IMP-OST : 3rd Sep, 2012 ( Post 2 of 7 )Special edition - Financial planning
Source : i-Secure Solutions's website
Longer life span and lack of social security
People live longer now as compared to the earlier generation.
Most individuals have no retirement benefit when they retire from work.
Few generations ago, someone would start earning by the time on reached the age of 20 years, work till the age of 58 years, and live till around 65 years. In such a case, one earns for 38 years and lives off the retirement savings for the next 7 years.
Fast forward to recent times, one starts working at 25 years of age after completing post graduation studies. Many are quitting their jobs earlier, but let us consider a retirement age of 6o years and life span of 80 years. That means, one works and earns for 35 years to support port retirement life of 20 years. The scales have tilted.
Add to that the fact that earlier, in most jobs ( including private sector ) pension was a given thing. Now in most jobs ( including government no ) "No pension" is the norm.
If finance are not planned properly, the retirement years could be very challenging.
Proliferation of numerous products
Life insurance industry was opened to private players in the late 90s. This led to proliferation of insurance products which are predominantly investment oriented.
Though LIC continues to dominate the life insurance industry business, new players have caught up considerably with their product innovation, aggressive marketing and new distribution channels.
In mutual fund industry, with over 35 asset management companies (AMC), the growth has been moderate to good with product innovations and increase in reach to a wide geography and class of investors.
Many products and services have also been introduced by the banking industry which has contributed in the availability of choices for the financial consumer.
There is also a reduced attractiveness of the traditional products, e.g. tax free RBI Relief bonds etc.
Complexity of product and services
Innovation can lead to either simplicity or complexity. In the financial services industry, however the innovation has made the products increasingly complex.
An investor today can participate in the equity markets simply by investing in a mutual fund scheme through SIP ( Systematic investment plan ), but it is a still challenge for many in understanding how mutual fund actually work, and how market forces impact various products differently.
An investor today can have both insurance and investment in a single market linked product called ULIP ( Unit linked insurace plan ), but appreciating his/her actual need for insurance and a return on investment as well as analyzing various components and charges of a ULIP product is detailed and complex process.
Investors need informed guidance on making a finance sense out of what is being offered to them as investment or insurance, in order to achieve their financial goals.
Increasing income and saving levels
Indian economy has been growing at a 6-9% rate of GDP growth driven mainly by domestic consumption.
The educated and urban middle class has experienced increase in income levels.
At the same time, unlike our counterparts in many parts of the developed countries, Asians, and especially Indians believe in saving money. India has considerable household saving ratio which is more than 25%. Here again investors need guidance to channelize their savings.
Increasing level of borrowings
In todays financial markets there is an easy access to loans resulting in increased levels of borrowing by people.
If not managed carefully this leads to as serious mismatch in earnings and repayment leading to problem in cash flow. Leveraging the low interest rates is a critical aspect which needs to be explained to the borrowers.
Higher aspiration and goals
The days of building a house at retirement with accumulated saving and retirement benefits are over.
With access to easy credit at a fair rate of interest and a capacity to repay that loan, given higher income levels, people want to buy house at a younger age.
The lifestyle and aspirations have gone up significantly. People want to give the best education to their children. people want to go on regular vacations. people want to buy apartment in up-market localities. people want to be financially independent in their post retirement phase.
Inflation
Many times, prices of household items rise at a slow pace and hence go unnoticed.
In such a case, it is natural to ignore the impact of such increasing costs over ones life time.
A well written financial plan will always consider the impact of inflation and have safeguards built in.
Nuclear families
Joint families provided great safety net for most individuals as it shared the resources and difficulties.
Now with growing urbanization leading to nuclear families, these smaller families have a need to plan better.
They can no longer depend on the support of the larger family since they might be geographically distant.
Plethora of information
Today, thanks to television, internet and press, there is profusion of public information on various personal finance topics to the investor and consumers.
The media has made huge impact in the availability of financial information an analysis on real time basis to consumers.
Although this has helped many investors to take measured investment decisions, others are exposed to many new concepts and terms leaving them more confused than before.
Also there is dearth of availability of relevant information to the investor enabling him to take the right investment decisions.
Since many of this information are disseminated in smaller bits, the consumers / investors need expert financial planner who can put it all together and give need based advice.
Go back to respective i-Secure Monday Post
Increasing level of borrowings
In todays financial markets there is an easy access to loans resulting in increased levels of borrowing by people.
If not managed carefully this leads to as serious mismatch in earnings and repayment leading to problem in cash flow. Leveraging the low interest rates is a critical aspect which needs to be explained to the borrowers.
Higher aspiration and goals
The days of building a house at retirement with accumulated saving and retirement benefits are over.
With access to easy credit at a fair rate of interest and a capacity to repay that loan, given higher income levels, people want to buy house at a younger age.
The lifestyle and aspirations have gone up significantly. People want to give the best education to their children. people want to go on regular vacations. people want to buy apartment in up-market localities. people want to be financially independent in their post retirement phase.
Inflation
Many times, prices of household items rise at a slow pace and hence go unnoticed.
In such a case, it is natural to ignore the impact of such increasing costs over ones life time.
A well written financial plan will always consider the impact of inflation and have safeguards built in.
Nuclear families
Joint families provided great safety net for most individuals as it shared the resources and difficulties.
Now with growing urbanization leading to nuclear families, these smaller families have a need to plan better.
They can no longer depend on the support of the larger family since they might be geographically distant.
Plethora of information
Today, thanks to television, internet and press, there is profusion of public information on various personal finance topics to the investor and consumers.
The media has made huge impact in the availability of financial information an analysis on real time basis to consumers.
Although this has helped many investors to take measured investment decisions, others are exposed to many new concepts and terms leaving them more confused than before.
Also there is dearth of availability of relevant information to the investor enabling him to take the right investment decisions.
Since many of this information are disseminated in smaller bits, the consumers / investors need expert financial planner who can put it all together and give need based advice.
Go back to respective i-Secure Monday Post
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