Investment planning for a secure future

financial planning, retirement planning
financial planning, retirement planning

Adequate income, manageable expenses, regular savings and investment, good returns from investment, adequate health and life insurance cover and sufficient income after retirement are the essential ingredients for financial security and happiness. Unfortunately, most people, particularly in developing economies, do not realise these goals. The big villain here is the lack of financial planning. As the saying goes, “failing to plan is planning to fail.”

Every household receives income. Routine expenditure is met out of this income. But this is not sufficient; future expenses also have to be provided for. That is why savings and investment become important. Financial planning is planning finances for optimum results. Financial planning involves the processes of streamlining income and expenses, savings and investment, and assets and liabilities. It involves the identification of financial goals and formulating and implementing an action plan to realise those goals. Financial planning is necessary to ensure that households have enough resources to fund present and future needs.

Broadly, the important areas of financial planning are the following:

  1. Personal financial planning

Finances have to be planned in such a way that income and expenditure are matched. It is important that each family should live within its means. Living beyond one’s income would lead to debt trap and bankruptcy.

  1. Debt counseling

There is nothing wrong with borrowing. In fact, the right kind of borrowing can be a smart idea. For instance, borrowing to buy a house helps not only in owning your dream home but also in tax planning. But it is important to plan ‘how much and when to borrow.

  1. Insurance planning

Insurance planning involves providing for adequate health and life insurance. In this age of increasing life expectancy, health insurance is hugely important. Similarly, the breakdown of joint family system has rendered life insurance crucial. Life insurance need not be treated as an investment. A low premium- high cover term insurance is the best.

  1. Investment planning

Investment planning can make a huge difference to the financial condition. Early and regular investment in the appropriate asset classes can ensure financial security.

The essentials of investment planning can be summarised as follows:

  1. Set your financial goals

Normally, people have goals such as acquiring a house, buying things like vehicles, marriage, supporting the family, children’s education/marriage, retirement planning and finally bequeathing one’s wealth.

  1. Decide on the time frame to achieve these goals

It is important to decide the time frame for achieving different goals. For example: when to acquire a house, when to buy a car, when to fund the education of children etc.

  1. Assess your risk appetite

The ability of a person to take risk is important. Risk appetite depends on several factors like age, income level, expenditure commitments etc.

  1. Allocate your investible funds based on your risk profile

Invest more in high growth assets like stocks/ equity mutual funds (risky in the short- run but not in the long-run) in the early phase of your career when risk appetite is high and less in stocks and more in fixed income assets (debt funds, bank deposits) as you approach retirement.

Asset classes for investment

These days, investors have a wide variety of asset classes to choose from, such as: Bank deposits, Non- Convertible Debentures, gold and other precious metals, PPF, NSCs, PO deposits, stocks, mutual funds, ETFs, Gold ETFs, real estate, REITs(Real Estate Investment Trusts), InvITs (Infrastructure Investment Trusts) and National Pension Scheme.

Bank deposits, PPF, NSC etc have a very low risk, but real returns from them are low. REITs and InvITs are yet to emerge as popular asset classes. On the other hand, investment in stocks, either directly or indirectly through mutual funds or portfolio management services, can yield all the benefits of investment mentioned earlier. There is an element of risk in the short-run, but in the long-run risk is extremely low and the benefits can be substantial. History of investment during the last 150 years proves beyond doubt that stocks out-perform all other asset classes in the long-run. Rs. 10000 invested in BSE Sensex stocks in1979 (BSE Sensex which was 100 in 1979 is now around 35000) would have a market value of around Rs 35 lakhs today, excluding dividends. On the other hand, Rs 10000 deposited in a fixed deposit in a bank in India in 1979 would be worth around Rs 3 lakh today.

A major attraction of investment in stocks is the tax advantage. Dividends are exempt from tax up to Rs 10 lakhs a year. Dividends from equity diversified funds and balanced funds are taxed at 10 % only. Another major attraction of investment in stocks and equity/ balanced mutual fund is the favourable treatment of LTCG (Long-Term Capital Gains). Long-term capital gains are the gains accruing to investors when they sell stocks/ mutual funds at a profit after holding them for a minimum period of one year. LTCG up to Rs 1 lakh is exempt from tax and LTCG beyond Rs 1 lakh is taxed only at 10 %. For those in the high tax brackets, this is very attractive, indeed!

Insurance and home should be priorities

 If you have a family, which is dependent on you, life insurance should be a top priority. A term insurance would be most desirable. Similarly, in this age of increasing life expectancy and rising medical expenses, health insurance is important. Since interest rates, particularly for home loans, are presently very low, this is an ideal time for acquiring one’s dream home through home loans.

After meeting the EMI for a home loan and life and health insurance premia, the balance investible funds should be invested in appropriate asset classes based on the investor’s risk profile.

Investment and risk appetite

How much and where to invest should be decided on the basis of your risk appetite, which in turn, will depend on your age, wealth, income, expenditure commitments etc. As a general principle, it would be ideal to have an aggressive portfolio in the early phase of one’s career, say up to 35 and then moving on to a balanced portfolio till age 50 and thereafter opting for a conservative portfolio. A sample is given below:

Aggressive Portfolio

 A young person, in the early phase of his/her career, should opt for an aggressive portfolio. Here 75 per cent of investible funds may be invested in equity. 20 per cent may be invested in debt funds/ bank deposits and 5 per cent in gold bonds.

Balanced Portfolio

Starting from middle age up to, say, 50 years of age, investors should ideally opt for a balanced portfolio, where 50 per cent of investible funds may be invested in equity. 40 per cent may be invested in debt funds/ bank deposits and 10 per cent in gold bonds.

Conservative Portfolio

 As one approaches retirement, investment strategy should shift to conservative mode. As a general principle, it can be said that equity investment share of the portfolio should be brought down and the share of debt/bank deposits should increase. 25 per cent in equity, 65 per cent in debt funds/bank deposits and 10 per cent in gold bonds can be a general norm here.

However, it is important to note that this a general principle. The asset mix of the portfolio should depend on the risk appetite of the investor. It is quite possible that a very senior person may have a very high-risk appetite. In such cases, the equity component of the portfolio can be much higher than the conservative norm.

Youth should opt for an aggressive portfolio since their risk appetite is high. Particularly double-income families can afford to have a very aggressive portfolio since they have a very high-risk appetite. A significant part of savings should be ideally in stocks. Since direct investment in stocks require financial expertise, it would be desirable for investors without this expertise to invest in stocks indirectly through mutual funds. SIPs (Systematic Investment Plans) are the best way of investing in mutual funds.

Investment in gold should be ideally through gold bonds. The choice between bank deposits and debt funds will depend on the interest rate scenario and rate expectations. The tax slab of the investor is also important. Debt funds are more attractive than bank deposits in a falling interest rate scenario. Falling interest rates push up bond prices benefiting debt fund investors. Apart from the asset classes mentioned above, it is important to keep money equivalent to six months expenses in savings bank account or liquid funds to meet emergencies.

India has the best structural growth story among Emerging Markets. Investment in stocks/mutual funds is equivalent to an investment in the emerging India growth story. Therefore, equity should be an essential component of any portfolio. The returns, in the long run, are bound to be substantial.

An investment is made because it obliges some objective for an investor. Your investment objectives may differ in accordance with your life stage and risk profile. Every investor invests with a precise objective in mind and each investment has its own exclusive set of benefits and risks.

These investment objectives are significant because certain investments and strategies work for one objective, but may produce disgraceful outcomes for another objective. It is quite likely you will use several of these investment objectives concurrently to achieve different objectives without any conflict.

Let’s scan these objectives in details and see how they differ.

Capital Appreciation

Capital appreciation is concerned with long-term growth. This strategy is most familiar in retirement plans where investments work for many years inside a competent plan.

However, investing for capital appreciation is not limited to qualified retirement accounts. If this is your objective, you are planning to hold the stocks/investments for many years. You are comfortable to let them grow within your portfolio, reinvesting dividends to purchase more shares.

You are not very concerned with day-to-day fluctuations, but keep a close eye on the fundamentals of the company for changes that could affect long-term growth.

Capital Protection

It is a strategy you often associate with elderly people who want to make sure they don’t outlive their money. Retired on nearly retired people often use this strategy to hold on the detention has. For this investor, safety is extremely important – even to the extent of giving up the return for security. The logic for this safety is clear. If they lose their money through foolish investment and are retired, it is unlike they will get a chance to replace it.

Investors who use capital preservation tend to invest in bank CDs, Treasury issues, and savings accounts.

Current Income

If your objective is current income, you are most likely interested in stocks that pay a consistent and high dividend. You may also include some highly-rated bonds.

All of these products produce current income on a regular basis.

Many people who pursue a strategy of current income are retired and use the income for living expenses. Other people take advantage of a lump sum of capital to create an income stream that never touches the principal, yet provides cash for certain current needs


The speculator is not a true investor, but a trader who enjoys jumping into and out of stocks as if they were bad shoes. Speculators or traders are interested in quick profits and used advanced trading techniques like shorting stocks, trading on the margin, options, and other special speculative strategies.

They have no love for the stocks they trade and, in fact, may not know much about them at all other than the stock is volatile and apt for a quick profit.

Speculators keep their eyes open for a quick profit situation and hope to trade in and out without much thought about the underlying companies. Many people try speculating in the stock market with the misguided goal of getting rich. It doesn’t work that way.

If you want to try your hand, make sure you are using the money you can afford to lose. It’s easy to get habituated, so make sure you understand the real possibilities of losing your investment.

Other objectives

While the aforesaid objectives are the most common ones among investors today, some other investment objectives include tax exemption and liquidity.

Some people invest their money in various financial products solely for reducing their tax liability- as some investments offer tax exemptions.

Many investment options available are not liquid. This means they cannot be converted into cash instantly. Then they prefer for liquidity. Such investments include stocks, exchange-traded funds and liquid funds etc.

Your investment style should match your financial objectives. If it doesn’t, you should take professional help in dealing with investment choices that match your financial objectives.

Posted: May 2018


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