Financial planning is the bedrock of thoughtful investing. Without proper financial planning, investments can go haywire. But it is easier said than done. Financial planning requires diligent understanding of one’s financial resources, future goals and how those resources can be utilised in pursuit of such goals.
A recent discussion with Ghazal Jain, Fund Manager – Alternative Investments, Quantum Mutual Fund, as part of Outlook Money’s ‘Investment Made Easy’ webinar series threw some light on the strategy one should adopt for thoughtful financial planning. Jain was in conversation with Sutirtha Sanyal, Assistant Editor, Outlook Money.
Here are some edited excerpts from the discussion:
How would you define financial planning for thoughtful investors?
Financial planning is a long-term strategy for intelligently managing your money so that you are able to accomplish your goals and objectives in life, while you navigate the ups and down that inevitably come at every stage of life.
What would you define as the four-five stages of financial planning?
The foremost would be having an emergency fund. This is a vital step and should never be taken for granted. Once this is taken care of, then you can think of defining and prioritising your financial goals.
The next stage would be that you start saving more, and right from the word go. That is, you start saving from now, not tomorrow.
Third would be that you need to make sure your investments beat inflation.
Fourth, don’t keep your savings idle in a bank. Invest your money. Only then, will it grow. Lastly, diversify your investments. Don’t keep all your investments in one basket. Have suitable asset allocation and stick with it in accordance with your goals.
What would you define as the first stage of investing?
To start with, you need to save to be able to invest. Then, you should clearly define your investment objectives and, accordingly, go about your investing plans. You should not invest in a haphazard manner. Likewise, don’t blindly follow the advice of others in terms of your investment goals. Your investment objective should be defined by your time horizon, your risk-taking ability and, based on this, you should start your investing journey.
The clarity as to what you are trying to achieve through your investment, should be the first stage in your investment journey.
How should someone who is just starting out in his/her career go about financial planning?
Equity should ideally make up the bulk of their investment portfolio—about 65-100 per cent. That’s because they need to grow their money over and above the rate of inflation over the years. Also, since they have a long investment horizon, equities would be most preferable because, historically, they have performed well over the long term, though they are volatile in the short term. That said, allocation should also be guided by one’s individual risk capacity and risk appetite.
More importantly, one shouldn’t get perturbed by the ups and downs of market movement. One should just be disciplined and keep investing. They will come out financially stronger.
How does one go about making changes in his/her asset allocation over time?
Asset allocation would change over time. Based on the risk we can take and the time left to achieve a goal, there are different avenues that can be considered for investing. For instance, for goals such as child’s education and your retirement, which are long-term in nature, you could consider moderate- to high-risk investments, depending on how much time you have to achieve that goal. So, hybrid mutual funds could be a good option, as they are a mixture of equity and debt. The equity provides the return, while the debt component provides the stability.
Likewise, a young investor looking at retirement will have a pretty long-term horizon, and one should think of equity mutual funds for his goal. But someone in his 40s might consider hybrid mutual funds for the same, because he won’t have that much time on his hand.
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