Why financial planners are still best bet for investment advice

Can you plan your finances by using the numerous online calculators? The ones that help you set financial goals, tell you how much you need to invest and at times even suggest financial products that can help you reach these goals.

While these calculators do give you an idea about where you stand and how you must proceed, you must be careful. They have serious limitations and making financial decisions on the basis of only their findings can be damaging.

We tell you about some drawbacks of these calculators and why they are just guiding tools and not a substitute for advice given by financial planners.

How much should you save every month for higher studies of your child? There are numerous online calculators that can tell you the figure. But all these will require that you enter a key figure which, in all likelihood, is impossible to ascertain-the funds required. How can you know how much money you will need for higher education of your child, say, 10 years from now? You will probably do a quick calculation in your mind and come up with a figure based on some unverified assumptions. The calculator will then tell you how much monthly savings or investments you need to make on the basis of this assumed figure. Any investment decision based upon such a calculation will be flawed.

Such assumptions are usually made while trying to arrive at an investment figure for achieving particular financial goals such as child's marriage, education, buying a home, etc.

A similar assumption is made at the time of calculating the premium for health insurance. You put the figure for the cover (Rs 2, 3 or 5 lakh), enter your age, the number of members to be covered, and the premium calculator gives you a figure.

But how can you be sure that a cover of Rs 3 lakh will suffice for your family without knowing the cost of major medical procedures in hospitals in your city. Only if the calculator takes into account the cost of major medical procedures can it be useful for deciding the ideal health cover.

ASSUMPTION ABOUT INFLATION

A calculator for planning your child's education will ask you the expected inflation figure during the accumulation phase. You will most probably key in 6-7%, the average wholesale price inflation for the last few years. However, you should realise that the cost of education may rise much faster than the wholesale price inflation. Even a minor change in the assumption can give very divergent results both in terms of the corpus and the monthly savings required. We used a calculator on the website of a life insurance company to see how much you need to save (10 years from now) for your child's MBA degree that costs Rs 8 lakh today.

According to the calculator, at 6% inflation you will have to save Rs 14.32 lakh, at 7% Rs 15.73 lakh and at 10% Rs 20.75 lakh.

If you invest on the basis of a figure that is less than the actual, you will fall short of the goal by a wide margin. If the time horizon is longer, say, in case of planning for retirement, the fund shortfall may be really damaging.

For instance, if a 30-year-old wants to save for retirement (at 60), considering that he will lives till 85 and his monthly expenses are Rs 30,000, he will require Rs 3 core at retirement if inflation during the accumulation phase is 6%, Rs 2.3 crore if it is 5% and Rs 4 crore if it is 7%.

"We have often seen that 6-7% inflation (wholesale) for all expenses throws up a very large figure. If the expenses are divided into different categories and appropriate inflation figures are assigned to each, the ideal corpus is easier to build," says Manish A Shah, cofounder and CEO, Findirect Services, a financial planning company.

THROWING UP FIGURES THAT PUT OFF CUSTOMERS

One of the biggest drawbacks of financial calculators is that the figures (based on assumptions that we discussed earlier) they come up with are so large-whether it is related to building a fund or monthly savings for a financial goal-that the individual is highly likely to be discouraged. They do not give an alternative solution.

In our earlier example, where the goal was saving for the child's MBA degree, you need to save Rs 9,284 a month for a corpus of Rs 14.32 lakh, Rs 10,198 for Rs 15.73 lakh and Rs 13,446 for Rs 20.75 lakh. Investing Rs 10,000 or more every month for just one expense can be a herculean task for most given that there are other financial goals such a retirement planning too.

Often, monthly savings needed according to these calculators for your financial goals exceed earnings. This can be intimidating.

GUIDING TOOLS, NOT EXPERT ADVICE

Most calculators give figures based on numbers fed by you. Some even give investment tips.

"These are guiding tools and should not be used for getting advice. The numbers arrived at are based on assumptions, and advice based merely on these numbers can lead to wrong planning," says Tanwir Alam, founder and CEO, Fincart, a financial planning company.

If it's the website of a mutual fund house, the products suggested will be its own, which may not be the best performing funds in their categories.

NOT CLEARLY VISIBLE

Calculators are often somewhere in the background of the website, where they may not be visible to investors. It's rare to find websites where calculators are prominently displayed.

"Before Google came with its search engine, even Yahoo! had a search engine on its website, but it never got the prominence a Google search engine got. The reason is simple. Yahoo! search engine was buried among loads of other applications, while Google's search engine was at the forefront," says Manish A Shah of Findirect Services.

Shah says that they have tried to address this issue by giving prominent space to these tools on the homepage of their website Bigdecision.in.

So, the next time you use a calculator, make smart assumptions to get correct results.