Investing Without a Financial Plan and Goal

Investing is not just about money and finance, it is also about future financial securities. And just like with anything else in life, the more planning we do, the greater our chances for success. As financial planning has the same importance for investment. Building an investment portfolio without having a clear direction is like attempting to construct a house without a blueprint. Before Investing in fixed deposits, stocks, mutual funds, real estate, and other investment vehicles, we should analyze our financial objectives and goals.

Each goal and objective an investor has may require a different path and approach to help achieve that goal. For example, saving for retirement, planning a child’s education & marriage, business setup, and large goals like purchasing a house each may require a different strategy. Considering how much risk you are willing to take based on your risk profile. Time horizon is also a big factor, someone who is planning to retire in five to ten years should generally be more conservative than someone who is in their twenties or thirties.

You should also give prioritize, which asset class you will be investing, and how it will impact on your financial goals. Within your portfolio, you should be focused on diversification, not just between asset classes’ equity, bonds, and real estate but also within each asset class growth vs value, short-term vs long-term, etc. To emphasize the importance of planning, we look to what Benjamin Franklin said: “If you fail to plan, you are planning to fail.”

Mis-guiding and Mis-selling of Financial Products

Mis-selling means that you were given unsuitable advice, the risks were not explained to you, or not given the information to you which needed and ended up with a product that isn’t right for you.

Mis-selling is a significant problem in the financial services industry. Brokers, financial advisors, bank representatives, or other salespeople of financial products who are compensated based on commissions. Usually, they sell investment products based on how much they can earn rather than what is suitable or what is needed by investors.

In the Indian financial market for investment decisions, investors mostly dependent on financial agents and companies. For the last many years some of the agents and so-called “Financial Advisors” are using fancy words and tactics to investors and sell them inappropriate products like insurance policies, high-risk mutual funds, and bonds, etc.

The cost of misselling financial products affects the investor’s portfolio security, returns, and risk management. (Investors lost 1.5 trillion due to misselling – source live mint)

Paying Excess Commission In Investment Products

Many times we have seen brokers, financial advisors, bank representatives, have their own interest and biases in business and high commission products.

High commission-based investment products increase the expenses of the portfolio and that affects portfolio returns. Examples like high commission fixed deposits, regular mutual funds, insurance policies, etc. In regular mutual funds alone, 8500 Crores of investor wealth was consumed by financial middlemen. The commission percentages for other products like insurance policies and ULIPS are indeed much higher.

Regular Mutual Funds – Regular mutual funds are those mutual funds that are Invest through a mutual fund agent, brokers, distributors, or advisors. Regular mutual funds include commission on a recurring basis. Due to high commission expenses, returns are comparatively lower in the case of direct mutual plans.

Direct Mutual Funds – In Direct mutual funds, agents, brokers, or other intermediaries have no role. Investors are free from commission or distribution fees, which bring down the expenses and give higher returns than the regular mutual funds.

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