According to financial planners and advisers every person who has a dream in life that needs some financial backing to achieve, should have a financial plan in place to meet those monetary needs without stretching his budgets much. For example, people may have long term dreams like buying a house, own marriage, children's education and marriage, early retirement, a comfortable retired life etc. There could be short and medium term life goals also, like buying a car, meeting yearly insurance premium, foreign vacations with family, annual fee for kid's schooling etc. The reality is that with a bit of a planning all these short, medium and long term goals could be met with ease. Financial planning is required to have a smooth ride in life in meeting these goals without stretching the budgets much.
However, investors and planners often face some impediments while putting in place a financial plan. One of them, where they have to use an approximation and the chance of deviation from the estimated figure is very high, is the rate of inflation. Since the fund accrued will be used in the future, every financial plan has to take into its calculation an inflation figure.
For example, if a person is investing to meet the future cost of MBA for his daughter, the financial planner helping him will take into consideration the current cost of the MBA that the girl intends to pursue in future, the current rate of inflation for the same course and then calculate what the cost of that MBA could be when the girl is ready to join that. Since it is nearly impossible, even for the best of analysts and economists, to estimate the rate of inflation for even the next few months. And here planners have to approximate the rate for several years in the future. So the estimated rate of inflation is always an impediment to draw up a financial plan.
Another impediment to drawing a financial plan is data collection, planners say. Since a financial plan is a customised product for a family, with varying income and expenses streams, and also different financial goals, complete and accurate data about the family's income, expenses, existing investments, loans etc., become crucial to draw up a financial plan. Getting complete and accurate data for the family while setting out to plan their finances for the future often comes as a hurdle to planners.
After collecting the relevant data, processing the same also is often an impedi ment to draw up a financial plan. If the data is there which is accurate and complete, but the processing of the same is not efficient, that could hinder the whole process of planning, planners say.
After these hurdles are overcome, the next step is risk profiling of the main earning member as well as the whole family for which the plan is being put in place. Financial planners and advisers say that most individuals either underestimate or overestimate their risk-taking ability. However, for an optimal financial plan, correct risk profiling becomes very important. If the risk taking ability in underestimated then the investments might go into products which are riskier for the family. On the other hand, if it is overestimated then investments may go into products with lower expected returns which in turn may lead to sub-optimal wealth creation.
For example, if an individual is able to take higher risks but is estimated to be at a category lower than his ability, he may have a larger share of large cap funds in his portfolio. However, if his risk profiling was done correctly, he would have had a larger exposure to midcap schemes with chance of higher returns.
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