FINANCIAL PLANNING

Financial Planning

• Definition: Financial planning is the process of estimating financial needs of a person and implementing a comprehensive plan to meet those financial needs during his or her lifetime through investment.
• Details: It involves determining current financial situation, developing financial goals, and using investment, risk management, and tax planning strategies to meet those goals.

Financial Planning Process

• Determine Current Financial Situation: Understand income, expenses, assets, and liabilities to calculate net worth.
• Develop Financial Goals: Categorize goals into basic, secondary, retirement, and estate planning, and use SMART criteria (Specific, Measurable, Achievable, Realistic, Time-bound) to set goals.
• Example of SMART Goal: Instead of "I will save money," a SMART goal would be "I will save ₹ 48,000/- every year by setting aside ₹ 4,000/- every month."

Goal-Based Investing

• Definition: Goal-based investing focuses on meeting personal and specific financial goals through asset allocation.
• Details: It involves identifying financial goals, classifying them into short-term, medium-term, or long-term, and allocating assets accordingly.

Five-Step Approach to Achieve Financial Goals

1. Identify Specific Financial Goals: Prepare a plan to fix each investment with a specific goal.
2. Classify Goals: Short-term (less than 1 year), medium-term (1-8 years), and long-term (more than 8 years).
3. Decide on Asset Allocation: Allocate assets based on income, risk appetite, and investment horizon.
4. Choose Right Investments: Diversify within asset classes to minimize risk and maximize returns.
5. Review and Revise Financial Plans: Regularly review progress towards goals and investments.

Choosing Investment Options and Understanding Risk

• Investment Products: Fixed income securities, equity investments, mutual funds, etc.
• Risk and Return: Every asset class has its own risk and return, with equities being high-risk and debt instruments being relatively low-risk.
• Three Pillars of Investment: Safety, liquidity, and return.

Returns from Investment

• Regular Income: Equity investment (dividend), fixed income investment (interest).
• Capital Appreciation: Increase in value of initial investment over time.

Risks and Returns

• Definition of Risk: Probability or likelihood of loss occurring in relation to expected returns.
• Relationship between Risk and Return: Higher risk often comes with potential for higher rewards.