For almost everything you need finance and if it is not planned properly the finance may go waste and your requirements do not get fulfilled.
Over a period of time financial planning parameters have changed. Financial planning is no longer limited to bank deposits or company deposits of Government supported schemes giving nearly double-digit returns but there are other investment opportunities giving attractive returns. In India the insurance sector has been privatized therefore several options have enabled one to separate insurance from investments.
In fact finance for major expenses such as buying a house or higher education or car are easily available along with tax efficiency to some extent. With time the income-tax laws have also changed. Thus these changes have changed the outlook of the people regarding finance planning. Now while doing planning factor such as tax laws, liquidity, risk involved and suitability of the instrument to match ones risk factor, are taken into account.
There are some essential elements of personal finance planning which can be taken under consideration:
- Insurance for protection
- The objective or requirement for which the money is being invested
- Time period when will the money be needed.
- Unknown future cost.
- If you think it is necessary to take risk and if yes then does it match with one’s risk appetite.
- Selection of investment instrument which gives desired returns.
- The instrument chosen should provide tax efficiency.
- The investment should be that in which you are able to withdraw money when required without any cost.
- Costs involved for managing the money.
- All the terms and conditions of the instrument should be
Following the above parameters the planning process can vary from person to person and to some extent can be unique to each individual.
Regarding insurance one should not combine insurance with investments. This is an expensive way of achieving both the objectives.
Now days most of the life insurance companies have designed plan called term insurance which is a low premium high risk cover plan. Under this only death benefit is covered and offers no survival benefit. However this may sound strange but it is the best form of insurance one can choose.
Investment in Life insurance depends up on one’s current income, loan liabilities and provision for the future major expenses.
Before investing one should do a study of asset classes in which one wants to invest i.e. equities, gold, real estate, mutual funds and bonds and other fixed income securities.
If we see the past record equities and real estate has been found the best option for investments as these have delivered better returns in overall. The investment made in real estate needs large amount of expenditure and is also not liquid and not even partially liquid. Therefore investing in equities and the related instruments is good option and if investment started at early age builds good wealth. Mutual funds which are being considered the best option among the upper middle class also offer opportunities to invest in other asset classes such as precious metal, real estate and bonds for different tenures.
Privatization of life insurance and mutual funds might create fear regarding the credibility of the operators. Therefore the government of India has set up regulatory authorities like IRDA and SEBI for insurance and finance sector with an aim to regulate the operation of these entities and one can be reasonably assured that there will not be any fraud or misappropriation of funds.
So one can sensibly combine and develop a portfolio to achieve financial goal along with risk protection at different phases of life.