To achieve a specific predetermined goal, the person should have a sound plan in his mind. A plan may be called a step/process towards achieving an Objective or dream to be fulfilled over a period of time. Proper planning is a prerequisite. Well planned Goal mean half achievement of goal. This article deals with Financial Planning, its importance and steps inovolved in a sound financial planning and financial instruments available for financial planning.
Meaning of Financial Planning :
Financial Planning means and includes Evaluating the investing and financing options available to person. Planning include attempting to make a sound and optimum decisions , highlighting effects of consequences of these decisions for the benefit of person in the form of financial plan and comparing future performance against that plan. A Person includes an Individual for the purpose the article relating to Financial Planning.
Financial Planning is a long term process. Financial Planning is also required for Partnership Firms, Companies, Limited Liability Partnership, Trusts, Hindu Undived Families and such entities are used as an instrument for financial Planning. Making wise investment decisions in a correct financial instrument and at a right time is a prerequisite for a succesful financial planning.
Financial Planning can be done based upon age factor of an Individual. Financial Planning required for the age between 0 to 21 Years, Of course financial planning is done by Parents of a Child. Next age group falls between 21 to 40 Years, financial planning by an Earning Individual who has completed his education. Other Age group falls between 41 Years to 60 Years, financial planning done by financially well settled and earning Individuals. Next age category falls beyond 60 years, who plan their finances based upon financial action and decisions taken between 21 Years to 60 years age group.
Following factors need to be considered before financial Planning :
1) Financial Goal to be achieved : The needbased financial planning and Objective to be achieved shall be a criteria for a financial planning. Financial goal may include child education, Expenses for Marriage, Retirement Planning and alike.
2) Available Financial Resources : Financial Planning depend upon available finances for investment by an Individual after meeting all his daily needs. Surplus amount not immediately required shall be used for financial planning.
3) Culture and Behaviour of Person : Individual choices, Lifestyle of person habits and behaviour of person decides nature and scope of financial planning. Credit card use for payment need to be curtailed/properly used to avoid future financial difficulties.
4) Provision for Contingencies : An Individual should always set aside 10 per cent of his savings to meet emergencies and contingencies in the form of Liquid assets like cash, Short term Fixed Deposits and reasonable bank balance for this purpose.
5) Family Responsibilities of a Person : More family responsibilities of a person, more the need for financial planning. The allocation and investment of funds available for investment are limited and optimum utilization of funds at proper place is crucial in financial planning beneficial to family as a whole.
6) Risk Profile of a person : The risk taking and risk bearing capacity of a person is much more important in decision of Financial Planning. It is commonly said that more risk, more returns. But it depends upon age, surrounding financial environment and economoic conditions at the time of financial decisions.
7) Taxation aspects: Most of the Investments and financial planning is done considering taxation aspects and tax benefits. No doubt, taxation aspects should be considered to avail legitmate tax benefits, care should be taken that proper instruments and proper amount should be invested to avoid financial difficulties. Now, Individuals can opt for either pure Investments without tax benefits or Investments only with tax benefits.
8) Manner of Implementation of Financial Plan : The success of a financial planning depend upon how effective the financial plan is implemented in effective manner. The role and advice by a Financial Planners is much more important in proper implementation of financial plan.
Once a Financial plan is set out, let us consider Investment options or avenues so that financial goal is achieved in proper manner.
1) Investment in Securities market : Following Investment options are available in this segment :
a) Equity shares/Securities of Listed entities.
b) Preference shares with fixed Dividend (Convertible/Non Convertible)
c) Employee Stock Option Scheme wherever applicable to specified empployees.
d) Government approved Bonds with different options
e) Commercial Paper
f) Debentures with Fixed rate of Interest (Convertible or non convertible).
2) Investment in Bank/ Company Fixed Deposits (Five years with Bank , tax benefit can be availed)
3) Investment in Gold, Silver, Diamonds with short term or long term view.
4) Investment in Real estate like Plot of Land, House, Shops with long term views with intent to earn fixed Rent income, appreciation of Value of property over a period of time.
5) Investment/Trading in Foreign Currency. Commodity trading
6) Investment in Insurance. Insuarance and Investment should never be mixed. Term Plan to cover Life of a person with low premium and high Sum assured should be preferred.
7) Investment in Medical Policies to cover emergency Hospital and medical expenses. Mediclaim policy should have higher sum assured to cover higher cost of Hospitalization. Terms of Policy should be studied properly to avoid rejection of claim by mediclaim company.
8) Investment in NSC (National Saving Certificates), Sukanya Schemes, Kisan Vikas Patra and other Post office saving schemees with Guarantee and fixed income assurance should be selected.
9) Investment in PPF (Public Provident Fund) available with all banks. A 15 year Scheme with specified rate of interest compounded annually is a good option for long term investment with availing of tax benefits.
10) Investment in Mutual Funds. Instead of investing directly in Equity shares/securities market, a professional help is sought who suggest to invest in good quality mutual funds to reduce Investment risk. Following types of mutual funds are available for investment :
a) Equity Mutual Funds (b) Debt Mutual Funds. (c) Liquid Mutual Funds (d) Open ended and close ended mutual funds (e) Mutual funds having tax benefits and having lock in period of three years.
11) Portfolio Managment Services (PMS) providing a well tailered package of Investment considering needs and objective of Investor.
12) National Pension Scheme ( NPS) recognzed by Government regulated by Pension Fund Regulatory Development Authority of India) is a financial instrument providing well balanced pension amount after retirement. Various other pension plans from LIC and Private Insurers are also available in the market.
From the above, we can conclude that how important is financial planning in our life. With proper and timely financial planning, a person can have a peace of mind and can avoid financial difficulties in life. Every person should learn habit of financial planning and a financial discipline to have a sound future.
Disclaimer : The Views expressed in this Article are based upon prevailing facts and information available and views expressed are purely personal in nature. Readers are advised to seek expert opinion before arriving at a decision. You may reach me at [email protected].
Exuastive guidence. Covered all options available.