FLAME Newsletter - October 10, 2012


“A goal without a plan is just a wish” - Larry Elder

We all set goal and targets for ourselves or dream of achieving something significant. However, if we have no means or set plan of achieving the goal, the entire purpose of having the goal is defeated. To achieve any material goal, we need money. This is where financial planning helps.

Importance of Financial Literacy for the Growth of Financial Planning

Madhu Sinha

Financial literacy or financial education can broadly be defined as understanding of financial market products, especially rewards & risks, to make informed choices. Viewed from this standpoint, financial education primarily relates to personal finance to enable individuals to take effective action to improve overall well-being and avoid distress in financial matters. Financial literacy goes beyond the provision of financial information and advice. 

Financial education is the process by which investors improve their understanding of financial products, concepts & risks, and through information, instruction and objective advice, develop the skills and confidence to become more aware of financial risks & opportunities, to make informed choices to improve their financial position.

Thus, financial literacy is the ability to know, monitor and effectively use financial resources to enhance the well-being and economic security of oneself, one's family, and one’s business.

Need for financial literacy

Financial literacy has assumed greater importance in the recent years, as financial markets have become increasingly complex and the common man finds it very difficult to make informed decisions.

Financial literacy is considered an important adjunct for promoting financial inclusion and ultimately financial stability. Both developed and developing countries, therefore, are focusing on programmes for financial literacy/education. In India, the need for financial literacy is even greater considering the low levels of literacy and the large section of the population, which still remains out of the formal financial set-up.

To understand financial planning, a person should be financially literate to understand the importance of preparing household budgets, cash flow management and asset allocation to meet financial goals. Everyone saves money for future needs but the approach is to save surplus money without preparing household budgets, without prioritising personal financial goals,  without properly allocating investments in different asset classes and without understanding real rate of return (after adjusting for inflation).

Individuals make a wide array of financial decisions through their lifetime. Examples of such decisions include providing for children’s higher education, saving for retirement, managing credit wisely, budgeting, tax and estate planning, insurance, etc. Each of these decisions is prompted by the emergence of a need. To help consumers make informed decisions, financial education is very important.

The writer is a certified financial planner and has 20 years of experience in investment advisory, client handling and teaching.

Myths about Financial Planning 

Varun Jani 

In India, ‘financial planning’ is a new and emerging concept in the field of financial services. Most of us want to improve our personal finances but we feel that going to a financial planner is a waste of time. Many people also misinterpret the term ‘financial planning’. According to them, financial planning means just savings money in FDs and other financial instruments.

However, these all are myths about financial planning which we need to break and free our minds. Let us understand the common misconceptions which many people have about financial planning.

Myth: 1

I am busy, no time for financial planning

Yes, all of us are busy. We are busy at work, home, shopping, etc. We constantly delay our decision to check our portfolio as a result we never understand why financial planning is necessary. However, it is high time and we need to think serious about our savings and investments. Since, it is our hard money, and we need to educate ourselves where to invest and why to invest.

Myth: 2   

I don’t need a financial plan

Many of us think that we don’t need a financial plan. Some think that there is a lot of time to save money. According to me, a financial plan is necessary to meet our future goals such as money needed for our retirement, buying a house, our children’s education, their marriage, etc.

Some of us prepare a financial plan only when we get time. However, we don’t stick to the plan. Some people invest only when they want to save taxes. However, this is not the right method to approach financial planning. Financial planning is not rocket science but is a very simple exercise to follow. We also need to monitor our financial plan as it may change with our changing goals.

Myth: 3

Financial planning is same as investing

The most common misunderstanding among people is that financial planning is all about investing money in some financial instruments like buying insurance, investing in FD, recurring deposits, etc.

Investing is one aspect of our financial planning process. Investing money is necessary but it cannot help us to achieve our financial goals. To meet our financial goals we need financial planning which is a systematic and long-term process and cannot be done in a single day.

Investment planning refers to investing money. But financial planning refers to how much money has to be invested, why it needs to be invested and till what time the money has to be invested. It also includes whether the investment made will give us the desired returns. Besides, financial planning helps us to make a budget of our daily expenses, cash-flow analysis, financial responsibilities, buying the right insurance cover and making smart tax & investment decisions. By and large, investing is secondary and financial planning is primary.

Myth: 4

Financial Planning is only for rich

Many people think that financial planning is only for the rich and the elite people. But this is not true. The fact is that everybody needs money to meet our present and future financial needs. Hence financial planning is necessary for each one of us. However, it depends on individuals some may afford to go to a financial planner due to lack of time or other constraints. While a few people can also try to manage their finance by seeking good financial education.

Myth: 5

Financial planning is a one-time exercise

As said earlier, financial planning is a strategic and systematic exercise to achieve one’s financial goals. Many times people feel that financial planning is a one-time process and there is no need to review their financial plan regularly. Everyone should keep in mind that our goals may remain same, but the economic environment, government policies, taxation norms change so we need to adopt review our plan accordingly to achieve our financial goals.

Myth: 6

I am too young for financial planning

No one is too young or too old for financial planning. Our circumstances change at various stages of life so it’s never too early to start financial planning for better financial future.

At young age, you can create a smart budget and save for big events in your life—like your marriage or buying a house. There are many advantages of starting an early plan because the interest that you earn on the invested income increases by compounding and that in turn increases the investment corpus by a phenomenal amount. Thus, starting early will help you increase your retirement corpus by an unimagined amount! Planning at the younger age is the ideal thing.

Myth: 7

Financial planning is free

A lot of people believe that financial planning is free and they don’t need to pay for it. Remember, there is no free lunch. Some insurance agents or distributors who give you advice may mis-sell you a financial product which you don’t need completely. Some of these agents push products because they get good commission on them. Hence, it is better to educate yourself about financial products. You may also seek a financial expert’s advice to guide you for products for which he may charge you a nominal fee.

Financial planning is a professional service and it should be compensated like any other professional services such as a legal advice given by a lawyer or medical advice given by doctor. You should consider financial planner as your family’s financial doctor who takes care of the financial health of your family.

Myth: 8

Financial planning is all about retirement planning

Planning for the future doesn’t mean that it is only for the retirement. But it also means planning for the unforeseen events of our lives. It is a common misconception that having a financial plan and savings means making huge sacrifices now and putting your immediate life goals on hold. This is wrong. With the constant rise in inflation rates, financial planning is necessary for each one of us so that we are not dependent on other people to support us for our requirements.

The writer is a certified financial planner and the founder of nextstep Financial Planners.

The Pareto Principle in Financial Planning

The 80/20 rule or the Pareto Principle is applicable to almost everything we see or experience in our lives. According to this principle 80 per cent of the benefits we reap come from 20% of our actions. For example 80% of the marks scored in an exam come from studying 20% of the time. This 80/20 rule is applicable to financial planning as well. 80% of your major returns could come from 20% of your investments. 

Here’s how:

Shares: Have you ever considered investing in shares? If you take a close look you’d see that not all shares have shown trends to inspire long term investments. All people who’ve grown rich by investing in shares have made 80% of the money by investing in 20% of the shares. If you want to invest in shares choose those who’ve been consistent in their returns and you’d see that they comprise 20% of the total lot you might contemplate buying.

Keep realistic expectations: It’s not wise to invest everything at one place. You never know which 20% is going to bring 80% benefits to you. It’s advisable that you keep your expectations realistic.

Financial Goals: It is important for you to understand that that if you are making a good income, 80% of your needs can be met by just 20 per cent of your income. You need to ask yourself what it that you want in life is. Money matters most, but isn’t everything. Plan your investments in a way that your children receive the best education, your family is well kept and you have the money when you need it most.

Read more…

Knowledge vs. Perception in financial planning

The Importance of Goal Setting and Visualizing in Financial Planning


India’s 2012 poverty line was set at Rs 28.65 per capita daily consumption in cities and Rs 22.42 in rural areas. This means that if per capita expenditure is above these respective amounts per day, you are not considered poor.


Fallacy of Composition

It is an assumption that what is true of one portion is necessarily true of the whole. It is a common problem in economics, what is good for a firm or individual family may not be good for the aggregate of all firms or families.


After the Dow Jones Industrial Average in 2010, India had its brush with a flash crash last week. On Friday morning, the NSE Nifty Cash index crashed over 900 points after some erroneous trades by a dealer of Emkay Global Financial Services. Even though the index recovered almost all its losses, there was widespread panic for the short while during the incident. 

Freaky Friday freezes Nifty: Erroneous trade it was!


FLAME (Financial Literacy Agenda for Mass Empowerment) is an IIFL initiative to promote financial literacy amongst the masses in order to make them an integral part of India's spectacular growth story.

In an era of accelerating GDP and rising per capita growth, financial literacy has become more critical than ever before such that we all reap the tangible benefits of the nation's economic prosperity. Financial inclusion has been quite high on the governmental agenda, given its emphasis on widening the Banking & Financial services network across the country. IIFL's FLAME initiative stands committed to complement this effort by helping common people gain financial growth and security though better awareness and education on the variety of financial products while avoiding the lure of and loss from unrealistic claims made by unscrupulous agents and ponzi schemes.

Our objective is to light a FLAME, as the name suggests, which will set ablaze a chain of FLAMEs across the country. The new-found light of knowledge will undoubtedly dispel the dark clouds of financial illiteracy and ensure the bright sunshine of financial growth and prosperity.

This portal is but one of the various IIFL initiatives that would be part of FLAME.

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