Embrace financial planning

By - Hemant Rustagi
CEO, Wiseinvest Advisors

In today’s complex financial environment, investing money judiciously to ensure that you have enough at every stage of your life is becoming increasingly challenging. Financial planning can play an important role here. Having a financial plan in place and a strategy to implement it would mean that you will be able to allocate appropriate funds for all your requirements.

In other words, financial planning helps you make informed money management decisions to secure your future. It helps a great deal in achieving your financial goals as well as meeting personal priorities by taking into consideration factors such as the available resources, responsibilities, risk appetite and lifestyle. A financial plan lays down the allocation of savings across various asset classes to achieve an appropriate risk-reward balance.

There are certain basic requirements for approaching financial planning. These include defining and setting quantifiable goals, incorporating risk management, understanding the effect of each financial decision and being realistic in terms of expectations.

Establish Goals

To develop an effective plan, you must list out your goals, i.e. your short-term, medium-term and long-term goals, and assign a time horizon to each of them. Thereafter, you need to quantify these goals so as to set a target that needs to be achieved over a pre-decided time horizon.

Remember that when you invest for the long-term, inflation is a bigger risk than the risk to capital. Therefore, while working out long-term targets such as your child’s education or your retirement planning, you must consider the impact of inflation. If you fail to do so, the corpus that you achieve at the end of the tenure could be substantially inadequate. To achieve a positive real rate of return, i.e. the return minus inflation over time, equity and equity-related instruments must be the mainstay of your long-term portfolio.

Similarly, to achieve medium- and short-term goals, the focus should be on hybrid and debt instruments respectively. The key consideration while investing for these goals should be capital protection and tax efficiency of returns.

Prioritise Risk Management

Before starting your investment process, you must ensure that you have covered your risks adequately. These would include risks to your life, health and property. Buying the right insurance policy is equally important.

Remember, paying too much premium for a policy that does not provide adequate insurance makes you compromise on what you achieve over time. For example, a term insurance plan scores over traditional and unit linked insurance plans, both in terms of the quantum of insurance cover as well as costs. Therefore, it is always advisable to separate your insurance needs from your investment needs.

Don’t forget to build a surplus equivalent to six months of your monthly expenses. This emergency fund will ensure that you don’t disturb your investment process for various goals when faced with the vagaries of life.

It is equally important to ensure that your risk management process is periodically and systematically reviewed to further reduce risk.

Follow Asset Allocation For Success

As is evident, goal-based investing can help you a great deal in ensuring that you invest with a clear time horizon and avoid making abrupt changes in your portfolio. The asset allocation process, which is an integral part of financial planning, largely determines the level of risk and the likely returns from your portfolio.

You need to be careful to avoid underestimating risk and/or overestimating rewards from your investments. By correctly estimating the risks associated with each of the investment options, you can improve your chances of building greater wealth. The right way to succeed is to invest like an optimist and manage risks like a pessimist.

Make Tax Planning A Part Of Your Financial Plan

By making tax planning an integral part of your financial plan, you will not only pay lesser taxes but will also realise the full potential of tax savings instruments. Besides, investing in tax-efficient instruments like mutual funds would go a long way in improving your real rate of return.