Asset Allocation

1. ASSET ALLOCATION

Jay and His wife Ritu are working in reputed software firm. They are investing most of there savings in gold. Reason being they feel gold is safest investment avenue and it is giving handsome returns.

On the other hand, Rahul trainer in MNC investing heavily in direct equity. He has his set of reasoning. Rahul’s family is in stock broking business. So he is getting direct access to the so called tips or calls. He feels it is easy to earn good returns on invested amount.

There is common problem with investment psyche of both Jay & Rahul. There investments are not well diversified! There exposure to a particular asset class is high. Every asset class rated differently for attributes like risk, return, liquidity etc. Higher exposure to one asset class result into liquidity problem, lesser or negative returns.

Let me explain Diversification with daily life example. We all have wardrobe. Our wardrobe is inclusive of Formal wear, Casual wear, Ethnic wear & so on. Each attire class is designed to cater specific need. Like Formal wear for office use, Casual for informal meetings and Ethnic for traditional events.

We can’t afford to miss on any attire class.

In the same way, different asset class caters to different financial needs of an individual.

Need for diversification bring us to the financial planning process. First of all we need to decide upon our investment objective. Three things will be instrumental while deciding investment objective namely –

1. Size of a Financial Goal – we are investing to achieve certain financial goals like Car Up gradation, Holidays, Child education, Retirement and so on. We need to calculate the amount required for these goals. Amount will be size of a financial goal.

　

2. Time Available – It is the time available for reaching goal. E.g. If I want to retire at 60 and my current age is 26 then time available for goal is (60-26) 34 Years.

　

3. Affordability – For accomplishing goal how much one can invest? May be monthly/yearly or in lump sum. That investable amount is the affordability.

After doing the basic home work for arriving at investment objective next step is to decide upon asset allocation for achieving the investment objective.

Let me explain this with simple example –

Rahul wants to buy a car after three years from now. Car will cost then Rs. 4, 80,000

He can invest 11,000 per month.

In above example –

2. Size of financial objective – Rs. 4,80,000

3. Time available – 3 Years

4. Affordability – Rs. 11,000 per month

Now for achieving goal of buying car, Rahul’s investment needs to grow at rate of 12.33%.

We need to design asset allocation which will give return 12.33%.

Asset Allocation for Rahul –

Asset Class	Weightage in %	Investment per Month (in INR)	Return rate in %
Fixed Deposit	10	1100	9.4
Gold Funds	30	3300	12
Balance Funds	30	3300	12
Large Cap Equity MF	30	3300	14
Total	100	11000	12.33

In above asset allocation –

5. Investments are well diversified among different asset classes.

6. Risk associated with investment is diversified by investing in different asset classes.

7. It is easy to change asset allocation if required without much of hampering returns.

8. Logical way to invest as you know expected rate of return i.e. 12.33%

　

Just to summarize – Asset allocation is key area while investing. One should be rational with there investments. Over or under exposure to particular asset class might lead to non fulfillment of financial goal.

prateekpatani@yahoo.co.in

Cell # 95 95 41 77 38

Financial Planning Process

Financial Planning Process

In my last post I have discussed basics of financial planning.

Today I will be discussing the financial planning process –

Everybody have a wish list. Few wishes can be quantifiable in monetary terms.

Like – Buying a Home, Upgrading a Car, Foreign Holiday etc.

Rest can’t be quantifiable.

Such as – Peace, Satisfaction, Happiness and so on …..

I will discuss how one can achieve there wishes denominated in money terms.

For fulfilling any wish one has to have a plan. Without planning one can not achieve anything in life.

While planning for your financial wishes you need to follow a disciplined approach.

This Financial Planning Process is a bit lengthy one but worth of doing it.

Please note that for carrying out following procedure one needs to have expertise.

In short a Financial Planner can carry out this process efficiently.

Financial Planning Process –

1. Data Gathering - In this primary step one need to get there books of accounts right.

What are all expenses – Daily/weekly/Monthly/Yearly or occasionally need to note down.

Also all the sources of income recorded.

Information regarding existing investments should also be recorded.

2.  Setting up financial objective – After gathering financial data one can set there financial objective aka financial wishes. It can be anything as big as buying a Home or something as small as buying a LED television.  You again need to bifurcate this wish list into two categories.

a.       Tier I Goals

Goals which are essential in ones life.

Like – Buying a home, Child Future, Retirement etc.

b.      Tier II Goals

Goals which are luxurious in nature.

Like – Foreign Holiday, Farm House etc.

3. Cash Flow Analysis & Derivation of expected rate of Return –

Ones you gather the data and decide upon your financial objective, a Financial Planner will analyze your cash flow and derive the expected rate of return at which your surplus money need to grow in order to achieve all your financial goals. 

Deriving the expected rate of return is the crucial step in any financial planning. This rate gives us the base to build our financial plan.

During this step if derived expected rate of return is coming to unrealistic level then one need to realign there financial goals.

Ones financial goals are realigned & again expected rate of return is derived to practical level one can act accordingly.

4. Cash Flow Protection aka Insurance Planning –

After realignment of goals I& expected rate of return now important step is to protect the premise of the plan i.e. Cash flow of a person.

This  include deriving the corpus required to sustain life of a dependents & fulfilling all the essential financial goals. In scientific & structured way amount of insurance cover is calculated & insurance plan is implemented for a person.

This plan will include life cover, health cover as well as disability cover.

5. Creation of Investment Portfolio & Risk Mitigation

After protecting cash flow, next step is  creating an investment portfolio for achieving your financial goals in given period of time.  Designing of this portfolio is largely depend upon expected rate of return & time available for achieving financial goal. 

Also with help of risk mitigation techniques risk is minimized to the extent of achieving the financial goals.

Portfolio is diversified among the different asset classes with different weightages as a part of risk mitigation technique.  This whole process is based on scientific methods.

Here a skill of financial planner is tested. His expertise in forecasting return potential of different asset classes, selection of investment instruments is of utmost importance.

6. Implementation of Investment Portfolio  & Monitoring –

After creating a Investment Portfolio now comes the implementation phase.  Suggested portfolio need to be implemented in disciplined way.  It is always said that Indians are good with planning but bad with implementation. That’s the reason implementation & monitoring become important in financial planning.

7. Review – All the efforts of planning are in vain if there is no timely review. For financial plane to work effectively & efficiently one need to get the plan reviewed at least once in a year. During the years time few goals are either changed or modified. Also there might be a chance of increase in liability, increase in family size, changes in income etc.  Investment portfolio can be fine tuned if required.

This is in brief how financial planning is done. For practical implementation or more information on financial planning you can always feel free to contact me at –

 

prateekpatani@yahoo.co.in

Cell # 95 95 41 77 38

Basics of Financial Planning

Basics of Financial Planning

In recent times you must have come across term called Financial Planning thanks to business news channels & print media. You must be wondering what it means?

Here is the answer -

What is financial Planning?

Financial Planning is the process of meeting your life goals through the proper management of your finances. Life goals can include buying a house, saving for your child's higher education or planning for retirement.

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

Benefits of Financial Planning

1. Financial Planning provides direction and meaning to your financial decisions.

2. It helps you to understand how each financial decision you make affects other areas of your finances.

3. Financial Planning helps you to adapt more easily to life changes and feel more secure that your goals are on track.

Basics Steps one can follow for healthy financial life –

1.    Emergency Fund – In today’s fast changing, dynamic & uncertain economic condition one need to prepare for rainy days. It always makes sense to repair the roof when sun is shining. How much should be Emergency Fund? The calculation is simple. Your monthly expenses + EMI payments * number of months to get new job. It is advisable to create emergency fund for at least 6 months. This is first step in financial planning. I will cover more on emergency fund in my next article.

2.    Insurance – Second step is to get insure for any medical emergency. Now a days most of the employer provides health insurance aka mediclaim to there employees. But check for coverage offered & other terms & condition of the health insurance contract. Total family should be cover for any medical emergency. After insuring for one need to insure for life. In case of ones premature death. We will suggest that one should treat insurance as expense and not an investment. Instead of buying Investment + Insurance policies, Buy term insurance to get higher life cover at lower premium. Along with life insurance one need to be insured for disability. Personal accident policies cover disability & provides for fund when one is disabled (partially/completely) due to accident.

3.    Set Measurable goals – After taking care of all emergency, now it is time for setting up the specific goals that you want to achieve & when you want achieve. All this goals should be quantified. Like buying home after 2 years will cost for 40 Lakhs. 

After following basic steps, you get into planning zone. Here you required expertise. I will discuss more on this in my next article. Till then Keep Planning – Keep Investing & Keep Smiling.

prateekpatani@yahoo.co.in

Cell # 95 95 41 77 38