If you want to realise your dreams, it's important to chalk out a clear financial strategy. In the first of a 52-part series on investor education, we tell you how to go about it.
We earn, spend, and most of us invest too, but do you have a clear picture about your finances? Do you ask yourself why you have chosen a particular investment, what you should expect from it, and how it will help you reach your financial goals? Do you, in effect, have a plan? A majority of people are likely to answer 'no' to this question. We tell you the basics of financial planning and how to achieve it.
What is financial planning?
We all have certain goals in life and to fulfil these, we need money. Whether it is your child's education and marriage, buying a house or preparing for a comfortable retired life, having a clear financial plan makes it easier to achieve these objectives. Even if you believe that you have the resources to reach your goals, financial planning can help you use these optimally. It will ensure that the right amount of money is available at the appropriate time in the future.
Risks & rewards
Financial planning involves systematic and disciplined investments that can help create wealth over time. The most crucial aspect is to choose the instruments that can work for you and help achieve your goals. When you invest in a financial tool, you must keep in mind that its potential return will be a factor of the risk that you are willing to take with your money.
The lower the risk, the lower will be the returns that you can expect. High risk, on the other hand, is associated with high potential returns. It does not guarantee extremely good returns, just the possibility of higher ones. More risk could also lead to greater potential losses. Take stocks.
While these have the ability to deliver double-digit returns in the long run, they also carry the risk of negative returns. Similarly, gold may do well when the outlook on the other asset classes is unclear, but it may remain flat if the economy is doing well. Real estate investments, on the other hand, promise both rental income as well as price appreciation, but selling a property in a hurry is almost impossible.
How can you find out about the risk level that is appropriate for you?
There is no clear answer to this question because risk tolerance varies among people. It depends on your goals, income, your current financial situation and your life-stage. You need to determine how much risk you can take to earn the returns you want. The best way to deal with risk is to allocate your assets in a proper manner.
How to allocate assets
You can put your money in various assets to diversify your investments and balance risk. This is because each asset class, such as bonds, gold, stocks, real estate and cash, carries different level of returns and risk and will behave differently over time. So, if one asset is increasing in value over a given period, another may decrease.
The underlying principle of asset allocation is that when a person is young, he can afford to take more risk, but as he grows older, his risk appetite should lessen. After you retire, you may have to depend on your savings as your only source of income. So, you should invest more conservatively during this phase as asset preservation will be crucial.
Determining the proper mix of investments in your portfolio is important. It isn't simple to fix the percentage you should put in stocks, mutual funds and low-risk instruments, such as bonds and treasuries, particularly for those approaching the age of retirement.
Imagine saving for 30 or more years in the stock market, only to see it fall in the years just before you retire. Therefore, one must change asset allocation over time to move more towards safer asset classes (bonds, treasuries) as one gets older. To determine your asset allocation, approach an adviser who can customise a plan for you.
Formulating a financial plan, especially at an early age, can help you fulfil all your goals without any worries. In the weeks to follow, this series will take you through investments that can help you achieve your dreams
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Source : ET
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For more details join our FREE FINANCIAL PLANNING CLASSES or CONTACT US
We earn, spend, and most of us invest too, but do you have a clear picture about your finances? Do you ask yourself why you have chosen a particular investment, what you should expect from it, and how it will help you reach your financial goals? Do you, in effect, have a plan? A majority of people are likely to answer 'no' to this question. We tell you the basics of financial planning and how to achieve it.
What is financial planning?
We all have certain goals in life and to fulfil these, we need money. Whether it is your child's education and marriage, buying a house or preparing for a comfortable retired life, having a clear financial plan makes it easier to achieve these objectives. Even if you believe that you have the resources to reach your goals, financial planning can help you use these optimally. It will ensure that the right amount of money is available at the appropriate time in the future.
Risks & rewards
Financial planning involves systematic and disciplined investments that can help create wealth over time. The most crucial aspect is to choose the instruments that can work for you and help achieve your goals. When you invest in a financial tool, you must keep in mind that its potential return will be a factor of the risk that you are willing to take with your money.
The lower the risk, the lower will be the returns that you can expect. High risk, on the other hand, is associated with high potential returns. It does not guarantee extremely good returns, just the possibility of higher ones. More risk could also lead to greater potential losses. Take stocks.
While these have the ability to deliver double-digit returns in the long run, they also carry the risk of negative returns. Similarly, gold may do well when the outlook on the other asset classes is unclear, but it may remain flat if the economy is doing well. Real estate investments, on the other hand, promise both rental income as well as price appreciation, but selling a property in a hurry is almost impossible.
How can you find out about the risk level that is appropriate for you?
There is no clear answer to this question because risk tolerance varies among people. It depends on your goals, income, your current financial situation and your life-stage. You need to determine how much risk you can take to earn the returns you want. The best way to deal with risk is to allocate your assets in a proper manner.
How to allocate assets
You can put your money in various assets to diversify your investments and balance risk. This is because each asset class, such as bonds, gold, stocks, real estate and cash, carries different level of returns and risk and will behave differently over time. So, if one asset is increasing in value over a given period, another may decrease.
The underlying principle of asset allocation is that when a person is young, he can afford to take more risk, but as he grows older, his risk appetite should lessen. After you retire, you may have to depend on your savings as your only source of income. So, you should invest more conservatively during this phase as asset preservation will be crucial.
Determining the proper mix of investments in your portfolio is important. It isn't simple to fix the percentage you should put in stocks, mutual funds and low-risk instruments, such as bonds and treasuries, particularly for those approaching the age of retirement.
Imagine saving for 30 or more years in the stock market, only to see it fall in the years just before you retire. Therefore, one must change asset allocation over time to move more towards safer asset classes (bonds, treasuries) as one gets older. To determine your asset allocation, approach an adviser who can customise a plan for you.
Formulating a financial plan, especially at an early age, can help you fulfil all your goals without any worries. In the weeks to follow, this series will take you through investments that can help you achieve your dreams
~
Source : ET
~
For more details join our FREE FINANCIAL PLANNING CLASSES or CONTACT US
