Role of Advisor in Financial Planning
It is being often said that Financial Planning is unique to everyone. “One size fits all” theory does not apply in Financial Planning. So, here comes the important role of “Financial Advisor”. He or she has to analyze the person’s financial situation and offer the relevant financial advice.
While this Financial Advice is individualized, there are some general things to do in certain age groups.
Advice for a person between 20 to 30 yrs:
This age group is the best to set the foundation of financial life. Stronger the foundation, stronger the building. It is time to protect the risks of life so as to concentrate on other aspects of finance.
In view of the same, the best advices by Financial Advisor would be,
- Go for Term Life Insurance: The need for Life Insurance coverage is different for each individual. However, starting with Rs. 50.00 Lakh is a good idea. Minimum cover of 10 times of annual income is required.
- Go for Health Insurance covering your family: Even though health insurance coverage is provided by your employer, avail separate health insurance policy that covers your family. The amount of health insurance policy should be minimum of Rs. 5.00 Lakhs or 50% of your annual income, whichever is higher.
- Start accumulating Emergency Fund: Keep aside the amount that is equal to 6 months of your household expenses and invest the same in Liquid Debt Mutual Funds or in such instrument where it can be made available immediately. This money will provide you the strength to survive in the unforeseen situations.
- Start investing in Equity: Be it small amount, but investing in Equity through SIP is the best advice that one can get in their 20s. You may consider to invest a little higher portion in Equity after taking your Risk Profile into account.
- Possibly avoid availing Housing Loan or Car loan: This advice may be debatable. However, availing housing loan at an early age can be proved as unfavorable decision as housing loan liability is huge and have long-term tenure and impact.
Having said that, owning a house is important. Hence, invest for the goal of down payment of house for few years and then you can avail housing loan after 30s. The benefit of this would be you will have enough corpus and your loan amount would be lower. Further, you will have better financial stability in your 30s.
Likewise, car is a depreciating asset. Hence, car loan is not so smart way of utilizing your income. Understand the difference between needs and wants then take the mindful decision.
- Stay away from Credit Cards: The age group between 20 and 30 gets most attracted towards the offers, credit cards, & facilities like buy now – pay later. Do not get trapped into the vicious circle.
Advice for a person between 30 to 40 yrs:
- You can consider having loan for necessary assets: In your 30s, you can consider availing a home loan for your first home. Don’t purchase a house for investment purpose. Instead, you can invest that money in liquid assets and build a corpus for long-term. Availing loan for business expansion is a good idea as well.
- List your financial goals and start goal planning: This age group is quite stable in terms of finance or family. You can clearly list down the financial goals and start planning for the same. Invest according to time frame and priority of financial goals.
- Focus on Asset Allocation: While planning for financial goals, you must assess your Risk Profile (Investment Profile) and accordingly plan for the Asset Allocation. Selection of right proportion of Equity, Debt, Gold & Cash is vital for goal planning.
- Explore different Investment options: At this stage, you can explore different investment options. You may afford to take small exposure in risky assets such as Sector Mutual Funds or Small Cap Funds for long term in line with the risk profile. You can explore investment options such as PMS (Portfolio Management Services) or P2P (Peer to Peer lending), if your risk profile & amount permits.
- Start Saving for Retirement: Actually, retirement planning should be started in early stage of life. However, if you have not started, then this is the time to start it. You will still have 20-30 years to invest for retirement which is a good time frame.
Advice for a person between 40 to 50 yrs:
- Rebalancing your portfolio: At this age, you must have fulfilled most of your goals. However, you need to recheck your risk profile, rest of the goals and rebalance your investment portfolio accordingly.
- Recheck the amount of Term Life Insurance: Understand that your financial needs, accumulated corpus, earning capacity & liabilities have changed. In line with that recheck your Term Life Cover and opt for additional cover, if necessary.
- Ensure that you are Debt Free: In early stage of your life, you may have availed loans such as Home Loan, Car Loan, Personal loan, etc. Now, this is the right time to be Debt Free. Ensure that most of your loans are fully repaid by now. Living stress free life is important as well.
Advice for a person above 50 or for senior citizens:
- Write a “WILL”: No matter how much we don’t want it, death is inevitable, uncertain, unforeseen, unfortunate. Hence, it is essential to be prepared and plan to whom you want to transfer your hard-earned assets after you. This will help in avoiding difficulties that your heirs may face
- Safety First approach: Capital preservation is utmost important for you at this age. You must avoid investing in risky assets just to earn higher returns or for fun. The most important goal here is to check retirement corpus. Avoid withdrawing money from your retirement corpus for any other purpose. Shift your corpus from Equity to Debt, if necessary. Mindful investing & spending is important at this stage.
- Take the benefit of Fixed Income options offered by Government: After your retirement, you can consider investing in Government backed investment options such as SCSS (Senior Citizen Savings Scheme) or PMVVY (Pradhan Mantri Vay Vandan Yojana). I am not saying that you should completely avoid Equity Exposure. You can still invest, however, check your asset allocation and financial backup and take a decision.
- Recheck the amount of Health Insurance: You must have taken a Health Insurance Policy.
However, you should check the health cover and should top-up the policy. This is because the premium for Health Insurance Policy will be much higher after you attain the age of 60 years.
- Recheck the Asset Allocation & reduce the Equity Exposure if necessary: As a thumb rule, the risk-taking ability reduces with age. Since you cross the age of 50 years, you must look at the current asset allocation especially Equity exposure. Accordingly, shift your corpus from Equity to Debt, as your financial goal of retirement is near.
Financial Advisor – A Family Doctor
Financial Advisor is a “Doctor” of your financial life. Just as a doctor diagnoses your health issue and prescribes medicine, the financial advisor advises based on your age, goals, risk profile, financial background, etc.
I hope you got the idea of how important the financial advisor is in your life.
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