FAQ on Financial Planning Posted By - IndianMoney.com Research Team- On-24/03/09

1.      Who should prepare my personal financial plan?

A well-qualified financial planner should work with you to prepare your

plan. A financial planner combines the objectivity and trust long

associated with the financial planning profession and the financial savvy

developed through years of experience and expertise in personal

financial planning.

2.      What should include in a personal financial plan?A comprehensive financial plan - one that addresses your entire

financial picture - should include a review of your net worth, goals and

objectives, property and other assets, liabilities, cash flow, investments,

retirement planning, estate planning, tax planning and insurance needs,

as well as a plan for implementing your goals. 

3.      I do not have a lot of money. Do I need a full-scale financial plan?You may not. You can seek out different levels of financial planning

advice, from counseling on a particular issue to comprehensive

planning. Speak to the financial planners you are considering and

discuss with them your budget. You should be able to find one who

meets your needs.

4.      What role does goal-setting play in financial planning?It is important to list both short- and long-term financial goals on paper.

You can then rank the importance of the goals. If you are saving toward

something tangible, instead of just saving, it may be easier. These goals

could include: available cash for emergencies, education for children,

care for family members, retirement, a nest egg to permit a career

change, acquiring or selling a business, estate planning, financial

independence or personal objectives such as a special vacation or

second home. 

5.      How do I know how much I am worth?One of the first things that you should do in reviewing your financial

situation is to determine your net worth. Many people are surprised to

find out how much they are really worth. 

First, estimate the value of your assets. If you have owned your home

for a number of years you may be sitting on a nice nest egg. Several

different real estate appraisals will help you determine its worth.

Organize bank and brokerage statements and record their value. Do not

forget assets in EPF. List your liabilities such as mortgage, car loans or

credit card debt. Subtract your liabilities from your assets and you will

have a good estimate of net worth. 

6.      How can I plan for tomorrow when I can hardly pay for today?Create a budget. Determine what you actually spend each month. It is

easy to keep track of large expenses such as mortgage and car

payments. The variable items such as food, clothing and entertainment

are often what get away from us.

7.      How much should I be saving?It is hard to apply a rule of thumb toward savings, because it varies with

age and income level. Ten percent is a good start. If that amount is too

high for you, don not let that deter you. You can start by putting a little

money aside each month and slowly increasing it. 

8.      How does insurance fit in to the process?Evaluating your insurance needs is part of personal financial planning.

The insurance industry has changed a great deal over the past few

years and there is a wide array of new products. Some of them may be

better options than your current coverage. Your financial planner can

work with your insurance agent to see if you have adequate coverage. 

9.      What type of advice can I expect from a Financial Planner?You can expect objective financial advice that is tailored to meet your

financial goals and objectives, as well as the level of risk with which you

are comfortable. Depending on your unique situation and goals, your

financial planner may confer with your attorney, stockbroker, insurance

agent and other investment advisors to achieve the best plan for you. 

10. After a plan is developed, what happens next?The best plan is useless unless it is put into action. A financial planner

can advise you how to implement the plan and can put you in touch with

other financial experts as needed. 

11. How often should I update the plan?It is good to review the plan when there is a significant life event such as

marriage, birth, death or divorce. Any change in financial position should

be evaluated as well. Many people have an annual update that reviews

how the plan is being implemented. The review also considers changing

goals and circumstances.

How to Create an Investment Portfolio in Your Early 20s Posted By - IndianMoney.com Research Team- On-24/03/09

Step1: Set goals. If your objective is retirement, calculate how much you will need vs. how much income you will have when you retire.

Step2: Choose a strategy that will allow you to meet your goals. Brokers

and others offer varying advice on the best way to allocate assets,

therefore talk to financial advisors, read financial newspapers and

magazines, and visit financial Web sites.

Step3: Pay yourself first. Set aside 10 percent of your annual income

and invest it.

Step4: Invest in an Individual Retirement Account if you are eligible.

Step5: Put your money in conservative investments at first; for instance,

mutual funds that buy a variety of blue-chip stocks. After you have a

solid foundation, you can choose higher-risk investments.

Step6: Diversify. Buy a variety of investments; for instance, if you are

investing in mutual funds, you might put 30 percent of your money in

growth funds, 30 percent in aggressive growth funds, 20 percent in tax-

exempt bond funds and 10 percent in money-market, checking and

savings accounts.

Step7: Buy what you know. If you go beyond mutual funds and decide

to buy individual stocks, invest in companies that you know something

about.

 Financial Planning Strategies for 21st Century Posted By - IndianMoney.com Research Team- On-24/03/09

Financial planning strategies in the 21st Century need strategies of the new era, strategies for the info-tech era that can bring multiple streams of growing prosperity. Money is to buy whatever you want such as houses, cars, travel, etc. Surplus to share with the people you care most about. Below given are some financial planning strategies for the 21st Century.

1.      Understand the Value of Money Learn how to value each and every Rupee that flows into your life

because you can achieve financial freedom on just a Rupee a Day.

When you think about it, financial freedom all starts with a single Rupee.

You see, wealthy people do not think a Rupee "is just a Rupee." They

imagine it is a seed, a money seed that has the power to grow into a

huge money tree, giving off fruit to accomplish every one of their

dreams and they are absolutely right.

Remember, money that is compounding never sleeps. 24 hours a day,

365 days a year it keeps on growing. You have got to figure out a way

to get money working for you rather than you working for money. For

that you do not have to be a financial genius or you do not have to own

a big company. You can do it from your kitchen table using the money

that you are now foolishly throwing away. If you just re-divert a few of

your ill-spent rupees and direct them to some well-timed investments,

you can achieve financial success.

The most important thing is every day you wait, every hour you delay, is

like burning up your financial future so, do it now. Yes, it will take

sacrifice. It means deferring satisfaction for a while to allow your money

tree to grow. When you prematurely pick the fruit from your money tree,

you stunt it is growth and this can considerably slow down the time for

you to enjoy a fully matured, fruit bearing money tree.

2.      Control It Most people have only one main source of income - their job. This

income flows into the bathtub of their life and flows out through the

drains at the bottom. Most of the people spend everything that they

earn; they never retain any money in savings. They spend it all.

Obviously, the only way to have an overflowing prosperity in your life is

to plug up those holes and to turn on more regulators to have multiple

streams of income.

Cash flow management is the key to financial planning. You have not

only got to get the cash to flow into your bathtub. You have to manage

the leaks so that there is money left over at the end of the month with

this profit you buy stuff - assets. You may also buy things by going into

debt. The intention of the money game is to accumulate enough assets

so that eventually the income from your personal assets will support you

instead of your personal skills.

3.      Save it The third step is to save money. Wealthy people love to save money.

Do you know to buy things at wholesale price?  Wealthy people never

like to pay retail for anything. Anyone can save money by buying at a

discount... but do they save the money that they save? That's the hard

part. When you save money by altering your buying habits, take the

money out of your purse or wallet and get it out of your spending grasp.

Put it into a savings jar, and frequently deposit this money into your

savings account. That is when you have truly saved it. Would you like to

know how to cut your living expenses by 30% in 30 seconds? You

would? Well, take out your credit cards, keep one away for

emergencies, and cut up the rest. Statistics have proven that this simple

work out will automatically and almost effortlessly cut your living

expenses by an average of 30% over the next 12 months.

4.      Invest it With the money you are saving plus the 10% of the money you pay

yourself off the top, you must learn how to invest your money at

billionaire rates. Anyone can park their money at 3% the trick is to get it

to grow at 10 to 20%. There are many traditional investments that are

perfect to park your money. At the low end of the interest scale are bank

savings accounts and fixed deposits. Then, you have government

treasuries and bonds. Up the ladder are corporate bonds, stock market

and some of the most popular investments these days such as Mutual

Funds or Investment Linked Funds.

You must have money in all of these areas. Imagine a series of buckets

where money is drawn off from your bathtub. The first bucket must be

your emergency bucket. Let your 10% flow there first until you have at

least six months worth of living expenses saved. You would be

surprised how many people in this country is only one pay-cheque away

from bankruptcy. Do not let that be you. This money must be in the

safest place, a bank account at the highest interest rate you can find

where you can access to your money within days. Once this first bucket

is filled up, the stream of 10% will overflow into one of three additional

buckets named, conservative investments, moderately risky

investments and very risky investments. If you are older, you must have

more of your money in the conservative bucket. The younger you are

the more risk you can undertake.

The best way to invest for average people is in Mutual Funds or

Investment Linked Funds. A mutual fund is a collection of individual

shares purchased by a major company and managed by professionals.

You have to give them a small amount of money, they add it to that of

thousands of other investors and they watch over it for you. 

5.      Shield It Making money is a set of skills. Keeping it is another. As you work

toward your financial goals, you need to learn how to protect the wealth

you are creating. The worst mistake one can make today is leaving

large amounts of personal assets insecured. Get a liability insurance,

get a health and life insurance you do not want to spend all your hard-

earned money on medical fees.

Estate Planning Posted By - IndianMoney.com Research Team- On-24/03/09

Estate planning is a lifelong process in which you assess your situation and plan for the future. It includes planning for your retirement, possibility of disability, and for death. The estate planning process needs that you consider a wide range of legal, financial, emotional, and logistical issues.

Estate planning can be a positive experience, since it involves

appraising your situation and planning for your future. Even though most

people also find it unpleasant to think about the possibility of disability or

death, advance planning is also a way to show your love and to reduce

potential suffering later.

In other words, estate planning is a process of helping one in

accumulating, conserving, distributing and ensuring that the estate

reaches the right person who was nominated as the beneficiary. More

specifically, it is the process of making appropriate preparations for the

protection, conservation and distribution of one's assets for the benefit

of the loved ones. An estate plan ultimately, depends on the size of your

estate and how broad your needs are.

Analyzing Portfolios Posted By - IndianMoney.com Research Team- On-24/03/09

Portfolio managers focus their efforts on achieving the best possible trade-off between risk and return. For portfolios constructed from a fixed set of assets, the risk/return profile differs with the portfolio composition. Portfolios that maximize the return, given the risk, or, on the other hand, minimize the risk for the given return, are called optimal. Optimal portfolios define a line in the risk/return plane called the efficient frontier.

 

A portfolio could also have to meet additional requirements to be

considered. Different investors have dissimilar levels of risk tolerance.

Selecting the adequate portfolio for a particular investor is a difficult

task. The portfolio manager can evade the risk related to a particular

portfolio along the efficient frontier with partial investment in risk-free

assets. The definition of the capital allocation line, and finding where the

final portfolio falls on this line, if at all, is a function of:

 

·         The risk/return profile of each asset

·         The risk-free rate

·         The borrowing rate

·         The degree of risk aversion characterizing an investor

Financial planning strategies in tough times Posted By - IndianMoney.com Research Team- On-24/03/09

Even with hints of recovery, it is not easy to scope out the economy's direction and even difficult to make financial decisions for your family in such rough and tumble times. The following strategies can help to strengthen your money management skills. All are designed to give you an edge during the tough times. 

1.      Evaluate your spending habits Start first by analyzing your spending and savings habits. Here are

questions that you may need to ask yourself:

Do your debt payments, including your mortgage, exceed 35% of your gross monthly pay? If so, you have too much debt. Your mortgage must not exceed 35% of your gross income (Including property taxes and insurance).  

Do you justify impulse purchases? You have had a tough week, so you buy things to feel better. Or you tell yourself; “I don’t go on vacation much, so I will just buy these Italian shoes!” If this sounds familiar, try a “Stop Spending Week.” Eliminate restaurant meals and unplanned purchases. You will be surprised at the results. 

Do you shop around for the best deal? You can lower your expenses by shopping around for discount. Shopping around could save on a lot of expenses.

 

2.      Organize your financial life You must keep everything at your fingertips your budget, investments

and bills in one place. Staying on top of your finances can be

empowering because you know exactly where you stand. You should

Review and assess your savings goals monthly. The foundation for

living within your means is to get your finances in order. That is

necessary because you will need to calculate what it is going to take to

meet your long-term goals, for example, retirement. 

3.      Get serious and take these steps: Consolidate credit cards. If you have got three credit cards with

different teaser rates or annual percentage rates, you may not have a control on how much debt you are actually carrying. Transfer the balances to one card (make sure you know what the transfer fees are before you do) and pay off the card with the highest interest rate first.

Review investments periodically. Keep on top of how well diversified you are in and make periodic review of your portfolio.

Prepare for the worst. No one ever expects to get out of work. Built an emergency cushion. Six months is ideal. But if you are carrying too much debt, pay that down first. 

Get life and disability insurance. All of us need life insurance enough for a surviving spouse to pay off debts and to live comfortably for the remaining time.

Risk Tolerance Posted By - IndianMoney.com Research Team- On-24/03/09

Generally, the more risk involved with an investment, the higher will be the potential return. As a result, the more risk you are willing to take, the more potential your savings have to grow over a long period. Before choosing an investment, you must make sure that you understand the investment, the risk it carries, and how that risk relates to your investment goal. For example, if you are investing for your one-year-old child's education, you can probably afford to assume more risk in your investment than someone whose child will begin studies in the next year. Of course, there can be no assurance that any losses will be made up during the time period. 

Short-term investments, like money market funds, offer the least risk.

Fixed-income investments offer potentially higher returns with additional

risk. Stock investments offer the highest potential returns with the higher

amount of risk. A combination of stock investments, money market, and

fixed-income, can provide potentially higher returns than either money

market or fixed-income investments alone, with only slightly greater

risk. 

As you close to your goal, your risk tolerance might drop and you may want to change your asset allocation. Defending and protecting your savings might become more important. You might be willing to sacrifice the growth potential of most of your long-term investments in favor of the greater security offered by short-term investments. 

Risks involved in investments Posted By - IndianMoney.com Research Team- On-24/03/09

Inflation

One of the steadiest risks involved in your investments is inflation.

Inflation is the increase in the cost of living or decrease in the value of

money, expressed as a percentage increase over last year's prices.

Inflation is a simple concept that punishes the people who ignore it.

Even small changes in the inflation may make a massive difference in

the amount of money you have over time. You will still have the same

amount of cash, but it may not buy as much. It's easy to purchase a

movie ticket for 20 rupees, but not so easy if the price climbs to Rs.40.

Before you plan a secret attack on the inflation rate, keep in mind that it

is normal and usually works its magic at around 3 to 4 percent every

year. With the current economic situation, inflation is not such a factor.

On the other hand, job layoffs and pay freezes have left consumers with

fewer cash in their pockets, which carries a risk all its own.  

What finally counts is whether your investments can beat the inflation

rate or not. An investment that is too conventional can actually leave

you at risk. If you have got all your cash in a bank account, it may seem

reassuring to know the interest rate is guaranteed, but say that rate is

very less. It may not keep pace with inflation, and you could end up

losing ground.   

The risk of not meeting your goals Although this kind of risk does not get much attention but it is really the

most important one. If you set your sights on a new house or a college

education but do not achieve the goal, you might feel like a loser. Some

investors, in trying to avoid losses, or trying to make sure that they own

the best stake end up inviting the biggest risk of all that of not being able

to meet their financial goals. We are definitely not saying that investors

should be satisfied with subpar performances from their investments.

But do not lose sight of the fact that your primary goal should be to meet

your future financial needs.

Risk Management Posted By - IndianMoney.com Research Team- On-24/03/09

As per "Murphy's Law", "Whatever can possibly go wrong will," is the first step in determining risk. A person has four choices when dealing with risk:

1. Accept the risk.

2. Avoid the risk.

3. Transfer the risk.

Accepting the riskAccepting the risk is ofcourse the most economical course as it involves

doing nothing. That is the way you usually accept risks with very long

odds and against which you feel helpless at any rate, such as nuclear

war or chances of a meteor striking you or your property.

Avoiding the riskYou choose to avoid the risk when you sell a property at a discount with

no guarantees or a broker decides to have no salesmen because he

does not want to be responsible for their actions, or a family decides

against keeping a dog because of the possible harm it may cause to

other people or their property, or one decides to take public

transportation rather than drive to work to avoid accidents.

Transferring riskTransferring risk is very important. Transferring risk to a third party who

agrees to take the risk from your shoulders in return for the payment of

a certain sum of money, is what insurance is all about.

How risk affects your money now and in the future Risk is integral to investing, and it is important to understand your

tolerance for it. The good news is that investments offer a range of risk

levels, which allows you to choose the avenues that best match your

mind. Traditional savings accounts are guaranteed, but you pay for that

guarantee with relatively less returns. With stocks, on the other hand,

the price per share may go down in value and lose principal, but it may

also go very high. In return for increased risk, a mutual fund offers the

potential to increase in value.

One aspect of risk is fear of the strange. We can shed some light on the kinds of risk that can affect your financial situation, both positively and negatively. The key is to find your personal comfort zone by balancing potential risks in hopes of realizing potential reward. Just remember there is no guarantee in any characteristic of your life, so do not expect it to be different where your money is concerned.

Rebalance Your Portfolio Posted By - IndianMoney.com Research Team- On-24/03/09

Rebalancing is different from reallocation. Rebalancing is adjusting your portfolio through time to keep it in synchronize with your risk level. For example, say you're a moderately aggressive investor with an asset allocation of 80% stocks, 15% bonds and 5% cash. If the performance of your investments pushed that mix to 90% stocks and 5% bonds, you might sell some stocks and buy some bonds to bring those percentages back in line. 

Reallocation means shifting to a new asset allocation plan that reflects

an entirely different risk level. For example, an investor in his 30s may

prefer an aggressive asset allocation with 95% stocks. But by the time

he retires, he may switch to a moderately conservative approach with

only 40% stocks.

Why rebalance?Creating an asset allocation and investment plan and then rebalancing

is a little like planting garden. Planting the seeds may be the first step,

but without some important care along the way (watering, pruning) the

desired results may not come. 

In rising stock markets, people often take on more risk than they are suited for. We saw this in the last market cycle. In the late ‘90s, many investors fell in love with stocks and did not rebalance, consequently they ended up with a much larger percentage of stocks in their portfolios than their risk levels warranted. Many times, people only realize they have taken on too much risk when they experience the negative effects of that risk, when the market goes down. Many investors bought all the way up, and when the market started to come down, they realized they had taken on too much risk and sold on the way down, as a contradiction to the old “buy low, sell high” mantra.

How to Create an Investment Portfolio Posted By - IndianMoney.com Research Team- On-24/03/09

Following are the steps to be followed while creating an efficient investment portfolio.

Step1 Find out what items or events you are saving for. These can be

retirement, new home, children's education or anything else you

choose.

Step2 Find out when you want to retire, purchase a home or send your

children to college. It will help you to decide what percentage return you

need to earn on your initial investment.

Step3 Make a decision on how much money to invest. Invest what you can

comfortably afford now, keeping in mind that you can change the

amount later.

Step4 Find out how much risk you are willing to take. Many investments

generate high returns but are riskier than others.

Step5 Once you decide the amount you are going to invest, the returns you

want to achieve, when you need the money back and how much risk

you are willing to accept, put together your investment portfolio.

Step6 An investment counselor or stockbroker can be a good source of

advice, tell them your objectives and ask them to recommend how to

allocate your money.

Step7 Monitor and revaluate your portfolio at least once in a year.

Investment Planning Posted By - IndianMoney.com Research Team- On-24/03/09

Good investment planning can turn your objectives from dreams into realities. How you allocate your money among different kinds of investments can have a greater effect on investment success than the individual investments you choose. So, your first step in investing toward your goals must to work out an asset allocation for your investments. Following are the two important factors to be taken care while going for an Investment planning.

·         Asset Allocation 

·         Diversification Asset Allocation  Asset allocation is the process of deciding what percentage of your

money to put in the different investment avenues such as: stocks,

bonds, money market instruments, and other investments, like real

estate. Your asset allocation may depend on your investment time

frame, your savings goal, and how much risk you are willing to

undertake to achieve that goal. 

Diversification After you decide on an asset allocation, the next step is to diversify your

risk by investing the money in different investment platforms. By putting

your money in dissimilar investments, you can spread the risk. Rather

than investing in one stock, you could invest in a variety of stocks. That

way, if one stock performs poorly it will not affect the performance of the

entire portfolio because it represents a smaller portion of your overall

stock portfolio. 

Before setting an asset allocation and diversify your investments, you

need to know about the choices that are available for you such as;

·         Stocks 

·         Bonds  

·         Money Market Investments 

·         Mutual Funds / Investment Linked Funds

Investment Return 

While choosing investment avenues, potential return should be given key consideration. The higher your return, the quicker your investments will grow and the earlier you will attain your goal. But be conscious that the annual percentage returns and yields you see published in ads,

prospectuses, and articles don't take into account inflation or taxes, two factors you must consider in your investment planning. And one more thing is that if higher the potential returns investment risk also will be higher.

 Money Management Posted By - IndianMoney.com Research Team- On-24/03/09

Following are the factors coming under money management

·         Cash Flow Management 

·         Trimming Your Budget 

·         Reduce Housing Costs 

·         Buy Smart 

Cash Flow Management Many people find that their expenditure is more than their earnings. It is

difficult to increase your net worth (and meet your financial goals) if you

are constantly falling behind on the income front. Therefore, cash flow

management is the key to achieve personal financial security. Check

and calculate your cash flow using Cash Flow Calculators. Most causes

of overspending can be solved through use of a budget. Simply going

through the process of putting together an annual budget can help you

to prioritize expenses and uncover areas where you will be able to free

up more money to use for savings and investments. 

Lots of people find that they can develop the discipline needed to put

money aside on a regular basis by budgeting for savings and

investments in the same way they do for other expenses. A good way to

make sure your budgeted amounts actually do go into savings and

investments is to set up an automatic saving plan with a bank or a

mutual fund company. 

Trimming Your Budget 

Cutting dawn your expenses will take some effort. You may have to

postpone some purchases and find ways to spend less on the things

that you want to buy. By cutting costs, you must be able to afford to

contribute more to your savings and investments. Likewise, if large debt

payments are making it difficult to save, you need to look at ways you

can reduce this burden so you can move toward your financial goal. 

Reduce Housing Costs One good opportunity to explore is the possibility of refinancing your

mortgage. The thumb rule is to consider refinancing your home when

mortgage rates drop two percentage points or more below your current

rate. But people who plan to stay in their home for a while can come out

ahead with a rate reduction of as little as one percentage point. 

Buy Smart 

How and when you shop can make a visible difference in your spending. Different items generally go on sale at different times during the year. Plan before you purchase such as when to purchase and from where to purchase?

Rules for investment Posted By - IndianMoney.com Research Team- On-24/03/09

 

1.      The longer you invest the lower your risk.

2.      The longer you invest the higher the return.

3.      Don’t invest unless you’re willing to leave it for atleast 5 years. Anything

shorter than a year is called gambling.

4.      Remember, it is almost impossible to buy low and sell high in the short

run. So don't play in the market.

5.      The key is long term dollar cost averaging. Dollar cost averaging

means, you invest every month, regardless of where the market is

heading. Do not even read the news papers, just buy month in and

month out. Over the long run, this is the best strategy. 

How to make Financial Planning work for you? Posted By - IndianMoney.com Research Team- On-24/03/09

Financial planning process is for you. To achieve the best results from your financial planning, you may need to be prepared to avoid some of the common mistakes by taking into account the following points:

1. Set measurable financial goals.

Set exact targets of what you want to achieve and when you want to

achieve. For instance, instead of saying you want to be "relaxed" when

you retire or that you want your children to attend "good" schools, you

need to quantify what "relaxed" and "good" mean, so that you will know

when you have reached your goals. 

2. Understand the effect of each financial decision.

Each financial decision you may take can affect many other areas of

your life. For example, an investment decision may have tax effects that

are damaging your estate plans. Or a decision about your child's

education may affect when and how you reach your retirement goals.

Always remember that all of your financial decisions are interrelated. 

3. Re-evaluate your financial situation periodically.

Financial planning is a dynamic process. Your financial goals may

change over the years because of changes in lifestyle or circumstances,

such as marriage, birth, house purchase or change of job status. Revise

your financial plan according to the time changes by to reflect these

changes so that you stay on track with your long-term goals. 

4. Start planning as soon as you can.

Do not postponement your financial planning. People, who save or

invest small amounts of money early and often, be likely to do better

than those who wait until later in life, similarly, by developing good

financial planning habits such as saving, investing, budgeting, and

regularly reviewing your finance early in life, you will be better prepared

to face life changes and handle emergencies. 

5. Be realistic in your expectations.

Financial planning is a common sense approach to manage your

finances to attain your life goals. It cannot change your situation

overnight; it is a lifelong process. Remember that incidents beyond your

control such as inflation, interest rates or changes in the stock market

will affect your financial planning results. 

6. Realize that you are in charge.

If you are working with a financial planner, make sure you understand the financial planning process and what the planner must be doing. Provide the planner with appropriate information on your financial situation. Ask questions about the suggestions offered to you and play an active role in decision making.

Do I Need Personal Financial Planning? Posted By - IndianMoney.com Research Team- On-24/03/09

Planning for a secure and comfortable financial future is not very easy. May be you are saving to buy your first home/car. Perhaps starting your own business is a dream. The costs of education have increased and you may wonder how you will pay for your child's education. You will probably live longer. Additional years after retirement can cost more

than initially planned. Your EPF (Employee’s Provident Fund) may not be sufficient to maintain your standard of living after retirement. Multifaceted financial marketplace and varying tax laws make it difficult to understand your financial picture. 

Everyone needs to plan for future. At every income level, there are steps to make more efficient use of your assets and to make sure a secure financial future. It helps to build up well-defined goals and to map out suitable strategies to turn your dreams into reality.

Objectives of financial planning Posted By - IndianMoney.com Research Team- On-24/03/09

1. Protecting yourself and family: Major cash losing loopholes in financial planning are the medical expenses. One who has parents and young kids must enough care to provide all the forthcoming requirements of medical treatments for them. First part of your financial plan is protecting your family and yourself through a best Mediclaim policy available in the market. Once you have applied and successfully finished the part of Mediclaim policy, you are free from any expenses that might occur due to medical treatment requirement from yourself or dependents. This option will not only give you protection from medical expenses to you and your family but also, provide the income tax benefit under section 80D in India.

2. Secure your family in case of any consequences happening to your life: This is the part planned to the future of the family. Suppose

you are the only breadwinner in the family and something happening to

you will affect the entire family at the maximum worst. You must be

prepared to overcome such situations in a cost effective manner. The

finest solution for this is to take a term insurance policy instead of any

traditional products or ULIP’s from LIC or any other Private companies.

You can decide the nature of a term policy such as the level of

protection required and pay a premium as per that. This will be very cost

efficient manner. Term policy commonly has a less premium with huge

protection. The thumb rule on the amount of protection is 7 X your

annual income. In term policy, the nominee will receive the entire

assured amount in case of the sudden death of the policy holder. Once

you have completed the term policy term without any issues, then you

will not get back the premium you paid for the policy term. Remember,

when applying for a term policy; do it as early as possible. Term policy

premium increase is depends on your age of entry and that amount will

continue till the end of policy year. Applying early will give you the

benefit of less premium amount all through the policy terms. Also, keep

in mind to get the maximum policy term once you applying for a term

policy. The other important aspect of term policy is, providing you tax

exemption under Indian Income Tax Act.

3. Protect your major assets: Here is another policy you can take to

protect your major assets like home and all accessories, vehicle etc.

When planning for vehicle insurance, you must go for a Third Party

Insurance to meet all the expenses occurring from a possible accident

that cost you money as benefits to the victim. Third party insurance

covers this and they will pay on behalf of you. If you are living in your

own house, a policy to cover your home and all the assets from possible

incidents like theft, fire or any kind of natural calamities will give you the

maximum benefits.

4. Protect your family from any mortgages or loans you have taken: If you have a home/mortgage loan and you are the only

breadwinner, then your family is in major trouble in case of any

consequences happening to you. For instance, you have a home loan of

35 lakhs and you and family is staying in that home and in case of your

unfortunate death, what will happen to your family? Obviously the

lending institution will inform your family to repay the loan or move from

the house to road. As a part of your financial planning, you may not be

interested to happen this. It is a best practice to apply for insurance on

loan to deal with such situations. There are lots of companies providing

policies on the loan amount. In this case, you are protecting the family

through the policy. Suppose you die, insurance company will pay your

remaining loan amount to the lending institution and your family will be

safe to live in the home. This is also a term policy and have small non-

returnable premium.

5. Meet the unexpected situation that cost you money: There are

circumstances to one’s life not only medical but lots other. As the part of

a good financial plan you must be ready to find the fund at any time if

there is any such event take place. These are such money requirements

that will not have any benefits from the above mentioned policy.

6. Plan for your kid: This is the important part in your financial plan and

has to take. Kids are our major wealth and there are necessary steps

needed to safe their future. One can plan in various ways to protect their

kid from possible out of money to meet their educational and marriage

expenses in the future. There are different kinds of ULIP’s available in

the market to invest for the kid’s future. Providing better money

management awareness to your kid is an essential part. You can open

a children specific account providing by various banks and compel them

to start saving by put the small amounts they are collecting from their

pocket monies or from gifts.

A clever parent always take care to provide better understand about the

money to their kid. You can use a range of best practices for your kid to

grow a savings habit to them. As well as the ULIP and kids specific

account, you can open a PPF account and deposit some amount at the

end of each month. This will provide you best returns from power of

compounding as well as tax benefits under section 80C in India. Having

a particular plan for your kid is necessary before starting any kind of

investment or action. This can be higher education, marriage, or making

a savings habits to your kid. With a good plan, you can surely achieve

the goal in a good manner. The next idea to have a better future for your

kid is investing in the stock market. If you are little aware about the

investments in the stock market, you can invest in equities through

mutual funds. There are kids specific plans available in the market but

before committing the investment, you must study well about the

features of fund and its past performance and possible returns.

 

7. Plan for your retirement: This is another important part one must

take care of. If you are planning well for the retirement from the

beginning of your career, you are in the success path. Retirement plan

must have long term focus and one must take an investment for this

with very long term focus. It is open to you to make a decision on the

age you plan to retire and what amount you need in each month after

retirement. Once you have decided both, you can go for an investment

plan to achieve these goals. Below given are the possible ways you can

plan your investment particularly for retirement.

·         Equity  

·         Mutual funds

·         Index funds

·         ULIP space

·         Bank FD’s

8. Balancing the portfolio depends on various factors: A well

organized investment plan must have proper diversification and balance

between equity and debt. Equity is always risky compared to Debts.

According to the growth in age the risk taking capacity of a person

decreases. To find out what is the affordable ratio of Debt and Equity for

a person there is a simple rule, reduce your age from 100 and the

resulted percentage you can invest in equity and rest in Debt. For

instance; if your age is 30, then 100 – 30 = 70, in this case invest 70%

in equity and rest 30% in debt. Balancing your portfolio properly

depends on your age and income.  

9. Requirement of financial advisor: To make your financial planning

process effortlessness, a financial planner plays very important role.

But, selecting a financial planner should be very careful or you else will

be in trouble.  

10. Monitoring your portfolio: While implementing your financial plan through various investments, monitoring it is the final part to take care of. Through a good time to time monitoring, you can identify the strong and weak points in your portfolio to act as per that. Monitoring not only gives you the opportunity to recognize your investment performance to act but it enable you to balance your portfolio till a great extend considering the major factors like your age, objectives etc. From a long term viewpoint, a monitoring process must be there at least once in 6 months or a year.

Step by step financial planning Posted By - IndianMoney.com Research Team- On-24/03/09

The word financial planning has enormous meaning. Different people can interpret the same in different style. Proper financial planning has a simple meaning that a person must not run out of money whenever a present or future requirement occurring to him or family. In India, especially middle class families are not well conscious about the requirement of a good financial planning. This will put them in trouble with out of money in some circumstances once if they had enough money in their hand.

Accurate financial planning is not a single or simple process. Instead, it

involves 3 major phases such as:

·         Self Assessment,

·         Planning

·         Execution.

 Process I: Self assessment:This is a primary step one has to complete prior to planning his finance.

Doing a self assessment make him capable to understand his current

wealth status and responsibilities. Following are the things to be

covered in the self assessment process.

1.      What is your age and

2.      What is your main source of income?

3.      Who all are your dependents in your family?

4.      What are your expenses?

5.      What is your monthly savings?

6.      What is your current investment status?

7.      When you are planning to retire?

One should identify his wealth status proceeding to move with financial

planning.

Process II: Planning of financePlanning requires your attention to lots of areas where possible

mistakes can happen and that can cost you. When planning the finance,

one must take care of the following points in a greater extend:

1.      Self protection and protection of dependents from accidents and

medical treatments

2.      Securing family and dependents from any future consequences

happening to your life

3.      Protect your major assets

4.      Protect yourself and family from mortgages and loans

5.      Meet the unexpected expenses that may occur

6.      Plan for your children

7.      Plan for your retirement

8.      Plan your investments and balancing the same as per your age, risk

profile, goals, etc.

9.      Financial advisory if required

10. Monitoring your wealth and investment status

Process III: Execution phase of your financial plan

Execution phase required more efforts than the above mentioned 2 phases. Once after completing the same, it is a necessity to monitor the status time to time to understand the status and act as per any action if necessary depends on your life changes or requirements.

Steps to be taken by a financial planner Posted By - IndianMoney.com Research Team- On-24/03/09

While taking care of the client’s investments a financial planner has to give importance to many factors that helps to safeguard his client’s interest. Following are the major steps to be followed by a financial planner.

Step 1: Setting goals with the client is the first step, this step is meant to

identify where the client wants to go in terms of his finances and life.

Step 2: Gathering relevant information on the client. This should include

the qualitative and quantitative aspects of the client's financial and

relevant non-financial position.

Step 3: Analyzing the information. The information gathered must be

clearly analyzed so that the client's situation is properly understood.

This includes determining whether there are sufficient resources to

reach the client's goals and what those resources are.

Step 4: Constructing a financial plan based on the understanding of

what the client wants in the future and by considering his current

financial status, a roadmap to the client goals is drawn to make easy the

achievements of those goals.

Step 5: Implementing the strategies in the plan guided by the financial

plan, the strategies mentioned in the plan are implemented using the

resources allocated for the purpose.

Step 6: Monitoring implementation and reviewing the plan. The implementation process should be closely monitored to ensure it stays in alignment to the client's goals. Periodic reviews are undertaken to check for misalignment and changes in the client's circumstances. If there is any significant change to the client's situation, the strategies and goals in the financial plan will be revised accordingly.

Choosing a Financial Planner Posted By - IndianMoney.com Research Team- On-24/03/09

Practically anyone with reasonable wealth or a decent income could benefit from the services of a financial planner. Financial planner means someone with the expertise to make a comprehensive financial plan for an individual household. This plan must cover the household's financial goals, budget, insurance and risk review, asset allocation, review of an estate plan and retirement plan. Such detailed planning is not likely to be met by brokers and agents interested in commissions on financial products they sell.

A financial planner has a wide knowledge of areas such as investments,

tax planning, and estate law but is improbable to be the financial

professional you require in these individual areas. Rather the financial

planner can help coordinate your financial planning with your

accountant, investment professional, insurance agent, and estate

lawyer. The extensive expertise that a professional financial planner

possesses will help you to ensure that your financial goals are met and

that all areas of your financial life are analyzed. 

Hiring a planner will help you avoid costly financial mistakes that could

seriously injure your financial health. It would not be hard for most

financial planners to find serious gaps in most household finances, gaps

that are easily worth the cost of the planner's services. Even individuals

with expert knowledge in one finance field such as investments may fail

to notice areas such as insurance or estate planning. A few people have

the time, expertise or desire to do a complete financial plan for them.

Saying that most would benefit from using a financial planner is not to

mean that there are no wide differences in abilities and costs among

planners. Few areas will pay wealthier rewards for the public than

gaining basic knowledge in personal finance. If one is not careful, fees

and commissions could cancel out much of the benefit of using a

financial planner.  

The first step in selecting a financial planner is to limit your search to

someone who is certified in financial planning such as Certified

Financial Planner (CFP) and the Personal Financial Specialist (PFS).  

The second step is to look for recommendations from people that you

respect for names of financial planners and interview these planners.

Your aim should be to find someone who meets your needs and who

will look after your interests.  

The third question you need to ask is how the financial planner receives

compensation and how much will this compensation cost you annually.

In calculating the costs, one should consider fees, commissions,

transaction costs, and annual fees of the financial products that they

recommend. It is fairly possible that after adding sales loads and

management fees, the after-expense return that you receive from

equities will not justify the risk you are undertaking

Financial planners fall into two broad types: fee-only financial planners

and commission and/or fee-based financial planners. While some give

the preference to fee-only financial planners, it is depend on your

circumstances as to which one will be best for you.  

If you need a comprehensive financial plan and you are willing to invest

your funds yourself, then a fee-only financial planner may be best

choice for you. If you want the financial planner to manage your money,

than many fee-only financial planners will move to an asset-based fee,

normally 0.5% to 1.5%, of your assets. Two factors must be kept in

mind. First one is that this fee must be charged annually. Second, most

financial planners place your funds to work in a mutual fund and that

means you continue to pay the mutual fund another fund management

fee annually. Since evidence and theory recommend that none of these

efforts will result in outperforming an index mutual fund, one might

wonder why not go directly there and save about 2% in fund

management fees plus, on average, you will have a mutual fund that will

outperform most professionals.  

In commission-based financial planning, individuals run the risk that the

commissions charged on the financial products (i.e.; financial planners

demand) will add greatly to the cost of the financial planning. The risk of

conflict of interest occurs when the planner receives greater

compensation based on what financial products that they recommend. It

may be possible, however, for some individuals that the free or reduced-

cost financial plan would not be counterbalanced by the higher

commissions. For instance, the one-time load on the mutual fund might

be cheaper than paying the annual 1.5% fee to a fee-based financial

planner. You should compare all of these costs when deciding which

financial planner is the best for you.

From the above given information on financial planners, it is clear that

knowledge on the consumer's part is very essential.  

Questions to ask While choosing a Financial Planner

The questions given below can help you to effectively interview and

assess financial planners to find the one that's right for you. You need to

select a competent, qualified professional with whom you feel

comfortable, one whose business style suits your particular financial

planning needs. 

1.      Experience Find out how long the financial planner has been practicing and the

number and kinds of companies with which he/she has been

associated. Ask the planner to explain past work experience and how it

relates to his/her current financial planning practice. Select a financial

planner who has at least three years' experience in providing financial

planning services. 

Qualifications Ask the planner what qualifies him/her to offer financial planning

recommendation and whether he/she holds a financial planning

designation, such as CFP or PFS. Look for a planner who has proven

experience in financial planning topics such as tax planning,

investments, insurance, estate planning, and retirement planning.

3.      Services The services offered by a financial planner depend on a number of

aspects including licenses, credentials, and areas of expertise. Financial

planners might be licensed to sell insurance or unit trust products. Some

planners offer financial planning advice on a series of topics but do not

sell financial products. Others may specialize in a particular area such

as retirement planning, insurance or risk management. 

4.      Approach

Ask the financial planner about the natures of clients with whom he/she has worked and the financial situations with which he/she is familiar. Some planners prefer to develop one plan that considers all of your financial goals. Others provide advice on specific areas, as needed. Make sure the planner's viewpoint on investing is not too cautious or excessively aggressive for you.

Why people approach financial planner? Posted By - IndianMoney.com Research Team- On-24/03/09

People obtain the help of a financial planner because of the complexity of knowing how to perform the following:

1.      Providing direction and meaning to financial decisionsAllowing the person to understand how each financial decision affects

the other areas of finance; and allowing the person to adapt more easily

to life changes in order to feel more secure.

2.      Defining personal financial decisionsPersonal financial planning is broadly defined as “a process of

determining an individual's financial goals, purposes in life and life's

priorities, and after considering his resources, risk profile and current

lifestyle, to detail a balanced and realistic plan to meet those goals”. The

individual's goals/objectives are used as guideposts to plan a course of

action on 'what needs to be done' to reach those goals.

Along the data gathering exercise, the intention of each goal is

determined to ensure that the goal is meaningful in the context of the

individual's circumstances. Through a process of careful analysis, these

goals are subjected to a reality check by taking into consideration the

individual's current and future resources available to achieve them. In

the process, the restrictions and obstacles to these goals are noted. The

information will be used later to find out if there are sufficient resources

available to get to these goals, and what other things need to be

considered in the process. If the resources are inadequate or absent to

meet any of the goals, the particular goal will be adjusted to a more

realistic level or will be replaced with a new one.

Frequent Planning requires consideration of self-constraints in postponing some pleasure today for the sake of the future. To be effective, the plan must consider the individual's current lifestyle so that the 'pain' in postponing current pleasures is tolerable over the term of the plan. In times where current sacrifices are involved, the plan must help to make sure that the pursuit of the goal will continue. A plan must consider the importance of each goal and must prioritize each goal. Many financial plans fail because these practical points were not satisfactorily considered.

Licensing and other regulations related to Financial Planner Posted By - IndianMoney.com Research Team- On-24/03/09

The name of 'financial planner' is mostly an unregulated term in many countries. Lack of regulation has permitted financial services personnel in these countries to use the title randomly. Often, financial products intermediaries, like life insurance agents and unit trusts agents, use the title to project a professional image to clients even when they are not trained in the professional characteristics of financial planning. This has sometimes led to mistreatment. Clients may be misleaded to receive financial planning services that are unprofessional, from unethical providers.

To protect the industry, financial planning professionals and

practitioners from across the globe have started to form trade

organizations to provide self-regulations and to maintain some

orderliness in the industry. Organizations such as the FPA (Financial

Planning Association) have begun to organize high-level training

programs and certify members who successfully completed these

programs.

What is a Financial Planner's job function? Posted By - IndianMoney.com Research Team- On-24/03/09

A financial planner is one who uses the financial planning techniques/process to help you understand how to meet your life goals. The planner can take a `Clear View` of your financial situation and make financial planning recommendations that are suitable for you. The planner can look at all of your financial needs including budgeting and saving, insurance, investments, taxes, and retirement planning. Or, the planner may work with you on an individual financial issue but within the framework of your overall situation. This approach of financial planner to your financial goals sets a financial planner apart from other financial advisers who may have been trained to concentrate only on a particular area of your financial life.

A financial planner is the best friend who needs to advice you on ways

of achieving financial goals. He is a client-oriented professional who

works in the best interest of his customers. When you have a

professional relationship with a planner that does not mean that he

replaces other professionals such as doctors, lawyers or accountants. A

planner is a coordinator who works with other people in making the

planning (Financial Planning) process work.

Personal financial planning is a process, but not a product. It is an

organized, well-planned system of developing strategies for using your

financial resources to attain both short- and long-term goals. He will

help you to answer the following questions:

·         Where am I? 

·         Where do I want to go? 

·         How do I get there? 

·         When should I start planning?

It is very important to start planning for the future as soon as you can.

Time passes very fast - it is never too soon to start planning for

tomorrow. 

A financial planner is specialized in the planning aspects of finance, in

particular personal finance, dissimilar to a stock broker who is only

concerned with the actual investments, or with a life insurance

intermediary who advises on risk cover products.

Financial planning is generally a six-step process, and involves

considering the client's situation from all relevant angles to generate

integrated solutions. The six-step financial planning process has been

adopted by the International Organization for Standardization (ISO).

Financial planners are also known by the name financial adviser in

some countries, even though these two terms are technically not

synonymous, and their roles have some functional differences.

Even though there are many types of 'financial planners,' the term is mainly used to describe those who consider the entire financial picture of a client and then offer a comprehensive solution. To differentiate from the other types of financial planners, some planners also called as 'comprehensive' or 'holistic' financial planners. Other kinds of financial planners may specialize in one or more areas, such as insurance planning and retirement planning.

Who is a Financial planner Posted By - IndianMoney.com Research Team- On-24/03/09

A professional who helps individuals to set and achieve their long-term financial goals, through investments, tax planning, asset allocation, risk management, retirement planning, and estate planning is known as a Financial Planner. The role of a financial planner is to find techniques to increase the client's net worth and help the client to achieve all of his/her financial objectives.

A financial planner is a practicing professional who helps people deal with various personal financial issues through proper planning, which includes the following but is not limited to these major areas such as: cash flow management, education planning, retirement planning, investment planning, risk management and insurance planning, tax planning, estate planning and business succession planning (only for business owners). The works engaged in by these professionals are commonly known as personal financial planning. In executing the planning function, he (financial planner) is guided by the financial

planning process to create a financial plan for a client's specific situation and to meet his specific goals.

Investment alternatives Posted By - IndianMoney.com Research Team- On-24/03/09

There are a wide range of investment alternatives available for investing. The more common ones are:  

1.      Cash and deposits

It refers to all liquid instruments that bear minimum risk, only that the

principal amounts invested can be lost in this type of investments.

2.      Fixed income securities

These are a group of investment vehicles that offer a fixed periodical

return. A fixed income security is a security or certificate which shows

that the investor has lent money to the issuer in return for fixed interest

income and repayment of principal on maturity.

3.      Shares

Shares are different from stock in that a shareholder is a part owner of

the company. A company is a separate legal individual, which is owned

by all of its shareholders. The value of a share changes according to the

market's view of the worth of the company. Others factors too can

influence the share prices, like how the country's economy is doing, the

interest rates, inflation rates, company earnings, currency performance,

etc.

4.      Unit trusts

These are useful avenues for small private investors who do not have

huge funds or time to receive professional investment management

advice. Unit trust investments can generate income in the form of

interest, dividends and capital gains.

5.      Investment trusts

An investment trust is a company registered under the Companies Act.

An investor can purchase shares in that company. The company itself

will invest in a wide range of equities and other investments. In a unit

trust, the investor buys units in the trust itself and not shares in the

company.

6.      Properties

There are 3 types of real estate investments such as: the agricultural

property, the domestic property and the commercial / industrial property.

Properties can provide high capital appreciation and a steady flow of

income. Also they are considered low risk investment.

7.      Derivatives

Derivatives are financial instruments whose values are linked to the

price of underlying instruments in the stock markets. For instance, a

stock index future is linked to the performance of a specified stock

market. Stock options and financial futures are 2 popular derivative

instruments for investors.

8.      Commodities

Commodities can be bought as physicals where the goods exist and are

delivered right away or as futures, where the goods may not yet exist

and will only be delivered in the future. Commodity prices can be

unstable as they depend on supply and demand as well as on the other

variable factors such as the weather or unexpected pest attacks. For

instance, a new pest may reduce a crop, thus greatly increase prices for

the crop to be harvested in a few months time. Huge profits can be

made from commodity futures and equally large losses can also be

incurred if things go wrong.

9.      Life insurance

Life insurance can be closely connected with the national interest

because it is a means of reducing financial suffering that death may

bring. It is also a method of saving and to a degree, of investing. In

other words, life insurance is like a collection of funds into which a large

number of policy owners jointly contribute in relation to their risk

exposures, in order that a specified sum of money will be paid from the

pool of money on the death or other emergencies dependent on human

life. There are 4 basic forms of life insurance cover :

·         Term insurance

·         Whole life insurance

·         Endowment insurance

·         Annuity

10. Annuities

Annuities are contrary to insurance protection against death. It is a

contract where, for a cash consideration, the insurer agrees to pay the

annuitant, a predetermined sum (annuity) on a periodical basis during a

fixed period of time or for the duration of the survival of the respective

life. This is done with the understanding that the principal sum shall be

considered liquidated immediately on the death of the annuitant.