Article

Six steps to create a great financial future

Nutan Gupta

27 Mar 2018

Making your financial plan? Do you want to invest for your future and make your money work as hard as you do? The best person who you can emulate is a financial planner. Certified financial planners follow a six-step process while they devise and implement a financial plan for their customers.

The Six Steps of Financial Planning

Financial Planning Process

Determine the goal and purpose:

The focus of this step is to find the base for planning itself. It is important to know your destination before you start the journey. The steps in the right direction will only take us to the desired destination. A certain degree of awareness of the stock market, financial strengths, weaknesses, future goals and plans, etc. is essential. It is important to understand yourself to be able to determine your future and plan your finances accordingly.

Data gathering or collection:

This is a step where you gather all the information about your finances. You also determine data about your financial goals. Questions one must ask themselves are:

  1. What financial goals do you want to achieve?
  2. In how much time do you want to accomplish these aims?

For instance, if you want to collect information for your retirement plan, you need to understand annual income, savings rate, years left before you retire, your savings till date, your future major expenditures, expected a rate of return, etc. One must write down this to be able to visualize the data for the next steps.

Data Analysis:

This is a step where you start analyzing the data you have at one place. This will initiate the planning process with some basic assumptions. Suppose you have saved 1 lakh rupees until now. You have 25 years until retirement. You want to save ten lakhs before you retire. How much would you be able to save each month? What rate of interest would you need to invest it for you to arrive at the retirement corpus? You have to use a financial calculator to be able to determine these figures. There are many financial calculators available online which will work out the numbers in seconds.

Develop the plan:

Now you have all the calculations and figures with you. You can start developing the plan. Here you can use the help of a financial advisor, or you can also do it on your own. You have to understand the various instruments of investment before you start investing. If you want to be aggressive, you can invest a part of your funds in equity or mutual funds with high returns. Similarly, you can also choose medium risk or low-risk mutual funds if you feel you do not want to take high risk.  You have debt options too which pose no danger. However, the rate of return for these is also small. It is wise to strike a balance between high, medium and low-risk investments and make decisions to be invested in all of these. Depending on your plan you can choose the quantum of investment in each.

Implement the plan:

Now that you have all the calculations and allocations in place, you need to carry out the plan. It is important to invest regularly and stick to your investment plan. Procrastination and delay will affect your funds and plans significantly. You have to be disciplined and get started to reach your goals.

Monitor the plan:

It is important to follow the plan regularly. One cannot implement the plan and forget about it. Many factors can change your plans, and you will have to make the necessary modifications. Personal factors like emergencies, expenditures and career changes can affect the program. External factors like political changes, national elections and economy affect the performance of investment instruments. It is important to tweak the plan and make necessary changes in your investments accordingly.

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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 

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Six steps to create a great financial future

Nutan Gupta

27 Mar 2018

Making your financial plan? Do you want to invest for your future and make your money work as hard as you do? The best person who you can emulate is a financial planner. Certified financial planners follow a six-step process while they devise and implement a financial plan for their customers.

The Six Steps of Financial Planning

Financial Planning Process

Determine the goal and purpose:

The focus of this step is to find the base for planning itself. It is important to know your destination before you start the journey. The steps in the right direction will only take us to the desired destination. A certain degree of awareness of the stock market, financial strengths, weaknesses, future goals and plans, etc. is essential. It is important to understand yourself to be able to determine your future and plan your finances accordingly.

Data gathering or collection:

This is a step where you gather all the information about your finances. You also determine data about your financial goals. Questions one must ask themselves are:

  1. What financial goals do you want to achieve?
  2. In how much time do you want to accomplish these aims?

For instance, if you want to collect information for your retirement plan, you need to understand annual income, savings rate, years left before you retire, your savings till date, your future major expenditures, expected a rate of return, etc. One must write down this to be able to visualize the data for the next steps.

Data Analysis:

This is a step where you start analyzing the data you have at one place. This will initiate the planning process with some basic assumptions. Suppose you have saved 1 lakh rupees until now. You have 25 years until retirement. You want to save ten lakhs before you retire. How much would you be able to save each month? What rate of interest would you need to invest it for you to arrive at the retirement corpus? You have to use a financial calculator to be able to determine these figures. There are many financial calculators available online which will work out the numbers in seconds.

Develop the plan:

Now you have all the calculations and figures with you. You can start developing the plan. Here you can use the help of a financial advisor, or you can also do it on your own. You have to understand the various instruments of investment before you start investing. If you want to be aggressive, you can invest a part of your funds in equity or mutual funds with high returns. Similarly, you can also choose medium risk or low-risk mutual funds if you feel you do not want to take high risk.  You have debt options too which pose no danger. However, the rate of return for these is also small. It is wise to strike a balance between high, medium and low-risk investments and make decisions to be invested in all of these. Depending on your plan you can choose the quantum of investment in each.

Implement the plan:

Now that you have all the calculations and allocations in place, you need to carry out the plan. It is important to invest regularly and stick to your investment plan. Procrastination and delay will affect your funds and plans significantly. You have to be disciplined and get started to reach your goals.

Monitor the plan:

It is important to follow the plan regularly. One cannot implement the plan and forget about it. Many factors can change your plans, and you will have to make the necessary modifications. Personal factors like emergencies, expenditures and career changes can affect the program. External factors like political changes, national elections and economy affect the performance of investment instruments. It is important to tweak the plan and make necessary changes in your investments accordingly.