Amidst all the ups and downs in the stock markets, lot of investors are clueless as to what steps should be taken to ensure a balance between growth, risk and liquidity. It is significant to revisit the prudent approach to managing one’s finances. At this juncture, one should introspect and stick to the dos and donts!
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For most of the educated people and especially for those who do not have anything to do with finance at their work places, asset allocation is apparently a puzzling term.
There are broadly five types of asset classes viz debt, equity, commodities (understood mainly as gold and silver), real estate and cash. In each of these asset classes there are various instruments or investment options available in the market
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When Krishna Patel and his son Amit (names changed) walked into our office, they had a simple problem: The senior Patel (59) was to retire in a year’s time and needed to effectively use his retirement corpus.
The father expected his provident fund (PF) maturity to be around Rs 60 lakh. He had a fixed deposit (FD) balance of Rs 10 lakh, about Rs 1 lakh in savings account, an equity portfolio of around Rs 4 lakh and owned a small, self-occupied flat in the Mumbai suburb of Vile Parle. He had a personal health insurance cover of Rs 5 lakh that also covered his wife (56), a homemaker.
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Mr. Sudhir Agarwal (name changed) visited our office a few days ago for reviewing his financial plan.
While discussing his current financial scenario, he mentioned that he had just incurred an expenditure of over Rs. 2 lakhs on a vacation abroad which was his dream holiday. The question here was “at what cost did he take the vacation?”
The money was initially earmarked for his daughter’s primary education and it was rather lavishly spent on something less important.
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It was a Tuesday afternoon, around two years ago, when Priya Nath (name changed) met us for the first time. Priya was a thirty four year old single mother of an eight year old daughter, Aditi (name changed). Priya had recently lost her husband. She was working for an MNC and was very worried about her personal finances. Till his death, her husband was handling all the finances and she never paid much heed to it. But now she had to take charge
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The problem with the 21st century seems to be that of having too many options. Right from buying a mobile phone to buying a car to choosing an investment product there are a number of options available today.
What becomes crucial is how one decides which products to choose from, when to invest and for what time horizon?
The fact is that there can never be one good product which suits everyone’s requirement. So it is indeed important to know what factors one needs to consider before making the right investment decision.
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We have always come across people saying that no two persons can have the same set of Fingerprints. This theory remains unchanged even in case of financial planning. Financial planning, in common terms, is a roadmap which ensures that you reach your destination without any difficulties.
There are several reasons why a financial plan can never be the same for two people.
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Financial planning is a detailed process of understanding one’s financial status and milestones and then coming out with a comprehensive solution. However more often than not, financial planning is looked at more from a quick fix solution. I often come across people asking me which product I should invest in. The question is not about where to invest, but why to invest, which will decide your asset allocation. However the habit of jumping to fast solutions sometimes end up having adverse consequences. The common mistakes which I have come across while people plan their finances are as under:-
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Mr. Karthik Rajan is a 37 year old married man and has one child, aged 7. Four years back, Karthik and his wife were looking for an apartment in the price range of about Rs. 50 lacs but ended up buying one worth Rs. 80 lacs. The reasons for buying a house beyond his means were peer and family pressures. He moved into his new apartment and immediately took a personal loan to renovate his house. Plush interiors coupled with state of the art furnishings cost him almost Rs. 10 lacs. But that was not all, Karthik believed that having a car especially a high end one is a necessity and so took a car loan for the same.
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We often use the term rich and wealthy interchangeably. But do they actually mean the same. If one gets hundred rupees now as gift we say he is richer by hundred rupees, however we do not use the term that he is wealthier by hundred rupees. The term Wealthy is defined as abundance of material wealth. However when we talk about this under the financial planning aegis, we could imply as someone who is financially free. Now when we say that someone is financially free the question is when can we really call ourselves as financially free? Is there a benchmark figure or number which can term us, as one who has achieved financial freedom. The answer lies in us going through the following points which can help us decide if we indeed have reached financial independence.
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