Do you know that majority of the problems in your financial life are purely because of psychological reasons? We are all humans being and are prone to think irrationally at times, due to which, a lot of many wrong decisions are taken in our personal finance. Behavioral Finance is the area of finance that combines psychology and finance together and gives you an insight so as to how a common investor makes mistakes in his decisions. Today, I am going to talk about on “What should an investor be responsible for?”
We buy an arbitrary insurance policy because the agent was really persuasive or some uncle (or dad’s close friend) happened to be an agent and sold us a policy to secure our future. We buy mutual funds, because the poster on the road showed us a fortune and an opportunity we cannot miss! Our decisions are based on our friends’ recommendations and what we see the television or read on the internet and newspapers. We keep buying or investing for all the wrong reasons-like pressure from a family agent (who is an uncle/aunty), a perceived need to save tax etc. and at the end, we call it our “portfolio”. Now you could have reasons that agent was so really persuasive, sold us policy and you have obliged to your agent uncle. But damn, in fact agent has not sold to you but you have really bought it. It is up to you and your onus is what you are buying.
Just revisit your portfolio and ask yourself how much of it is because of your purposeful planning and meticulous thought? How often you sat down, studied product, compared with other similar ones and then come to the conclusion that is the most suitable one for you?
Let’s imagine a scenario, which will give you a brief idea on “Onus of Investor”.
Scenario 1: Ajay do not understand much about investment, but still he without blinking an eye invests Rs. 10,000, Rs. 50,000 or Rs. 1.00 lakh in Insurance or Mutual Fund.
Scenario 2: Now, Ajay goes to the Sabzi Market and then he buys half-a-kg of tomatoes at Rs. 20 a kilogram and each tomato he selects with such a care thinking that he has to buy a quality product and not on the recommendation of the seller.
If you look both scenario, you will notice that the same person Ajay does not give a damn at all when he is investing in Mutual Fund or Insurance.
Why did this happen?
Truly speaking, when I thought about it, I reached a conclusion that it is true that the investor doesn’t think when investing in Mutual Fund, but he thinks a lot when he is buying tomatoes, because he understands tomatoes. He doesn’t understand Mutual Fund at all. So investor devotes his time on things which he understands.
What is the Onus of Investor?
Onus of investor is very simple to understand. What makes is a crucial aspect to understand is to influence rightly towards the investor’s attitude. If you again draw a parallel with the doctors, the doctor doesn’t only give you the medicine for your diabetes but also tells you that you must change your attitude towards life, you must go for a walk regularly, you must not worry so much, you must do this, and you must do that. This is the responsibity of patient how he follows the advice of the doctor rather throwing onus of treatment by the doctor.
The same way, the financial planner is like a financial doctor. He tries to influence the attitude of investor to bring it to the correct attitude. These attitudes can vary. They can be one extreme, there is like no tomorrow, enjoy today “Kal Ho No Ho” kind of a person and on the other end there can be a person who thinks that money is too much below of dignity, I don’t talk about money, it just repulses me. Even that attitude is quite detrimental to the financial well-being of a person. So the investor should remain away from greed and negligence. He has to follow a self-discipline balance approach towards his financial life.
You only have to do a very few things right in your life, so long as you don’t do too many things wrong.” – Warren Buffet
Now the most important thing is what financial investor who never takes risk will never gain anything. His goal of financial well-being will be very small. If somebody decided that I want to keep my liquidity and I want to put my money into Bank savings account for all time to come, then you have avoided all risks, but at the same time you have forgone all the upsides which are possible. So it will be onus of financial investor, at the same time to adopt a correct attitude towards risk, to weigh the risk against the rewards and then take a correct decision. So in all aspects, I think that financial planner would serve a very important role.
Financial Planner will educate you
Financial Planners will make you understand reasoning behind every suggestion he gives to you, He will make sure that you agree and understand everything, so that in future you can take similar decisions yourself. Has any Mutual funds advisor told you why SIP is better for you Or Why You should expect great returns in long term from Equity?
Has Any Insurance Advisor or agent told you what are the important things you should be aware of before buying a ULIP? Or why you should avoid Endowment Polices for Long term wealth Creation? I doubt there are many of them giving any genuine information.
Financial Planner wants to make your Financial Life Better
Financial Planner goal is not limited to insurance planning or Investment Planning. In fact a Financial Planner is trying to make your overall Financial Life better and paving a smooth financial path for you, on which you can start walking. Your overall financial life is made up of different components Insurance Planning, Investment and Retirement planning, Child Future Planning, and Tax Planning etc. He will take care of all these avenues.
Conclusion
Most of the Indians are totally clueless about financial planning and only in recent years there has been some awareness about it. Most of the people try to fix their finances on their own without accepting that they are not competent enough to do it, they need a professional, and don’t you pay to Doctor or Lawyer or any other Professional, and then why not hire a Financial Planner? Go for it!!
Suresh Kumar Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner’s Guild, India. He is also a member of Financial Planner’s Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in