Tips for financial planning

Tips for financial planning

You might not be born rich but you can grow into wealth. After all, becoming rich is not luck. It is effective financial planning. And to make an effective financial plan, you need to employ a few basic financial planning tips and avoid mistakes that can jeopardise your entire financial plan.

There are some best financial planning tips which, when followed, lead to effective financial planning. Do you know these financial planning tips India? They are simple to follow and can easily manage your debt. Here are some:

• Save first, spend later

This is the first tip for you to follow in your financial planning process. Whenever your income is credited, save a portion of it first. At least 30% of your income should be directed towards savings for your financial goals. Of this 30%, hold 10% in an emergency fund for unforeseen expenses. (Link to thumb rule article). Also, another 10% should go towards a retirement corpus. This way, you start retirement planning early and retire rich.

• Plan your taxes and tax saving

Tax is an integral part of your income. Breaking it into relevant sections like medical, travel, etc. can be a nice trick. It can help you make the most of all possible tax exemptions and deductions. Here are some tips to maximise tax benefits:

Section 80C lets you save up to Rs.2 lakh of your taxable income from tax. Use the investment avenues of this section to maximize tax-saving. You can choose from PPF, ELSS, 5-year Fixed Deposits, National Savings Certificates, etc. This includes the additional Rs.50,000 deduction that you can get through National Pension Scheme (NPS).

Section 80D lists tax-saving options on health insurance for self, spouse children and dependent parents. You can save up to Rs.60, 000 of your taxable income if you pay premiums for health insurance policies of your family and your parents. Also make use of the tax deductions on medical expenses.

Home loans can save tax in two ways. You may know about the deduction on principal repayment as a part of 80C. But do you know that the interest component also gets a tax deduction, over and above the limit of Section 80C? This is as per Section 24 that allows interest on home loan to get you a tax deduction. This section’s provisions can be utilised for maximum tax-saving.

• Manage your debts: Control bad loans, optimise good loans

The next important tip is managing your debt. Repay your loan instalments on time to avoid damaging your credit score and high interest payments. Stay away from or get rid of bad loans and optimise good loans. Here are some ways how:

Bad Loans:
1. Credit card loans involve very high interest. Also, the interest is charged on a per day basis until you pay off the debt. Thus, the interest compounds and your net cost rises too high. So, pay off your credit card loans first. Never revolve credit card outstandings.
2. Personal loans also have high rate of interest and little tax efficiency. After you pay your costly credit card debt, prepay or pay off your personal loan debt next. Refinance loans to lower interest rates if possible too.
3. Car loans being secured loans have a lower rate of interest. But they can be paid off at the earliest too. After all, they provide no tax relief, unless you are classified as a ‘professional’ in the tax system.

Good Loans:
1. Home loans are good loans as they help you save tax. We read earlier about the tax deductions on your home loan principal and interest repayments. So, if you have a home loan, don’t rush to prepay it.
2. Similarly, zero-interest finance options need not be prepaid. Instead, use your excess funds for investment to generate good returns.
3. Education loans too provide tax benefits. So, think twice before prepaying these too.

• Don’t put all eggs in one basket: Diversify your investments

Don’t favour one investment avenue. Diversify. Have a good equity-debt mix in your portfolio. The proportion of debt investment in your portfolio should be equal to your age. As you grow older, your debt investments can increase as your risk-taking ability reduces with age. Of course, don’t confuse this with loans and other debt liabilities. Equity allocation should depend on your risk appetite.

• Pen your goals

Goals are best understood and remembered only when they are penned down. Analyse whether your goals are short-term or long-term ones. At least 10% of your investments should be directed towards long-term goals, while the rest can be directed for short-term investments. Pick the right investment avenues based on the horizon of your goals. Don’t invest in long-term investments for your short-term goals.


Why simply saving is not enough

How many times have you heard your parents and relatives say: “It is very important to save money. Don’t spend all of it.”That’s a very sage advice. But guess what? Simply saving money in a bank account is not enough. You need to go one step ahead. And that means to invest. Employing smart investment tips through a smart investment plan can make the difference between creating wealth and merely saving.Why simply saving is not enoughSavings can help you meet a few financial goals. But in order to truly build your wealth over the long-term, it is important to invest utilise smart investment ideas to make money. Of course, there is a risk of losing money in investments, such as a smart investment in share market. But as an astute investor, it is possible to manage the risks and enjoy high returns.How to make smart investment choicesHere are some tips you could follow to shift from saving to building wealth.Lower returnsWhen you save your money in a bank account, the returns you earn can be very limited. For instance, most banks offer around 6-7% on fixed deposits. The interest rate on savings accounts is much lower at 3-4%. And with inflation usually hovering between 4 and 5%, it is highly possible that your buying power reduces over time. In other words, your returns are eaten away by inflation.Potential growth from investingOn the other hand, there are many investment avenues that offer greater returns to investors. Mutual funds offer returns anywhere between 10-15% per year. You can invest in debt funds, equity funds, Exchange traded Funds (ETFs), balanced funds and so on. Investing directly in the stock markets can help you earn much higher returns annually. So, based on your risk appetite and financial goals, you can choose to invest in any of these options to start building wealth. Goal planning and investmentsAs you grow older, your financial responsibilities are bound to increase. Getting married and having kids can be emotionally wonderful. But it also means that your expenses start growing. Buying a new car, a new house, putting your kids in good schools and colleges are some of the major expenses that occur down the line.With a fixed income and limited savings, it may not be possible to do justice to all these milestones. However, by creating a proper financial plan and investing for the long-term, you can slowly but steadily create a large corpus of wealth. And one by one, you can meet all your financial goals on time.Start investing nowMany people wrongly assume that investments are only possible after you have saved a large amount of money. Yes, it is important to save first and then invest. But that doesn’t mean you need a huge amount to invest. You can start investing even with small sums of moneyMany mutual funds allow investors to investors to invest as little as Rs 500 each month through SIPs. Here, the important thing is consistency. By investing month after month, you can really see the difference over a period of time. As your income and confidence grows, you can increase your SIP. And as your knowledge of the market grows, you can branch out and invest in other avenues too. Stocks, futures, options and gold are a few possible avenues.ConclusionAs a young person, setting financial goals may be the last thing on your mind. However, that shouldn’t stop you from investing for long-term wealth creation. Remember, savings are good but investments are better. DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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Why some assets are riskier than others

Be it stocks, mutual funds, bonds, exchange-traded funds or real estate, there is an element of risk in all types of investment. The only thing that separates them is the degree of risk. In order to understand this better, let’s look at factors such as investment risk management, investment risk and return etc., amongst others that determine the risk level of each investment option. Factors that influence risk element of each assetWhat is investment risk? The risk level of each asset is dependent on its characteristics, investment horizon and behaviour (the way an asset reacts to change in overall market, political and economic environment, interest rates etc.). • Level of volatilityVolatility indicates how rapidly the value of an investment asset can change in a specific time period. This is why stocks are considered volatile. That’s because share prices can change several times in a short time. This means that you can either make a large profit or lose a large chunk of your investment in a short time. A fixed deposit, on the other hand, is less volatile because its value doesn’t change intermittently. This is why fixed deposit returns you receive are fixed. • Time horizonDuration of an investment can determine the risk level as well. For example, a short-term equity investment can be risky because its value changes constantly. But when it’s held for a longer period of time, various studies show that equity is a high-performing asset class. That’s because the price of equity usually flattens in the long run. There is a sense of stability in the long run. Meanwhile, debt investments are relatively safe for short- to medium-term goals. That’s because they provide steady returns if not kept for very long. They can be a long-term investment option as well but the returns may not be able to beat inflation. This is why people usually opt for equity over the long-term and debt investment for a shorter time period. • Nature and characteristicsYou also need to look at the nature of an asset class (equity, debt and gold are some examples of an asset class). Let’s take the example of stocks again. Owning shares of a company means you own a part of their business. You are entitled to company’s profit. You are also expected to bear the loss. This is why stock investments can be a high-risk, high-reward investment. On the other hand, investing in bond means lending money to an entity (it can be a government or a corporate) for a defined period. The chances of losing your money in such cases occur only if the company or the government default. • Asset behaviour towards economyRisk can also be assessed by particular asset’s behaviour towards prevailing economy. For example, market value of bonds reduce with an increase in interest rate and vice versa. Equity investments also get impacted by everyday price movement, industry performance and many other factors. • Individual investor’s risk toleranceIn the end, everything boils down to an investors’ ability to take risk. For example, investing in equity can be a risky proposition for a retired person because they usually look at an asset class that can provide them a steady source of income. In contrast, the risk appetite of a younger person is usually higher and may opt for equity. That’s because they can absorb the short-term volatility and wait for the investment to potentially provide high returns in the long run. To sum upEvery financial asset has a degree of risk. Understanding the nature and level of risk helps you manage those risks effectively to pursue your financial goals. This is why IndiaNivesh can offer you specialised solutions to achieve your financial goals.

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  • What is CAGR & How to Calculate it?

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

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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."

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