Why is financial planning different from investment planning - Motilal Oswal
Why is financial planning different from investment planning - Motilal Oswal

Why is financial planning different from investment planning?

Quite often we all tend to use the terms financial planning and investment planning interchangeably. Actually, there is a major difference between the two. While they do tend to blend into each other at times, one needs to remember that they are not one and the same. The key difference between financial planning and investment planning lies in the precise area of focus. While financial planning is the broader framework, investing planning is the nitty-gritty of the execution of the plan. Let us look at 5 important aspects that put the financial planning vs investment planning debate into perspective.

 

Financial planning is the framework, investment planning is the detailing

This is the primary difference between financial planning and investment planning. The financial plan lays out the broad framework to reach your financial goals. When do you retire and how much fund you require? What is the rate of inflation you consider? How do you plan for your short term goals and your long term goals? What is your risk appetite and how much risk you should take to meet your goals? Are your financial goals crisis-proof? These are the kind of framework related questions that financial planning answers. Investment planning is a lot more into the nitty-gritty of asset mix, asset returns, diversification etc. The investment plan is your pathway to your financial plan. One is the ideation and the other is the execution.

 

Financial planning looks deep into the distant future

You would typically see a financial planner looking deep into the future. The financial planner will ask you to start worrying about your retirement that is due after 30 years or your child’s education that is due after 18 years. You may wonder; is it possible to look so far into the future? That is what financial planning is all about! It is based on the premise that a good approximation is definitely better than not planning at all. Investment planning, on the other hand, takes a much shorter and smarter perspective. It looks more at how different classes like equity funds, debt funds, liquid funds and gold funds will perform in the next few years and how it will chart your journey towards your goals.

 

Investment planning is about investments; financial planning is a lot more

When you talk of investment planning, the focus is more on asset classes. You focus on equity, debt, gold, liquid assets etc. The whole focus here is to tweak your asset mix in such a way as to get close to your financial goals in the most predictable way. Financial planning is a lot more. It is about everything that is essential to help you meet your dreams. So financial planning has a major role to play in helping you reduce your debt, especially your high cost debt. It also focuses on other products that reduce your risk like life insurance, health insurance, asset insurance, liability insurance etc.

 

Financial planning requires structural shifts; not regular monitoring

The financial plan is generally a static document. You cannot keep reviewing your financial plan regularly and keep making changes to it. Once the financial plan is done and signed off, its sanctity is respected for years to come. The only valid reason for reviewing a financial plan is when there are major structural shifts in the asset class returns or when your financial situation undergoes a major shift. The investment plan, on the other hand, needs to be constantly reviewed. In fact, it is advisable to review your investment plan at least once a year and set a target of rebalancing the investment plan based on some fixed external stimuli. The investment plan is rebalanced under various conditions like shift in asset values, macro changes, underperformance of an asset class etc. In fact, rebalancing the investment mix is your response mechanism to move seamlessly towards your goals.

 

Financial plan is unique like your fingerprint

It may not be inappropriate to say that your financial plan will be unique to you; almost your unique fingerprint. To that extent it is almost biometric. Financial plan is a much larger combination of assets, liabilities, future plans, insurance and liquidity. A single financial plan cannot be replicated for anybody else. The investment plan can be largely template. Your asset mix will either be 70:30 in favour of equities or the other way round. Alternatively it may be one of the combinations in between. The point is that you can actually quantify it and your investment plan will be part of a finite set of possibilities. That is where the uniqueness of financial plan as a framework really stands out!

 

The moral of the story is that the financial plan is the framework that defines your goals, risk and returns. The investment plan is more a plan of action that helps you along the way!
 

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