Having a good education is the foundation stone for a bright career. Your education determines your success and that is why a good education is always stressed upon by parents. When it comes to education, international education is a dream which every parent has for their children. They want their kids to receive education from a reputed international institute to give them an edge in their career.
Education, whether domestic or international, proves to be quite expensive. Education inflation is steadily rising and pursuing higher education in any reputed institutes requires a considerable amount of money. While parents save money to educate their child, sometimes, the savings might not prove sufficient, especially given the increasing cost of education. In such cases, an education loan comes to the rescue.
An education loan is a loan which is allowed by banks and non-banking financial companies to fund higher education. You can avail a loan for yourself, your children and even for your dependent siblings for financing their education. Some of the features of education loan are as follows –
The loan funds the cost of tuition, admission, boarding expenses and other costs related to the course being financed
The loan is a good loan as it offers tax benefit on the interest paid for the loan under Section 80E of the Income Tax Act, 1961
The repayment usually starts a year after the completion of the course of getting a job, whichever is earlier
The repayment tenure allowed is between 7 to 10 years
How to apply for an education loan?
You can apply for an education loan either by visiting the branch of a bank or NBFC offering the loan or online. Online application can be done either through the website of the bank or NBFC or through the website of loan aggregators. Aggregators are better as they allow you to compare the loan offers of different lenders and then choose one which has the lowest interest rate. A collateral security might be needed to avail the loan when the loan quantum is high. You must also fulfil the eligibility criteria of the lender to avail the loan.
Benefits of education loan
An education loan is beneficial in the following respects –
Ease of financing quality education
Funding international education
Protect your financial savings from being drained
Affordable interest rates
Funding of all types of expenses incurred in higher education
Tax benefit on interest paid
Easy repayment which allows the student time to get a job before loan repayment starts
Affording an education loan
An education loan has a long repayment cycle and also a low interest rate. These factors make it easy for parents to afford an education loan. Moreover, the tax benefit allowed at the time of repayment of the loan also helps you increase your disposable income therefore making the loan affordable.
Repayment of an education loan
Repayment of the education loan is done through EMIs. The EMIs depend on the rate of interest, principal amount of loan and the repayment tenure selected. The repayment starts a year after completion of the course and getting a job. This allows students to easily pay off the loan. As a parent, you should make your child repay the loan from his/her income. This makes your child financially responsible and also reduces your debt burden.
Estimating the amount of education loan
When planning for your child’s future, you need to estimate the cost of education which would incur when your child pursues higher education. Moreover, if you are availing an education loan, you need to assess the amount of loan needed to sufficiently cover your child’s education expenses.
When estimating the cost of the child’s higher education, inflation should be considered. Inflation would increase the cost of education in future and so you need to find out the actual funds needed. For instance, if a course today costs Rs.10 lakhs, in 10 years’ time, it might double to Rs.20 lakhs.
You, therefore, need to plan to accumulate Rs.20 lakhs by the time your child needs funds for education. Thereafter, when the time comes, you can finance the education of your child through your savings and also through an education loan if your savings fall insufficient.
Education is a very important thing for your child and being a parent, you would want the best for your children. To afford the best education, you can save and also avail an education loan to ensure that your child does not have to compromise on the education which he/she should receive. For complete details on education loan, take this course on financial planning and understand what the loan is all about and how it works.
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As the breadwinner of your family, you need to provide for the varied financial needs of your family besides the needs of yourself. You, therefore, need to plan your finances in such a manner that the different family related goals can be met. Do you know how?
Let’s have a look at the different financial needs which you and your family can have and how you can plan for such needs effectively –
As you become financially independent, you need to address your financial needs and plan for your goals. These goals include –
Let’s understand how you can plan for each of these goals that you have –
Planning for wedding
Weddings are once-in-a-lifetime affair and involve considerable expenses. As such, you need to plan for them. Ideally, you should plan for your wedding related expenses in advance. You can set aside funds regularly to create a considerable corpus to meet the expenses of your wedding. Alternatively, if you are planning to get married in the near future, you can avail a personal loan. Personal loans are unsecured loans which give you funds for immediate financial needs.
Planning for wedding related expenses should also include planning for a honeymoon. As with weddings, honeymoons are also a once-in-a-lifetime affair and can prove expensive if you plan a perfect itinerary. You can, therefore, save in advance or opt for a personal loan to fund your honeymoon expenses
Though it seems far off, you need to plan for your retirement from an early age. When you do so, you can save small amounts over a long term period and build up a considerable corpus. This corpus would, then, help you fund your retirement expenses. You should choose suitable investment avenues for investing your retirement fund based on your risk appetite. Also keep in mind inflation and its effect on living expenses so that your corpus can be inflation proofed
2) Planning for Family
Once you have taken care of your needs, you should focus on the financial needs of your family, i.e. wife and kids. Here’s how you can plan for your family’s needs –
Planning for a DINK family
A DINK family means Double Income No Kids. This family is where both the husband and wife works and they have no responsibility of kids. These families have a high disposable income with no immediate responsibilities. If you have a DINK family and you are planning on having a child, you should, first create a corpus for your child’s future. Thereafter, you can plan for –
Buying a home
Buying a luxury car
Going on international trips, etc.
A higher part of the disposable income should be directed towards savings so that when responsibilities increase, you have sufficient savings at your disposal. Retirement planning should also be started so that you can create a substantial corpus for retirement.
Planning for a family vacation
Vacations are a way to unwind and a family vacation helps you spend time with loved ones. So, if you take vacations regularly, you should plan for them. You can save and create a travel corpus for your holidays by investing in low-risk funds since vacations are a short-term goal. Moreover, if you earn a bonus or a profit, you can use it to supplement your travel fund. If, however, you are short on funds, you can avail a travel loan. It is a type of personal loan which gives you funds for travelling so that you can take a vacation with your family.
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3) Planning for Parents
Financial planning for your parents should be done separately because they have distinct financial needs which need to be met. You need to make your parents financially self-sufficient so that they can manage their finances even when you are not around. So, here’s how you can plan for your parents’ financial well-being –
First and foremost, you should highlight the importance of saving money. Your parents should be made aware of the fact that they need to save money for their retirement so that they can live comfortably. Help them save and choose the right investment avenues for their retirement needs.
Parents often want to leave behind a legacy for their children. You should, therefore, help your parents do the same. Help your parents invest their savings and then create a Will allocating their property in the way that they want.
If your parents are financially dependent on you, buy a term plan for replacing your income in case of your unfortunate demise. Thereafter, insure your parents under a senior citizen health plan for their medical needs.
Pensions give you parents regular incomes in their old age so that they can be financially independent. So, help your parents plan their pension. Help them invest in a life insurance pension plan which would give them lifelong incomes
While you plan and take care of your and your family’s financial needs, you need to educate your family about the various assets and liabilities you have and how the same can be accessed. Store all your financial documents in one safe place and educate your family members about them. This would help them access the documents when needed when you are not around.
Your family is your most prized possession and their financial planning should also be sound and fool-proof. So, follow the above-mentioned financial planning tips for your family. For detailed information on any of these tips, you cantake this FREE financial planning course and get solutions to all your questions.
Everyone wants to be rich so that they don’t have to worry about meeting their financial responsibilities. While becoming rich might be a tad bit difficult, you can definitely meet your financial responsibilities with your existing income if you plan for it.
Financial planning is a beneficial tool to plan your finances so that you can achieve your goals easily. It is a step-by-step process of planning your finances in such a manner that your income can build up a corpus for your future goals.
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When talking about financial goals, the first thing to understand is what exactly these goals are. Financial goals are nothing but the different financial responsibilities of your life. They are financial needs which require funds and should be fulfilled during your lifetime.
Financial goals differ across different individuals but some of the common ones include the following –
These financial goals can be short term, mid-term or long term in nature based on when you need to fulfil them. If the goal is to be fulfilled in the coming year or two, it is termed as a short term goal, like taking a vacation. Similarly, a goal which should be fulfilled after 8-10 years would be a long term goal, like retirement planning.
While you plan for your financial goals, you should make sure that your goals are S.M.A.R.T. Do you know what is the meaning of S.M.A.R.T. goals?
The full form of S.M.A.R.T. is as follows –
S – Specific
M – Measurable
A – Achievable
R – Realistic
T – Time-bound
If a need fulfills these criteria, it can be categorized as a financial goal. Alternatively, if it doesn’t, it would not be a financial goal and planning for it would be foolish. For instance, you wanting your child to pursue international education is a S.M.A.R.T. goal but you wanting your child to study only in Harvard or Oxford is not S.M.A.R.T. because admission to such institutes is based on merit and not on financial planning.
Emergency Planning – The Stepping Stone to Financial Planning
While identification of financial goals is the first step in financial planning, emergency planning is the foundation of a successful financial plan. Emergency planning means planning for an unexpected emergency which would cause financial loss. You should first create an emergency fund so that your financial plan is not disturbed due to an expected emergency. Emergencies are unavoidable and the wisest thing to do is to plan for them so that they do not disrupt your carefully laid plans.
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Core Principles of Financial Planning
To start financial planning, you need to identify your goals and plan an emergency fund for those challenges which life throws your way. Once you are done with these two important tenets of financial planning, you can chalk up your financial plan for your goals. When creating a financial plan, however, the core principles of financial planning should be kept in mind. These principles would help you avoid common financial mistakes and create a fool-proof financial plan for your goals. Here are the top 20 most common money mistakes people often make which you should avoid while planning your finances.
So, what are the core principles of financial planning?
There are 4 core principles of financial planning which are as follows –
What they mean?
Core principle # 1 – Spend less than you earn
Limit your expenses so that you can save. The higher the disposable income that you have, the more can you save towards your goals and build up a considerable corpus.
Make a budget and stick to it
·Supplement your income
Core principle # 2 – Pay off unnecessary debts
Bad debts can incur high interest charges and severely impact your credit score. You should, therefore, manage your debts effectively and get rid of bad debts
Pay off bad debts before planning investments
Continue good debts for the benefits that they provide
Core principle # 3 – Retirement planning
Though retirement might be a far off thing you need to plan for it over a longer tenure to accumulate an optimal corpus which can take care of the inflated expenses post retirement
Start retirement planning from an earlier age
Earmark a retirement fund and invest in it regularly to grow with through the power of compounding
Core principle # 4 – Incentivize yourself
You need to keep yourself motivated on your financial journey so that you can stick to the financial plan that you have made
Enjoy life and don’t fret about your goals if you have made a financial plan
Review your plan regularly
Incentivize yourself if the financial plan is working
Financial planning is important if you want to achieve financial independence. The adore-mentioned aspects of financial planning have been explained in brief. If you want a more detailed guide into financial planning, what it means and how to go about it, you can take this financial planning course and become a pro.
Do you wish to go on a cruise vacation to celebrate your 10th wedding anniversary? Do you want to present your parents with a car for themselves? Do you wish to retire at the age of 50 and spend your time travelling the world? These may be your short, mid and long term life goals but are you sure how you are going to fund them? The answer is quite simple – you need to start saving. However, you need to be smart about your saving avenues and ensure you undertake goal-based savings only. Once that is done, you will be able to achieve all your dreams and stay financially secured until the very last day of your life.
Let us begin by understanding the need to save. Saving money is nothing but building up a corpus that you can use for various purposes. From attending to an emergency such as a medical emergency to paying for a planned expense such as buying a house, your corpus can help you achieve life goals with greater ease.
There are multiple reasons for goal-based savings. Here is a list of the most common goals for which you should save:
1. For emergencies
Life often throws many surprising challenges in front of you and most of the time, you may find yourself unprepared for them. From your vehicle getting involved in an accident to your mobile phone getting stolen, from your parents requiring urgent hospitalization to your investments suffering due to slow market trends, you can never know what financial challenge lies at the next end. You, therefore, need to save some money and keep it ready for such unforeseen expenses. This is the most important reason why you should get into the habit of saving money each and every month to ensure you have enough with you when you need to address an emergency.
There are multiple factors that determine your emergency corpus amount like:
Average monthly expenses
Nature of your job, whether the government sector or private, whether temporary or permanent, etc.
Your monthly outstanding liabilities like home-loan EMI, etc.
Pro Tip: Your emergency corpus can be any amount from 3 to 18 months of your family’s average monthly expenses. A quick calculation of Emergency Corpus = Average monthly expenses X 6.
Must-have products for emergencies, other than your emergency corpus, is a credit card and a health insurance plan for your family.
2. To buy a house
The day you begin working and earning for yourself, you achieve the independence you always wished. The next step is buying a house and for that, you need to save periodically from your salary. Since a home is one of the three greatest requirements of life (along with food and clothing), you need to buy a home at some point in life. Start saving money early on in your career so that you will have a corpus to pay the down payment of your house and be financially capable of getting a home loan as well. This requires a lot of focus and so you should begin working on it without any delays or distractions.
3. To pay for your child’s education
It is every parent’s responsibility to pay for their children’s education. You have to save money for this purpose. Even if you are young and single, you need to think ahead and start saving for years to come when you will be a family person with a spouse and children. Rather than burdening yourself later, start planning and saving right away so that your children get the best education and you can pay for all the expenses without the situation getting too economically burdensome for you.
Pro Tip: Education inflation is more than 10% in India and is ever-rising, especially for higher and professional education.
4. To pay for your child’s marriage
Another massive responsibility that you have to fulfill in life is to see your children settle down in life. Apart from their education, you also need to save for their marriage. If your children are young now, begin planning and saving so that you have enough time to build up the necessary corpus. There are some very handy investment schemes such as the money-back child insurance plans, post office saving schemes such as the Sukanya Samriddhi Account, etc. that help you to save for your children’s future needs such as their marriage. Look for such investments and save in a smart manner.
5. To plan for your retirement
You need to save sufficiently for your post-retirement years. Remember, as soon as you turn 60, your income will stop overnight. The pension you receive may hardly be good enough to support your lifestyle. Rather than having to depend on your kids, you can stay financially independent and secure only if you plan ahead. Start saving for your retirement immediately. No matter whether you are in your 20s, 30s or 40s, it is never too early to start saving for this purpose. The earlier you begin, the easier it will be for you to have more money for the twilight years of your life. You can use the money in your retirement years to pay for your daily expenses, for your medical bills or simply to achieve your life goals such as travel.
There could be various other reasons for which you might have to plan and save ahead of time. The reasons would vary from person to person and can range from sister’s wedding to a foreign trip to parent’s health issues to almost anything.
All you need to do is, identify the goal and then save systematically towards the same in a disciplined manner.
These are some of the main reasons you need to save your money. As you can see, some of these require a longer saving-period and some shorter. You need to understand your life goals and then start building the various funds accordingly.
As mentioned above, people save for various reasons. While some of these are to achieve a dream related to their leisure, others are for practical and sustainable purposes. So while you need to save for a lavish vacation, you also have to save for your retirement years. Financial goals are nothing but targets you set yourself and the monetary arrangements you make to achieve them. Financial goals are usually divided into three groups:
A. Short-term goals
Short-term financial goals are those goals that you need to take care of in the immediate future. Ideally, you need to have a corpus ready for these goals. But you can be disciplined with your expenses and savings and provision for these goals as and when needed. Most of the short-term financial goals are repetitive in nature and you need to address them at regular intervals. The only way to be prepared for these goals is to make a budget and strictly stick to you. You need to have control over your expenses in order to save enough money to fund the short term financial goals and also to save for the mid and long term goals. The most common short-term financial goals are:
a. Paying EMI’s for the various loans you have
b. Clearing the monthly credit card bills
c. Arranging for annual family vacations
d. Getting the best health insurance cover for your entire family
e. Indulging in self-care
Tenure for short-term goals:
are usually from 0-2 years.
Top investment products for short-term goals:
can be a savings bank accounts (with 4-7% ROI), Bank Fixed Deposits, Liquid and Debt Mutual Funds, etc.
B. Mid-term goals
Next, we have the mid-term financial goals. These are some of the most crucial goals that you need to provide for. Unfortunately, and rather dangerously, many people tend to deprioritise these goals while they focus on the short term and long term financial goals. Mid-term goals are those goals which you need to meet just a few years down the line. You don’t have to wait until your retirement nor take care of them at the end of the month. The mid-term financial goals are in fact some of the most common life goals we all encounter. You need to build up sufficient funds for these goals to ensure you do not stumble along the way. Some of the common mid-term financial goals include:
a. Getting married
b. Having a baby
c. Clearing your student loan
d. Buying a house
e. Starting a business
f. Taking care of your parents
Tenure for mid-term goals:
are usually from 2-5 years.
Top investment products for mid-term goals:
can be Bank Fixed Deposits, Debt Mutual Funds, Gold, etc.
C. Long-term goals
A lot has been said and discussed the long-term financial goals of a person. You must have heard many people tell you that you need to save for your twilight years. While retirement is definitely one of the most crucial long-term financial goals, there are other goals that require planning and saving over a long period of time. It is a good idea to start saving early on in life for the long term goals so that you can save in small amounts and still end up with a large corpus. Some of the common long-term financial goals include:
a. Saving for your retirement
b. Sending your children to the best foreign university for higher studies
c. Buying a lavish villa at a good location
d. Owning multiple properties
e. Travelling the world
f. Buying an expensive car such as a Lamborghini
Tenure for long-term goals:
are usually more than 5 years or so.
Top investment products for long-term goals:
can be Equity Mutual Funds, Real Estate, Direct Equity, etc.
Now that you know more about financial goals and their importance, you need to start saving towards them. Here are some handy tips to help you along the way:
Step #1 – Set S.M.A.R.T. goals
S.M.A.R.T. is an acronym for Specific, Measurable, Achievable, Realistic and Timebound.
Always remember that the life goals you set for yourself will be different from those that your friend has. Life situations vary and no two families are the same. You have your own set of responsibilities. For instance, your friend may be a single person who lost his parents as well. He does not intend to get married and so he is saving extensively for a world tour. On the other hand, you are a father-of-two and have dependent parents as well. Your financial goals would then primarily revolve around the well-being of your family members. Thus, setting specific and relevant financial goals is the first step in the process.
So, you need to identify your goal and then make it S.M.A.R.T. For example, your financial goal could be “Child Education”.
But you need to make it Specific, Measurable, Achievable, Realistic and Time-bound by making it “Child Education Expenses of INR 1 CR after 15 years”.
Step #2 – Segregate your goals and pen it down
As discussed, financial goals are classified into three groups – the short, mid and long term goals. You also need to identify your goals and sort them accordingly. You need to have a fair idea of your goals and by when you need to achieve them. This is a vital step as you need to have different savings mechanisms for each type of goal. For instance, you may depend on a fixed deposit to pay for your annual family vacation and a mutual fund to pay for your daughter’s wedding. It is thus crucial for you to know the timeline and segregate your financial goals to plan better.
Actually penning your financial goals down is one-step towards the same, as it is etched in your mind forever.
Step #3 – Make a monthly budget – Expense Planning
It is extremely helpful to make a monthly budget as that is the point from where you can begin your financial contributions. After all, the savings need to come out of your monthly salary. So you need to make three divisions, one each for your income, expenses and savings. Calculate your monthly household expenses and other payments that you cannot avoid. This would include outstanding EMI’s etc.
Once that is done, calculate the amount of money left. Then, decide the amount of money you want to leave in your savings bank account as an emergency fund and the amount you want to invest. Once you have a plan ready, it will become easier for you to save for your financial goals.
Step #4 – Keep the saved money away from your wallet
Store the money you save away from yourself, in a savings bank account or lock it up in investments. If you have money lying around, you will be very tempted to spend it. Since discipline is important, you need to keep all distractions away and save with complete diligence.
It is also important to note that you need to be responsible with your credit card usage. When you do not have the cash with you, do not simply keep using your credit card to pay for unnecessary expenses. This will defeat the purpose and you will fail to save appropriately for your financial goals.
Step #5 – Invest properly – Choose the products carefully
And finally, you need to invest properly. There are several investment options available to you. While some like fixed deposits are low risk, others such as equities carry some risk. The yields from each type of investment are different. It is extremely important for you to understand the type of investment, its mechanism and return offered. You also need to correlate the investment with your savings needs and see if the returns would be of use to you. If you are not sure, speak to a financial advisor and then choose the correct investment option. Making an error here can prove to be very damaging and can hamper all your future financial targets.
Step #6 – Annual Review of your Investment Portfolio, Goals and re-aligning the same
This is a super important step in your Financial Planning called Review. This needs to be in line with your asset allocation and risk profile.
Only when you Re-view your portfolio, you would be able to analyse the same and check if your portfolio is following the desired path. If not, then a re-alignment of the portfolio might be necessary.
Also, goals keep changing and evolving with time. Annual review and analysis of the investment portfolio can be a healthy check on the progress of the same so that there is no shortfall when the goal is near.
What to keep in mind while planning for your financial goals?
To be able to save properly and build up the highest corpus, you need to keep the following factors in mind when saving towards your financial goals:
1. Factor in inflation
Inflation is a factor that you must keep in mind when you save for your future financial goals. Remember, an item that costs Rs 1000 today may cost Rs 5000 in the next decade. If your dream villa costs Rs 2 crore today, it will probably cost Rs 4 crores* in 10 years’ time and so you need to save more. Unless you factor in the inflation, you will not be able to achieve your financial goals in a manner you wish to do so.
*In average inflation in India is 7.66% in 2019.
2. Invest according to your asset allocation and risk appetite
As stated, some investments carry a low risk and others carry a higher risk. When you invest, keep an eye out for the risk factor. If you are a conservative investor, choose investment options that are suitable for you. If you are more of a risk-taker, invest in higher-risk instruments. Be comfortable with your investments as only then can you invest properly and achieve your financial goals in time.
Asset Allocation is an allocation of your investment portfolio for portions of debt, equity and other products like real estate, gold, etc. based on an individual’s risk-taking capacity (i.e. risk appetite).
3. Be realistic when setting your goals
And finally, you need to be very realistic about your life goals. Everyone wants the very best of things in life, but the hard reality is that not everyone can afford everything. If you are a mid-level salaried executive, you possibly cannot have the things a movie star has! So be realistic about your financial goals and set achievable targets for yourself. This will help you to save properly and fetch you the goals in a hassle-free manner.
Basically, make your financial goals S.M.A.R.T. and then work towards the same in a systematic and planned manner.
Discipline is the key here. You need to be disciplined and stay focused at all times. If you lose the eye on your goal, you will shift from the path and achieving your financial goals will become a real challenge thereafter. To avoid this, be as disciplined with your money as you possibly can. Keep your eyes on the targets you have set for yourself and achieve your financial goals with ease.
To wrap it up
Goal-based savings are essential and allow you to manage your money properly. As we saw, there are different categories of financial goals. You have the short-term goals, mid-term goals and the long-term goals. The different goals cater to different life situations and needs and must be addressed accordingly. Keep all the points mentioned above in mind and begin saving for your financial goals. Once you are disciplined and focused, you will be able to achieve all your financial goals with ease.
Investing your hard-earned money is an important step towards wealth creation. However, you need to invest properly and through the correct instruments to ensure you get the returns you desire in a time that suits you well. There are many financial instruments that you can choose from, but not every one of them is suitable for you. You need to invest as per your financial capacities as well as according to your risk profile. Take a look at this article to know more about the financial instruments available for investing your hard-earned money and how you can choose the best option for yourself.
What are the different types of financial instruments?
There are primarily two categories of financial instruments, namely, the fixed income instruments and the equities. While the former offers fixed returns, the latter is more risky but better suited for achieving long-term financial goals. Here is a detailed look at the various investment instruments available in India:
1. Cash instruments
As the name suggests, a cash instrument is a type of investment that includes cash savings and instruments. The cash instruments include bank savings accounts, cash bonds, etc. These are highly liquid investments that help you to meet your short-term financial goals. It is very safe to invest in the cash instruments as practically no risk is involved here. However, the returns are also lower as compared to the other financial instruments.
2. Company and government bonds
Many corporate funds, as well as the government enterprises, require additional funds from time to time. This is why they issue bonds that are given to the investors. As an investor, you need to buy the bonds by paying a sum of money. This money is used by the company or the government towards their operation expenses. In return, you get a fixed return at regular intervals. When the bond matures, you receive the entire amount you paid, back. A company or a government bond is also a very secure form of investment that helps you to earn steady dividends in a low-risk manner.
3. Stocks and equity investments
Businesses raise money by selling their stocks and equities to the general public. The equities are sold at registered places such as the stock markets of the country. As an investor, you can invest your hard-earned money in stocks and equities and see your wealth grow. However, these investments are a bit risky. When the company performs well, you get to make profits on your investments as the stock prices consistently rise. However, if the company begins to perform poorly, its value drops and the stock prices begin to fall as well. At such a time, you stand to get very low and unprofitable returns from the stocks and equities. Similarly, when the economic condition of the country is poor, the stock markets crash and all the stock and equity investments begin to suffer. It is therefore wise for you to spread your investments over a number of stocks and equities and not invest all your money in a single stock. This is a factor you must remember before you invest in this financial instrument.
4. Mutual funds
Mutual funds are a type of financial instrument where the money of various investors are pooled in together and invested. As an individual investor, your money may not be sufficient to buy the stocks, shares or bonds. This is why you invest in a mutual fund to get higher returns. The yields and profits earned on the investments are evenly distributed to all the joint investors. The risk is lower and the chances of earning profits are higher as well. You can choose between three types of funds in a mutual fund investment – the equity funds, the fixed income funds and the money market funds. As is obvious, the equity funds carry the highest levels of risk, followed by the fixed income funds and the money market funds that carry the least amount of risk. You need to choose the fund carefully, after analysing your risk appetite.
An exchange traded fund, or an ETF as it is popularly known, is another financial instrument that is very well-suited for investments. Here, the benefits of mutual funds and equities are combined. You get to invest your money in diversified funds as you can do in a mutual fund. Then, as the name suggests, you can buy and sell the ETFs easily in the stock markets much like the equities. These features make the ETFs very popular and a common type of financial instrument among the investors.
6. Precious metals
Precious metals such as silver, platinum and gold act as excellent investment instruments. Gold, for example, proves to be a good investment platform. The price of gold rises continuously and consistently. If you buy gold worth Rs 10,000 today, you can sell it at a much higher price after a few years. Investing in precious metals is therefore a very common thing to do and is definitely something you must consider doing as well.
Apart from precious metals, you can also consider investing a portion of your money in property. It is always a good idea to buy some property in your own name. Apart from becoming a lifelong asset, a property also offers high returns on investments. Property prices appreciate regularly and so if you ever need to sell your property, you are quite guaranteed of making a profit.
8. Investing in businesses
Many small businesses look out for private investors who can support them with financial investments. If you have the kind of money they need nu are willing to take a risk, you can consider using a small business as an effective investment instrument. You can get the stocks of the company or you can agree to a profit-sharing arrangement. In either case, you can stand to earn huge profits against your investment, provided the business does well. You need to assess the business model and see the potential of the firm before you put in your hard-earned money into it.
These are some of the best investment instruments available to you. Choose the option that appeals to you the most and get the best returns out of your investments.
Insurance is often mistaken as a financial instrument. However, insurance is a very important product which needs to be taken but for the purpose of protection only and not as an investment.
What is a financial risk profile?
You may have heard the term “risk” quite often when you discuss your financial matters with others. But what exactly is risk and how does it affect your investments? Well, there is a very strong correlation between risk and investments. Most of the financial instruments used for investments carry certain degrees of risk. Simultaneously, every investor has a risk profile of his own. A risk profile is the amount of risk an individual investor is willing to take.
The risk profile of a person majorly depends on the three following factors:
1. Willingness to take a risk – Risk Tolerance. This is a psychological factor.
The first and the most important factor associated with risk-taking is the willingness to do so. You cannot possibly have a high risk-appetite if you are not willing to take a risk with your investments. Many people are conservative investors who do not like taking any kind of risk with the investments they make with their hard-earned money.
On the other hand, some investors believe in taking risks as they feel the more risks they take, the higher their chances get of making greater profits. This is a personal trait and differs from person to person. There is no fixed level or degree against which the risk-taking willingness of an investor can be measured.
2. Ability to take a risk – Risk Capacity. This is a financial factor.
The other factor that plays an important role here is the investor’s ability to take a risk when choosing the financial instruments. Not everyone is financially stable enough to risk all their money. If an investor has limited resources and banks heavily on the returns for his financial requirements, he cannot possibly afford to take a huge risk. In that case, he will have to settle for low-risk investment instruments. This is a factor that needs to be calculated before any investment is made. If in a worst-case-scenario, the investor loses his entire corpus, how would he cope with the situation? Once an answer is found to this question, the risk-taking ability can be clearly understood.
3. Need to take risk – Risk Requirement. This is also a financial factor.
You may not want to take too much of risk but in order to fulfill your financial goals, you might be required to do so. This is a pure financial planning oriented informed decision.
While the risk-taking willingness, as well as the risk-taking ability, need to be kept in mind, as an investor you have to take a few risks when investing your money. You surely do not invest for fun, do you? All your investments are done keeping your financial goals in mind. You need your wealth to grow so that you can have enough funds to meet your life-goals. So to achieve these, you need to take risks. If you invest all your money in fixed deposits, you will earn a much lower yield, as compared to the yield you can earn when you invest in stocks and equities. Of course, the risk will be lower in a fixed deposit, but will the investment be really fruitful for you? This is where the concept of risk requirement proves to be crucial and extremely important for serious investors who look to build up their wealth.
The risk profile of an investor is thus very crucial and determines the kind of returns he earns from his investments.
The key is to find a balance between the types of investment instruments. Rather than fixing all your money in a single financial instrument, spread it out and have a diverse portfolio. You should have a balance between the risky investments and the safe investments. This will help you to earn steady returns, irrespective of the market conditions.
How to choose the right financial instruments to invest based on your life stage and risk appetite?
Keeping all the points mentioned above in mind, you can understand the importance of choosing the best financial instrument to invest your hard-earned money. But how exactly does one choose the right and most suitable investment option? Here are some pointers:
Step#1: List down your financial goals
The financial goals determine your need to invest. Every individual has separate financial goals related to their life-situations. You need to first understand why you are investing. Are you investing to meet a short-term goal like clearing your outstanding student loan? Or are you investing to create a retirement fund? The choice of financial instruments will greatly depend on this as you need to find instruments that will drive in returns at a pace that suits you.
You need to be completely honest when assessing your own risk-profile. As mentioned above, the risk profile consists of two components – willingness and ability. Analyse both these factors about yourself and see just how much risk you can take with your investments. This is another way in which you can find the most suitable financial instrument to invest in.
Step#3: Factor in your age and dependents and financial liability
A young person has fewer financial responsibilities and has a higher disposable income. An older person may have a family to support, loans to clear off and an upcoming retirement to save for. This is why the investment patterns of people change as they age. A young person can definitely take higher risks with his money. However, he may not have a corpus as high as an older person who has been working for decades. Age is a crucial factor and your investments will majorly depend on your age. Choose an investment option that matches your age and life situation as this will bring in the best yields for you. Then you need to factor in your dependents and your existing financial liability.
Step#4: Understand the financial instrument
Each instrument has some pros and cons. You need to know the investment objective, the time horizon and then make an informed decision.
An extremely vital tip for you is to understand the financial instrument before investing. You cannot make the proper and correct choice unless you understand how the different financial instruments work. You should never follow someone’s footsteps and invest in a particular instrument unless you know how it works. For instance, if your brother makes money by investing in mutual funds, the same model may not work for you. You cannot invest your money in a mutual fund and expect to get the same returns unless you know what the procedure to earn the best returns are.
Step#5: Take the help of an expert
If you are in any doubt regarding the various financial instruments, you should take the help of a financial expert. an expert can guide you and help you to make the correct choices. Discuss your financial goals, risk profile and financial health with the expert and he will make the best plan for your investments.
Once you take care of the above-stated pointers, you will be assured of finding the most suitable financial instrument to invest in.
In a nutshell
The financial world is vast and as an investor, you find many good options to invest your money in. However, in the financial world, there is no instrument that offers the one-size-fits-all benefit. Every investor is different and has a different risk profile and financial capability. This is why you need to understand your own profile and capacities and choose the best investment instruments for yourself. Keep all the tips and guidelines mentioned above and choose your options very carefully, always try to maintain a mix and have a diverse portfolio. Along with this, keep your eyes firmly on your financial life goals and you will surely find the best instrument to invest your hard-earned money in.
A personal finance advisor is a trained expert who guides you with your investments and financial planning. A financial advisor may simply offer you his advice or he may plan your investments for you. You need to hire a manager after assessing your requirements and understanding how the manager can be of help to you. Take a look at this article to know what a personal finance manager does and the different ways in which he can help you.
Who are personal finance managers or personal financial advisers?
Personal finance advisors are trained and experienced professionals who offer customized financial guidance to their clients. A personal finance advisor understands your financial goals and allows you to make investments that would help you achieve those goals.
Here is a lowdown on the exact profile of a personal finance advisor:
1. Advisors are experienced in personal finance
The biggest attribute of a financial adviser is that he is experienced. With experience, one can understand how the markets work, how investments yield returns and what makes your wealth grow. A personal financial manager, with the help of his vast experience, can guide you properly and tell you exactly what you need to do with your finances. You may have some bookish knowledge yourself, but without experience, you cannot tread safely. This is why hiring a manager helps you.
2. Highly trained
The personal financial advisers are highly trained individuals who have the best degrees from the best institutes around the world. This makes a manager very skilled in his work as he understands the basics of financial management in a wholesome manner.
A personal finance adviser is a highly-helpful resource that you must consider getting when you need help with financial planning and investments.
What do personal finance managers do?
A wealth manager’s primary duty is to ensure your wealth grows, while you meet all your financial goals. A personal financial manager helps you to streamline your expenses and encourages you to save and then helps you to invest the saved money. Take a detailed look at the main responsibilities of a financial manager:
A. Analyzing your financial condition
The first and foremost job that the adviser undertakes is that of analyzing your current financial situation. It is the adviser’s job to assess the situation, understand the concerns, make a plan and then offer his advice to the client. This is why you need a personal finance adviser who can work with you on a one-on-one basis and help you sort out your monetary challenges.
B. To help you make your cash flow analysis
The next, and one of the most important duties of a personal finance adviser is to make a tailor-made cash flow analysis for you. The plan must primarily include your income, expenses and savings. The plan must be designed in such a way that you know how much to spend and how much to save. This is crucial, as only when you save can you start investing.
C. Help you choose your investments
Perhaps the most important role of your financial adviser is to help you choose your investments. Many people do not properly understand the basics and scopes of the various investment tools such as fixed deposits, mutual funds, etc. Everyone needs to invest as it is only through investments that one can accumulate greater funds, save tax, plan for the future and achieve their financial goals. A good personal finance adviser understands your finances and your risk-taking capacities and then tells you exactly where you need to invest to get the best results.
The very mention of the word ‘tax’ causes fear and confusion in the minds of many people! Tax is a severely challenging topic and though you may think you know all about it, you may actually just be aware of the tip of the iceberg. Tax management and payment need to be done with complete precision. You should also look for ways in which you can save tax in a legal and effective manner. But do you know how to go about it? If not, your personal finance adviser will help you out, as tax planning constitutes one of his main duties.
Debt management is crucial. Most people these days have various loans such as home loans, personal loans, car loans, etc that they struggle to pay off. On top of this, the outstanding credit card bills also add further pressure. A personal finance adviser can guide you properly and help you to manage your debt in the most effective way.
You have to plan ahead and build you a good corpus for your post-retirement years. This needs a lot of planning and precision. Your financial advise helps you to make a productive plan through which you can save more for the years to come.
G. Legacy planning
Death is the greatest eventuality of life and we all must prepare for you. You would not want your family members getting into disputes over your wealth after you are gone, so you need to ensure your legacy planning happens and everyone knows about your plans. Your financial adviser can help you make a will and distribute your wealth in a way that you find suitable.
A personal finance adviser, therefore, assists you in making the correct financial decisions. You can do it all by yourself, but you may not know the right mechanisms and tools. Your financial adviser puts you on the right path and
Who needs a personal finance manager?
Anyone who looks out for a better lifestyle within the financial resources they have needs a personal finance manager. The manager tells you how to use the money you have to make it grow while you take care of your financial responsibilities. You may need a wealth manager when:
1. Just starting out
Young executives who are just starting their careers could benefit from hiring a financial adviser. If you are at such a point in your life, you need to get a wealth manager to help you understand the financial dealings. He can also tell you all about the investment opportunities and guide you in your debt management. Implement the ideas and see an upward growth in your wealth as you progress in your career.
2. At an important juncture of life
You may also require the services of a personal finance adviser if you are at an important juncture of life such as your marriage or parenthood. At such a time, the advice of a wealth manager proves to be absolutely priceless. You may be confused about how to manage your finances. The personal finance adviser will guide you and make the best possible financial plan for you to follow.
3. Starting a new line of work
If you are starting a new career, you will need to hire a wealth manager. The manager will ensure you get the most out of your income, no matter how little or reduced it is. He will also guide you about the new tax norms, the investment options, etc.
4. About to retire
If you are about to retire, or you have already retired, you should speak to a personal finance adviser and understand how you can plan your finances from here on. There are bound to be many changes to your earning patterns and so you need a fresh and effective financial plan. The wealth manager can help you to make sound investments and also guide in other areas such as tax payments.
Remember here that a personal financial manager may charge you a few thousand rupees or several lac of rupees. You need to find someone whom you can afford. Do not go beyond your means as that will put undue financial stress upon you.
Why you should take help of personal finance managers to plan your finances?
A financial adviser offers an impartial, third-party analysis. You may have a good financial knowledge and your investments may be sound, but you would still not be able to make the best out of your financial plan unless you put in all your time into it. With your job, your familial responsibilities and your leisure time activities, you may find it difficult to devote all your time to just planning your finances. This is the main reason why you need a wealth manager.
Then, if you are not confident enough about financial planning, you most definitely should take the help of a wealth manager. Do not trust the internet to give you advice, especially on such a crucial topic. You cannot possibly risk your wealth dwindling because of improper investments that were made without proper assessment. Take the help of a personal finance adviser and manage your money in the best possible manner.
And finally, if you want to secure your future, you should take the help of a financial adviser. You may be a single person in your thirties now but in a few years, you may be a family man who is about to retire. You need to think about the future and ensure you have an economically carpeted existence at all times. You as well as your loved ones should never have to face any financial troubles, and this can only be achieved if you plan your finances well. Take the help of a personal finance adviser and the job will become a lot easier for you.
You need to hire a personal finance manager when you feel a bit lost and think you need a road-map to get back into the game. A wealth manager can, at such a time, help you get back on track by showing you the correct financial route to be on.
Types of personal finance advisers in India
If you are convinced that you need a wealth manager, you should look to get someone who would be of great use to you. Did you know that there are different types of personal financial advisers in India? They include:
Distributors – Distributors, such as the mutual fund agents, can act as wonderful financial managers. They can correctly advise you on the type of mutual fund to invest in, after understanding your financial standing.
Bancassurance managers – The bancassurance relationship managers can also function as excellent personal financial advisers. They can guide you on how you can choose correct insurance cum investment tools and put you on the proper financial path.
Insurance agents – Apart from your investments such as mutual funds and equities, the life insurance plans also form an important part of your portfolio. You need to have the correct plans that offer an investment opportunity while covering your life. A good life insurance agent can guide you here and help you to select the best option.
Brokers – A wealth manager who manages your investment portfolio and earns a brokerage from the AUM (assets under management) can be a very good personal financial adviser. However, you need to select your broker very carefully as you will plan your entire investment based on what he tells you.
Paid RIA – An RIA, or a registered investment adviser, is a paid wealth manager whose primary and only job is to offer advice on investments. RIAs are very accurate financial advisers who many people hire. They work in exchange for a fee.
What is robo-advisory?
Robo-advisory is a type of digital financial advice. It is delivered to the client via a mobile application or through a web portal. It involves very little human intervention. The advice is generally based on formula and mathematical calculations and so is considered to be precise and reliable.
The final word
A personal finance adviser is a person who guides on how to stay financially secure and make your money grow. They alert you about the dangers of incorrect investments and inform you about the correct channels through which your wealth can grow. Whether you are a youngster just starting out with investments and financial planning or you are an industry veteran with many years of experience under your belt, you can always benefit by hiring a personal finance manager. Choose your manager wisely and work with him closely to ensure you get the best value out of the partnership.