During last two weeks or so, I had the privilege to visit and interact with Armed Forces Officers at Indian Institute of Foreign Trade(IIFT), New Delhi, Meerut, Pannagarh and Mumbai (Kalina) Military Garrisons. During the course of my presentation and subsequent interaction with Officers, I realized that the concept of Personal Financial Planning is not clear to most of us and we are not planning and channelizing our resources towards achieving our desired financial goals.
Important highlights of my interaction are as given below:
1. Contribution to DSOPF. Itstill remains the most preferred option for investments. Although some part of the investments must go towards DSOPF but investments in equity through equity mutual funds can not be ignored. Equity has been the largest wealth creator in the past. Investments in equity Mutual Fund through SIP will create enormous wealth in the times to come as India is all set to double its GDP from existing 2.5 trillion dollars to almost 5 trillion dollars by 2025.
2. Goal Based Investments. Investments are being done in an adhoc manner without linking them with future financial goals. Such investments have an inbuilt risk of getting redeemed prematurely at the slightest volatility in the stock market or to fulfill any insignificant desire. Under such conditions it is rarely feasible to achieve one’s financial goals. Investments based on financial goals is the only way out to meet your desired targets.
3. Investments not in line with Risk Profile. Selection of an Asset class is directly related to an individual’s risk profile. An individual averse to risk should not allocate high proportion of investments into equity as he or she will not be able to handle the volatility in the market. I have observed that officers having low risk appetite and who invested in the equity mutual funds in last year or so are finding it very difficult to see their capital being eroded. For them , investments in debt mutual funds would have been a better option. So investments based on risk profile is very important factor.
4. Loan, a Biggest Culprit. A large number of officers tend to take loan to buy an expensive car, to take personal loan or credit card loan to buy house hold articles/ go on foreign vacations. Cost of borrowing money is huge and it prevents an individual to plan their investments to achieve other important goals in their life since most of the money goes in paying the EMI. For example, a car loan of Rs 10 lakhs @ 9% for 7 years will have an EMI of Rs 16000. Invariably we are tempted to change our old car by the time loan period of 7 years is going to be over and we end up taking fresh loan to buy a new car. This process carries on almost throughout our earning life. Had we not taken this car loan and invested this amount of Rs16000/- pm @ 9% for twenty years, it would have generated a corpus of Rs 1.02 Crore.
5. Investments in Insurance Products. Most of us have invested our large amount of money in different insurance products but unfortunately all these products are not pure life risk coverage products. Bulk of the premium in such insurance products go towards investments and the rate of return (RoI) is not more than 5-6% at max. Aim of insurance is only to protect against the risk of life and definitely not an option for investments. There are much better options available for investments. Term Insurance is the only option which one should exercise to protect against the risk of life.
6. Direct Investments in Stock Market. I have come across Officers who are directly investing their hard earned money into buying stocks without professional competence in understanding the balance sheet of the business in which they are putting their money, purely based on hear say/ tips from friends and recommendations through other websites etc. Most of them are into great losses and the most unfortunate part is that they are not even aware of their present situation. Direct investments in stocks require great deal of acumen in understanding the company’s business, regular monitoring and high risk appetite. For people like us, better route may be through equity mutual funds.
7. Inadequate Financial Awareness. Lack of financial awareness restricts the investment options. It is very essential that all of us must devote some time to read books/ magazines/journals on the subject. More we are aware financially, better we can manage our money.
It is my sincere request to one and all to devote some time on management of money with the aim of making money work for us rather than we working for money all the time.