Thumb Rule for Financial Planning

Thumb Rule for Financial Planning

Financial planning may not be all that an easy task. In fact, it can be easy to make mistakes or get the steps confused. This, however, needs to be rectified right away. Otherwise, a flawed plan has the tendency to negatively affect your financial health.

Don’t worry, though. There is a thumb rule for financial planning that one must follow, just like most crucial planning. Or you could avail a qualified financial planner to save on time and effort. Refer to these basic financial planning rules of thumb, which, if followed, can help in creating the perfect financial plan:

• The 30/30/30/10 rule

One of the thumb rules for financial planning is a very simple rule that helps allocate your monthly income to various priorities. According to this rule, your monthly income should be divided in the following manner:

This allocation of your income lets you take care of all aspects of your financial plan without any strain.

• Loan EMIs: Never exceed the 30% of gross monthly income

The 30/30/30/10 rule also gives a direction of your liabilities. If you have loans, the aggregate EMIs of your car loan, home loan and any other liabilities you have should not exceed 30% of your monthly income. At best, this can be pushed up to 50%, but no higher. If it does, you would invariably fall into a debt trap. So, assess your EMI payments as a percentage of your monthly income. If it is more than 30-50%, it’s time to manage your debt.

• (6*monthly income) for your emergency fund

Every financial plan is incomplete without the provision of an emergency fund. This fund takes care of sudden expenses which might blow your carefully planned budget and hamper your savings. The 30% of your income that you invest should also contain a provision for emergency funding. Ideally, you should direct 10% of your investments towards an emergency fund. An ideal emergency fund should have at least 6 months’ worth of your income. Many also suggest that it should have enough to fund expenses for 3-6 months.

• Life Cover: The Rule of 10

Just like how half-knowledge is dangerous, underinsurance can be hazardous too. Unfortunately, many make the mistake of under-insuring themselves or their family. Yet, optimal life cover is essential for providing financial security for your family.
When choosing a term life insurance plan for covering your death risk, decide the coverage basis your gross annual income. Your life cover should be at least 10 times your gross annual income. Only then will you be able to create a sufficient corpus for your family in your absence.

• Choose appropriate investments through the Rule of 72

Do you know how long it would take for your investments to double? The Rule of 72 helps you find just that. No need for complex mathematical calculations. Just divide 72 by the rate of return promised by an investment avenue. This should give you a tentative idea of how long it will take to double your investment amount. For example, if an instrument promises 8% interest, it would take 72/8, i.e., 9 years for your investments to double. Similarly, for a 12% interest rate, 6 years would be needed to double your investment. So, use this rule to understand for how long you should hold your investment to get a 100% rate of return.

• Retirement fund: Minimum allocation of 10% per month.

When investing, direct at least 10% of your investments towards your retirement corpus. For a more comfortable retirement, increase this allocation to 15%. This can help you benefit from the power of compounding through long-term investments and build a decent retirement corpus. Also, ensure that your retirement corpus is at least 15-20 times your gross annual income.

• Asset allocation rule

Your portfolio should have proper asset allocation depending on your risk profile. Ideally, (100-your age)% of your portfolio should be invested in Equity. In fact, this is often indicative of your risk appetite. At younger ages, a higher equity exposure can be manageable. Any volatility you face can be smoothened out over time and you can earn attractive returns. Debt allocation should, consequently, be equal to your age. Thus, as your age increases, your equity exposure can reduce and debt allocation can increase to cut down on risks.

The bottom line

These are the basic rules of financial planning which are universally applicable. When you are designing your financial plan, follow the financial planning thumb rule as mentioned above and other helpful tips to avoid mistakes.


Myth Busters about Investing

With virtually unlimited supply of financial information accessible today, there has never been a more profitable time to know more about investing. Regrettably, there is also a good deal of misinformation that goes together with useful data.Falling prey to market misconceptions can make you commit silly investing mistakes. Getting influenced by investing myths can majorly affect your financial journey. Common myths about investing can have a severe impact on quality of investment decisions you make. So, here is an attempt to tackle some myths about investing which is decoding investment myths is essential. Myth 1. Too young to think about retirementReality: It’s never too early. You can build significant amount of corpus when you have time on your side. Being a stereotype who believes in not starting early will lose out later. Actually, starting early can help you build an enviable retirement kitty. Myth 2. Tax-saving is the objective of financial planningReality: There are lot of people who rush to invest only for tax-saving purposes. However, meeting tax goals is not the only criteria in investment. Investments are to be planned in advance to meet your financial goals too. Myth 3. Investing requires lot of fundsReality: Times have changed. You don’t need a large sum to invest anymore. There are investment options like mutual funds which allow you to invest in smaller amounts. You can invest in them for as low as Rs 500 every month.Myth 4. Fixed deposits are the best Reality: Fixed deposits are safe and provide guaranteed returns. But fixed deposits cannot fetch you inflation-beating returns. Myth 5. Bonds are very safeReality: This is a common misconception. There are various types of bonds. The degree of risk depends on its credit rating, maturity and interest-rate volatility. Understanding the relationship of price and yield is crucial in this case. Myth 6. Quick money can be earned from stock marketReality: Stock market is a great place to make money only if you have time, hard work, patience, discipline and rational approach. There’s no other substitute. Myth 7. There’s no harm over-diversifyingReality: It’s true that diversification is the key to investment success. But, over-diversifying your portfolio can dilute the return potential. Myth 8. All advisors are the sameReality: There are many advisors like fund managers, investment advisors, financial planners, brokers and insurance advisors; the scope of these advisors differ. The key is to choose the right advisor depending on what you are looking for. To sum upRational thinking and trusting the right information are two key truisms that should stick with you. This can be more than enough to debunk the general myths about investing. Nothing else should matter. People may offer to give advice but it is important for you to sift the truth from the faff.A number of factors can eat into your pension or retirement pot. These are, typically, medical costs, lifestyle upgrades, assisting children with their education, caring for older people, and most importantly, inflation that can be a huge drain on one's finances. This means it is even more essential to ensure your invested money is working hard to help you take care of yourself and the ones closest to you. At the end of the day, investment myths are more than disheartening; believing them could prevent you from building the kind of financial plan you require to address lifetime purposes. Let the myths stay with the storytellers and speak to a professional finance expert to know more about savings and investment plans.

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Why do you need to set goals?

What is goal setting?Everyone has dreams and ambitions. For example, a student may want to stand first in class. An athlete wants to win the gold medal in a track and field event and so on. But when it comes to finance, everyone has a similar dream. People want enough money so that they can meet their needs and desires. However, having a dream is not enough. You need to convert these dreams into reality. And for that, goals are necessary. To borrow a line from author Napoleon Hill, “A goal is dream with a deadline.” The goals of financial management are critical in ensuring a seamless investment process for a better tomorrow.So, let’s find out why goals are very important when it comes to financial planning.Goals in financial managementWhat is goal setting? Stocks, mutual funds, bonds, pension plans and fixed deposits are some of the common investment avenues where people invest their money and can be regarded as goals. But instead of simply investing to earn higher returns in the future, it is always better to invest with a purpose, thus emphasising the importance of goal setting in our lives. Why is goal setting important? Let’s take Gaurav’s case as an example. An accountant by profession, he has a wife and two young kids. He wants to start investing because his financial responsibilities are going to increase in the future. The illustration below lists a few of his future responsibilities and financial goals he wants to achieve in the next few years. Clearly, Mr Gaurav has different obligations. But on a closer look, it is possible to segregate them into three different categories: Importance of goal setting Segregating your financial requirements into short-, medium- and long-term goals can be very helpful. This way, you can create a good plan to achieve these goals at the right time in life. In addition, it also helps you identify which investment options can help you achieve your goals as fast as possible. ConclusionTaking that first step to invest money is very important. But it is more important to invest towards specific goals. This way, you can channel your funds in the right manner and utilise the benefits of goal setting through a sound financial plan, thus realising your dreams in a timely manner.

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The above mentioned are a few things that one must know before indulging in commodity trading in India. As a beginner or seasoned investor, you can contact IndiaNivesh for any assistance relating to the Indian commodity market. Our experts and professionals can help you in finding the best commodity to trade in India according to your risk-taking ability and financial goals. Our aim is to exceed the client’s expectation in all endeavours and we will be glad to serve you.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

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They invest in an equity mutual fund as they have the potential to generate higher returns. Once they reach their desired corpus, they can opt for an SWP. Through this facility, they move the funds from the equity investments to a relatively safer/ non-volatile option such as Bank Deposits, etc.   Final Words Systematic Withdrawal Plans help to cultivate a sense of financial discipline. It can be effectively used as a means to fund your monthly expenses or finance your (or your parent’s) retired life. Not only does it offer regular income but also ensures a controlled and budgeted approach to spending. However, you should try to withdraw only the interest part and keep the capital amount intact. In case you are unable to decide how much is too much, it is best to seek the help of an expert like IndiaNivesh. The team at IndiaNivesh can help you choose the right Mutual Fund scheme and the correct SWP amount basis your financial needs and investment tenure. They also offer a wide range of financial solutions related to broking and distribution, institutional equities, strategic investments, investment banking and wealth management. You can read all about them on "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."

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  • Commodity Investment – Reasons to Invest in Commodity Market

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Hard commodities- Those, that are obtained through mining and extraction. Example of hard commodities includes oil, metals and natural gas. Why should you invest in the commodities market? Commodities play an important role in the development process and hence are building blocks of every economy. Commodity investments can help you diversify your portfolio into a different asset class apart from shares and bonds and enhance the overall returns of your investments. For many of you, the general perception is that the commodity market is complex and hence not something that everyone can dabble into. However, commodity investments can fetch you handsome returns.  Here are the top three reasons to invest in commodity markets for all types of investors-1. To diversify your portfolio  One of the key factors that determine the success of your financial planning is diversification. Diversification with regards to investment portfolio means investing in various assets that are not correlated to each other of your portfolio in different asset classes. Most of you would be diversifying your portfolio in five major asset classes which include cash, shares, fixed income securities, real estate, and gold. In times of increased volatility in the markets, you are either holding on to cash or investing in gold. Gold is considered the safest haven for investment in turbulent times and Indians tend to invest in gold because it is considered as a symbol of wealth and has ornamental value. However, in reality, the gold in your portfolio is your investment in commodity and just like all the other commodities the returns from it are independent of the returns generated by stocks and bonds. Just like gold, there are other commodity investments whose returns are not correlated to equities and bond markets. The price of any commodity investment is a function of demand and supply and by doing proper research and analysis you can make profits from commodity market investments.2. To provide a hedge against inflation Inflation is the general rise in the price of goods and services over time. For any investment to be fruitful, it is important that the returns generated beat the rate of inflation.  Higher inflation effectively erodes the real returns generated by your investments in stocks and fixed income securities. However, in the case of commodities, higher inflation relates to the higher price of commodities. So, unlike other investments, your commodity investments will result in a strong performance when inflation is high. Given the current situation when inflation is constantly on the rise, investing in commodities will provide a hedge against inflation.3. To improve potential returns The prices of individual commodities can fluctuate significantly due to several factors such as demand and supply, the impact of natural calamities, exchange rates and the economic health of the nation.  The rise in infrastructure projects in a developing country like ours and also globally has had a positive impact on commodity prices. As the commodity market is still an untapped arena, many of them are trading at a lower price than their actual potential. Proper research and effective implementation of investment strategy in commodities can help investors improve the overall returns on their portfolio. What are the various options to invest in commodities? The commodities market is a very deep market and investors have many investment vehicles to access it.  Let us look at the various options available for investors to buy and sell commodities1) Investing in the physical form Commodities such as gold, silver, etc., are bought by investors in physical form.  However, not all commodities can be bought in physical form as it has its drawbacks of storage and spoilage. Even in the case of precious metals security and insurance increase the cost of your investment. Moreover, most of the time you want to invest in a commodity, not for end-use but to make profits if you anticipate that the price will increase. So, buying a commodity in physical form, except for precious metals, is generally not recommended for retail investors.2) Investment through commodity futures One of the most common ways to trade in commodities is through a commodities futures contract. It is a standardised agreement to buy or sell fixed quantities of the underlying commodity at a predetermined price on a specific date as mentioned in the contract. Also, commodity trades happen electronically through commodity exchanges where investing real-time commodity is possible.  Multi Commodity Exchange of India (MCX), National Commodity and Derivatives Exchange (NCDEX) are two of the many commodity exchanges present in the country which help investors trade in commodities. All the commodity exchanges come under the regulation of the Forward Markets Commission (FMC). 3) Commodity ETFs Commodity ETFs are another popular investment option available for retail investors to diversify their holdings in commodities. Commodity ETFs invest in a single commodity and physically hold and store it, invest in a commodity futures contract or invest in a commodity index that tracks the performance of multiple commodities. Investors can invest in commodity ETFs electronically in their Demat account. 4) Commodity Stocks Investors who are not comfortable with investing in commodity futures or ETFs can diversify their portfolio in commodities is by investing in commodity stocks. Commodity stocks are stocks of those companies which are directly or indirectly related in the manufacturing process of the commodity and hence have a positive correlation with the commodity.  For example, if you feel that the steel prices are going to increase, then you can invest in the stocks of various steel companies listed on the exchange. 5) Mutual funds One of the biggest reasons for an investor to shy away from commodity investment is that commodity investments require a lot of time, knowledge and expertise to make the right investment choices. However, now SEBI has permitted mutual funds to invest in the commodities market through the exchange-traded commodities derivatives (ETCD) route.  Thus, retail investors can now participate in commodity markets in a structured manner through professionally managed mutual funds. Takeaway Commodities are a broad and diversified asset class that offers a great investment opportunity to investors. Given the high inflationary pressure and volatility in the markets, dedicating a small portion of your portfolio to commodities will help enhance the overall performance of your investments. Investing in commodities may look intimidating and you may feel a little hesitant to explore your options, but correct guidance from an experienced financial advisor can help you understand the nuances of commodity markets and make the right investment decisions as per your investment needs. Financial advisors at IndiaNivesh possess the requisite expertise and experience to help and guide you with investments in commodities markets.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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