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
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.
plan, you should be able to do the following:
and priorities your life goals
stock of your existing finances and the role they will play in
meeting the goals as also whether the current set of investments
the right ones for you.
the right investment instruments including how much insurance and/or
a contingency reserve should you have to take care of your
your investments and Set milestones of execution and review
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
Your risk appetite, investment objective
and investment horizon will determine your asset allocation.