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How to Start Planning


Financial Planning is not a product or one- time event ,but a process - a life long process.It is an organised ,well planned system of developing plans for your financial resources which helps you to achieve both short term. A comprehensive financial plan is one that addresses an individual's entire financial picture. Ideally I should include a review one's net worth, goals and objectives, all assets ,liabilities, cash flows,investments, retirement plans, estate planning, tax planning anf insurance needs, as well as plan for implementing your goals.


Steps in Financial Planning


1. Understand your current Financial status

As part of your data gathering process towards assessing your current financial status you have to start by estimating the value of your assets and liabilities.

Assets :-Bank A/c passbooks, Postoffice deposits certificates and pass books,mutual fund statements insurance policies, Investment in shares & bonds statements, FD in banks need to be organised.

Liabilities :- Listing one's liabilities is equally important while estimating the net worth Car loans , Housing loansa and Credit card debts need to be ascertained. substracting your liabilities from your assets will give a good estimate of your net worth


Your Net worth = Your Total Assets - Your Total liabilities

Now you need to formulate outfolw statement i.e. the amount you spend or have to pay towards monthly commitment. House mortgages, Car EMIs, Credit card payments need to be organised. You also need to write down expenses like eating out, expenses on clothing & entertainment . By substracting these from you’re your current income give you your saving.

Your current income - Your outflow = Your Savings


2. List out your goals

Now you need to list your short term and long term financial goals on paper. Listing goals make it easier to rank with a level of importance . Also it is psychologically easier to save if one is saving towards something tangible , instead of just saving. Typical examples of financial goals include : having cash handy for emergencies, educatin for children, healthcare for family members, a comfortable retirement , a nest egg to permit a career chance, acquiring or selling a business ,estate planning, financial independence, or personal objectives such us a special vacation, or second home.


3. Set time lines for achieving

First you need to " Prioritizing Goals and Setting values " to list out goals. Long term financial goals represent the long-term requirements of an individual. These goals could extend beyond a period of six years but should not be so long that the goals become unrealistic to achieve. Short term or intermediate goals are generally spread over a period of two to five years. Now you need to prioritize these goals on the basis of the urgency in fullfilling them. Thus an individual can identify the more need immediate attention and those which can be deferred for some time.


4. Assessing your risk profile

Understanding risk profiles :- Risk is the uncertainity associated with the value of your investment at the time of disinvestment. For instance , when you invest Rs 10,000 in a safe deposit, it will become Rs 10,800 after 1 year if it offers an 8 % rate of return. However, there is no saying what the value of an investment of Rs 10,000 in stock market will be after a year- it could be Rs 20,000 or Rs 8,000 or anything else . Accordingly you could say the stock market is more risky than a fixed deposit.

A certain amount of risk is part and paecel of the investment process.Very rarely is money is made at zero risk. Therefore ,the key to successful investing is to identify your risk taking capacity and return objective. Risk and return is inextricably linked. The higher the risk , the the higher the gain that you can expect . Investments in stock markets promise higher return, while low risk investments such as bonds and fixed deposits offer low returns.

Generally speaking an individual's risk profile is essentially determined by " Objective Factors" (age,income level, number of dependents, job security ) and " Subjective Factors" ( risk behavior specific to each individual's psychology). The former constitute an individual's risk capacity and latter determine his risk tolerance.


time on their side and hense, ability to cope with loses(i.e they will have time to recover from loss).also younger people usually have lesser/no dependants,which further increases their risk taking capacity. However, an older person with significant amount of wealth and no dependant would perhaps have a higher risk taking capacity than younger person. while assessing one's risk taking capacity, one need to consider such objective factors.

Factors determining RISK TAKING CAPACITY

Factors determining RISK TOLERANCE

Quantifiable Factors such as Your age, Income, number of dependents,

psychological aspects such as Your attitude towards Risk

Consider a case where you invest Rs 1 lakh in the stock market today in a well diversified portfolio. next day market crashes and your investment goes down by 10 %. How would react?. Your risk tolerance is the degree of of uncertainity you can handle when there is negative change in your portfolio's value.In other words how you react when your investment make a loss. There is a subtle differance between risk tolerance and risk taking capacity.

Thus "Risk tolerance " lies in the mind of an investor and tell us how much risk he can handle as whereases "Risk taking Capacity" is the amount of risk an investor should take keeping in mind the above factors discussed above. While devising an investment strategy , you need to know your risk tolerance level because risk tolerance along with risk taking capacity determine what investment avenues would suit your need.


5. Formulate an Investment

After considering above steps incuding assessing your risk profile now its time to formulate a sound investment strategy. " ASSET ALLOCATION" is the key to any investment strategy "creating an optimal investment mix , bearing in mind risk profiles and return objectives, is what asset allocation is all about". when done properly ,asset allocation ensures that a portfolio diversifies or spreads the overall risk across investments. A balanced portfolio should include a mix of equities,debt investments , commodities (such as gold, silver) and real estate.


Percentage return from various form of Investments (1980-2005)

Equities and related investments, such as equity based mutual funds, carry a high level of risk. At the same time, the graph shows that equities outclass all other investments in long run. More importantly ,they help you beat inflation and create wealth. It's not advisable to invest in equities if one's investment horizon is short term , as the investments are completely dependent on the whims of capital market.

Debt instruments on the other hand include relatively low risk instruments such us government bonds,money market funds bank fixed deposits,debt funds, gilt funds, and so on. One cannot expect phenomenal results from these investments ; infact many debt instruments offer a fixed rate of return, which often fails to outrun inflation.

Stock Market


Fixed deposit









An individual generally fits into one of the below catagories based on his or her risk profile :-

Investors Profile

Assets Allocation


Almost entire portfolio invested in debt

Moderately Conservative

About 70 % of portfolio invested in debt and balance 30 % in equity


About 50-60 % of portfolio invested in debt and balance 40-50 % in equity


About 80 % of portfolio invested in equity and balance 20 % in debt


6. Invest based on the stretagy and your risk profile

Once the optimal Investment mix and horizon has been identified ,expected average returns on this Asset Allocation can be computed to judge if the selected allocation will help achieve one's goals. If your objective is to create enough wealth to achieve certain goals , one can not afford to invest in low -risk low- return investments. Then ,more moderate goals allow you to sacrifice returns for safety of your investment.


Matching your expected returns to your financial goals

Investor type

% of Portfolio in

Expected returns on portfolio per Year









Moderately Conservative












Assuming 15 % return on equity and 7 % return on debt each


7. Review your Financial Plan

Making investments to achieve one's investment objective does not bring an end to the investment process. Investing is an ongoing process; investors need to monitor the performance their investments . This will ensure that they are updated with respect to their portfolios. It also gives them an opportunity to make necessary alterations to their portfolio in case some investments have failed to deliver.


Monitoring one's risk profile and hence one's portfolio at regular intervals is equally important. Lastly, keeping a track of one's goal could have a profound impact on a financial planning exercise. The goal that are so precious today may seem irrelevant in few years, if circumstances change. Other goals may take precedence over previous ones . It is for this reason its strongly recommend that you review your situation every six months to a year.


"The Best plan is useless unless put into action"


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