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Goal based financial planning

Vikas and Ram are colleagues in an IT firm who strongly believe in saving and investing. Both often discuss different investment offerings. Vikas is a strong believer of goal based investing whereas Ram’s focus is more on analyzing and comparing financial products to get optimal return. Ram believes that wealthcreation is more important as once you have money you are free to decide which goal you want to spend on. One day, Ram invites Vikas and his family home. This time Ram’s wife opens the discussion on Goal based financial planning. She requests Vikas to explain the importance of goal based financial planning.

Vikas explains Goal based financial planning as a focused process of investing toachieve Real Life Goals.Goal based financial planning does not work on “Do it and forget it” way. Here, the key is regular review of portfolio and goals.Vikas explains 5 benefits of goal based financial planning over product approach.

• Emotional and financial view point

Today every parent understands the need of higher education for their kids. Assume you are investing for your child’s higher education in a systematic way for a longer tenure. As the goal has emotional value, this investment would be the lastone to get disturbed during a financial crisis. Generally, goal based investments donot get disturbed for a longer period because of which they also attract the benefit of compounding. In this way,goal based financial planning has both emotional and financial view point.

• You would know how much to spend

It’s a myth that financial planning advises you to save, save and save. Very few people know that goal based financial planning can guide you to “Guilt Free Spending”. In financial planning, you can set aside money for your daily spending under budgeting section. The yearly outings and purchases can also be planned. If the spending’s are from an account earmarked for a particularspending, you would be more comfortable spending that compared to an unplanned spending. Most of the youngsters avoid financial planning as they consider it as more savings and no spending. Goal based financial planning believes that you “living life” today is as important as your comfort during your retirement.

• Will help plan future liabilities better

It is said that “compounding is the eighth wonder of the world, those who understand it earn it and those who don’t pay it”. While planning your goals, you can visualize the requirement of each goal and plan. This can help you reduce your future liabilities at least for the planned goals. Instead of taking loans in future you would now start saving for the same. Its always better to invest for your goals and earn profits than take loan and pay interest. When you plan your goals in advance you can save less and achieve more.  Totally goals can reduce liabilities by guiding you on how much you want to spend and how much you can afford to spend.

• Considers Inflation tenure, risk and return

Product side of investing focuses on getting highest return and goal based investing considers all the above and aims at risk adjusted return. Better combination of tenure and asset class can help us get optimal return from the portfolio. In asset classes like equity, the probability of loss reduces as the tenure increases. So, it is always wise to allocate riskier assets for longer goals. Short term goals can be managed by fixed income products.

• The key is to review periodically

Periodic review of portfolio and goals is the key. Life takes twists and turns that we don’t always see coming which is why it is important to review your financial situation. As change in your personal situation occurs, it is understandable that your goals may change. What can change over years is your situations, lifestyle, legislation, Taxation, Insurance needs, asset liability match and need for estate planning.

Created by Knowise Learning Academy India Pvt. Ltd.

Knowise is a Bangalore based firm that specializes in CFP (Certified Financial Planner) training and is an authorized education partner with FPSB

The scenario of Indian investors is slowly changing. Earlier, the concept of investment was limited to Fixed /Recurring deposit schemes, life insurance plans, buying gold and real estate. But a lot has changed in the last two decades. Firstly, people are spending more than their earning. Secondly, there is no concept of pension or any retirement benefits and a higher lifestyle inflation. This establishes the need for personal financial planning and advisors who can chart out these financial plans. Certified Financial Planners have been hand holding the customers and helping them to reach their financial goals across 26 countries.

Currently, there are more than:

• 160,000 CFP certified professionals across the globe
• 72000 CFP professionals in USA

As far as India is concerned, we have close to 2000 CFP professionals.

In India, 1.25 crore people pay-up income tax and there are only handful of advisors across India catering to the need. Due to the ever changing financial scenario, an individual would need a qualified financial planner to be on his side. The experts have estimated that India would need more than 50000 qualified financial planners in the coming years.

There is a greater demand for CFP certificate holders in the BFSI domain and they would have an upper hand over others. A CFP professional could look at working with:

• Banks
• Wealth managements firms and distribution houses
• Mutual fund and insurance companies
• Boutique financial planning firms
• Financial planning software firms

The certification would open up the doors of entrepreneurship. Aspiring individuals could look at starting on her own and pursue the career as a practicing financial planner. A practicing financial planner could look at earning from:

• Charging the clients for construction of the financial plan
• Commission earned from advising various financial service products like Mutual funds, insurance etc.

Financial Planning and Standards Board (FPSB) India awards CFP certification in India. To get the certificate one has to clear the examinations set by FPSB India. CFP certification has 6 modules;

• Introduction to financial planning
• Risk analysis and insurance planning
• Retirement planning
• Investment planning
• Tax and estate planning
• Advanced financial planning

There is no examination for the first module but the content of the same is tested in the rest of modules. There are 2 different pathways of pursuing CFP certification.

Regular pathway:

Any individual with 10+2 qualification can start pursuing the course. Since there is no examination for the first module, the rest of the four modules need to be cleared before appearing for last module examination i.e., advanced financial planning.

• The exams are conducted online in NSE-IT centers across India
• All the exams are multiple choice questions based
• There is no negative marking for the wrong answers
• 50% is the passing mark

Once the final exam is cleared, a candidate can apply for CFP charter membership. An individual should have 3 years of experience in financial services industry to get the membership or to obtain the certification.

Challenge Status Pathway:

This program is meant for people with professional work experience. Under this pathway, a candidate is exempted from writing the exam for the first four papers and can appear for last module exam directly to complete the certification. For an individual to qualify for challenge status program, the following criteria should be fulfilled;

• 2 years full time post graduation degree or professional qualifications prescribed by FPSB India
• 3 years of work experience in financial services industry or 5 years of work experience in other industry

After successful completion of the examination, one has to fill out the application for obtaining the CFP certification. The certificate is valid for 1 year and the candidate should obtain 15 Continuing Education (CE) points to renew the certification. CE points are obtained in the form of attending the seminars, answering the questionnaire in financial planning magazine, teaching etc.

Today, we are living in a world of consumerism.  Everything that we need is available at the click of a button. From groceries to clothes to gadgets – everything can be bought in a minute with the help of technology. Technology definitely has a lot of advantages but it also brings with it certain challenges that we tend to ignore. Since we don’t have to step out of the house, spending money has become extremely easy.

Let’s go back 20 years when shopping was a family activity that was planned days in advance to ensure the time was spent efficiently and everything needed was bought at once. As kids, we would get new clothes on a festival and new toys on birthdays. No other demands were adhered to and we were left to wait for those special occasions to get our demands fulfilled. Our parents’ generation definitely had lesser options to spend money on and was extremely wise with every penny that they spent.

Our generation is facing a 360 degree turn in terms of spending. Kids these days don’t necessarily have to wait for festivals or birthdays to get their wishes fulfilled. With smaller families and higher disposable incomes, parents tend to spend more on kids and on themselves. This trend indicates that the future goals are compromised on for short term happiness. By the end of the month, most families that are not disciplined about their savings are left with minimal or no savings and most of them wonder if they are earning enough. It is never about the income. It is about the spending. Savings require discipline and patience.

The amount that an individual saves can be directed towards various goals that an individual might have and can be channelized in different investments products based on the need. As an example, with education expenses going up, it becomes immensely important to save for our children’s higher education. If we take a simple example of an MBA degree, here is how the expenses have grown over the years.

Some of the other goals could be travel, retirement, children’s marriages etc. All these goals would require money and if not planned today, it will get very difficult to achieve these goals in the future.

Investing money is a simple but structured process that requires discipline and patience. The money saved every month should be invested in the right investment products. In general, the earnings of an individual are directly proportional to the amount of time he/she invests physically in doing certain work. But investments work round the clock & do not need your physical presence to grow!!!

Globally the general thumb rule for savings is;

The end Goal of any investment is to give you Financial Freedom! Reach the financial goals without any stress or sense of burden.

A decade back, an investor seeking information on investment products had very limited options to choose from. Most investors would go with products advised by their agents, family, friends or colleagues. There has been a drastic change in the way investments are handled today considering the vast information that is available at the click of a button. The current buzz word is “FinTech”. This revolution has brought financial services products onto technology platforms which has led everyone to have access to huge amounts of information before taking a decision.

An individual looking to buy a mobile phone or any other retail product visits multiple e-commerce sites, compares the prices of different brands, offers and features before short-listing the product he/she wants to buy. Same is the case with investors in the financial services industry. Today, before making the investment decision, the investor reads through the product features and compares them with the peer group. So a financial advisor may not be able to close the “sale” by telling the investor that “this is the best product/this is the product with highest returns”.

But selecting a mutual fund or an insurance plan isn’t as simple as buying the cheapest product loaded with best features. There is no “One size fits all” concept applicable for financial service products. Every best performing product might not suit every investor. Every investor has unique requirements like:

• When is the right time to start planning for retirement
• How do I save tax
• I am unable to understand the need of covering risk
• When is the best time to invest
• Which is the best investment option
• Where should I invest the retirement funds
• How do I plan to transfer my inheritance etc.

It would be difficult for an individual selling one or two financial products to deal with all the financial needs of a client. In such cases, an investor would need help from someone who can prepare a comprehensive financial plan long with an execution strategy. A financial advisor or a planner would be the right person in guiding the clients in setting financial goals (retirement, buying a house, foreign travel, higher education, covering risk – insurance etc) and helping them achieve the same. Globally, people approach financial planners for handling their personal finances. It’s like having a family finance doctor.

A financial advisor/planner comes with comprehensive knowledge in various financial products, operational aspects and their suitability based on the objective of the client. For an individual to call himself/herself as a financial advisor, he/she needs to possess the required knowledge on subject matters like:

• Retirement products and planning
• Risk assessment and insurance
• Evaluating investment options
• Taxation applicable to individuals
• Estate planning

Apart from the knowledge on the subject matter, a financial advisor should also hold necessary professional qualification. The professional certification could either be a course like Certified Financial Planner (CFPCM) or NiSM Investment Advisor(Level 1 & Level 2). These certifications would help an agent or product distributor to transform into a financial planner/advisor.

The Indian financial industry needs qualified financial planners/advisors. We have little more than 500 entities/individuals who are registered with SEBI as Investment advisors. With regard to CFPCM as a certification, we have close to 1800 CFP certificate holders in India vis.a.vis 75000 CFPs in the United States. There is ocean of opportunities for an aspiring individual to make a career in Financial Planning domain. Hence, one should aim to become a doctor not a pharmacist.

Article written by Karthick CS (Director, Knowise Learning Academy)

Banking  jobs have always been sought after for any individual who wants to make a career in the financial services space.  Banks not only provide stability but also growth and the option to diversify your skill set. In the 60s, completing a graduation degree was a big achievement as it came with a guarantee of a bank job. Though the banking sector had not opened up by then, there were enough people vying for a bank job. Yet, it was much easier to get a job in the banks in those days as the competition was much lesser.

Fast forward to the 21st century where getting a basic graduation degree is commonplace and most people opt for a post graduate degree to enhance their skill set and become a specialist of sorts. The competition is much more considering higher availability of qualified people who want to build a good career for a good lifestyle. Exposure to the global markets gives individuals a better understanding of different types of jobs available.

If you are looking for a career in the banking space, one of the most sought after job roles is that of a credit analyst. Most people, if given an option, would not want to be in sales as it is a high stress profile with targets that are not welcome. Hence, a credit analyst position gives you the opportunity to be part of the banking ecosystem and contribute to the growth of the bank by analyzing the risk in giving any form of credit (credit cards, loans etc.) to individuals or corporates.

What exactly do credit analysts do?

Today, we live in a world of credit where everything from a mobile phone to a house can be bought by paying a small down payment followed by monthly EMIs. This also means big money for the institutions who are offering credit as interest earned on these loans is extremely lucrative. But this also means that the institution is willing to take the risk of default and hence the chance of losing the principal. Hence, credit analysts play an important role in analyzing the profile of the entity before a loan is granted. Credit analysts are responsible for collecting and analyzing information of the entity by looking at their credit history and paying habits. A credit analyst would also evaluate the future contingencies involved and the potential to pay up the EMIs. Hence, this profile could translate into a lucrative career for those individuals who are good at analyzing data and enjoy number crunching.

Skills required to becoming a credit analyst

Strong analytical skills – Considering a credit analyst deals with a lot of financial data, having strong analytical skills becomes a pre-requisite. They should be good with number crunching and should be able to identify anomalies in the data to reach a right decision.

An eye for detail – A credit analyst should have an eye for detail to look for hidden information in the profile that might not be written explicitly. They need to be diligent and pay great attention to detail

Understanding of different sectors – Since the credit analysts have to analyze entities that could come from varied industries, a basic know how of the different industry sectors is definitely a value-add that can help credit analysts take a more informed decision.

Ability to read financial statements – A credit analyst should be able to read financial statements and analyze them before reaching a decision on whether credit should be given or not.

What is the education qualification required to become a credit analyst?

A credit analyst position is a specialized job that requires specific skill-set. The minimum education qualification is a bachelor’s degree in a financial stream where fair amount of exposure is given to accounts, economics, financial statement analysis etc.  But as mentioned earlier, a bachelor’s degree might not be sufficient to cater to the complete skill set required for the job. An additional certification in the credit space would surely be a value add that would differentiate an individual from others vying for the same role. A certification like CCRA (Certified Credit Research Analyst) is a specialized certification that focuses on credit analyst jobs and is a course that many institutions look for before hiring individuals.

In the 60’s or the 70’s, banks/institutions used to spend ample time with employees for trainings them on different aspects of a particular job role.  But in the current scenario, with increasing target pressure and less time in hand, on the job trainings become difficult. Hence, an individual is on his own and has to figure out ways of enhancing his skill set by himself. This is where a CCRA certification can be very helpful and provide the right knowledge for the job.

Job opportunities available with CCRA certification

There are ample job opportunities available for a credit analyst. Some of them could be with the banks (car loan, home loan, credit card, personal loan etc.), Credit rating agencies, Insurance companies, Non- Banking Finance Companies(NBFCs), Credit Monitoring agencies, Credit Research agencies etc.

Article written by Namrata Arora (Director, Knowise Learning Academy)