Budgeting is different from financial planning

Budgeting is different from financial planning

What if I say that trees and leaves are the same thing? You would argue, and rightly so, that they are not. The leaves are a part of the tree but they are different.

The same difference holds true for financial planning and budgeting. A lot of people may think they are interchangeable but that is not the case. Budgeting is an exceptionally critical component of a financial strategy. It assesses how much you earn, evaluates how much you consume, and assists you in spending lesser than your income. On the other hand, financial planning, considers your existing financial condition and creates an extensive portfolio by forecasting prospective incomes, asset values and withdrawal plans based on your available financial data.

To understand what is budget, it is important to run the rule over financial planning and budgeting first and then find out how they differ. Here we understand the difference between a budget and a financial plan.

What is financial planning?

Financial planning prepares your financial future, helps you meet your life goals, and gives you financial independence. Effective financial management includes all aspects of your money, including your income, expenditure, investments, and taxes.

What is budgeting in business?

Budgeting tells you how much you can spend basic your monthly income. For an average household, a monthly budget consists of the expenses incurred on grocery, children’s education, utilities, lifestyle expenses, etc.
What is the difference between a budget and a financial plan?

  • Scope

Financial planning is a broad concept. Identifying your goals, saving your income and investing are a part of this. Budgeting is one part of the whole financial planning process. It represents a single step just like leaves represent one part of the tree.

  • What they represent

Financial planning is based on your financial goals and helps you in achieving them. Budgeting, on the other hand, gives you an idea of your spending pattern and helps you in identifying unnecessary expenses.

  • Horizon

A financial plan is devised to take care of your future needs. Budgeting, however, is a short-term concept. It is, generally, done on a monthly or an annual basis.

  • Use

Financial planning determines the quantum of your investments. A budget is done to curb possible overspending. This is one reason why budgeting is part of a financial plan. Otherwise, you may never be able to save enough to fulfil goals.

To sum up

Though budgeting and financial planning seem similar, they are very different. Despite being different from each other, budgeting and financial planning are complementary to each other. Budgeting helps you save while financial planning uses the saved amount to invest in order to help you meet your financial goals.


How To Get Your Portfolio Up And Running

Every investor dreams of success. But, investing is not an easy art. There is no dearth of strategic portfolio management advice around promising instant success. But how does one sift through the clutter to get the right advice? Unfortunately, most individual investors fail to manage their investment portfolio on their own. With volatile markets and a glut of information, there is the danger of making a catastrophic move. To safeguard one’s portfolio and pre-empt risks, it is important to take the right kind of precautions. Here we understand what is strategic portfolio management.First things first, take controlIn spite of managing your own investment portfolio it is not bringing you the kind of returns you had in mind, or appears to be stuck, the primary thing to do is not to panic. Find out the cause and identify investments that are contributing to overall non-performance. Take requisite action on your portfolio, keeping in mind your long-term perspective. Do not let fear rule your decision making abilities. Clarity on the situation and a few portfolio management tips can help you decide when to hold them and when to sell.Let’s look into some investment strategies and portfolio management tips that can help you decide: Average down strategy Average down strategy aims to reduce your average cost in a stock. You buy additional units of stock that have slipped in price to average out the cost. Let’s take an example to understand this. For instance, you purchased 1,000 units of ABC stock at Rs. 50 per share. The price per share then drops down to Rs. 45. Now, if you buy additional 1,000 shares at Rs. 45, your average cost will come down to Rs. 47.5. Similarly, this strategy could also be applied to mutual funds to average out costs. This average down strategy strategy should be applied only if you have researched thoroughly on the company whose stock you hold, and convinced about its future potential, having implicit trust on the management and the company’s fundamentals. With a strong belief in the company’s fundamentals, you can continue to hold it for a long period of time by averaging down the cost. Sell the losers Fact-finding and doing necessary groundwork on the company is useful in ascertaining the company’s future potential. Get rid of the falling investments if the price has dropped and is not likely to recover. This strategy works well when the stock price has been on the wane and the company’s fortunes seem to be under threat. There is no point in holding on to a stock that is underperforming.  Mistakes help you become wiser, and the investing process gets better with your learning. But, learning to avoid mistakes makes you a smarter investor. To be a successful investor, you need to have a clear methodology. Here are a few portfolio management tips to make your portfolio work for you: Draft a solid plan Formulate disciplined strategies  Create a diverse mix Have a logical reason for every decision Periodically review and rebalance  Do not let your greed and fear drive your investment moves To design, strategize, implement, manage and rebalance your portfolio rightly, you need to have the time, self-drive and most importantly extensive experience. The question is, would you be able to do it all by yourself? Do you have the requisite knowledge, competency and skillsets to manage your stock portfolio correctly?If you are hesitant to do it by yourself, there exists a tailor-made solution called portfolio management services that bring in expertise, knowledge and professionalism to achieve specified goals.ConclusionTo make your portfolio grow productively, follow an investing style that suits your risk profile, asset allocation, financial goal and time horizon. To avoid irrational decisions, conduct further study on your investment choices. A focused portfolio along with a disciplined approach is the key to success.

read more


Indicators that show you need to start investing

Most people don’t think about when to start investing in the initial stages of their career. In fact, investing and saving for future is hardly a priority at that point. But the reality is that in investing, there is nothing like too soon. You can begin your investment journey with a very little amount as well. In fact, starting early gives your money more time to grow.To begin with investing, there is no better time than present! Here are few simple reasons for you to start taking charge of your finances; it can help you to know why to start investing. To give you an indication to start investing we list out some factors.Make up your mind to save as soon as you start earning!The perfect time to start investing is when you are young, healthy and independent. Here is why it makes sense to start investing early; here are key reasons how and when to start investing for future that can work wonders for you.- Long-term compoundingPower of compounding can do magic if you keep you invest for the long haul. Let’s take two different scenarios to understand this.✓ Scenario 1: Suman started an investment of Rs 5,000 per month at the age of 25. By the age of 60, his investment of Rs 21 lakh would fetch around Rs 1.9 crore, assuming the rate of return as 10% per annum. ✓ Scenario 2: Rahul started an investment of Rs 10,000 per month at the age of 35. By 60, his total investment of Rs 30 lakh can only fetch around Rs. 1.3 crore, assuming the rate of return as 10% per annum. Retirement corpus is lesser in the second scenario even if the invested amount is more! That’s just because investment was started ten years later. Such is the effect of time and compounding! Tips: Start investing in systematic investment plan from your very first salaryClarity on future goals indicates there is a need to investFormulate an investment strategy once you have recognised your financial goals. For example, you may want to set aside money for your marriage, which is 12 months down the line. Now that the end target is precise, you can start to fine tune the investments to reach that goal. You can similarly create long-term goals and invest accordingly. A well-calibrated investment strategy will help you realise your goal in the long term.There are some strong indicators that tell you to start investing. They are: 1. You have your financial goals penned down. This is the first step of financial planning. This is because you know how much money you need and when. It also means that you are “investment ready”.2. You have paid off your outstanding loans and still have some cash in hand. This will help you build your investment kitty.3. When investments aren’t meant to merely save taxes. Here are a few investment strategies for beginners:✓ Start today! There is nothing called the right time. The sooner you start, the better for you. Waiting for the better job and better salary will only make you miss the opportunity.✓ Take help of advisors. You can make a better choice with their help. ✓ Know the products that you are investing in. Understanding the product helps you make an informed decision.✓ Start with simple options in the beginning. Start by investing in options like mutual funds and then proceed to other asset classes like equity.✓ Monitor and review your investments.✓ Increase investment amount with time. ✓ Create emergency fund. Try to keep at least six months’ worth salary in this fund. ConclusionStarting early is the key to success. So, take charge of your financial future and get started as soon as possible. Keep reviewing your investments regularly and track their growth. This will help you reach your goals successfully.

read more

Are you Investment ready?

*All fields are mandatory

related stories view all

  • What is a Unit Linked Insurance Plan, Types & Benefits

    What is ULIP? Insurance plans are meant to provide financial security to you so that in case of premature demise, your family does not face any financial trouble. Though insurance plans provide unmatched financial security, many individuals also seek good investment returns on their premiums. Keeping this sentiment in mind, ULIPs were launched in the year 2000 when private life insurers were also allowed to operate in the insurance domain. Today, ULIPs have become quite popular, and insurance companies are offering different types of ULIPs to their customers. Let’s understand ULIP meaning in detail and its benefits – What is a ULIP plan? ULIP’s full form is Unit Linked Insurance Plan. A ULIP is an investment-oriented life insurance plan. The plan gives you the dual benefits of investment returns and insurance coverage. The premiums that you pay for the plan are invested in market-linked investment funds, which offer attractive growth. Returns under ULIPs are, therefore, not guaranteed but can be attractive if given time. How do ULIPs work? ULIPs are considered to be a transparent insurance plan as the premiums you pay, and the growth can be easily monitored. When you buy a ULIP, you can decide the amount of premium you wish to pay (provided it is at least the minimum required premium under the plan). The sum assured is then calculated based on the amount of premium paid. ULIPs have different kinds of investment funds which include the following – Equity fund wherein at least 65% of the portfolio is invested in equity-oriented securities Debt fund wherein at least 65% of the portfolio is invested in debt-oriented securities Balanced fund which combines both equity and debt investments for moderate risks and moderate returns You can choose one or more of these investment funds as per your risk appetite. After that, relevant charges are deducted from the premium, and the premium is directed towards the selected fund. As the value of the underlying assets grows, the value of the fund grows. Your investment in the fund also grows, and you get market-linked returns. ULIPs also provide you with various flexible benefits which are as follows – Switching – under switching, you can change the investment funds if your investment preference has changed Partial withdrawal – you are allowed the flexibility of withdrawing from your fund value partially after the first five years of the policy have expired Top-ups – additional investments can be done towards the plan through top-up premiums Premium redirection – you can choose to redirect your subsequent premiums to another fund from the next policy year under this facility Surrender of the plan – if the first five years of the policy have been completed, you can surrender your policy to terminate the coverage before the chosen term. When the policy is surrendered, the available fund value is paid as surrender value, and the plan is terminated. Benefits payable under ULIPs Under most unit-linked plans, you get either a death benefit or a maturity benefit. These benefits are as follows – Death benefit – the death benefit is higher of the available fund value as on the date of death or the sum assured. If the fund value is higher than the sum assured, the fund value is paid otherwise, the sum assured is paid. Maturity benefit – when the term of the plan comes to an end, the fund value is paid as maturity benefit. The maturity benefit can be taken in a lump sum, or you can also avail the benefit in instalments over the next five years through the settlement option feature, which is available under most unit-linked plans. Types of ULIPs Though ULIPs are aimed at creating wealth, there are different types of ULIPs based on the financial goal that they fulfil. These types include the following – Investment ULIPs Investment ULIPs are the most common unit-linked plans which aim to create wealth over the term of the policy. Child ULIPs Child ULIPs are especially designed unit-linked plans for the financial security of the child if the parent is not around. Under these plans, the parent is insured while the child is the beneficiary. These plans have an inbuilt premium waiver rider. If the parent dies during the policy tenure, the death benefit is paid. However, the plan does not terminate. The policy continues, and future premiums are paid by the company on behalf of the insured parent. On maturity of the policy, the fund value is again paid as the maturity benefit which provides the child with the financial corpus needed to pursue his/her dreams. Pension ULIPs These are other specific unit-linked plans which help in creating a retirement fund. Pension ULIPs are deferred annuity plans wherein you pay premiums during the policy tenure to build up a retirement corpus. In case of death, the death benefit is paid. However, if the policy matures, pension ULIPs allow you to receive annuity pay-outs from the corpus created or defer the vesting age from which you would receive an annuity, or withdraw 1/3rd of the corpus in cash and use the remaining fund value to receive annuity payments. Thus, pension ULIPs create a source of income after retirement and are suitable for individuals looking to fulfil their retirement planning needs. Benefits of ULIP A ULIP is popular because of the following benefits it provides – It allows you to avail insurance coverage as well as investment returns in a single product The premiums paid and the benefits received under ULIPs are completely tax-free in nature helping you save tax The flexible benefits of ULIPs allow you to manage your investments as per your investment strategy The different types of ULIPs help you fulfil the various financial goals that you might have Switching and partial withdrawals do not attract any tax making ULIPs tax efficient Since the returns are market-linked, you get inflation-adjusted returns from ULIP ULIPs are attractive insurance policies that give you coverage as well as returns. Now that you understand ULIP meaning, its types and advantages, use our IndiaNivesh platform to invest in a plan as per your insurance and investment needs and enjoy all the benefits that the plan has to offer.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

    read more
  • What is CAGR & How to Calculate it?

    There are different types of investment avenues in the market and each of these avenues promises you a compounded rate of growth if you remain invested. Compounding of return means earning a return on the return earlier generated. So, if you invest INR 100 and earn a return of 10% in the first year, the amount would become INR 110. Thereafter, in the second year, you would earn 10% on INR 110 giving you a return of INR 11. This compounding helps grow and multiply your wealth considerably over a period of time. In the case of market-linked investments, the rate of return is not guaranteed. It varies over the investment period. To know the average rate of return on your investments, the concept of CAGR is used. Let’s understand what CAGR is and how it helps you find the growth of your market-linked investments. What is CAGR? CAGR’s full-form is Compound Annual Growth Rate. The Compound Annual Growth Rate, in simple terms, is the average rate of return of an investment over a one year period. CAGR takes into account two important factors - the time period of the investment and the fluctuations in the return. Since the returns vary depending on the market fluctuation, finding the return over a specific time period becomes difficult. CAGR gives you the average growth rate offered by the investment over the said time period. CAGR shows the approximate growth rate considering that there is no market fluctuation and that the returns earned are reinvested into the investment. How to calculate CAGR? It is very easy to calculate CAGR. There is a CAGR formula which you can use to find the Compound Annual Growth Rate of your investment. The CAGR formula needs three important details which are as follows – Value of the investment made initially (VI) Term of investment (T) Value of the investment at the end of the term (VE) Using these three inputs, the CAGR formula becomes – CAGR = (VE / VI) ^ (1/T) – 1 Let’s understand with an example – Mr. A invested INR 10,000 in a market-linked investment avenue. After 3 years, the value of his investments stands at INR 13,500. The CAGR for Mr.A’s investment could be calculated as below – VI – INR 10,000 T = 3 years VE = INR 13,500 CAGR = (13500/10000) ^ (1/3) – 1 = 10.52% How CAGR helps understand the mutual fund growth rate? Mutual funds are market-linked investment avenues which do not offer a guaranteed rate of return. Since the returns are subject to market fluctuations, CAGR becomes an accurate tool to measure the performance of the fund over a specified period. Investors can check the annual CAGR of mutual fund schemes and use the rate to find out which scheme offers better returns than others. The fact sheet offered by the mutual fund house contains returns generated by the fund over different time frames. These returns can prove to be confusing and so CAGR is an easier alternative to understand the performance of the fund. CAGR acts as a ready reckoner for investors to assess returns from a mutual fund scheme and also highlights the compounding of returns on mutual fund investments. Important points to know about CAGR The investment risk inherent in the scheme is not highlighted by CAGR. CAGR is merely a yardstick to measure the growth rate CAGR proves to be a good measure of growth for a short-term period, i.e. up to 6 or 7 years. If you are considering long-term investments, the growth trends over a short-term period would be averaged out. In such cases, CAGR would give an average rate even if the fund performed excessively well in a two or three year period and then the returns fell in later years. CAGR changes every year since the investment period changes CAGR for two investment funds can match one another even if the funds are different. This might happen if one fund performed well initially and the other one performed well in the last few years. As a result, the performance is averaged out and the CAGR Other modes of calculating returns from investments Besides CAGR, there are other ways to calculate the returns generated by market-linked investments. These ways are as follows – Returns since launch Under this model, the return earned by the fund ever since it was launched and till the present date is calculated. Trailing returns Under the trailing returns approach, you measure the performance of your fund daily, weekly, bi-weekly, monthly or annually. Annualised returns Annualised returns are calculated as the geometric average of the return yielded by the fund over a given period of time. CAGR v/s Absolute returns Absolute returns measure the total return yielded by an investment. The time period is not considered. CAGR, on the other hand, measures the return over a specific time period. For instance, in the previous example, INR 10,000 grew to INR 13,500 over a 3-year period. The absolute return would be 35% since it measures the total return earned on the investment. However, when CAGR is considered, the time period of investments is also taken into consideration thereby considering the time value of money. As such, CAGR comes to 10.52% which is a more realistic figure. While absolute returns show the returns generated, the time period is missing. You cannot figure out how many years it took the investment to generate this return. But CAGR shows you the annual return making it easier to make a judgement on the performance of the fund. The next time you invest in mutual funds, stocks or other market-linked investment avenues, consider their CAGR to choose the fund or investment which has better returns over its peers. So, visit IndiaNivesh and find out a mutual fund scheme of your choice and then compare the scheme’s CAGR with its peers to choose the best performing fund.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

    read more
  • Capital Market – Meaning, Types & Functions of Capital Market

    We all know how various companies and industries raise funds for their short term requirement through the money market. However, when they need funds for long term, capital market is their source. The capital market is just like the money market but with a difference that funds raised in the capital market can be used only for long term. In this article, you will learn about the concept of capital market in detail. Let us first understand what is the capital market? Understanding Capital Market Capital market in simple words means the market for long term investments. These investments have a lock-in period of more than one year. Here, the buyers and sellers transact in capital market instruments like bonds, debt instruments, debentures, shares, derivative market instruments like swaps, ETFs, futures, options, etc. Let us now understand the types of capital market. Types of Capital Market The capital market is of two types i.e. Primary Market and Secondary Market. Primary Market The primary market is also called “New Issue Market” where a company brings Initial Public Offer (IPO) to get itself listed on the stock exchange for the first time. In the primary market, the mobilisation of funds is done through right issue, private placement and prospectus. The funds collected by the company in the IPO is used for its future expansion and growth. Primary markets help the investors to put their savings into companies that are looking to expand their enterprises.  Secondary Market The secondary market is a type of capital market where the securities that are already listed on the exchange are traded. The trading done on the stock exchange and over the counter falls under the secondary market. Examples of secondary markets in India are National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). After learning about the types of capital market, let us now learn about the capital market instruments through which money is raised. Ways of Raising Funds Offer through Prospectus In the primary market, the prospectus is used to raise funds. The company invites the investors and the general public through an advertisement known as the prospectus to subscribe to the shares of the company. The shares or debentures are allotted to the public on the basis of subscription. If the company receives a high subscription then allotment is done to them on pro-rata basis. The company hires merchant bankers, brokers or underwriters to sell the shares to the public.  Private Placement Some companies try to avoid the IPO route to raise funds as it is very costly. Instead, they give investment opportunity to few individuals via private placement. Here the companies can offer their shares for sale to select individuals, financial institutions, insurance companies and banks. This way they can raise funds quickly and economically. Rights Issue The structure of capital market allows the companies in need of additional funds to first approach their current investors before looking at the other sources for finance. The right issue gives the current investors the first opportunity to make additional investments in the company. The allotment of right shares is done on pro-rata basis. However, if the current shareholders of the company do not want to exercise their rights, the shares can be offered to the public. e-IPO e-IPO means Electronic Initial Public Offer. e-IPO is an agreement between the stock exchange and the company to offer its shares to the public through online mode. It is a fast and speedy process. The company here needs to appoint registrar to the issue and brokers to accept the application received from the public. The above mentioned are the ways of raising funds through the capital market. Let us now learn about the various functions of the capital market. Functions of the Capital Market Helps in the movement of capital from the people who save money to the people who are in need of it. Assists in the financing of long term projects of the companies. Encourages investors to own the range of productive assets. Minimises the transaction cost. Helps in the faster valuation of financial securities like debentures and shares. Creates liquidity in the market by facilitating the trading of securities in the secondary market. Offers cover against price or market risks through the trading of derivative instruments. Helps in efficient capital allocation by way of competitive price mechanism. Helps in liquidity creation and regulation of funds. The above mentioned are the functions of the capital market. The capital market performs its functions with the help of buyers and sellers who interact and transact. The structure of the Indian capital market is well regulated and highly organised. The capital markets may be sometimes termed risky because they do not give fixed returns annually. But when looked from a long term perspective, their performance has always been good and rewarding for the investors. If you want to learn more about the capital market or put your savings in the capital market, you can contact IndiaNivesh Ltd.Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."

    read more