Many people ignore Financial
Planning and start thinking very late about the same. Many a times despite of
thinking about planning our finances we are not able to get the time to
structure them. Or at times we take it lightly and ignore the same. Here are
some basics which one should do if somebody is not able to structure a
financial plan for himself.
Start investing early
and Invest only after you are through with your monthly expenses and have an
investible surplus.
Always start with Insurance so that you cover your Liabilities. Get
a Health Insurance and Take a Life Insurance Cover once you are married. For
enhanced Liability coverage depending on your investment limits you may take
Critical Illness and Personal Accident coverage. These covers are also
available as riders along with your Life Insurance. For Life cover just take a Term Insurance to get a maximum
coverage. Online Term Insurance are available with high coverage and at low
cost and should be considered. However just make sure that you get the medical
tests done and do all require disclosures. This ensures smooth claim
settlements to your family in the event of any mishaps. Don’t go for any ULIP / Endowment /
Traditional Plans. They are not an effective combination (However they are sold
the maximum by distributors due to high commissions).
Take Health Insurance: Take
a Health Insurance to cover your unforeseen medical exigencies. Taking Health
Insurance in early age is beneficial as it is highly cost efficient.
Now Plan your Investments: Decide your goals / the timeframe / your
budget and investible surplus and then your Asset Allocation. Simple rule:
Diversify between Equity and Debt depending on your time frame and age.
1.) 1
to 30 days – Liquid Funds
2.) 30
to 365 Days – Ultra Short Term Debt Funds and Short Term Debt Funds
3.) 366
days to 5 years – FMP’s, Dynamic Bond Funds, Income Funds, MIP’s, FD’s.
Decision should be made depending on the interest rate scenario. Just keep in
mind that FMP’s and Debt Mutual Funds are tax efficient is
investment is held for more than 1 year (10% without Indexation and 20% with
Indexation whichever is less). However this is best only if an investor falls
within 30% Tax slab as he gets a min 20% arbitrage over FD’s. For anybody
falling in 10% slab FD’s. Anybody in 20% Tax slab can divide his investments
between Debt Funds and FD’s. This is because an investor falling in 20% tax
slab might enjoy a tax arbitrage if Indexation is taken into consideration
(Effective taxation rate after applying indexation might go down below 10%
considering the current indexation rates.).
4.) Above 5 years : Equity is the best as
long term returns out of Equity are the best. In case you are not able to
invest a Lumpsum amount invest through SIP (Systematic Investment Plans) with
as low as Rs. 1000 per month. SIP’s are the best investment options for a
Salaried investor to generate good returns over a long term. Remember
Investment is Equity Mutual Fund is highly tax efficient as investor doesn’t incur
any Tax if investment is held for more than 1 year from the date of Investment
(Long Term Capital Gain is Tax Free). Never fear Volatility of Equity. Ups and
downs in Equity are common but if a discipline and patience is maintained for
the requisite horizon one does get a decent return beating inflation and
fulfilling the required goals.
5.)
Allocation
to PPF: Always allocate some amount to PPF as it is an old and well proven
investment option from the last many years offering a consistent return of 8%.
Only restriction: It has a minimum lock in of 15 years. But withdrawal after 15
years is Tax Free.
This article just emphasizes on basics. I have
not included the nitty gritties of Financial Planning and Products in this
article. 
