For a Rich Future

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.

What is 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.
STEPS IN FINANCIAL PLANNING
Create a sound financial plan in six steps
1.

Establish your goals in life short, medium and long

term
2.
Work out what assets and liabilities you have write
them down
3.
Evaluate your current financial position how close are
you to achieving your goals?
4.
Develop your plan create a route map for achieving
your different goals
5.
Implement your plan make the changes and make it
happen
6.
Monitor and review your plan at least yearly and make
adjustments when needed
Dynamics of financial planning
Financial independence is now an integral part of our complex lives.
Gone are the days when it meant having enough to tide over one's
personal needs without really having to struggle. In current times,
due to various reasons like a fast-paced life, job insecurities and
high inflation rates (that erode the value of money), being financially

competent in the present as well as the future should is of prime

importance for every individual.
However, it is widely observed that most individual's spend their life
in earning money and saving it but ignoring the third most
important aspect, financial planning, i.e. managing money. The
process of financial planning entails understanding an individual's
present and future earnings ability, analysing future financial
requirements (like buying a house) and developing a path to create
wealth and reach those goals as per the individual's ability to
tolerate investment-related risks. Further, financial plans must be
dynamic to reflect the ongoing changing market environment and
the changing needs of the individuals.
Why is financial planning important?
Financial planning is important for all individuals as it not only helps
in meeting the present and future goals but also in dealing with
unforeseen emergencies in life; in short, it provides the much
needed financial security. Further, in a high inflation economy like
India, rising prices erode the value of savings and financial planning
can help in growing money at protecting a portfolio from such
rampant erosions. Financial planning via diversification also helps to
harness the power of compounding and reduce the uncertainties
arising from a volatile market scenario.

While financial planning is important, it requires an understanding

of various terms and processes - understanding the investment
opportunities in the current financial system, creation of an
optimum asset allocation / portfolio mix, tracking and reviewing the
investments among others. Hence, we will try to simplify the
financial planning process through a few steps.
Define current financial state and financial goals.
Individuals must clearly understand their current financial state
which will give them an idea about their earnings and expenses.

This analysis will reveal the annual cost of living and indicate the
savings (income less expenses) or surplus money available for
investment. After getting an idea about the current financial
standing, investors must analyse the financial needs and goals
which will help them to understand what they hope to attain.
Commonly observed goals include buying a house, funding child's
education, retirement planning, etc. The process doesn't end in just
identifying the needs and goals but also find out the resources and
the time frame required to fulfill them. Any financial need or goal
would translate into determining the tenure of the investment i.e.
short-term (< 1 year), medium-term (1 - 5 years) and long-term (>
5 years).

Analyse the risk profile.

Analysing an individual's risk profile is an important component of
financial planning as the asset allocation in a portfolio critically
depends on this; remember each asset class carries different types
of risks like market risk, credit risk, liquidity risk and interest rate
risk. For any investment, a certain amount of risk cannot be
ignored. But while investing in asset classes which offer higher
returns, individuals must analyse their own risk taking (depends on
the objective, time horizon, income level and age) and risk
tolerance abilities (capacity to lose some or all of initial and
subsequent investments in exchange of greater potential returns).
E.g. an individual of over 40 years of age but with a stable long
term income source can look at investing a relatively higher portion
of the portfolio into risky assets such as equities unlike an individual
unlike someone of the same age but with a not-so-stable long term
income source.

Pick the right asset allocation mix

Traditionally, the three main asset classes are equities, fixed income
(debt) and cash and equivalents. There are non-traditional asset

classes such as real estate, gold, and commodities, to gain

additional returns even though these assets carry additional risks
compared to traditional assets. By allocating capital across several
asset classes, the benefits of diversification can maximize gains and
minimize the losses. After deciding upon different asset classes,
individuals must develop an asset allocation plan which will
determine the proportion of investments in each of the major asset
classes. A right asset allocation plan means apportioning the
investor's surplus across the various asset classes and their
instruments based on the individuals' risk return profile. Mutual
funds in India invest across most of the traditional as well as nontraditional investment classes and provide an ideal medium for
investors, while also offering the benefit of professional
management at low costs.

Conclusion
Given the ongoing market volatilities, it is important that individuals
must have a disciplined approach to investments which can be
acquired by following the above steps. Besides, individuals must
keep in mind a simple modern day adage-Start Early, Invest
Regularly and Be Updated-be it on their own or with help from a
professional financial planner.

Elements of a Financial Plan

Financial goals: A financial plan is based on an individual's or a
family's clearly defined financial goals, including funding a college
education for the children, buying a larger home, starting a

business, retiring on time or leaving a legacy. Financial goals should

be quantified and set to milestones for tracking.
Personal net worth statement: A snapshot of assets and liabilities
serves as a benchmark for measuring progress towards financial
goals.
Cash flow analysis: An income and spending plan determines how
much can be set aside for debt repayment, savings and investing
each month.
Retirement strategy: The plan should include a strategy for
achieving retirement independent of other financial priorities. The
plan should include a strategy for accumulating the required
retirement capital and its planned lifetime distribution.
Comprehensive risk management plan: Identify all risk exposures
and provide the necessary coverage to protect the family and its
assets against financial loss. The risk management plan includes a
full review of life and disability insurance, personal liability
coverage, property and casualty coverage, and catastrophic
coverage.
Long-term investment plan: Include a customized asset allocation
strategy based on specific investment objectives and a risk profile.
This investment plan sets guidelines for selecting, buying and selling
investments and establishing benchmarks for performance review.
Tax reduction strategy: Identify ways to minimize taxes on
personal income to the extent permissible by the tax code. The
strategy should include identification of tax-favored investment
vehicles that can reduce taxation of investment income.
Estate plan: Create arrangements for the preservation and
distribution of assets with attention to minimizing settlement costs
and taxes. Review and update estate panning instruments, such as

wills, inter-vivos trusts, power of attorney, medical directives, and

marital trusts.

What is mutual fund?

A mutual fund is a professionally managed investment fund that
pools money from many investors to purchase securities. While
there is no legal definition of the term "mutual fund", it is most
commonly applied to open-end investment companies, which are
collective investment vehicles that are regulated and sold to the
general public on a daily basis. They are sometimes referred to as
"investment
companies"
or
"registered
investment
companies". Hedge funds are not mutual funds, primarily because
they cannot be sold to the general public. Once a small player in
financial markets, due to their meteoric growth in the late 1980s and
early 1990s, mutual funds now play a large and decisive role in the
valuation of trade able assets such as stocks and bonds.

Type of mutual fund.

 OPEN ENDED.
Open-end fund (or open-ended fund) is a collective investment
scheme which can issue and redeem shares at any time. An investor
will generally purchase shares in the fund directly from the fund
itself rather than from the existing shareholders. It contrasts with
a closed-end fund, which typically issues all the shares it will issue
at the outset, with such shares usually being tradable between
investors thereafter.
Equity Linked
While tax planning may seem to be a difficult process, Mutual Funds
offer you a simple way to get tax benefits, while aiming to make the
most of the potential of the equity markets.
An Equity Linked Savings Scheme (ELSS) is an open-ended Equity
Mutual Fund that doesn't just help you save tax, but also gives you
an opportunity to grow your money. It qualifies for tax exemptions
under section (u/s) 80C of the Indian Income Tax Act.
BALANCED FUND
Balanced funds are geared toward investors who are looking for a
mixture of safety, income and modest capital appreciation. The

amounts this type of mutual fund invests into each asset class
usually must remain within a set minimum and maximum.
DEBT FUND
Debt Mutual Funds mainly invest in a mix of debt or fixed income
securities such as Treasury Bills, Government Securities, Corporate
Bonds, Money Market instruments and other debt securities of
different time horizons. Generally, debt securities have a fixed
maturity date & pay a fixed rate of interest.
EQUITY FUND
Equity schemes endeavor to provide potential for high growth and
returns with a moderate to high risk by investing in shares. Such
schemes are either actively or passively (replicate indices)
managed, and are best suited for investors with a long term
investment horizon

CLOSED ENDED FUND

A closed-end fund (CEF) or closed-ended fund is a collective
investment model based on issuing a fixed number of shares which
are not redeemable from the fund. Unlike open-end funds, new
shares in a closed-end fund are not created by managers to meet
demand from investors. Instead, the shares can be purchased and
sold only in the market. This is the original design of the mutual
fund which predates open-end mutual funds but offers the same
actively managed pooled investments. In the United States, closedend funds sold publicly must be registered under both the Securities
Act of 1933 and the Investment Company Act of 1940.
Closed-end funds are usually listed on a recognized stock exchange
and can be bought and sold on that exchange. The price per share is
determined by the market and is usually different from the
underlying value or net asset value (NAV) per share of the

investments held by the fund. The price is said to be at a discount or

premium to the NAV when it is below or above the NAV, respectively.
A premium might be due to the market's confidence in the
investment managers' ability or the underlying securities to produce
above-market returns. A discount might reflect the charges to be
deducted from the fund in future by the managers, uncertainty due
to high amounts of leverage, concerns related to liquidity or lack of
investor confidence in the underlying securities.