Financial planning: A clear financial guide to perplexed investors

Financial needs are evolving at a rate faster than one ever thought. Staying in tune with the latest changes has become an onerous task.

Financial needs are evolving at a rate faster than one ever thought. Staying in tune with the latest changes has become an onerous task. Investors are agitated and confused by the recent moves of the government as it reduced the rates of small savings schemes. Fixed income rates are coming off, the real estate is seeing unprecedented pain and equities were never everyone’s cup of tea. Even gold has also lost some of its sheen and behaved too erratically for one’s comfort. Crux, the investor is confused and disillusioned.

Saving is not investing

Savings is what is done for short term and investing for long term. Indians have always been serious savers but average investors. Most Indians confuse savings to investments. The definition of savings and investments has changed with every passing generation. Our grandparents were focused on earning bread for the large families. Our parents were focussed on saving for future of their children and gradually building assets. The current generation earns well and the differentiator would be how well the savings are channelised.

The average retail inflation for last 15 years is 8.25%. Most investments in bank deposits have given negative real returns. The rupee has lost its purchasing power because of inflation. The middle class suffers more as the lifestyle upgrades due to growing aspirations make actual on ground inflation much higher than the headline inflation numbers of 5% to 6%.

Invest early

Contrary to popular belief, financial planning is for all age groups. The young have to plan for their entire life, the middle-aged for their retirement. Irrespective of the age, there are some problems we can face anytime. What if there is a job loss? Or for that matter, a stock market crash that can wipe off your savings. Or an accident that can leave you unfit to provide for your family. Such things are tough to imagine but keep happening all the time. The relevance of a financial plan is fully understood when you start to put your entire future in perspective, emotional as well as financial.

Long-term goals

This is the corpus needed for expenses that you plan to make in the next 10-20 years. A corpus which will give you financial independence and realise your cherished goals. Think big and invest small but regularly. The most important point in financial planning is that one must start early. Consider this example: A and B have been friends for a long time. They are of the same age. A started investing R10,000 every month at the age of 25 while B started at 35. At 55 years of age, when both plan to retire, A’s corpus would grow to R2.27 crore assuming returns of 10% a year while B would have just R76.50 lakh. This is the power of compounding. Equity should be the preferred asset class to achieve these goals.

Medium-term goals

This is the corpus needed for expenses that you plan to make in the next three to five years. A car, own house, a dream holiday or an expensive accessory. The investor should look at moderate risk investment options like balanced funds, monthly income plans and long-term bank deposits.

Contingency funds

This is the money that you may need to handle a personal emergency. It should be available instantly, partly as physical cash and partly as funds that can be immediately be withdrawn from a bank. Guard your health and mitigate the risks by taking a health insurance policy and a term plan of life insurance.

Diversify investments

Diversify your investments for better risk adjusted returns. Risk, time horizon and liquidity are important parameters. The longer the horizon, the higher the probability of compounding returns in equity and real estate. Most investors confuse tax planning to investments. Life is more than saving for availing Section 80C benefits.

Health is wealth

All the money and amenities in world cannot replace your and family’s well being. Exercise regularly, eat healthy and live stress free by accounting for contingencies.

Review and rebalance

Last but not the least is a periodic review of progress towards set goals. Keep the basics in mind and follow a disciplined approach. Use of common sense and informed decision goes a long way in defining the outcome. We work for money and let the money also work for you.

The writer is co-founder & CEO, Complete Circle Consultants

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