Planning For Contingency

Personal financial planning having different components like Asset planning,Insurance planning, Investment planning,Tax planning, Estate, and Retirement planning. Apart from all,there is one more planning, that is Contingency planning.In this Planning about when an emergency occurs what are the proper and immediate steps are to be taken by the management or employees.

Contingency planning has three main components – 

Protection,

Detection and

Recoverability. 

This planning plays an important role in the event of flood, fire, accident, illness or any other unexpected events. It is a plan developed when something unexpected is likely to occur or occurs at any time and may put strain on one’s life and work. 

Personal financial planning includes planning for meeting those needs or situations that are unforeseen.Contingency planning is not just about disasters, but about preparing of events, such as loss of data, supplier or other disruptive unknown events. It is therefore important for every person to prepare to make contingency planning as a part of every day plan.Often, these plans are devised by governments/businesses/organizations. They are also called ‘back-up plans’/‘worst case scenario plans’ or ‘Plan B’. It consists of if-then statements, which define solutions and deploy when the problems occur.

Driving Factors Of Asset Allocation

Asset Allocation is an important tool to achieve financial goals.Asset allocation helps in avoiding day to-day decisions in investing.For any financial planning process to be successful only when Investor’s portfolio periodically to see whether the current asset allocation is meeting the required financial goals. Any change in the financial goals or risk tolerance of the individual causes a change in allocation of assets. Research Studies indicate that 90% of the difference in returns between portfolios is due to asset allocation and not due to market timing or stock selection.Asset allocation depends on time frame, risk tolerance, investor’s preferences and Investment opportunities. These are,

Time Horizon: Time horizon represents the time period within which an investor wants to achieve his/her investment objectives. There is no particular period during which one should or should not invest or hold an asset for a particular period of time. The time period depends on the investment objectives. When it comes to asset allocation, it is one of the most important factors. 

Risk Tolerance: Risk tolerance is the ability and willingness of the investor to tolerate the risk. There are three types of investors. Aggressive investor is one who is ready to take risk and who is not concerned about market fluctuations. Conservative investor is one who is not ready to bear much risk, has limited knowledge about financial markets, and is not ready to take any fluctuations. Lastly moderate investor is one who has reasonable understanding of the market, accepts moderate risk, and invests for medium- and long-term. 

Asset Allocation

Asset allocation is an investment strategy that investors use to diversify investments among various investment vehicles such as stocks/bonds/mutual funds/real estate etc. It is an important tool to achieve financial goals.Asset allocation helps in avoiding day to-day decisions in investing. For any financial planning process to be successful, it is always advisable to review the investor’s portfolio periodically to see whether the current asset allocation is meeting the required financial goals.Any change in financial goals or risk tolerance of the individual causes a change in allocation of assets. Studies indicate that 90% of the difference in returns between portfolios is due to asset allocation and not due to market timing or stock selection.


Asset allocation is the most important process for an Financial Planning.It plays an important role in determining the performance of an investment & It is influenced by market outlook,time horizon and diversification.To execute the process of asset allocation with an Individual s Financial objectives and constraints, risk and return estimates of each asset class and correlations between asset classes. 

Tax Planning

Tax planning is defined as “Considering the tax implications of an individual throughout the year with the goal of minimizing the tax liability”.Tax planning is an essential part of personal financial planning. Tax liability can be minimized by taking care of all tax exemptions, rebates, deductions, and allowances. While understanding what tax planning is, it is also necessary to understand what tax planning is not. It is not tax evasion, not difficult and not just putting money in 80 C investments. Tax consequences have to be considered while making any financial decisions:

There are two types of taxes – Direct, and Indirect taxes.

• Direct taxes such as income tax, wealth tax are collected directly by the     

   Government. They form 30% of government’s revenue. 

• Indirect taxes comprise excise duty/sales tax/customs duty, and they form 70%

   of the Government’s revenue.

Significance Of Tax Planning

Tax planning is basically an ongoing and year-round activity.

• It involves use of investment vehicles, retirement programs/estate distribution to reduce/shift/defer taxes;

• It reduces taxes by using the techniques that create tax deductions; shifts taxes by using gifts or trusts to shift some of the income to other family members who are in lower tax brackets;

• Deferring taxes can be done by reducing or eliminating taxes today by pushing them to the future;

• By way of tax planning, one can take advantage of all deductions and tax provisions to minimize tax liability, and

• Tax planning is closely related to many personal financial planning activities –investment/retirement and estate planning.

Retirement Planning start Early

Retirement planning is an important aspect of personal financial planning and is incomplete without it.It is a forward-looking planning.Early Retirement Plan is also Very Important to Avail the Advantage of Time Value of Money.

Lets get an idea with an example of comparison

Let's compare two people : Mr.X and Mr.Y.

Mr.X starts saving Rs.750 per year from his age of 15 and stops investing to his nest egg at the age of 30. 

On the other hand,  Mr.Y. starts investing Rs.5000 per year when he is 30 and continues investing this amount every year till he is 60. 

If both earn 15 % post-tax return per annum on their investments, who will have more 
wealth when they retire at age 60.

Four Principles of Asset Allocation

Asset allocation helps in getting the right balance between risk and return by investing in a variety of assets. One common mistake investors make during allocation of assets is to take more risk required to accomplish the desired returns. Risk return trade-off 

compensates an investor for assuming risk. Investors manage or balance risk and return 

through asset allocation and select investments that offer high return than expected for 

the risk they are ready to assume. 

Asset allocation is the most important process for an investment management.There are  four principles for asset allocation, they are 

• Risk rewards trade-off; 
• Risk depends on the investment horizon; 
• Rupee cost averaging; 
• Risk depends on the financial situation.

Risk and Rewards are Related: Risk and rewards is a risk reward trade-off. With 

investment rewards can be increased only by assuming greater risk. It is important in 

investment management. Higher risk is the price one pays for more generous rewards. 

Financial Planning Constraints

Constraints of Financial Planning

Though personal financial planning is a process to effectively manage the finances and investments of the clients in order to achieve their financial goals, yet it is not away from constraints. Below are the three important constraints of personal financial planning: 

Inadequate Resources: Though it is advisable to start personal financial planning for 
an individual at an early stage, but inadequate resources constrain the individual in 
doing so. 

Inappropriate Products: Another important constraint of personal financial planning 
is dearth of appropriate products. No appropriate product that suits the investment 
parameters of the investor adds to the constraints of personal financial planning process. 

Need For Financial Planning

In Today’s competitive and complex world, a person has alot of choices for everything he needs like Place of Living, career, savings and investments etc. It is becoming difficult for a person to develop financial strategies that helps in improving his lifestyle. Even availability of sufficient funds worries the individual about his/her future. The best way one can achieve one’s financial objectives is through Financial Planning.Financial Planning helps in defining one’s financial goals and in developing strategies to achieve those goals.

Objectives of Financial planning

Personal Financial Planning can be defined as “Taking conscientious and systematic steps towards fulfilling one’s financial goals”. It refers to the proper planning and implementation of well-coordinated plans to achieve financial objectives. It is a dynamic process. It helps individual deploy scarce available resources in a wise manner.Savings and investments made today have to match the future goals. To make sure that this happens, proper projection of the future needs and evaluation of the future course of

actions become necessary. Planning in financial areas is necessary for the people whether they are rich or poor. If a person has huge cash reserves, he can plan to invest and spend it wisely. Similarly, a person, who has low or inadequate funds, has to plan to get more benefit out of scarce funds.

Process of Asset Allocation

Asset allocation process is highly self-effacing and simple process. It varies from Person to Person due to Investment nature of everybody. Though People have similar goals and risk tolerance, no two Persons have the same asset allocation. Most individual investors engage an experienced investment manager to advice on asset allocation. Right mix among the various investment options helps the investor in achieving financial goals. The asset allocation process is a step-by step process that includes the following: 

Consideration of Investor’s Personal Situation: This is the first step in the process of Asset allocation. Before actually starting the asset allocation process, one has to first analyze the present financial situation by means of determining the assets, liabilities and net worth of the Investor that are available for investment. Even the tax status of the investor is to be analyzed. 

Considering Investment Objectives: Once Personal financial situation  of the investor is considered, investment objectives has to be created. The most important Investment objectives include maximizing current income and Capital preservation. 

Financial Planning

Financial Planning is the process of meeting our life goals through the proper management  by our finances.Goals in Life like Buying a house,Savings For Children s Higher Education & Marriage or Retirement Planning. 

The Financial Planning Process involves Six steps,these six steps we can finding our Current Level.Using these level strategy we can get a clear idea about where we are now what we may need in the future and what we must do to reach your goals.

These process consists 1.collecting relevant financial information,2.Setting goals for our Life, 3.Examining our current financial status and coming up with a strategy or plan for how can we meet our goals given in our current situation and future plans.

Benefits

Financial Planning provides direction to our Financial needs and meaning to our financial decisions.It makes an understanding about how much each our financial decision  make affects other areas of your finances. 

For example, buying a particular investment product might help us pay our loans faster or it might delay our retirement plan significantly.By viewing each financial decision as part of the whole, we can consider its short and long-term effects on our life goals. we Can easily adapt to changes in our Life & Secured feeling on our Goals are on track.

Financial Planning Process

These are Following Six Steps of Financial Planning

Setting measurable goals Understanding the impact of each financial decision Periodical Review of Our Financial situation Start planning Early Be realistic in our expectations Realizing that we are responsible

Portfolio Management Services(PMS)

PMS gives investors access to an institutional process of money management Provides a customized solution by matching the unique circumstances and objectives of each investor.Wealth creation based on disciplined investment process is the crux of PMS.Effective diversification helps reduce portfolio volatility and enhances risk-adjusted returns over long term.PMS gives investor direct ownership of the individual securities in the portfolio

Benefits Of PMS

Professional Management 

The service provides professional management of equity portfolios designed to deliver consistent long-term performance while identifying and controlling risks.

Continued Monitoring

The PMS Provider understand the need to constantly monitor Investor portfolios and bring in periodic changes to optimize the results.

Investment Constraints & Investor Categorization

Investment Constraints 

There are Some constraints be there in Investment also.Investor Goal/Objectives can reach only it has overcome all these Constraints.An Investor seeking fulfillment of one of the above goals operates under certain constraints also .The Constraints affecting Investment are

• Liquidity 

• Age 

• Need for Regular Income 

• Time Horizon 

• Risk Tolerance 

• Tax Liability. 

 Investor Categorization 

For a successful investment policy, investment objectives and risk tolerance have to be a blend of constraints and preferences of the investors. Each investor has his/her own set of objectives and constraints. While most of these are known only in qualitative terms, they will eventually lead to form quantitative objectives and constraints by the Investment manager, which, in turn, form the basis for the formulation of the optimal portfolio.The Two broad Category Of Investor are

Financial Planning Rewards

Any change in the life of an individual changes his personal financial planning process.

There are three long-term rewards of personal financial planning – improved standard of living, wise-spending patterns, and wealth accumulation. The three rewards of personal financial planning are 

• IMPROVED STANDARD OF LIVING
• SPENDING MONEY WISELY 
• Current Needs
• Future Needs
• WEALTH ACCUMULATION

IMPROVED STANDARD OF LIVING

Personal financial planning helps manage one’s resources and control undue expenses.Standard of living represents the quality of a person’s lifestyle.A person can maintain his/her standard of living or even improve it by planning efficiently his/her income and expenses and then provide for investment to meet the future contingencies. Quality of  life is tied with material as well as non-material items. Even money for health,education, entertainment contributes to the quality of life.Increasing of two-income families increases spending capacity and also the aspirations for future requirements.As the income increases, the need for planning also increases,so that money can be managed in a wise manner.

SPENDING MONEY WISELY 

Spending money wisely is another pay-off of personal financial planning. An individual 

always has two options with him/her with respect to his/her hard-earned money –spend it or save it for the future. Sometimes, it is important for an individual to forgo his/her current needs to save for the future. Thus, if money needs to be spent, it should be spent wisely. Put differently, one should think of what manner of spending or what type of spending in what combination – gives the most satisfaction for each rupee spent.

Portfolio Management

The Art and Science of making decisions about investment mix and policy, matching investments to objectives, Asset allocation for individuals/institutions and balancing risk against performance.An Investment  Portfolio is a grouping of financial assets like Stocks,Bonds,Mutual Funds,Bank Deposits,ETF s Gold/Silver,etc.,.These Portfolios Differ from Individual to Individual and that Portfolio should aims to achieve our Financial Objectives.Investors should develop an Investment Portfolio according to their Investing Objectives & Risk Tolerance.

A Good/Effective Portfolio should contain all Investment Instrument should be in right proportion,That is the aim of Financial Planning.Investment made in Right Instrument at the right time for the right tenure will bring Financial Success.

Portfolio Management - Model Portfolios

Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs.equity, domestic vs. international, growth vs. safety, and many other trade offs encountered in the attempt to maximize return at a given appetite for risk.All Instrument/Asset in a Portfolio should allocated as per their Risk & Age,this is the principles of Financial Planning.All Instrument are in right Proportion is the Good Portfolio Management.

Assets/Instruments involved in Portfolio Management are

1. Stocks Related Investments

2.Debt/Fixed Income Instruments

3. Real Estate

4. Gold/Silver