The Right Mix
Financial planning goes beyond mathematics and theories because what may be right for one may not be right for another person even if all other parameters match fully
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Times are changing. Many veterans will agree that there was a time when convincing a client to start a SIP of even a small amount of Rs. 1,000 was a daunting task.
Moreover the commissions were also very low as compared to Life Insurance. Hence, advisors were happy selling Life Insurance policies. Every time a client has some surplus money, another policy was suggested.
Then came the knowledge and product boom. With the start of Y2K era (many of my generation will be aware of this term:) the market scenarios changed and people became more receptive of Equities and Equity based products like Mutual Funds, ULIP's etc. Financial Planning and Asset Allocation became the common terms. Everybody was searching for ideal figures, and infact still searching. Many algorithms, software, theories and mathematical models have been developed around this.
I have always believed that Financial Planning goes beyond mathematics and theories. Because what may be right for one may not be right for other, even if all other parameters match cent percent. Let us try to find an answer to this in an easier way applying the concepts of behavioral finance.
Take a piece of paper and pen for some simple calculations. Write your take home monthly salary at the top. From this subtract all your expenses including kitchen / family expenses, children school fee, loan EMI's, Fuel expenses, Dine out and shopping expenses and also your Insurance Premiums (converted to monthly amount) etc. The amount you are left with is your monthly surplus.
Generally speaking, based on your income you can invest anything between 70% to 80 % of this amount. Now the question is why not 90 % or 100%. Well, the answer is very simple, mathematically you are right and can even go upto 100%, but if your neck measures 15 inches and your tailor stitches your collar exactly 15 inches then how would you feel? If you think that you would feel suffocated, then you would agree to why I am suggesting maximum 70% to 80 % of surplus to be invested. Even after deducting all your expenses, the surplus still should not be fully used as it will strain you mentally.
Now, in next step, once you know how much you can invest, we would now decide the asset allocation. Although your goals and other factor may influence this decision, but we are talking in general terms only. (See graphic)
Again in the end I would say, Financial Planning is not only mathematics. A strategy that might appeal to one might not appeal to other. But based on my experience in the industry I have found above asset allocations to have a major acceptability, with minor deviations in some special cases.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.