Careful,Now

Indians will start financial planning geared at early retirement and longer life spans.

Indians will start financial planning geared at early retirement and longer life spans

Indians start this decade besotted by the experience of the last decade in personal finance. The last seven yearsfrom 2003 to 2010 were marked by a significant rally in equity,gold,real estate etc. These were the primary asset classes in which Indian investors had invested. So,investors took asset allocation for granted: the more risk you took in your personal portfolio,the more money you made. The financial crisis-led downturn lasted just a year. Investors who were averse to risk lost out on significant opportunity for wealth creation. But investors have forgotten the experience prior to 2003 between 1994 and 2003 all asset classes were on a plateau.

Therefore,when we look at personal finance over the next 10 years,the key thing for investors will be to start thinking about asset allocation again. Returns will be moderate and the last decades assumption wont hold.

Efficient asset allocation means investing in under-performing assets and reducing exposure in outperforming assets. To illustrate with the last decades experience: Efficient allocation would have meant investing in equity from 2001 to 2003,investing in equity in 2008,increasing exposure to debt post-2009 general election. Within equities,it would have meant investing in technology and pharma in 2007,investing in mid-caps in 2008 and investing in infrastructure in 2010.

The other most significant change to impact the area of personal finance is the way people work in modern India. In the old days,people were paid poorly,but had jobs for over 40 years. Now,the retirement age is variable and not 60 years as before. This requires people to do better financial planning. It is no longer enough to plan for retirement at 60 and have a staid saving plan from 22 to 60. Different work cultures and more opportunities means that theres going to be an increased need for personal finance and investment. The next decade will,therefore,see much more activity in personal finance as more and more young Indians join the workforce.

All of us face three common and major risks in life: early death,physical disability and too long a life. Insurance products such as term insurance and disability insurance answer the threat of the first two risks. But when we live longer,its important for the person to have enough wealth to sustain himself and his/her family. Already,in countries like Japan,living till 80 or 90 is becoming the norm. Even in the 2001-2010 decade,financial planning wasnt very much geared to post-retirement periods longer than 10-15 years. In the next decade,the realisation will hit young working Indians that there may be a post-retirement period as long as 30 years. That means personal finance will not just become much more critical in the next 10 years,but it will also need to be much more innovative.

The third factor that will loom large in 2010 8211; 2020 is the rest of the world. The fall in markets in 2008 8211; 2009 happened due to international developments. In 2010,we had market falls driven by events in Dubai,Greece and Ireland. As the decade begins,European debt problems are still bothering global investors and on the US economy,the question is still open. The number of uncontrollable factors determining market returns have increased and will further increase as the decade progresses. This,again,means asset allocation will become much more important in this decade.

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Given all this,the biggest trends in the personal finance space in 2010-2020 will be careful choices about what to put money into all assets will not give good returns all the time as well as much higher demand for more intense financial planning. The latter,as we explained,will be driven by higher mortality age,early retirement age and changing life cycle needs.

Advice suppliers will therefore need to think of new strategies,as much of the last decades advice will be distinctly old-fashioned in this decade. This also means India will need and will get more professional financial advisers. Even in the last decade,personal finance continued to be largely self-prescribed. As the personal financial management segment becomes integral to life choices,the demand for well-trained financial advisers will rise.

The last decade saw most personal finance advice concentrating on the short term and was short on details. This decade will see investors changing their transactional relationships with their financial planners to more long-term,advice-based. Therefore,financial planning will be a sunrise job in this decade.

The personal finance sector will have to service an India where wealth creation and long-term,conservative financial planning will be the dominant themes. So will be increased uncertainty,especially from global factors. Everything affecting our money will become more exciting,and more challenging.

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The author is Managing director amp; CEO,ICICI Prudential AMC

amp; The Last Decade

Read their ULIPs
Personal finance saw many innovations in 2001-2010,but was more or less bookended by unit-linked insurance plans ULIPs,which attracted ordinary investors like nothing else. And as the decade ended,ULIPs engendered one of the biggest controversies in personal finance,with allegations of mis-selling and regulatory battles.

The Start
ULIPs were launched in 2000,coinciding with the opening up of the insurance sector for private players. It was perceived as a great product,not least because it required little paperwork. It combined insurance with investment,and with the stock markets booming for most of the decade the attraction of catching the upside,combined with buying insurance,proved a big seller.

The Competition
The mutual fund,a pure play investment product,gave ULIPs some tough competition in the initial years. Transparent structure,low cost and a pure investment option gave mutual funds an edge. ULIPs,however,proved to be more than a match by the early middle part of the decade.

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The Debate
Should investment be mixed with insurance? Thats what money professionals debated through the decade. Most pros thought investment must strictly be investment,and not confused with life cover. But the popular verdict was somewhat different.

The Controversy
In the last year of the decade,the debate was thrown into sharp relief and in courts when two regulators,SEBI stock market and IRDA insurance fought over the question of who should regulate ULIPs. It was an unprecedented and embarrassing fight. Finance Minister Pranab Mukherjee had to intervene. IRDA was finally entrusted with the task of making ULIPs more transparent.

The Change
IRDA cut the overall costs inherent in ULIPs life insurance part. The lock-in period was raised to five years from three years and life cover was increased. As the decade ended,the debate was still on. Financial experts werent convinced. Many felt ULIP costs are still high,and suitable only for investors with long 10 years time horizons.

Ritukant Ojha