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How To Become
Your Own Financial Planner?

An exclusive Program To Develop The Skills To Manage Your Personal Finance

We believe by signing up for the initiative, you too endeavour to develop the skills needed to understand the nuances of personal finance and be money-wise.

Module IV: Prudent Ways To Plan Your Investments

Now that you've understood the financial mistakes to avoid and the importance of asset allocation, let us move on to the next important topic of this module...

Session 13: How To Create Portfolios For Your Life Goals

In this session, we will be covering three life goals:

- Child's education needs;

- Child's wedding expenses; and

- Funding a vacation

We haven't covered Retirement Planning here -a vital life goal; because it will be covered extensively in our ensuing module: Tested Ways To Retire Rich.

So, let us begin this session with the first goal:

How should you go about planning for your child's future

(Education and wedding needs)

"If there must be trouble, let it be in my day so that my child may have peace" - Thomas Paine.

Indeed, this is what every parent wishes for as rightly stated by Mr Paine (a famous English-American political activist, author, political theorist and revolutionary).

Every parent wants to give their children the best future - be it education, lifestyle, and even getting them married off in pomp and style.

But in order to fulfil these desires, prudent financial planning is a must! You have to follow a prudent approach and start early.

If you start saving and investing early, it will give you a wider time horizon to meet your financial goals and help you build a bigger corpus. It is pretty much the case of: the early bird gets a bigger worm.

Saving money for your child's future is not enough these days. You have to invest in various avenues and build a wealth generating portfolio.

Let's take these case studies to get a clearer perspective...

Case Study 1:

Mr Shah’s Son’s Age

3 years

Cost of Education in today's terms

Rs 5 lakhs

Time left for graduation

15 years

Inflation rate (assumed)

10% p.a.

Cost at time of graduation course

Rs 20.88 lakhs

Investment rate (assumed)

12% p.a.

Amount Mr Shah needs to invest per month

Rs 4,180
(Note: The table is for illustration purpose only)

Mr Shah has a 3 year old son, who'll be graduating in 15 years.

He intends his son to pursue engineering.

If the cost of graduation is Rs 5 lakh today, 15 years hence, Mr Shah will need much larger sum for his son's engineering fees.

So, first let us see how much this would add up to...

Assuming inflation @10% p.a., graduation would cost Rs 20.88 lakh.

And to achieve this, he needs to invest at least a sum of Rs 4,180 every month, which is assumed to fetch him a return-on-investment of 12% p.a.

However, if Mr Shah delays this investment, and starts to invest for his son's education after 5 years from today, he would need to invest more than double, i.e. Rs 9,079 per month.

Where should he invest?

Given that the investment time-horizon to achieve this goal is 15 years away, it's worthwhile to park the money in equity for 12 years.

  • SIPs (or Systematic Investment Plans) in diversified equity mutual funds are a promising investment avenue (for the benefits they offer)

  • The monthly investment should be done in a mix of largecap, flexicap, and midcap mutual fund schemes in the endeavour to maximise wealth creation.

As the goal time-horizon approaches nearer, i.e. it is 3 years away, Mr Shah's investments should move out from risky to relatively safe investment avenues such as short-term debt funds, liquid funds, and fixed deposits.

Now let us look at how you can fulfil the goal of your child's wedding expenses with the second case study...

Case Study 2:

Mrs Gupta’s Daughter's Age

2 years

Cost of Marriage today

Rs 15 lakhs

Time left for Marriage

22 years

Inflation rate

10% p.a.

Cost at time of marriage

Rs 1.22 Crore

Investment rate (assumed)

12% p.a.

Amount Mrs Gupta needs to invest per month

Rs 9,516
(Note: The table is for illustration purpose only)

Mrs Gupta has a daughter aged 2.

She wants to create a corpus to meet her wedding expenses, when her daughter turns 22 years of age.

Currently, Mrs Gupta envisages spending Rs 15 lakh on her marriage. But 22 years later, she will need a much higher amount to fund her daughter's wedding expenses...

Considering inflation @10% p.a., the wedding expenses based on the current figure would cost around Rs 1.22 crore in 22 years.

And to achieve this, she'll be required to save and invest at least a sum of Rs 9,516 every month in an investment avenue that is expected to fetch a rate of return of at least 12% p.a.

However, if Mrs Gupta delays this investment, and starts to invest 5 years from now, she would need to invest almost double, i.e. Rs 18,464 per month.

Where should she invest?

In this case too, the investment time-horizon for this goal is 15 years away, the money should be parked in equity for 12 years.

  • SIPs (or Systematic Investment Plans) in diversified equity mutual funds are a promising avenue (for the benefits they offer)

  • The monthly investment should be done in a mix of largecap, flexicap, and midcap mutual fund schemes in the endeavour to maximise wealth creation.

She can even buy gold -in physical and/or through Gold ETFs (depending on her existing proportion of wealth in gold).

As the goal approaches nearer, i.e. it is 3 years away, Mrs Gupta should move out from risky to relatively safe investment avenues such as short-term debt funds, liquid funds, and fixed deposits.

Here are...

5 Vital points to secure your child's future

  1. You need to invest in wealth creating investment avenues such as equity mutual funds to beat the rising costs (inflation) of these goals. Starting early via SIPs can help you enjoy the power of compounding, besides being easy on your wallet and infusing a sense of discipline to achieve the financial goals.


  2. You need a financial plan. Most of the times it happens that, as a parent you know what you want for your child; but aren't clear as to how to get there. A prudent financial plan draws a roadmap to achieve these goals; and if executed well, can help to make your dreams come true.


  3. Always account for inflation, while aiming to build a corpus for your child's future. This will enable you to create an adequate corpus, because inflation otherwise plays an effect of eroding the purchasing power of your hard earned money.


  4. Look out for customised investment solutions. Merely going by names that prefix child's future goals/benefits may not always be a prudent choice. It may not help you accomplish the goals you've envisioned. Invest based on your investment horizon, risk profile, asset allocation and inflation rate, among other factors when planning your investments. As you compare gadgets and home appliances before purchasing them, you must exhaustively compare financial products before investing in financial instruments to address your child's future.


  5. If you aren't well-versed in selecting investment avenues, don't hesitate to seek the services of a trusted financial advisor, or a Certified Financial Planner who can handhold you while planning and investing in a bright future for your children.

Now let us take a look at planning for the third financial goal:

How to fund a vacation

As you plan for many critical financial goals, viz. children's education, their marriage, your retirement, amongst a host of others, you need to unwind sometime; you need a good holiday after much hard-work. After all, we all have one life to live.

"The best thing about a vacation is planning it." - said Andy Rooney (an American radio and television writer who was best known for his weekly broadcast: "A Few Minutes with Andy Rooney")

And indeed, a prudent approach can make your vacation truly enjoyable -without much burden on your personal finances.

So, let's take a look at what all you should do...

Follow a 4-step approach...

  1. Finalise the destination and estimate budget - Consider all the costs associated (flight/train tickets, food, sight-seeing, travel insurance, shopping, sightseeing, etc.) based on the destination you're traveling to. Do your bookings in advance and avail of discounts/offers.

  2. Determine the amount to be saved each month to travel at a future date - accounting for inflation, time horizon before you travel, and the present value of the total travel cost today.

  3. Systematically invest the amount saved each month, in wealth creating investment instruments to earn a desired rate of return. If your time horizon before the vacation befalls 5 years from now, invest in equity mutual funds; but for time less than that, refrain from investing in equities -choose debt instruments.

  4. Ensure you timely liquidate your investments - This is needed to fund your vacation. Moreover, it is prudent to keep the vacation money in a separate bank account before going on a trip so that you don't land up spending more than what has been decided. Also, this will help you to keep a track of all your expenses.

Please avoid taking personal loans to fund your vacations. The high interest rate (usually in the range of 15-19% p.a.) can jeopardise your financial wellbeing in the long run.

Instead, plan well in advance -and we're sure your vacation will be memorable without being a load on your personal finances.

When you invest to accomplish your financial goals, pay heed to the asset allocation that is best suited for you. Remember, asset allocation differs from person-to-person, based on his goals, time horizon, and risk profile.

Here's an ideal asset allocation approach based on the time horizon before goals are achieved...

ASSET ALLOCATION BUCKETS

Years to goals

Equity

Debt

Gold

<=3years

< 10%

> 85%

< 5%

4 years

40%

55%

5%

5 years

45%

45%

10%

6-7 years

55%

35%

10%

8-10 years

70%

20%

10%

<10 years

80%

10%

10%

(Note: The table is for illustration purpose only)
  • For somebody with a short term investment horizon i.e. less than 3 years, it is advisable to allocate more funds towards fixed income, and allocate fewer funds in your portfolio to riskier assets such as equity and/or gold.

  • For a medium term investment horizon i.e. 3 to 5 years, your allocation to riskier asset classes can increase, to take advantage of the higher risk-reward ratio that these asset classes offer. However, maintain a healthy allocation to fixed income instrument to balance your portfolio as your investment horizon reduces.

  • For life goals with a longer term investment horizon - 6 to 10 years or more - such as funding your child's education or marriage, your retirement; allocate a higher proportion of your funds to riskier asset classes, to take advantage of the power of compounding in your longer time horizon. This is because you have greater flexibility and opportunity to grow your wealth. Any setbacks the portfolio suffers can be recovered with sufficient time in hand. Maintain some exposure, if not too high, to fixed income and gold. This can align your portfolio well reducing the risk to an extent.

Finally, here are a few...

Points to Remember

  • Begin the process of saving and investing early. This will enable you to create an adequate corpus to fulfil your life goals-be it your child's future, funding your family vacation, or even your own retirement.


  • Have a financial plan in place addressing to each of these goals.


  • While planning for your child's education, distinguish between graduation needs, post-graduation needs, and super-specialisation.


  • Don't get carried away by names viz. child-benefit plans, child-care plans, etc.-they can be highly misleading. Evaluate the traits of each financial product, and see if it suits your needs. Avoid making ad-hoc investment decisions.


  • Likewise, while planning a vacation consider all the facets of your travel plan based on the destination.


  • Invest in wealth creating asset classes to accomplish your financial goals.

Thank You For Participating!

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