Financial Planning and Working with Investors

We all have dreams, be it owning a car, a house, child attending a prestigious college or building a healthy retirement corpus. But we seldom pen down these goals and work towards a plan for achieving them. These can be termed as your life goals.

Financial Planning

Contrary to popular belief, financial planning is not just investing. It is a process. It allows you to manage your finances in such a way that you link it to your goals. Making a standalone investment in a life insurance product means nothing if you do not know the amount of cover you need, or whether the maturity proceeds are adequate, or whether you need a life cover.

The process of financial planning should help you answer three questions. Where you are today, that is, your current personal balance sheet, where do you want to be tomorrow, that is, finances linked to your goals, and what you must do to get there, that is, the asset allocation and investment strategy that will help you achieve your objectives.

Developing a financial plan needs a consideration of various factors. First, your objective or the purpose for which the investments are being made. The time period, too, is critical, since the longer the period of investment, the higher is the ability to absorb risks. Also, one of the most important factors that many of us did not account for earlier is inflation. The level of inflation can deplete your return from investment considerably. Today’s expense of Rs 10,000 would be Rs 43,000 in 30 years if the inflation rate stays at 5% per annum.

Mutual funds as a financial planning tool: Mutual funds have managed to constantly deliver financial planning solutions to investors by way of various products that they offer. Contrary to popular belief, mutual funds are not an asset class. They are vehicles that allow you to execute your financial plan.

In terms of the risk-return perspective, not only can you choose funds which are as safe as you want (such as liquid funds), you can also invest in funds that can be as risky as you want (such as sectoral funds). In between there are various types of funds that have different levels of risk. Not only are they cost efficient, they are tax efficient as well.

Investment tools such as systematic investment plans (SIPs) and systematic transfer plans (STPs) are ideal for salaried individuals who want to invest consistently and ride through market volatility. By rightly identifying the risk you are willing to take, your liquidity requirement and your return expectation, you can match a fund to suit your investment objective.

Remember to invest in products you understand, and more important, stick to funds that have an established record. Given below are excerpts from the interaction that investors had with the panelists.

How to Create a Financial Plan?

A good Financial plan differs from person to person according to their individual needs, goals and long-term plan. But the steps involved in a creating a sound personal financial plan are by and large similar for all. Let’s look at the steps involved in the creating a financial plan for yourself:

1. Find out your Current Financial Situation

You should be well aware of your current financial status and net worth before setting out to reach your goals. A discussion with your financial advisor will help you understand your net worth and put a spotlight on your priorities. For example, after the analyzing your current financial situation, you discover that planning for the marriage is more important than planning for buying a car. You need to understand your cash flows, income levels, dependants, running loans, liabilities etc. This research will help you prioritise your goals and carve a plan accordingly.

2. Time Frame and Budgeting

For a financial plan to work, it is of utmost importance that a clear timeline is defined. The timeline gives you a direction to reach your set goals. Moreover, the deadlines keep you alert and motivated to reach your goals in time. Along with this time frame, it is important to have a budget accompanying it. A budget gives you an idea about your expenses, spending, and savings that ultimately help you in reaching your goals.

3. Set Goals- Short Term, Mid Term, and Long Term

You must have clear goals in order to make full use of your financial plan. The financial plan is the road that leads you to the targets that you have set. Your goals can be either short-term, mid-term or long-term.

Short-term goals are those goals that you set for the near future. These goals have specific time frames and an objective that you want to accomplish in say a year or two years’ time. There are a lot of short-term financial goals that can be set as per your wish list. For example, save for a family vacation, buy high-tech gadgets, etc. Mid-term goals are those goals that you wish to achieve in the next three to four years. It may include important goals like saving up for marriage or higher education, buy a fancy car, paying off previous debts (if any), or to start a business, etc. As you march on to complete your short-term goals, you can start ideating your mid-term goals and also plan on how you can achieve them.

Long term goals are the ones that might take you considerably more time to achieve than the previous two types of financial goals. Planning for long-term goals such as your children’s future, their education, your own retirement, etc. takes meticulous planning and organization. You can start by setting up short-term and mid-term goals, deliver them on time and then build on it to achieve your long-term goals.

4. Assess your Risk

Investing plays a big role in your long-term wealth management. It’s never too late to start investing. Any investment comes with a risk factor attached to it. Investing Early gives you the ability to take bigger risks and thus an opportunity to generate higher returns. But before investing, one should assess their own risk-taking ability or do their Risk assessment to know their risk appetite. Risk profiling helps you understand how much risk can you take and then invest accordingly. Assessing risk involves many factors such as the ability to tolerate loss, intended holding period, knowledge of investments, current cash flows, dependants etc. Assessment of risk ensures that one stays within the zone defined by risk. This tries to ensure that in the long run, one does not see unexpected action or outcomes in the investment portfolio.

When an investor undergoes risk profiling, they have to answer a set of questions designed specifically for the purpose. The answers to those questions are recorded and used to calculate their risk appetite. These set of questions differ for different Mutual Fund Houses or distributors. The score of an investor after answering the questions determines their ability to take a risk. An investor can be a high-risk taker, mid-risk taker or can be a low-risk taker.

5. Asset Allocation

You should decide the mix of your asset classes such as debt and equity depending upon the risk appetite that one has. The asset allocation can be aggressive (investing mainly in equity), moderate (more inclined toward Debt fund) or it can be conservative (less inclined towards equity). You need to match your risk profile or risk taking capacity with the asset allocation you seek to have in your investment portfolio.