Very Basics of Financial Planning

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. 

 Suggested Investments according to horizons:

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.