Factors to keep in mind before building a Financial Plan

An investor education & awareness initiative.

Very often, the best accomplishments are outcomes of meticulous planning. A sound financial position, too, is a result of diligent planning. A financial plan helps individuals make the most of their money by enabling them to achieve various goals – including purchase of property, funding of children’s education and building their retirement corpus – in a comfortable manner and at the right time, notwithstanding setbacks and unexpected events which may exert strain on resources. By creating a financial plan, you can understand your current financial position, prioritize objectives, achieve goals and maintain stability during trying times. The following are the important aspects to be considered while you prepare a financial plan:

1. Financial Goals:

  • Identify: Identify the things important for you to achieve in your life, and think of when you want to do them. Some common goals for most people include purchase of a house, funding of children’s studies, spending on a dream vacation, building a retirement fund etc.

Assign timelines: Then, list down your financial goals and categorize them according to the time horizon i.e. long-term, medium-term and short-term. The goals should be realistic and specific; for instance, simply stating that you need to set money aside for your child’s education is not a goal. You must clearly state when the goal is due.

Assign costs: You also should state clearly how much you want to save for each goal. The amount that you want to save for a goal should be well thought out- for instance, account for inflation, which will increase the cost of the goal when it is due for fulfillment.

Prioritize: Think of all your goals and think of how important achieving them is to you. Also, think clearly of all priorities- personal, family related as well as work-related.

2. Your risk profiling: It’s essential to determine your risk capacity, your risk tolerance and the risk you need to take to achieve your planned financial goals. While risk capacity includes factors that can be quantified (your age, income, number of dependants, etc.), risk tolerance indicates your psychological tolerance and your willingness to take risk. Required risk is a financial characteristic and it is a function of the financial goals you have and the mathematical assumptions and calculations that you make to plan to achieve those goals. By taking too little risk, you may compromise on returns, while taking excessive risk may result in having to bear losses. The idea, therefore, should be to understand your own risk profile, to undertake optimal risk and have realistic expectations of risks and rewards.

3. Time horizon to achieve goals: The time left for you to achieve your goals has a bearing on how much how much you can save and the kind of investments which you can make. If you’re young and are planning for retirement (for eg, when in your 20s and 30s) which is still 30-35 years away, you are in a better position to save more and invest in high-risk-high-return assets such as equities and mutual funds. In your advanced years, you will need a stable source of income, for which you may need to invest in fixed-income bearing instruments such as fixed deposits and debt funds. The transition of investments – from one class to another – should be done in a gradual and disciplined manner.

4. Create a suitable investment portfolio: Once you have an idea of your saving and investment requirements, your goals, risk profile and the relevant time horizons, you need to create an appropriate asset allocation between different asset classes (equity, debt, etc.) spread across relevant financial instruments. Remember to always save regularly and invest with discipline.

5.Are you well diversified? While investing, you need to ensure that your portfolio is well-diversified. Avoid concentration in a particular asset class or sector. Not every asset class or every investment instrument within an asset class will do equally well at the same time. With a diversified investment portfolio, you are in a better position to manage risks. This way, a setback affecting a particular asset class will not dent the overall returns on your investment portfolio.

6. Are you insured sufficiently? While setting goals, you also need to account for obstacles which may arise because of unexpected events such as illness, injury, theft, destruction or demise. While this can happen through an emergency savings fund, you do not want to get caught in a situation where your savings fall inadequate to meet such an unexpected situation. This is where insurance comes in. Ensure that you get adequate insurance cover for life, health and property. Review your coverage needs periodically and pay the premiums regularly. Remember that insurance is not the same as investments and don’t make the mistake of confusing the two.

7. Do you have an emergency fund? While you may have insurance cover for unexpected events such as illness, job loss or property damage, the claim settlement process can take some time. To sail through this period, it is prudent to have an emergency fund – with three to six months of essential expenses – set aside in a separate account.

8. Tax planning: Financial planning should always encompass tax planning. You should keep a track of the available tax exemptions and rebates across all your investment instrument choices in order to deploy your funds in the most tax-efficient manner.

9. Monitor your finances: It’s prudent to track your finances on a periodic basis. Take stock of the investments, monitor the returns, and if required, realign your investment portfolio. You should also review your insurance needs and take additional cover, if required.

10. Financial planning should have familial concerns accounted for: A common mistake many investors make is to think of their own personal financial plan independently. While there is nothing wrong in doing so, experts recommend that financial plans should ideally account for all family needs, goals, income, expenses etc. For instance if you’re a married male in your early 30s, accounting for your spouse, factoring in your children and keeping goals in mind from a common perspective will help you prepare an even more robust financial plan.

11. Professional help is available: Just like you seek the help of a doctor for your health, it’s best to seek professional guidance of a financial advisor for your financial well-being. Paucity of time may be a limiting factor in managing your finances efficiently, even though you may have reasonable expertise in managing investments. It is thus wise to consult a professional financial planner. Moreover, you should also seek professional advice in legal and taxation matters.

Preparing your financial plan

The best time to prepare a financial plan is early on when you start earning. In case you missed doing that, then the second-best time is right now. A sound financial plan and a disciplined approach towards savings and investments will help you achieve goals, overcome challenges and attain financial independence with considerable ease and certainty. So don’t wait, start today!

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Key Takeaways

  1. A financial plan helps you determine the most suitable approach to achieve all your goals.
  2. It needs to take into account multiple factors such as your risk profile, portfolio diversification, emergency funds etc
  3. Your risk profile is very important to understand and it depends on your risk capacity and your risk tolerance.
  4. Taking an optimal level of risk to earn reasonable returns is important to generate wealth and to achieve your financial goals.
  5. Seeking professional help in financial matters can go a long way in helping you plan better.

Disclaimer: All Mutual Fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (‘RMF’). For more info on KYC, RMF & procedure to lodge/redress complaints, visit This is an investor education & awareness initiative by DSP Mutual Fund.