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What is Financial Planning ?
"Financial Planning is the process of
estimating the capital required and determining its competition. It is
the process of framing financial
policies in relation to procurement,
investment and administration of funds
of an enterprise."
It is a step by step process to ensure that
you plan and invest in a way so that you are
constantly in sight of your goals and the
effort that is required to achieve
them.
With a Financial plan, you should be able to do the
following:
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Set and priorities your life goals
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Take stock of your existing finances and
the role they will play in meeting the
goals as also whether the current set of
investments are the right ones for
you.
-
Identify the right investment instruments
including how much insurance and/or a
contingency reserve should you have to
take care of your dependents.
-
Track your investments and Set milestones
of execution and review
Interestingly, a lot of people spend their
time with the last step. The first three are
very critical for the overall exercise to be
successful.
What is an asset class ?
An asset class is a set of securities/
investment instruments that show similar
characteristics and behavior in the market.
The group of securities in an asset class is
also governed by the same rules and
regulations. For example, shares, property,
cash, fixed interest assets etc.
Asset classes can be broadly classified
into two types, namely defensive and growth
oriented. Defensive asset classes comprise
assets that generate safe and consistent
returns. They are suitable for investors who
are not willing to take high risks. Growth
oriented asset classes match the profile of
long term investors who do not fear risks.
Their aim is to generate higher
returns.
How do I decide on the right asset
allocation for me ?
Asset allocation is the process of
balancing risk and reward by dividing assets
according to an your individual goals, risk
appetite and investment horizon. By
spreading your investment across different
asset classes, you create a diversified
portfolio where the loss that you may make
on a certain asset class can be compensated
by the profits that you make on another.
Thus, you reduce the overall risk of your
investments.
There is no simple formula that can find
the right asset allocation for every
individual. Asset allocation is however one
of the most important decisions that
investors make. In other words, your
selection of individual securities is
secondary to the way you allocate your
investment in stocks, property, and cash and
other investments, which will be the
principal determinants of your investment
results.
Your risk appetite, investment objective
and investment horizon will determine your
asset allocation.
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