Can a mutual fund substitute your financial plan?

May 19, 2011

After the former Chairman of SEBI (Securities and Exchange Board of India) Mr C.B. Bhave abolished entry load (with effect from August 1, 2009), the mutual fund industry suffered a jolt. The distributors were unenthusiastic to push mutual funds to their clients, as no more luring commissions in-built in entry load were to flow for their business.

However later as a strategic move, the mutual fund industry started chanting the mantra of "financial planning". The mutual fund industry too, in order to safeguard their own interest of garnering more AUM (Asset Under Management), trained distributors to push mutual fund products by training them to emphasize on the need of financial planning to investors. And interestingly, distributors' too revealed interest as some mutual fund houses promised commissions from their own pocket.

But in all these strategic moves played by the industry and your mutual fund distributor / agent/ relationship manager, the question is - "were you offered an appropriate mutual fund scheme(s) meeting your financial goals, or were you a victim of mis-selling caused by the fragmented knowledge of financial planning on the part of your mutual fund distributor / agent / relationship manager?

The term financial planning unfortunately, has been very loosely used in the wealth management industry. Very few recognise that it is a much personalised service, where enormous personal financial data needs to be obtained to draw an unbiased plan which can aid you to achieve your financial goals.

Today, assessing the fact that there's a huge potential for financial planning, many software packages are available. Setting a trend, many mutual funds houses too have launched several mutual fund schemes, which they claim to cater to your financial goals. And many of you investors have shown a tendency to flock onto these fancy software packages or so-called financial planning funds. But in this bargain you have failed to recognise that the whole financial planning exercise is more personalised in nature, wherein you sit with a professional financial planner and divulge your personal financial information for him to draw an unbiased financial plan which helps you in achieving your financial goal(s).

How financial planning funds have fared?

Scheme Name	1 Year	3 Years	5 Years	Std Dev	Sharpe Ratio	*AUM in Rs cr	Equity (%)	Debt (%)	Gold (%)
	Returns in (%)
IDFC Asset Alloc-Aggr (G)	9.32	-	-	2.14	0.14	238.00	49.33	40.22	10.45
FT India Life Stage FOFs-50s +FR (G)	7.13	8.94	10.70	1.71	0.11	168.87	20.64	79.36	-
Birla SL Asset Alloc-Aggr (G)	6.88	15.75	17.91	6.32	0.13	15.15	68.97	31.03	-
FT India Life Stage FOFs-50 (G)	6.70	9.83	10.24	2.88	0.10	14.59	31.30	68.70	-
FT India Life Stage FOFs-20 (G)	10.59	12.23	14.86	6.98	0.10	14.14	82.00	18.00	-
FT India Life Stage FOFs-40 (G)	7.70	11.20	11.95	4.15	0.11	13.72	37.14	62.86	-
FT India Life Stage FOFs-30 (G)	9.08	11.60	12.63	4.88	0.10	8.64	49.46	50.54	-
ICICI Pru Advisor-Aggressive (G)	10.56	8.80	12.05	6.01	0.06	7.17	44.74	32.32	22.94
ING OptiMix Asset Allocator Multi FoF (G)	6.21	5.73	-	6.03	0.01	6.61	98.97	1.03	-
ICICI Pru Advisor-Very Aggressive (G)	9.45	6.95	10.32	7.58	0.05	6.36	64.07	12.69	23.23
ING OptiMix 5 Star Multi-Mgr FoF (G)	12.38	10.52	-	7.69	0.08	1.62	99.49	0.51	-

(NAV data is as on April 29, 2011. Standard Deviation and Sharpe ratio is calculated over a 3-Yr period.
Risk-free rate is assumed to be 6.37%)
*AUM as on March 31, 2011
(Source: ACE MF, PersonalFN Research)
While the table above reveals that some of the funds have delivered quite luring returns (across time frames) by managing the risk well; one should recognise the fact that they aren't a substitute to a exhaustive / holistic financial plan which focuses on multiple assets and multiple investment avenues, taking into account all various aspects of the financial planning exercise such as your:

• Age
• Income
• Expenses
• Number of dependents
• Risk appetite
• Financial goals
• Nearness to financial goal

And mind you this professional and holistic approach of assessing the micro-issues of your personal finances helps you to obtain a clear picture of where you stand today, where you want to be (your financial goal) and how can you achieve it (your financial plan).

Also please don't live under the illusion that financial planning is only meant for the wealthy ones. No! But, for you to build wealth to achieve your financial goals what is required is systematic financial planning - managing your money properly.

"Becoming wealthy is not a matter of how much you earn, who your parents are, or what you do... it is a matter of managing your money properly." - Noel Whittaker

Yes, we do understand that you may not have the expertise in drawing a financial plan by yourself. Thus for you to achieve financial freedom / financial goals you require the personalised services of an experienced financial planner, who is knowledgeable, selfless and who also reviews and balances your portfolio as and when the need arises.