How index funds are a game changer in low-cost financial planning

Published: June 7, 2021 at 10:12 am

Last Updated on June 7, 2021 at 10:12 am

Regular readers may be aware that we have maintained a list of SEBI registered fee-only financial advisors for the last the seven years. Hundreds of our readers work with these advisors receiving advice free from commissions and associated conflict of interest. Over the years, some readers have asked, “what is the solution for people who cannot afford to pay even Rs. 10,000 as fees?”

Their contention is, those who cannot afford a fee-only is better off with a distributor offering “free” advice and getting on paid on the back-end via commissions. In regular mutual funds, commissions are removed every day from the NAV from our investment value before the NAV is published.

Thankfully, those who cannot afford 15K or more to pay a fee-only advisor (for the first year, fee reduces by about half after that) need not despair and make additional investment mistakes by choosing “regular” plans. There are two options.

Before we get to that, we need to ask ourselves, do we really need a financial plan? Here is a simple test to find out. If you are below 30 and have not made too many investment mistakes, not purchased every shiny investment product, not in too much debt, you do not need an advisor.

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To begin with, all you need to do is understand the importance of an asset allocation and buy a Nifty or Sensex Index fund and start investing. This is an example: I can invest 50K a month but am confused about starting (don’t worry about the 50K per month figure). Also, see: At 22, how should I design my investment portfolio and invest regularly?

You can implement this in under a month with about 1-2 hours of study over weekends. It should typically take much less time. For other aspects of personal finance like an emergency fund, insurance etc., you can consult this free guide:  Re-assemble: Step by step money management basics for beginners.

A young earner who takes some time to appreciate why passive investing is a smart choice – see the arithmetic of index investing explained – can implement a simple, clutter-free financial plan for themselves without paying any fee. Here is a real-life example: How Avadhoot Joshi evaluates his investment portfolio.

Why index funds are a gamechanger: Many mutual fund distributors make a big deal about “choosing the right fund”. With index funds, that problem is forever eliminated. Yes, there are several other aspects to financial planning and portfolio management, but for someone in their 20’s, there is no flaming hurry to address these. They have the time to DIY. Even if they do not, they can always pay for these later.

Young earners who need assistance can go to fee-only India and identify a SEBI registered investment advisor whom they can afford. For example, Devendra Singh Negi offers a millennial plan starting at Rs. 1000 a month or a full financial plan starting at Rs. 2000 a month. Many others offer the equivalent of 12K a year. Upasana Mondal offers a Rs. 5000 plan.  Other financial planners on the list offer a stand-alone service where they advise on one particular aspect of personal finance.

You do not have to keep paying this for life. Put in some time to learn the basics of investing, and once the fee-only advisor unclutters your life and sets you in the right direction, you can navigate on your own. You can also get professional help again later on, by which time your income is hopefully higher 🙂

Older investors are likely to have significant investment clutter and varied future needs. For their own sake, paying a fee-only advisor is the only conflict-free choice. Even if the advisor’s fee is 50% of your monthly income, it is worth the investment because you do not have too much time left to experiment and make more mistakes.

In summary, investors must evaluate their current financial status in clarity and clutter and decide what to do. Young earners have the luxury of not paying planners fees but must DIY with elegant solutions like index funds. There is no need for them to invest in regular plans just because they cannot pay planner fees.

Older investors are better of paying the fee to avoid further mistakes. However, they would need to spend some time researching fee-only advisor sites to identify an affordable planner they are comfortable with.

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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