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5 Golden Questions about Financial Planning

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In this article, we are going to discuss the 5 Golden Questions of Financial Planning. Before you start the financial planning process and building your portfolio, you should ask these questions yourself.
5 Golden Questions of Financial Planning

5 Golden Questions of Financial Planning

Questions about Financial Planning To Ask Yourself !


In this article, we are going to discuss the 5 Golden Questions about Financial Planning. Before you start the financial planning process and building your portfolio, you should ask these questions yourself.

5 Golden Questions About Financial Planning

Here are the 5 Golden questions about financial planning which should get answered before you build your portfolio.

5 Golden Questions of Financial Planning
5 Golden Questions about Financial Planning

1.Net Worth?

  • When you start with your financial planning, you should first check the status of your Net Worth? Where do you stand? What is your current Net Worth?
  • For calculating the net worth, we should know the two aspects – Assets and Liabilities. What are your current Assets and current Liabilities?
  • When you are calculating your net worth from financial planning point of view, you should include only your financial assets in assets heads. Don’t include your real estate assets here because of the difficulties in the liquidation of real estate assets. While you can liquidate the financial assets whenever you are going to achieve your financial goals.
  • Following assets are considered as financials assets –
    1. Equity side : Equity Stocks, Equity mutual funds, ULIPs
    2. Debt side : Fixed Deposits, Debt Funds, PPF, EPF, LIC policy
    3. Liquid : Savings Account, Current Account, Liquid Funds
  • Net Worth = Assets – Liabilities
  • Thus, You can get an idea of your existing assets from the net worth number. And thereby. You can link these existing assets with your financial plan.
  • Thus, knowing your current net worth is the key parameter of financial planning.

2.Financial Goals?

  • Secondly, you should ask yourself what are my financial goals?
  • There are 3 types of financial goals based on the horizon :
    1. Short-term Financial Goals : Realising in 0-3 years
    2. Medium-term Financial Goals : Realising in 3-5 years
    3. Long-term Financial Goals : Realising in 5+ years
  • So you should enlist your financial goals according the horizon and then categorize them accordingly. While enlisting the financial goals, there are mainly two types :
  • Need-based goals and Want-based goals. So you should understand what are your need and should cover them on priority. Thus, after covering your needs, you can plan for your wants with the surplus available with you.
  • In the Indian context, Need-based Financial Goals are First Home, Children Education, Children Marriage, Retirement etc. On the other hand, Want-based goals are Vacation, Big Car, Foreign Trips etc.

3.Amount Required For Achieving The Goals?

  • Here, we calculate the amount that will be required for achieving/realising your financial goals. In this parameters, you should analyse how realistic are your goals? You can get the amount required for your goals as of today. But for achieving your future goals, you should always consider the inflation.
  • When you are considering the life-style inflation, you should take inflation range to be 7%-8% per annum.
  • While the education inflation is recommended to be at 10%. The recommendation of education inflation is based on the historical education expenses and its percentage growth.
  • Therefore, Inflation is a significant factor in calculation of amount required for achieving the goals.

4.Risk Appetite or Risk Taking Capacity?

  • It is also a very important factor in financial planning. You should first ask yourself, what is my risk taking capacity? Most of the investors enter into the market just by seeing the returns of the last 1-2 years. You should always focus on your risk appetite and your financial goals rather than investing blindly by going after the returns. Your financial planning process should not be return-driven only. So one must understand his risk taking capacity or how much volatility he can sustain.
  • For example, Are you ready for Averaging out of your portfolio, when it is down by say 10%? Many investors begin to redeem their investments instantly if below expected or negative returns are achieved. So, when there is a down-turn in the market cycle, you can realised exactly what is your risk taking capacity. Thus, you should build your portfolio accordingly.
  • If you are not ready to sustain such negative returns, then you should go with the less risky investment options such as Fixed Income Securities, Debt Funds, Government securities etc. And if your financial goals are not in a position to be achieved with such low volatile and low returns instruments, then you should toned down your financial goals. Because if you are not having that much risk appetite or having some behaviour management issues with volatile instruments to generate the expected returns, then it is advisable to scale down your financial goals.
  • Thus, rather than going into the equity out of your risk taking capacity just for higher returns, it is always better to be realistic with your portfolio according to your risk appetite. The underlying risk should also be taken into the consideration. Basically, we should not look at the market volatility as a risk. So just because of the volatility in the market, you should not redeem your investments.
  • So you should always analyse your portfolio properly before making such prompt or emotion-driven decisions.

5.Investment Options?

  • What are the different types of investment options? Normally, an investor with the higher risk taking capacity is advisable to choose equity investment options.
    1. On a broader base, a medium risk taking capacity investor is recommended to go with debt funds, RDs for the short-term financial goals realising in 0-3 years.
    2. For an investment horizon of 3-5 years, you can invest in Hybrid Funds. Hybrid funds are with a combination of Equity and Debt characteristics.
    3. For an investment horizon of 5-7 years, you can consider Large Cap Funds, Index Funds etc.
    4. If your investment horizon is 7-10years, then you can invest in Multicap Funds (ie. Mix of Large + Mid + Small Cap Stocks).
    5. And for an investment horizon of 10+ years and you are an aggressive investors, then you can choose Small cap  and Mid cap funds.
  • Here, we have discussed about only Mutual Funds and not the Stocks Investments. It is because when we are building our portfolio from the angle of financial planning, it is always better to stick to the mutual funds. Once, you have covered all your financial planning goals, then you can invest in the stocks with the available surplus funds with you. And you should build the mentality of investing in the stocks like a shareholder or a long-term investor and not like a trader.
  • For a more detailed comparative analysis, please refer our article :  Mutual Funds vs Stocks
  • You can try our stock subscription, here we have tried to make the retail investors understand the business model and the fundamental analysis of the stock. Rather than going for buying/selling target price of the stock, you should build an approach to become a long-term investor or a shareholder of the company. Thus, it is very important to understand the business of that stock to build that conviction for holding the stock in long-term.

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