Thursday, September 28, 2023

Understanding Financial Planning For Achieving Your Financial Goals

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Simply put, planning your investments uses a systematic process that involves setting financial goals, evaluating potential options, and implementing a plan to achieve those goals. Its prime objectives are wealth creation, risk management, and financial security. The heart of investment planning is aligning your financial decisions with your life’s important goals, such as child education, retirement, or buying a dream house.

  • Financial Planning in Action: For instance, if Ravi, a 35-year-old professional, wants to buy a house in the next ten years, he will need a certain amount of capital. By planning his investments wisely, he can reach his goal within his desired timeline.

Steps to Successfully Plan Your Investments

  1. Identify your Financial Goals

Recognising your financial goals is the first stepping stone. It could be anything – from planning your child’s education to building a retirement corpus. It’s crucial to specify and prioritise these goals.

  • A Structured Approach: Priya, a 30-year-old IT professional, prioritises her financial goals as follows:
    • Short-term (1-3 years): Saving for a car.
    • Mid-term (4-10 years): Planning for her child’s education.
    • Long-term (more than 10 years): Retirement planning.
  1. Assess your Risk Tolerance

Understanding your risk tolerance is crucial in investment planning. It defines your willingness to bear losses in exchange for potential returns. Your risk profile directly impacts your investment decisions.

  • Risk Tolerance in Practice: Suppose Karan, a 40-year-old individual, has a high-risk tolerance. In this case, he might prefer to invest a significant portion of his portfolio in equities, which carry higher potential returns but also higher risks. On the other hand, an individual with low-risk tolerance may lean towards safer investment options, such as fixed deposits or debt funds.
  1. Evaluate your Current Financial Situation

An accurate evaluation of your current financial status, including your income, expenses, savings, and liabilities, forms the basis of your investment strategy.

  • Financial Assessment Example: If Aman earns Rs 1,00,000 per month, his monthly expenses amount to Rs 50,000, and he saves Rs 30,000, he can consider investing the remaining Rs 20,000.
  1. Diversify your Investment Portfolio

Diversification is a risk management strategy that involves spreading your investments across various asset classes and investment options. It helps to minimise risk and contributes to the overall return on investments.

  • Portfolio Diversification Example: Ankit’s diversified portfolio might include a mix of equities, bonds, real estate, and mutual funds to balance potential returns with manageable risk.
  1. Create an Investment Plan

Creating an investment plan involves allocating funds, selecting suitable investment products, and setting a timeline for your goals. A well-structured plan is instrumental in reaching your financial goals.

  • Investment Plan Example: Nidhi, a 32-year-old working professional, might allocate Rs 10,000 for mutual funds, Rs 5,000 for equities, and Rs 5,000 for a recurring deposit each month.

Role of a Financial Consultant in Planning

While it’s possible to manage your finances independently, the role of a professional financial planner cannot be overstated. From understanding the complex financial market dynamics to creating tailored solutions based on your needs, a financial consultant makes your investment journey smoother. 

  • Benefits of a Financial Consultant: Meera consults a financial planner who suggests the best investment products as per her risk profile and financial goals. This tailored approach helps Meera avoid any investment pitfalls and steer her investments in the right direction.

Revisiting and Rebalancing the Investment Plan

Investment plans are not a one-time activity. They require regular review and rebalancing in response to changes in life circumstances, financial goals, and market conditions.

  • Review and Rebalance Example: If Rohit’s equity investments have performed exceptionally well, pushing the equity portion of his portfolio higher than planned, he might consider rebalancing by selling some equity and investing more in bonds or other assets.

Summing Up

Investment planning is much more than merely selecting a few financial products. It is a systematic process that involves understanding your financial goals, assessing your risk tolerance, evaluating your financial standing, diversifying your portfolio, and periodically reviewing your investments. It’s never too late to start your planning journey. Start today and secure a prosperous future!


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