Financial planning simplified

#Personal finance is a very wide subject. Here I just want to simplify the basics, why we need to take care of our money, why the inflow and outflow of funds need to me managed.  
Every person has their own perspective about life, income and expenses. However, we can start with the 5 constants of personal finance apart from the regular aspirations of education for your children, marriage and buying a home.
1. You are going to grow old
2. Prices will go up
3. Value of money will decrease
4. Financial markets will remain volatile
5. There will be unplanned emergencies
Now, what do we do? Start stacking up cash/ gold? Putting in Fixed Deposit? Buy stocks? Mutual funds? Insurance? What?
We need to simply the relation between the goals and financial needs. We need to come in terms with the purpose of the investment so that we allocate funds and plan in a right manner.  

How to go about it?
Start as soon as you feel it is important; don’t wait for emergencies to teach you harsh lessons.
Chalk out your financial goals based on the event and the expected timeline. For eg
Own marriage/ buying property/ vacations/ children’s education and marrage/ second home/ retirement planning etc.


Keep in mind


1. Keep goals clear
2. Time in hand
3. Risk taking ability
4. Avoid mixing asset classes
Based on your age, current financial situation, priority and timeline you can plan your finance. 
First, prepare an Emergency fund, ideally the most liquid investment like savings account/ Fixed deposit/liquid fund.
Your financial liabilities and dependants should determine the life insurance cover. Chose term plan, stay away from endowment and ulips. See Post to know more.
Health insurance is also a significant part of financial planning. A medical emergency can erode a significant portion of your wealth if not planned for emergencies.
Few goals which are 5 – 10 years away and more, a significant kitty can be built with a monthly investing a small amount into equity mutual fund. See post on wealth creation

Younger the age, risk taking capacity is more. Equity based mutual fund investment can yield maximum return in long term.  Thumb rule of equity investment is (100-age)% of total savings can be kept in equity. With increasing age/ nearing the goal gradually shift the investment into debts or fixed instruments like Fixed deposits.
Retirement planning is one more aspect one need to start early. As, the value of money decreases with passing time, maintaining the same lifestyle as today will cost you much higher 20 years later. Hence, investing for retire is important. See post
In other posts will go into details

S I P (Systematic Investment Plan) – TREND AMONG THE FIRST TIME INVESTORS, making a strong case for Mutual Fund Industry


In the recent past, especially post August 2009 (banning of entry load in Mutual Fund) media has bashed the MF industry many a times predominantly on net negative flow on equity funds despite remarkable market rallies. But if we closely analyze market data, there is a strong SIP movement fuelling up underneath this vulnerability. The new investors are taking SIP (systematic Investment Plan) way to create long term wealth.

Data from industry sources show that there has been consistent upward movement in the SIP folios in last one year in all Metro investors, Non metro cities (next top 25cities) and the smaller cities. The ticket size of average SIP has moved up from Rs. 2100 to Rs. 2200.

Micro SIP category (below Rs.1000, which is dominantly from semi urban and rural India) has seen a surge of 16% from the earlier 13% market share. Though the industry suffered a negative flow in equity funds, the financial year has seen a healthy growth trend with 3.24 Lakh new registrations.

Mutual Fund SIP – Beginners’ route to create a long term wealth
Systematic Investment Plan is a disciplined way of investing into mutual funds. Where in investors have option of investing a fixed amount of money in weekly, monthly or quarterly interval into a specific fund. It can be done by submitting dated cheques or ECS from a specified bank account (Electronic Clearing Systems – Used by banks for transferring fund from one account to another)

For eg. An investor investing as small as Rs. 1000/- per month making a total investment of Rs. 12, 000. Instead of investing Rs. 12,000 at one go, investors now have option of putting the amount in 12 equal installments.

And during volatile market movements, the cost of investment will be average and can see a consistent appreciation of the investment over long period of time.

Beginners’ first step of investment can start with Mutual Fund SIP. Here is why –
1. Small Installments – The new investors who do not have big money ready to invest and allocate in different things, can build their portfolio with a weekly/ monthly/ quarterly SIP over a long period of time. Eg . a ECS deduction of – 1000 per month make a investment of 12,000 in a year.
2. Disciplined Investing – The investors are seeing this an opportunity for a long-term investment as the amount needed for every installment is low and has the benefit of investing through a long span.
3. Beating the volatility of equity market– Investing equal amount every month (similar to saving in a recurring deposit) gives the investor a chance of averaging the risk of losing money through beating the short-term volatility by committing to a long-term disciplined investment.

But, we must look at few reasons why there is net negative outflow in last 1 year –
Reason 1. Advisors are less motivated to sell MF schemes as, as the easy brokerage has stopped coming in
Reason 2. Post market correction of 2008, the 2009-10 rally has made extra ordinary profits in many schemes, so the old investors are booking profits, which had grown multi folds over many years.

But yes, before investing, one should definitely choose the fund carefully.

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