent credit events. What asset classes should incremental money be flowing into right now?
That totally depends on an investor’s investment horizon. For long term goals, equity mutual funds are a good option and for short term goals, ultra short term or short-term debt funds are a good option
What mistakes should young investors avoid with respect to their insurance portfolios?
Stay away from investment liked insurance plans as they have high costs and the overall returns do not beat inflation. Stick with term plans, through which, an individual can take a high insurance cover at a low cost.
What steps can women take to become more financially independent and take charge of their personal finances better?
Women need to firstly read up about money management. They can start investing small amounts to start off, just to get experience in investing. Women should also take some risk and invest in equities and not stick on only to traditional products. Traditional products typically give returns which may not beat inflation. Once they have some experience, they must engage with a financial planner and have a financial plan done, so that their investments are linked to their goals. In all this, they must have absolute confidence in their abilities and not lose hope if they make some losses.
