Financial Planning

Financial planning is the process of making informed money management decisions to secure your future. Financial planning helps to achieve financial goals and meet personal priorities, taking into consideration available resources, responsibilities, risk appetite and lifestyle. A financial plan lays down the allocation of savings across various asset classes to achieve an appropriate risk-reward balance.

Financial planning may include :

  • Asset allocation
  • Investment planning
  •  Retirement planning
  • Insurance planning

Financial Planning : Steps

Financial planning helps to translate your personal objectives into specific plans and outlines strategies to implement these plans. The process of financial planning comprises of the following steps:

Plan your investments

To create wealth over time, one has to be a successful investor. However, to become a successful investor, one needs to have a plan as well as a strategy to implement it. Being an integral part of the investment process, one must consider certain key factors like the current financial situation, investment objectives, attitude towards risk and the time horizon.

There are three simple steps that can help determine an action plan. Firstly, make a list of personal and financial goals in the short, medium and long-term. For example, in the short term, you may want to buy a car; in the medium term you may aim to provide for children’s education; and in the long run, retirement funding could be an objective.

Secondly, you need to assess your current position in the financial lifecycle. Thirdly, you must decide as to how much risk you are willing to take while investing. This is particularly important as different financial objectives require different investments.

Asset allocation

Asset allocation is a method that determines how you divide your portfolio among different investments and provides you with the proper blend of various asset classes. In other words, asset allocation helps you to control risk in your portfolio as different asset classes will react differently to changes in market conditions such as inflation, rising or falling interest rates or a market segment coming into or falling out of favour.

There is a thumb rule for asset allocation; it says that whatever your age, that percentage of your portfolio should be invested in debt instruments. For example, if you are 25, you should have 25 percent of your investments in debt instruments. However, in reality, different circumstances and financial position for each individual may require different allocation.

Asset allocation is different from simple diversification. For example, if you diversify your equity portfolio by investing in 5 different equity funds, you really haven’t done much to control risk in your portfolio. In case of an adverse reaction, all these funds will react in a similar way. On the other hand, as mentioned earlier, different asset classes will react differently in any given situation.

Mutual funds are the most appropriate vehicle to practice asset allocation successfully. They not only provide diversification but also offer a “family of funds” to suit investment objectives of investors in different age groups with varied time horizons and occupations. Moreover, they also provide opportunities to re-balance the portfolio, which may be required as a result of changes in the circumstances.

Understand risks and rewards

Many investors make a mistake of underestimating risk and/or overestimating reward from an investment. One needs to careful about this aspect of investing. By estimating the risks associated with each of the investment options, you can improve your chances of building a greater wealth. The right way to succeed is to invest as an optimist and manage risk as a pessimist.

Select an appropriate investment option

In an ever-changing financial environment, it is essential to invest in smart options like mutual funds. Though investment risk and economic uncertainties can never be eliminated, mutual funds, thanks to their mix of experience, research and analysis are in a much better position to ensure that investors in different segments achieve their investment objectives. However, to benefit from the expertise of professional fund managers, it is necessary to invest in the right type of fund i.e. the one whose objective matches with yours.

Keep an eye on your asset allocation at all times

It is quite common to see investors allowing their portfolios to ride on in a bull market. Obviously, in times like these, the original mix of equity and debt is ignored in their quest to maximize the returns. No doubt, equity market requires a long term commitment, it is equally important to maintain the proper asset allocation. In other words, re-balancing, either up or down, is a necessary ingredient for the long term success. Portfolio rebalancing is a process of bringing the different asset classes back into a proper relationship following a significant move in one or more.

Remember, rebalancing is more about risk than return. It is equally important to decide on a time interval, like once a year, and examine the portfolio. If the asset allocation shifts a little, there is no need to bother. If it shifts by more than 5 percent, you should rebalance. This can occur naturally over time or following an abrupt rise or decline in one or more asset classes.

Another important ingredient for success is not to lose sight of your long-term objectives. Many a time, we shift the focus on short-term goals at the cost of our long-term goals. While at times it might become necessary to do so, you will do well to explore other possibilities rather than abandoning your long-term investment plan in a hurry.

Tax Benefits Under Section 80 C

There are certain approved investments that allow investors to save taxes under Section 80 C of the Income-tax Act. Under this, a taxpayer can claim tax exemption up to an investment of Rs.1.50 lakh. The following options offered by mutual funds are eligible for this tax benefit:

Equity-Linked Savings Schemes (ELSS)

ELSS are the most efficient tax-saving instruments under Section 80C. These diversified equity funds invest in equity shares of companies across market capitalization. However, being an equity-oriented fund, investors in these schemes have to withstand volatility from time to time to earn higher returns than other option under Section 80 C.

Being a tax saving option, ELSS have a lock-in period of 3 years. Capital gains and Dividends are taxed on the lines of other equity funds.

Pension Funds

SEBI defines a retirement scheme as an open-ended retirement solution-oriented scheme having a lock-in of five years or till retirement age, whichever is earlier. These schemes usually come with a lock-in period and they also qualify for tax deductions under Section 80C. Currently, Pension funds launched by HDFC Mutual fund, Reliance mutual fund, UTI and Franklin India MF offer Pension funds that are eligible for tax benefits under Section 80C.

Mutual funds offer you returns in the form of dividend or growth.


Debt funds are defined as funds that have exposure of less than 65 percent in equity and equity-related instruments. All other funds are defined as equity fund. The Union Budget 2020 has abolished Dividend Distribution Tax (DDT) on dividend distributed by mutual funds and accordingly, dividend income from mutual funds will be taxed in the hands of investors at their applicable income-tax from the beginning of the financial year 2020 21.

Capital Gains Tax

Capital gains tax is paid by investors on gain made from their mutual fund investments. Here is how capital gains are taxed:

Long-term capital gains (LTCG)

For the funds regarded as equity funds, a holding period of 12 months or more is regarded as long-term. LTCG above Rs.1 lakh from these funds is taxed at a flat rate of 10 percent( without indexation) plus Surcharge of 12 percent plus cess of 4 percent. The LTCG made till January 31, 2018, however, remains grandfathered, i.e. gains will remain tax-exempt.

For debt funds, a holding period of 36 months or more is regarded as long-term for debt funds. LTCG from debt funds are taxed @ 20 percent after indexation.

Short-term capital gains (STCG)

A holding period of less than 36 months for debt funds and less than 12 months for equity and balanced funds is defined as short-term. While STCG under equity funds are tax at a flat rate of 15 percent, debt fund investors have to pay STCG at the applicable tax rate. For example, an investor in the highest tax bracket of 30 percent will be required to pay SSCG @ 30 percent plus surcharge plus cess.

Begin investing early

It is a dream of every parent to provide the best of education to their children. However, the ever increasing costs and lack of proper planning makes it very challenging for many of us to achieve this very important goal of our life. The key, therefore, is to have a financial plan in place. A sound plan can makes it possible for your children to have better options both in terms of deciding the type of education as well as selection of colleges. Besides, investing for your children can provide financial security should anything happen to you or your spouse. The truth is that many people make the mistake of following a haphazard approach while investing for their children as they do while making investments to save taxes and building retirement corpus.

To achieve a long-term objective like children education, it is important to start investing early and follow a correct and disciplined approach to investing. Besides, to take care of escalating costs, it is essential to invest in those options that have the potential to give positive real rate of return i.e. returns minus inflation.

The earlier you start, the longer your investments will have the time to grow. Many parents make the mistake of not starting the investment process for their child’s education when he or she is in the pre-school. Remember, investing early would enable you to benefit from the power of compounding and that would ensure that there are no shortfalls in the targeted amounts.

The way you save, as well your investment strategy, will depend on many factors like how much you wish to save, how long until the money is needed, and whether you have a lump sum or will be saving out of your current income. Mutual funds can provide an excellent vehicle for investing for you child’s education. They offer diversification, flexibility and simplicity. Besides, investing through a tax efficient vehicle like mutual funds can help you accumulate more for your child’s education.

Things to consider before investing

Here are some important things to consider before you start your long-term investment process.

  • How much you want to invest on a regular basis? It is important that you choose an amount that you will be comfortable investing regularly over the long term.
  • Decide the frequency at which you want to invest—each month or each quarter.
  • Continue investing irrespective of whether the market falls or rises.
  • Remember the objective for which you are investing throughout the period. This will enable you to remain focused on this very important goal of your life.

For those who begin early, equity funds can be an ideal option. As mentioned earlier, equities as an asset class have the potential to beat inflation. For those who feel the need to have a mix of equity and debt, there are certain other options. Some of the mutual funds have established dedicated balanced funds for children where in one has the option of investing in a ready made equity-oriented or a debt-oriented fund. Alternatively, one can choose a combination of some quality open-ended equity as well as debt funds. By doing so, one can not only retain the control on the asset allocation but also on making changes that may be required to be carried out due to poor performance of some of the funds or to rebalance the portfolio.

Some model portfolios

Depending upon when you begin investing for your child, here are some model portfolios:

  1. Age of the child: newborn to 5 yrs – Investment horizon : 13 to 18 yrs

If you start investing at this stage, you allow your savings the maximum time to build up assets for your child’s education. With time on your side, you can take a higher risk and go for equity funds. However, if you choose to invest on a regular basis, try and increase the amount every year.

  1. Age of the child: 6-12 yrs – Investment horizon: 6 to 12 yrs

While a major part of the portfolio may still focus on aggressive investment options like equity funds, it would be wise to have a balanced portfolio to cut down volatility. The endeavour should be to start including lesser volatile investment options in the portfolio as the child grows older.

  1. Age of the child: 13- 18 yrs Investment horizon: 1 to 5 yrs

At this stage, it would be advisable to invest in funds that are least volatile. Also, liquidity should be an important consideration whiling working out the strategy. The open-ended funds can be an ideal choice as they ensure liquidity at all times and also you can achieve your goal of making your money grow at a healthy rate.

For those who decide to invest in equity funds on an on-going basis, a Systematic Investment Plan (SIP) can be the best option. It is a proven fact that a steady plan both in terms of savings and investments, help pursue financial goals. What SIP really means is that you invest a fixed sum say every month. When you invest a fixed amount, such as Rs.5000 a month, you invest at different levels of the market rather than committing a lump sum at a particular level. This helps in bringing your average cost lower than the average Net Asset Value (NAV) over time.

What is retirement planning?

Retirement planning is a process of making financial provision for retirement before reaching the retirement age. In other words, it involves setting aside a part of your income with the intention of deriving an income from the corpus build over the years. While most of us know that we need to save for our retirement, many of us are not sure about the right way to do so. No wonder, many people get overwhelmed by the thought of retirement and they wonder how they will ever save the huge amount of money required to lead a happy retired life.

What is the right way to go about retirement planning?

Most of us are face with this dilemma because we consider retirement planning as a single event rather than making it as life long process. In other words, if one saves and invests regularly over a period of time, even a small sum of money can suffice for this purpose. The key, however, is to start investing early as the real power of compounding comes with time. Albert Einstein called compounding “the eighth wonder of the world” because of its amazing abilities.

Another challenging aspect of retirement planning is to calculate how much you will need to support yourself and your dependents. As a thumb rule, you will require around 75% of your current income to maintain your standard of living. Of course, this amount will increase with inflation. Though it is a proven fact that starting early is an important aspect of retirement planning, it is extremely difficult to decide how much you will need after retirement. A professional advisor can make things easy and hence it is always prudent to go for professional advice to ensure success in the process of retirement planning.

Retirement planning is a part of investment planning and hence you need to examine your current situation and attitude towards risk. Remember, investing without a clear picture can be too risky. The key to success is that you need to adopt a disciplined savings programme as well as have a multi stage retirement path with the flexibility of multistage approach to investing. Periodic or haphazard saving can be counterproductive.

The road to investment success can at times be bumpy. Therefore, it is important to remain focused on this long term investment objectives. While it is impossible to foresee every obstacle, knowing some of the common mistakes help in avoiding them. These are not having a plan as well as a back up plan and not making most of the investment plan. Your investment strategy should cover the following:

  • Start early
  • Invest to beat inflation
  • Invest regularly
  •  Know your risk tolerance
  • Evaluate your insurance and investment needs
  • Follow a “buy and hold” strategy
  • Invest in tax efficient instruments like mutual funds.

Coming back to the importance of starting early, the fact is that for every 10 years you delay before starting to save for retirement, you will need to save three times as much each month to catch up.

Let us take an example of someone who is 30 years away from retirement. The question is what will be his annual expenditure then, after taking into consideration the increase in cost of living? Even if we assume a 5 per cent inflation rate for 30 years, the Rs. 100,000 annual expenditure will increase to over Rs. 435,000 by the time he retires. Therefore, if he plans for Rs. 100,000 per annum for his retirement, because that is how much he needs today, he would be having less than 25 per cent of what he would really require.

Important guidelines for retirement planning

Broadly, investors need to save a certain percentage of the annual income and invest in instruments that have the potential to give the desired results over different time horizons. The following can act as a guideline:

Ages : 25 to 40 – Depending on the age, 15 to 25% of the annual income should be saved. The portfolio should be dominated by equities and equity funds. These should comprise 70 to 80 percent of the investments. To balance out the portfolio, one should rely on other tax efficient investments such as PF, PPF and debt and debt-oriented mutual funds.

Ages : 41 to 50 – Investors in this age group should save around 25 to 35% of their annual income. As the time horizon to retirement is still long enough, equity and equity funds should continue to be a crucial part of the portfolio i.e. around 50% or more. The balance can be invested in tax efficient instruments providing steady returns.

Ages : 51 to 60 – At this stage of one’s life, the time horizon before retirement starts

shrinking. Therefore, for people in this age group, the prudent thing to do is follow a conservative approach. However, it is important to remember that it may only be a few years before one retires, but one may need to depend on retirement funds for many more years. Therefore, the key is to maintain a portfolio that will continue to grow for many years after one retires. Equity and equity should still be a part of the portfolio, though in a moderate percentage.