FINANCIAL PLANNING OPTIONS

Financial Planning can be like a maze. You have many starting points and even more routes that you can follow if you do not start by clearly defining your financial goals. Then you have asset classes to invest in which will help you move towards your goals.

Debt instruments like fixed deposits, bank recurring deposits, PPF, etc. provide maximum safety. Equity instruments like primary and secondary markets, equity schemes of mutual funds, etc. provide opportunities for high returns. While insurance provides financial protection and returns in the long run.

Real estate and Gold are also used as complementary investments for holistic financial plans.

The key to good planning lies in your asset allocation i.e. the choice of assets you invest in. Although a large section of Indian households save, most of them do not invest wisely enough. What is even more shocking is the fact that a good number of them keep their savings at home. This leads to a considerable wastage of resources which could have otherwise been used to create wealth.

Given below are the most common assets that you can invest in. Ideally you should spread your investments over a series of assets as this will help diversify risk.

Equities

Equities are widely regarded as the most lucrative assets to invest in. The returns on equity over the long term are generally high. However, equities carry a high degree of risk. If you are market savvy and follow the movements of the stock market, equities are a good option. Because of the risk element attached younger investors tend to go in for equities more than their middle-aged counterparts.

If you are not familiar with the stock market and still want the benefit of high returns, you can invest in mutual funds. A mutual fund in turn invests in a range of equities, thus reducing the risk. Moreover, investments are made by a fund manager who is an expert on the equity markets.

Another interesting option you can pursue is unit-linked insurance. Not only do you get a life cover, but also your premiums are invested partly in equity and partly in debt, depending on the option you choose and thereby giving you higher returns at the end of the policy term as compared to other forms of insurance.

Property

Property as an asset can also be used as an investment avenue. In fact, an investment in the right place at the right time can increase your wealth considerably. However, on account of the high levels of investment required and volatility of real estate, many investors are reluctant to invest in property. Another deterrent factor is that the returns on property are notional and cannot be capitalised upon until the entire property is sold.

Gold

Gold is a common investment avenue as far as Indian households are concerned. However, many people buy gold for religious or cultural reasons instead of evaluating it from an investment point of view. Over the long term, gold tends to appreciate in value. The returns on gold, though very reasonable are not as high as those on equities. However, it makes sense to diversify your portfolio and invest some of your savings in gold.

Cash

Cash as an asset includes saving bank accounts, liquid funds and short term fixed deposits. As you probably know, the returns on these assets are nominal. Still, it is advisable to hold a part of your assets in cash should you need it for some contingency. However, it is best not to hold more than 5% of your assets in cash unless there is an imminent requirement as that would unnecessarily block your resources and reduce your capacity to create wealth.