Why?

Because he might have taken the best medicines, but they were not the right ones for the disease Amit was suffering from.

Fortunately, the above incident is not true. The Amits of the world tell their symptoms to the doctor and let the doctor advice the right medicine.

Unfortunately, when it comes to financial advice, these very Amits ask 'What's the best investment?' They pick up tips in local trains, at the parties, in the gym or even from their paanwala. They read a few magazines, watch a couple of programmes and think they have learnt enough.

They implement such advice, without considering whether it suits their financial profile or not. The result is financial death. Then, they go about blaming the advisors, the regulators, the FIIs and everything under the sun.

The investment universe out there is a huge one. There are a number of investment opportunities with many options and sub-options. Each of these has a specific risk element, a specific time element, a specific return element and a specific liquidity element.

Therefore, each investment instrument is best suited to a specific need.

Amit's investment need is different from the Aruns and the Arunas, the Vijays and the Vijayas, the Deepaks and the Deepikas. Therefore, if investment A is good for Arun or Deepika, it may not necessarily be good for Amit too.

In fact Amit's own needs change with time and age. Equity may suit Amit better when he is 30; a mix of debt and equity may be a better option when he turns 45; and debt may be more palatable when he is 60.

Therefore, before Amit decides to invest, he must have a detailed financial plan. He could either make one himself or take help of an advisor. The plan is a broad roadmap of where he wants to go, what financial goals he wants to achieve and what retirement corpus he needs to build up.

The plan also defines what investment options suit Amit, given his financial profile.
It is going to be long financial journey maybe 30 to 40 years. And during this period Amit will experience a lot of changes - in his personal life, in his professional life, in the economic scenario around him. Therefore, the financial plan should be regularly updated and streamlined to take care of the new conditions.

Amit's financial plan must describe certain basic things.

Personal profile

Amit should detail out his age, family background, educational qualifications and professional experience. How much does he earn and save?

What are his assets? And what are his liabilities?

This will give an idea about how much Amit is likely to earn and save over his working life.

Investment objective

• What does Amit want in future - a house, a car, education and marriage of his children, retirement corpus, etc.? At what stages of his life would he need them?
• What is the investment amount?
• What is likely to be the investment pattern - regular or one-time or both?
• What is the investment horizon?
• What is the liquidity need? Will he need this money in next two months, six months or one year? Or can he keep it invested for much longer time?

Insurance planning

Is Amit adequately protected - both for life and medical emergencies? Are the amounts of life and mediclaim cover sufficient to meet the eventualities, in case of any unfortunate events?

Does he have the right policies?

Tax planning

Is Amit taking advantage of all the tax benefits available under the law? Is he rightly allocating his savings amongst the various options available, so that they are in line with his financial profile?

Risk assessment

What level of risk is Amit willing to take in equity? How does depreciation in investment value affect him, both financially and emotionally?

How critical are capital preservation, growth, regular income and volatility to Amit?

A broad perspective, taking into account all the above parameters and any other points specific to the investor, will give the appropriate investment solutions. It is said that right planning is 80-85 per cent important. Significance of actual investing is just 15-20 per cent.

Here's wishing all the Amits of the world, asking the right questions, a very happy planning and investing. Hope you get rich soon.

The author, Sanjay Matai is an investment advisor. You can reach him at sanjay.matai@moneycontrol.com

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