All about personal financial planning

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Achieving any goal in life has an element of finance requirement and unless it is planned for appropriately the goal may remain only a dream.

Like all things in life, financial planning parameters have changed over a period of time. It is no longer bank deposits or company deposits of Government supported schemes yielding virtually double-digit returns but there are other investment avenues fetching attractive returns. With the privatisation of insurance sector, there are several options to enable one to separate insurance from investments.

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Availability of finance for major expenses such as buying a house or higher education or car has become reasonable easy and to some extent tax efficient. Income-tax laws have also changed over a period of time. These changes have necessitated one to look at finance planning taking into account tax laws, liquidity, risk involved and suitability of the instrument to match one’s risk appetite.

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Essential elements of personal finance planning can be listed as under:

• Risk protection — use of insurance
• Goal fixing - objective for which the money is being invested
• Time frame — when the money will be needed
• Inflation — to consider future cost
• Risk appetite of investor — is it necessary to take risk and if so does it match with one’s risk appetite
• Returns expectations — is the instrument selected for investment likely to yield desired returns
• Tax efficiency — how tax efficient is the instrument chosen
• Liquidity — can the money be withdrawn when required without any cost
• Costs involved — how much we pay for managing the money to the promoter of the instrument
• Transparency - are all details pertaining to the deployment of money known

Based on the above parameters the planning process will vary from person to person and to some extent unique to each individual.

Broadly, finance planning will involve insurance for risk protection, choosing appropriate instrument for investment and make investments tax efficient to the extent possible to meet the finance requirement of future needs such as child’s education and marriage, purchase of property, planned major holidays, retirement needs, medical needs at old age etc.

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It is wise not to combine insurance with investments. This is an expensive way of achieving both the objectives.

Most of the life insurance companies have a plan called term insurance which is a low premium high risk cover plan. This carries only death benefit with it and offers no survival benefit. Although this may sound strange it is the best form of insurance one can choose.

How much life insurance will depend up on one’s current income, loan liabilities and provision to be made for future major expenses.

For investments, one should determine the asset classes in which one wishes to invest Equities, precious metals, real estate, bonds and other fixed income securities are popular available assets one can choose and invest.

Historically, it has been found that investments in equities and real estate have delivered better inflation adjusted returns. However, for investment in real estate one needs large outlay and this investment is also not liquid at will and also not partially liquid. It makes sense for one to invest equities and equity related instruments from early age to build wealth at a rate beating inflation.

Mutual funds also offer opportunities to invest in other asset classes such as precious metal, real estate and bonds for different time frames.

Now that life insurance is privatised and mutual funds are run by private sector organizations (excepting a few like UTI, LIC, and PSU Bank funds) one may have a fear about the credibility of the operators.

The Government has set up regulatory authorities like IRDA and SEBI for insurance and finance sector respectively to regulate the operation of these entities and one can be reasonably assured that there will not be any fraud or misappropriation of funds.

Investment in mutual fund schemes are tax efficient and outside the purview of mutual fund schemes some schemes promoted by Government are available with tax efficiency for investment like PPF, EPF & VPF.

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All these schemes can be judiciously combined to develop a portfolio to enable one to achieve financial goal at different stages in life keeping the risk protected all the time.

The views expressed in the article are the author’s and not of Sify.com

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