Financial Planning

What is financial planning?

Financial planning is a step-by-step approach to meet one’s life goals. A financial plan acts as a guide as you go through life’s journey. Essentially, it helps you be in control of your income, expenses and investments such that you can manage your money and achieve your goals.

If you take a closer look at the above examples, you’ll find that there is one factor that connects all of them: money. You need to have an adequate amount of money to fulfil your goals and desires. More importantly, you need to have money at the right point in time.

For example, if you want to build up a corpus of Rs. 10 lakh for your daughter’s college education through investments, you need to grow this amount by the time she turns 18. Not a year later. This is where financial planning becomes essential.

What are Benefits of financial planning?

There are numerous practical benefits to financial planning. It helps you to:

  1. Increase your savings
    It may be possible to save money without having a financial plan. But it may not be the most efficient way to go about it. When you create a financial plan, you get a good deal of insight into your income and expenses. You can track and cut down your costs consciously. This automatically increases your savings in the long run.
  2. Enjoy a better standard of living
    Most people assume that they would have to sacrifice their standard of living if their monthly bills and EMI repayments are to be addressed. On the contrary, with a good financial plan, you would not need to compromise your lifestyle. It is possible to achieve your goals while living in relative comfort.
  3. Be prepared for emergencies
    Creating an emergency fund is a critical aspect of financial planning. Here, you need to ensure that you have a fund that is equal to at least 6 months of your monthly salary. This way, you don’t have to worry about procuring funds in case of a family emergency or a job loss. The emergency fund can help you pay for varied expenses on time.
  4. Attain peace of mind
    With adequate funds at hand, you can cover your monthly expenses, invest for your future goals and splurge a little for yourself and your family, without worry. Financial planning helps you manage your money efficiently and enjoy peace of mind. Don’t worry if you have not yet reached this stage. If you are on the path of financial planning, the destination of financial peace is not very far away.
Financial planning for life goals

The importance of personal financial planning in India cannot be ignored. It is not just about increasing your savings and reducing your expenses. Financial planning is a lot more than that. This includes achieving your future goals, such as:

  1. Wealth creation

The rise in the price of everyday items means that if you want to maintain or increase your current standard of living in the future, you need to create a sufficient corpus of wealth. You may also want to purchase a better car or a new house in the future. All this requires money, and it merely highlights the importance of wealth creation. It is possible to achieve these goals by carefully investing your money in the right avenues.

  1. Retirement planning

Your retirement may be 25 or 30 years in the future. But that does not mean you plan for it when you retire. To enjoy a happy and comfortable retired life, you need to start building your safety net right now. Planning at an early stage in life can help secure your future against financial uncertainties. Also, you invest lesser amounts if you start early and gain from the power of compounding which helps to build a large enough corpus over the 25-30 year period.

  1. Child’s education

Education has become very expensive, not only in India but across the world. And in future, this cost is only going to rise. This is why it is necessary to start planning from the moment your child is born. Calculate how much you wish to earn and start investing in long-term investment avenues that can help you achieve this goal. You can approach a financial advisor for advice if you are not sure how to proceed further.

  1. Saving tax
    Every year, you are probably paying a substantial amount as tax. But you can now lower your tax outgo legally. The Indian Income Tax Act provides various provisions for people to reduce their tax outgo. By planning your taxes in advance, you can identify the best avenues to invest your money and reduce your taxable income. Mutual funds provide a tax efficient avenue for investing for your life goals.

Why personal financial planning is crucial?

To tackle inflation

Remember the time you went to a multiplex with your family. You must have probably heard your grandparents say: ‘Everything was so cheap back then’. It’s true. Twenty years ago, the cost of movie tickets was around Rs. 40, not Rs. 500 as it is today. Similarly, chocolates, coffee, clothes, petrol and other regular goods were much cheaper ‘back then’. This phenomenon of prices rising over the years is known as inflation. It is the steady increase in the price of goods and services over time. And if you are not careful, it can eat into your savings in no time. Here’s a simple example to illustrate its effect.

Imagine a chocolate bar costs Rs. 10 today and you have Rs. 100. With this amount, you can buy 10 chocolate bars. Over the next one year, imagine you keep Rs. 100 in a bank that offers you an annual interest rate of 5%. At the end of the year, you have Rs. 105 with you.

But over one year, let’s assume that the price of the chocolate bar increases to Rs. 11. This means you have to pay Rs. 110 to purchase the same 10 chocolate bars next year. But since you have only Rs. 105, you fall short of Rs. 5. This is how inflation eats into one’s savings. It reduces purchasing power over time, and you have to pay more money to buy the same goods.

You can combat inflation by investing in avenues that offer you better returns over time. But for this, financial planning is critical.

To create a contingency fund

The future is uncertain, and anything can happen at any time. Here’s a scenario that highlights this point.

Imagine a father who has taken an education loan to finance his daughter’s college education. At the same time, he is also saving money to fund his retirement that is a couple of years away. But suddenly, a medical emergency occurs in the family. Unfortunately, the lack of medical insurance coverage means he has to pay for medical expenses out of his savings. This depletes his retirement corpus and increases his financial burden.

Many people face such situations. And while it is good to hope for the best, it is necessary to plan for the worst. A sudden job loss or an unexpected medical emergency can shake up your finances considerably. This is why you need to have an emergency fund to deal with such issues. Financial experts advise investors to keep an amount equal to 6 months’ salary as a contingency fund. This can be invested in a liquid fund so that you can access the money quickly in case of an emergency.

To create a retirement corpus

Newer medicines and more significant advances in the medical field mean that people are now living longer retired lives. This is undoubtedly a good thing. You can enjoy more time with your family, explore your passions and dreams and travel around the world. But there’s one crucial question you need to consider: how can I fund all these expenses? You need to have an adequate amount of money to ensure you enjoy your retired life to the fullest. This is possible by having a financial plan that provides regular income post retirement.
To manage your money in the best possible manner

Satisfying the needs of your family members can be tricky. Your teenage son may want to go to a space camp during the summer while your oldest child is ready to go to college. In personal finance, planning is vital. It not only helps you understand the needs of different family members but also how you can achieve them. But for this, you need to manage your money in the best possible manner.

For instance, parking your savings in a bank account is better than spending all of it. However, this is not the best way to deploy your money.  In comparison, avenues like mutual funds could  provide better annual yields. So, when you identify your family’s needs and make your money work actively to achieve them, you may expect to see good results.

How to create a successful financial plan?
  1. Understand your current financial situation
    Determine the status of your current finances, viz., your income, expenses, debt, savings and investments. This is the first step in financial planning, as it gives you a good sense on the state of your finances and ways to improve.
  2. Write down your financial goals
    Ask yourself: ‘what are the different financial goals I wish to achieve in life?’ Write them on a piece of paper. Don’t hesitate to put down any goal because no goal is too small or too big. However, make sure that your goals are specific. For instance, here are some achievable goals: ‘I want to purchase an SUV worth Rs. 13 lakh in the next 18 months’ or ‘I want to buy an apartment worth Rs. 80 lakh in the next 5 years.
  3. Look at the different investment options
    There are numerous investment options available to investors. In the mutual fund market alone, you can choose from nearly 2,000 schemes. Different investment avenues help investors to achieve different goals. For example, equity funds are suitable for long-term goals like retirement planning, child’s education, etc. If you are interested in relatively steady income and you are risk averse, you may want to invest in debt mutual funds. Equity Linked Saving Scheme (ELSS fund) are good to save tax. When it comes to investing, many financial experts have highlighted the importance of mutual funds. Investing in these funds consistently over a longer period can help you achieve your dreams and goals.
  4. Implement the right plan
    You need to select the right investment option based on factors such as your goals, age, risk appetite and investment amount. If you are unsure on the funds you need to select for your portfolio, you can avail the services of a financial advisor. These are certified professionals who help investors make the right investment choices. They also help with other aspects like insurance, retirement planning, estate planning and taxation.
  5. Monitor your financial plan regularly
    The financial planning process does not end once you invest your money. You also need to monitor how the funds are performing regularly. If they don’t perform, you may need to replace them with better performing funds. You also need to follow your plan because as you grow older, your goals and dreams evolve. For instance, your financial priorities may change after the birth of a child. Now, you need to accommodate the expenses and objectives of a new member in your family.
Investment in Mutual Funds as tool for Financial Planning

Each one of us is unique, and so are our financial goals. While one may want to save for their child’s education another may have retirement planning or holiday planning as their financial goals. These goals determine the savings you need and the financial planning you must do to attain the desired goal amount.

Mutual fund investments can be beneficial to help you meet all your short-term, medium-term and long-term financial goals. The article explains why it can be helpful to invest in mutual funds.

  • Professionally managed

Skilled fund managers efficiently manage mutual funds. These fund managers study the growth prospects of a company, its competitive advantages and performance before investing your money in it. They have real-time access to crucial market information that helps them make the right decisions for your portfolio.

  • Offer diversification

Investing all your funds in stocks of a single sector can be relatively risky. Mutual funds help in diversifying your investment portfolio. It can offer you ownership of different stocks and bonds of companies belonging to varied sectors. This spreads the risk and could make your portfolio less volatile, thereby helping to create wealth.

  • Low-cost investment

Buying individual stocks can be expensive, but mutual funds make them affordable. This is because mutual funds manage a large number of investments from various investors, which distributes investment costs.

  • Lower investment thresholds

You can begin investing in mutual funds via a Systematic Investment Plan (SIP) for as low as Rs. 500 to achieve long-term equity benefits. The minimal investment threshold encourages steady investment and can help you achieve your goals swiftly.

  • Transparent and safe

You can invest in mutual funds online. It offers exceptional transparency, with detailed information about the scheme before you invest in it. Essential features such as the fund’s rate of return, its performance in the last three to five years, etc. are readily available for you to read.

  • Offer liquidity

Mutual funds offer excellent liquidity. If you are looking to buy or redeem an open-ended scheme, you can buy/sell on the day’s Net Asset Value (NAV) quickly. The money gets credited to your bank account within a short period.

  • Saves tax

Mutual funds are excellent investment tools for saving tax. For example, you can invest in tax saving mutual funds such as Equity Linked Savings Scheme (ELSS). It has the lowest lock-in period of three years among all tax-saving instruments. It also offers remarkable potential to grow your initial investment. You can claim a deduction under Section 80C of the Income Tax Act up to Rs. 1.5 lakhs and reduce the tax payable on your income.

The CHESSY Group, on strength of its research based customer centric approach and impeccable servicing, is recognized as one of the leading financial advisory service providers in the country.

CHESSY provides investment advisory services. The company is engaged in advisory and distribution services of mutual funds and is amongst one of the trusted intermediaries in the country. The Company provides customized solutions to the requirements of High Net worth Individuals and Corporate clients. Our strength lies in our ability to advise on investment strategies and structures, develop innovative products and distribute amongst a wide network of investors across the globe. We have constantly endeavoured to develop new instruments, tailor made to the requirements of our clients, enabling them to earn efficient post tax returns in accordance with their specific risk, return and maturity profiles.

Sharad Agarwal





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