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:

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.