Planning for financial goals is the biggest challenge for salaried Indians. This is based on 5,769 responses received from salaried employees to a survey by Finsafe India, a financial education company.
How underprepared Indians really are for financial emergenciesOn the question of the biggest financial challenge, 56 percent felt planning for financial goals was tough. Forty-five percent said they were not prepared to manage expenses in case of a job loss and 29 percent were worried about not being able to support elderly parents.
Respondents were also concerned about being able to meet medical expenses and being able to repay loans, especially credit card debt.
A majority of those surveyed are also not prepared for medical emergencies. Fifty-two percent said they were relying on employer-provided health insurance covers but were not sure if it was enough. Twenty-one percent were not prepared for health emergencies at all.
On investing, while 41 percent have put money in equities, 35 percent still preferred traditional investments like fixed deposits and insurance policies. Thirty-four percent of the respondents did not know where to invest.
Seventy-one percent of the respondents were interested in learning more about detailed financial planning, followed by mutual funds and taxation. Saving more and budgeting were also of interest to those surveyed.
Wrong investments, ad hoc planning
The survey points to the glaring need for financial planning for Indians. Generally, investments are done in an ad hoc manner based on recent performance and held for the short term while there is appreciation. Once markets fall or in case of volatility, investors tend to exit, thereby losing out on potential returns in the long run. This, coupled with low savings, is the reason people are not able to meet financial goals.
Another factor that stops financial goals from being met is opting for wrong investments. As per the Reserve Bank of India (RBI) annual report 2022, household savings are held primarily in fixed deposits. Six percent of gross national disposable income (GNPI) is held in deposits versus a meagre 0.5 percent of GNPI in equities. Fixed deposits are neither tax efficient nor do they beat inflation.
In my experience as an educator, individuals are not able to size up the amount they need to be saving for goals. They also do not realise how important it is to do so. A friend with a 15-year-old child was shocked to know she needed to save 10 times more than what she was saving for her daughter’s undergraduate education abroad. Similarly, for retirement, salaried people are not able to accept that just the employee provident fund will not be enough. Having equity exposure is imperative to build a higher retirement corpus.
The importance of financial advice
The problem lies with how financial advice is seen in India. Even now, the financial advisor is only seen as someone selling products. In the 1990s, the financial advisor was meant to show good (well-performing) mutual fund schemes to the customer. Beyond the returns, there was no discussion on financial goals and this continues even now to a large extent. It is a chicken and egg story with clients not discussing anything but products and advisors basically giving in to clients’ wants. Not all advisors are also equipped to talk about financial planning and/or feel the importance to do so.
Clearly, investor needs are changing and what is required is a big change in the way all stakeholders approach financial planning. Regulators need to give an impetus to widespread financial planning-based advice. There are only 1,324 registered investment advisors (RIA) in all of India who can do financial planning. There are many online platforms that provide financial planning tools, but these do not allow for human interaction, without which financial planning is incomplete. A tool can give suggestions but cannot understand investor emotions. Certainly, some changes in regulations concerning non-RIAs are urgently required to make financial planning more accessible to the public.
Financial advisors must also realise they add value through holistic financial planning and not just recommending schemes. They need to equip themselves with the knowledge and certification for the same.
While investors felt planning for financial goals is their biggest challenge, they need to be more open to paying fees. I find investors willing to pay only very low amounts that aren’t viable for advisors.It is good to see structured financial planning gaining importance and this is a great opportunity not to be missed by investors and advisors to build a better tomorrow.