Lot of us leave our financial planning to our parents during the early years of our career or to our financial advisers during the latter half of our lives. It is your money and leaving it to others to plan your finances is escapism due to lack of knowledge. It is not difficult to crack the numbers and plan your finances wisely. After all, you are the best person to know your needs and goals. In this article we give you an insight into five important aspects of financial planning that you must know and understand.

First and foremost is financial discipline. One must understand that a monk seeking self-realization (his goal) leads a rigorously self disciplined life. In the same way, you must also lead a financially self disciplined life to realize your financial goals. A sure way to achieve this is to inculcate the habit to ‘first invest and then spend’. Lot of us tend to first meet our expenses and then invest what we manage to save. Warren Buffet had once famously remarked, “If you buy things you don’t need, you will soon sell things you need.” The habit to invest before spending helps one to differentiate between his needs and wants. Therefore, it mitigates the habit to overspend on wants, a widespread financial indiscretion. Once you have decided to invest first and spend later, then you must invest regularly to achieve rupee cost averaging to beat the market volatility. For the market related instruments, this is best done through a systematic investment plan (SIP) or systematic transfer plan (STP) for mutual funds or systematic equity plan (SEP) for securities. In case of fixed income products, you have the option to invest through monthly installments in recurring deposit (RD) or public provident fund (PPF).

Second important aspect is goal formulation. Half the battle is won if one correctly formulates his financial goals. Your financial goals may include purchase of house, children education and their marriages, your own retirement, purchase of consumer products, vacations, and creation of emergency funds etc. Simply put, it entails that you first list out all your financial needs or requirements along with their tentative year of realization. Then calculate the number of years to their realization from the current year. This way you can classify these into short, medium and long-term goals. Goals falling between 0 to 3 years will be classified short-term, 3 to 7 years will be medium term and above 7 years is long term. This will then help you to correctly invest in the appropriate financial product. Ensuring capital protection is the singularly important consideration to meet the short-term goals. Therefore, one must invest in fixed income products like fixed deposit (FD) or RD, or ultra short or short-term debt mutual funds. In the case of medium-term goals, one must look to achieve growth of the investment while ensuring capital protection. Therefore, investment in balanced schemes or accrual debt schemes of mutual funds, or tax saving FD or bonds (5 to 7 years tenure) or PPF is a good option. For long-term goals wealth creation is the main consideration. Therefore, an investment in direct equity, equity oriented mutual funds or unit linked insurance plan (ULIP) is a good option. For the conservative investor, long-term debt (hold till maturity) mutual funds are a suitable option.

Third is the aspect of taxation. If you only concentrate on investments based on returns and not keep taxation in mind, then you may come to grief at the end of the financial year when your tax return will show large amount that you owe the taxman. In so far as taxation is concerned, you must first understand the different income tax sections under which one can save tax. You should judiciously invest to save maximum of Rs. 1.5 Lakh under Sec 80C under various available financial instruments. Take a medical insurance policy for yourself and your dependents that will provide you a relief of up to Rs. 60,000/-, if senior citizens are involved. One must also try and capitalize on home and education loan interest repayment deduction under Sec 24 and 80E respectively. Similarly, use Sec 80GG for saving from HRA. Next, is the implication of short and long term capital gains (STCG and LTCG) on various mutual fund schemes or securities, tax on dividend distributed income and income tax on fixed income products. After the 2018 budget, all equity mutual fund schemes and securities are taxable at @15.6% for STCG and other than equity are taxable as per applicable income tax slab rate of the individual. Further, all equity schemes have now been included under the ambit of long-term capital gains (LTCG) @10.4% without indexation and other than equity schemes @20.8% with indexation. Although all dividends are tax free in the hands of the investors, however, companies have to pay dividend distribution tax (DDT) @11.65% for equity oriented schemes and @20.8% for other than equity oriented schemes, which implies lesser dividend payout to the investor. All these tax rates include the surcharge and cess. When it comes to returns from interest income, they are mostly taxable as per the investor’s applicable income tax rate, except investments in PPF/EPF, Sukanya Samriddhi Yojana (SSY) and ULIP that enjoy the EEE status (exempt during investment, accumulation and redemption phases).

Fourth is to understand asset diversification. Proverbially, asset diversification implies that you don’t put all your eggs in one basket. The primary asset classes are real estate, equity, fixed income and gold. You can invest in each of these either directly or through a broker. Digitization of markets has brought in tremendous transparency for the learned investor to take well researched and considered decision to avoid falling into a trap. One must carry out diversification to beat the market volatility after his financial goal planning and assessment of risk profile, which is function of his age and liabilities. Overexposure in any these asset classes run the risk of either capital erosion or low returns that cannot beat the inflation. Moreover, before investment you must also understand their liquidity value so as to maintain balance between cash and asset holding. During your investment and accumulation phases of life, plan and invest with the aim to achieve ‘cash abundance and minimal assets’ for a comfortable and hassle free post retirement years.

Last but not the least is the Portfolio Review and Re-balancing. The first phase of reviewing the portfolio entails going through your entire portfolio in detail to see if it is on track to meet your designated financial goals. It must also find out the out performer and under performer schemes in your portfolio. In the second phase of re-balancing, one must exit from the under-performing schemes after due consideration for the exit load and tax implications while holding on to the outperforming schemes. In case your portfolio is not in sync with your financial goals then one must carry out asset diversification to re-balance after considering his risk profile. Re-balancing is best achieved through a judicious mix of switching from one scheme to another of the same fund house, redeeming to invest in an outperforming scheme of another fund house through SIP or STP, or merely starting a fresh SIP to bolster the portfolio.