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Posted On Friday, Oct 04, 2013
We all have dreams; which could be buying a vehicle, a dream house, higher education for our children, a holiday abroad or building a healthy retirement corpus. But, do we really formulate a strategy for achieving those goals? If not, then it’s high time for you to plan for it and then move forward towards achieving these goals.
As life today moves at such a fast pace, sound financial planning is the need of the hour. Through financial planning you can plan ahead and ensure that the phrase “Failing to plan is planning to fail” does not apply to you.
With proper financial planning you can be financially prepared for anything that life throws at you and might help to make your financial life a smooth ride rather than a road full of bumps and jerks.
What is Financial Planning?
Financial Planning is a process which allows you to manage your finances in such a way that you can link it to your future financial goals. While it may take some time to set things in motion and finding the right financial guide for yourself, but once you have the basics of financial planning in place then things will be a lot easier.
The process of financial planning should help you answer the questions (from a financial perspective) like:
Where you are today, i.e. what's your current financial status
Where do you want to be tomorrow, i.e. financial investments linked to your goals
What you must do to get there, i.e. the asset allocation and investment strategy that will help you achieve your objectives.
Life without financial planning is like an Unplanned Vacation
With a Financial plan, you should be able to do the following:
Set and prioritize your life goals from a financial perspective.
Check your existing investments and the role they will play in meeting your financial goals and also whether the current set of investments are the right ones for you.
Identify the right investment instruments for your future investments.
Everything from bank accounts and savings accounts to investments, insurance and retirement planning need to be regularly monitored to ensure you have enough funds to support you and your family - not only during your working life but after retirement as well. Therefore, it is important to start saving early.
Thumb rule for asset allocation - 'Don't put all your eggs in one basket'.
In other words, rather than putting all your money at one place, spread it across different asset classes, to reap maximum benefit and balance out the risk factor. It is strategic, as it looks into the foreseeable future and builds the allocation bearing the risk, return and liquidity needs in mind.
Nevertheless, asset allocation can be decided by measuring risk that is involved with each asset class. Therefore, before taking any investment decision you need to consider both aspects of risk - your risk appetite and the risk level of the investment options being considered.
An appropriate risk allocation, along with overall total risk and return targets, should be thought of as the blueprint of diversifying portfolio risk, while asset classes are the bricks and mortar used to execute the design.
Mutual funds as a financial planning tool
Mutual funds have managed to constantly deliver financial planning solutions to investors by way of various schemes that they offer. They are vehicles that allow you to execute your financial plans. Mutual fund is a type of investment vehicle that pools money from many investors to purchase securities. It mobilizes money from investors, to invest in stocks and securities, in line with the investment objectives of the Mutual Fund Schemes.
You may choose to invest directly in the market on your own, but most importantly you need to have the time and financial expertise to time the market correctly. Not all of us are blessed with these abilities; therefore it is suggested to “outsource” what is not your “core competency” which means that you should enter into the equity market via mutual funds. Investing in mutual funds involves professional Fund Managers managing your money, hence reducing the chances of taking a wrong call on a stock.
Equity funds have an element of risk inherent with them but in the long run they may help create wealth out of your savings. While the risk factor is always higher with equities, one should not ignore the high potential of gaining returns from them over a longer period of time.
So where can you invest your savings?
Firstly, you should know your financial goals and objectives and the time frame you need to achieve those goals. Then you should gauge your risk appetite and how much of your savings you can invest. Then select a fund which has a good investment process and whose objectives are aligned with your investment objective. Never choose a fund on the basis of past performance and rankings only.
While investing in equities you could look at investing in a diversified Equity fund. The reason to this is diversified equity fund are comparatively less risky than the sector and thematic funds. Sector and thematic funds are very volatile. Their portfolio is concentrated and depends on the performance of a particular sector or theme. So, if the performance of that sector or theme goes down, your fund performance also gets affected. But, unlike sector and thematic funds, diversified equity funds have a diverse portfolio that is cut across different sectors to reduce the amount of risk in the fund. Actively maintaining diversification prevents affects in one sector to affect the entire portfolio.
Moreover while there are many options to park your investments, may it be equities or bank FDs or other avenues. It is up to you to prudently decide your mode of savings after considering your risk taking ability. You may also consult a financial planner to guide you on your investment related queries.
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.
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