Before investing in specific investment products, it is important to be clear of the split in allocation
Every individual’s life journey is different. Our experiences, our social network, our personality, our reactions and beliefs make up the sum total of who we are. But no matter how different we are, we all need to undertake financial planning. It’s not just about spending wisely and saving prudently. Here are five important aspects you should ensure you have covered either yourself or with your financial advisor while planning your finances.
Risk profiling: Ideally risk profiling should be done before you start investing in various financial products and by a qualified financial advisor. Risk profiling is a process of evaluating an individual’s willingness and ability to take risks. This may be done through a questionnaire by the advisor or other risk profiler tools. The advisor could also then follow up with a detailed conversation with you to understand your reaction and comfort on expected returns or unexpected losses. This would then help to determine a suitable asset allocation say how much into equities (which is considered riskier), how much into fixed income products.
Cash flow budgeting: This is simply estimating/recording all your outflows (expenditure like say rent, EMIs, electricity bills, medical expenses, children’s school fees etc) and your inflows (salary, rental income, any other receipts) over a regular time period say monthly. If you have done goal planning you would have an idea about the amount you need to save every month to meet those goals. Is the net amount of receipts-expenditure enough for that? Do you need to increase your receipts or reduce your outflows? Often putting this down in an excel sheet can be revealing and may help you to track and manage your cashflows better. Again, a professional advisor can assist you with this process.
Emergency cash: This is fairly intuitive and most understand it. We may from time to time have some sudden unanticipated expenses due to events like a medical emergency, loss of job or a family member who needs help. So, a certain basic sum should be kept aside in a very safe and easily liquidable asset like say a liquid or overnight fund or short-term FD. Generally, as a thumb rule six months of living expenses should be kept aside for this purpose.
Asset allocation: Before investing in specific investment products, it is important to be clear of the split in allocation you wish to have into different asset classes. Broadly in India today most investment products can be classified into three main types: Equity, Debt (Fixed income) and Gold. There is also real estate which once upon a time was very popular but over last several years has become relatively less attractive. So, if you decide to 50:50 split between equity and debt, the schemes and products should be accordingly chosen.
Succession planning: This is an aspect which is typically paid low attention. When we die, it’s important that our financial assets are passed on to our heirs smoothly without them having to run around pillar to post. For this it’s important to plan while we live. This involves keeping a consolidated account of all our assets and liabilities and ensuring nominations are in place for our bank accounts and investments. Preparing a Will is also essential and would avoid disputes as well as release of investments by banks and other financial service providers to the rightful heirs and nominees.
As we near the end of an eventful pandemic filled year, make sure you ensure the above to be part of your new year resolution!
The author is Head – Fixed Income, Principal Asset Management