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Financial planning is easy. Just start early

Smita Tripathi

Sumit Bhatia, a 25-year-old consultant with a leading multinational is very clear about his financial goals: he wants to buy a house and a car in the next five years.

Similarly, Nivedita Pandey, 22, who is starting out as a model, wants to have her own apartment in a smart part of Delhi before she touches 30.

Bhatia and Pandey are part of an army of young professionals who all nurse similar ambitions. But Bhatia gets a regular pay cheque while Pandey's earnings depend upon the number of shows and photo shoots she does in a year.

Thus, even though their aspirations are similar, their investment attitudes will differ because of their earning style.

To get their numbers right Bhatia and Pandey need to figure out the investment strategy that is right for them.

Financial planning is a phrase that conjures hidden terrors for many people. But it needn't be that way. It is merely the process of attaining your life goals through the proper management of finances.

The process involves gathering relevant financial information, setting life goals, examining your current financial status and coming up with a strategy or plan to meet these goals given your current situation and future plans.

"Financial planning helps you maximise your wealth by investing in different asset classes, so as to capitalise on their risk, reward and liquidity attributes," says Anil Kumar Chopra, CEO, Bajaj Capital.

Your appetite for risk, your life goals, your earning capacity and regularity of income influences your financial strategy.

For instance, if you're the sole earning member of the family, then your risk appetite will be restricted. Similarly, if your earnings are irregular, a greater amount of planned saving is required.

Depending upon your life goals and your earning capacity, you need to create a portfolio geared to meet your needs.

Irrespective of profession and income status, the first essentials are to get a life insurance and medical insurance policy. "The first step of financial planning is to take care of your unpredictable needs. For this an insurance policy is a must," says Chopra.

Of course, the policy will depend upon your earning capacity. For instance, if you are a person with a moderate and irregular income, then it is best to take out a term assurance plan. These plans provide life risk cover but no return on premium.

However, the premium on these plans is the lowest. These are pure insurance plans. What this basically means is that the policy pays the sum assured only if you die before the expiry of the term. If you survive the term then you don't get anything.

On the other hand, if you fall in the high and regular income bracket then it is best to go for an endowment life insurance policy. This will ensure regular income for your dependents if you should die.

Under such a plan you pay the premium regularly during the term. If you die, your beneficiary gets the sum assured, the guaranteed additions and the vested bonuses. One can also go for an insurance policy with retirement benefits.

Also, while deciding which insurance policy to take, keep in mind the tax benefits that are available under Section 88 of the Income Tax Act. In order to determine how much insurance you should take out, multiply your annual income by five.

A Public Provident Fund account is also very important for any young professional. There are two reasons for this - first it is a tax saving instrument and second, it serves as a vehicle for retirement savings because it is long term in nature.

"A person in his early 20s who invests a small amount in PPF every month will get a lumpsum back before he touches 40. So by the time he has a family and starts thinking about the future of his kids, he gets the money back," says a Delhi-based financial planner.

For those falling under the irregular income bracket, the systematic investment plans of any debt fund are also a good investment option.

Small and regular savings can be put into SIPs. This encourages disciplined savings. Debt funds ensure stable and safe investments. The accumulated savings over a period of time would grow into a big lumpsum in future.

On the other hand, people who are in a high and regular income bracket can invest in the SIP of an equity fund as they are in a better position to take risks.

Investments by way of SIPs help to make the volatility of the securities market work in favour of the investor. As regular investments are made at periodic intervals, the units are allotted on the basis of prevailing NAV on the date of investment.

Since the amount invested every month is constant, the investor buys more units when the NAV is low and lower units when the NAV is high.

Young professionals should also consider diversifying their investments.

For instance, a certain amount may be put into infrastructural bonds, some in NSCs, a certain amount in fixed deposits and some can be used to take out an insurance policy. Such diversification helps to promote higher returns from different sectors.

To be a successful financial planner it is first necessary to set specific targets: what do you want to achieve and by when.

For example, instead of saying you want to be 'comfortable' when you retire you need to quantify what 'comfortable' means so that you'll know when you've reached your goal.

Also, you must keep revising your investments. This is because your financial goals may change over the years due to changes in lifestyle or circumstances, such as an inheritance, marriage, birth, house purchase or change of job status. You

need to revise your financial plan from time-to-time to reflect these changes so that you stay on track with your long-term goals.

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