Here's step by step process for investing money

What does it take to lead a successful and financially independent life? In cases like a student seeking overseas education, a bachelor planning for his wedding, etc., lies the need to plan for future expenses. Hence, financial planning is necessary.  

Investment decisions taken in the early stage of life have the potential to transform financial future. Also, starting at a young age allows you to take higher risk. Let’s have a look at a few very important financial/investment decisions.

Insurance: The most important thing to start your financial planning is by insuring you and your family from all sorts of emergencies like medical, financial etc. Hence, invest in insurance by the way of term plan and health insurance.

A term plan helps you insure yourself by comparatively paying a very low premium. You can also opt for accidental injury and critical illness riders with a term plan, and make it a full-fledged insurance scheme at a reasonable cost. You can deduct the amount of yearly premium paid from your taxable income. Buy term cover early to avail higher cover at lower premium. Opt for tenure covering till 60 or 65 years of age.

After term insurance, comes  medical insurance.which is essential as needs can arise unannounced. One obvious advantage is low premium of medical insurance for young individual. This will also allow you to see through initial waiting period of three years without any fuss. Delay in buying the policy may result in medical conditions that usually crop up in the late 30s and 40s. Start with individual plan and then convert the same to family floater once you get married and expand the family. Do not rely solely on employer health benefit. In most cases this may not be adequate and remember, this will not be available once you retire, when need for health cover is most.

Emergency fund : Even though you are adequately insured there are certain emergencies which insurance does not cover e.g. job loss. Always maintain your seven-to eight-months monthly expense as emergency fund and park the same either in short-duration bank fixed deposit or invest the same in liquid/money market-mutual funds or opt for sweep in savings account. This fund will come handy in case you decide to take career break for higher studies or lose your job or prolonged medical treatment.

Stress test : Before doing any investment in capital markets, it is essential to know your risk appetite and therefore, it is recommended that you do a financial stress test to know how much risk you can take while investing. This also helps in deciding your asset allocation which ultimately decides your overall portfolio returns.

Goal planning: In financial markets it is very essential to know your goal or your intention behind any form of investment as it helps in aligning your investments to your goals. A goal-based approach is a scientific way of assuring return on your investment. It is one of the important steps in financial planning.

Disciplined investment via SIP/STP : Systematic investment plan (SIP)/systematic withdrawal plan (SWP) in a growth asset like equity through mutual funds, is a disciplined and structured way of investment that gives handsome returns due to the power of compounding. The SIPs and SWPs also help by the way of rupee cost averaging i.e. it ensures that you buy more units when prices are low and less when they are high.

Just consider this. An amount of Rs 5,000 invested per month, growing at 12% can create corpus of Rs 1.54 crore in 30 years. Here, your capital investment is only

Rs 18 lakh and your money is multiplying by 8.5 times. If you delay starting SIP by just four years and give your investment 26 years instead of 30 years, you end up losing Rs 54 lakh, as your corpus after 26 years will be only Rs 96 lakh. Even small amount of Rs 2,000 invested per month, will give you Rs 62 lakh at the end of 30 years.

Will and trust : Financial planners, all over the world,  make sure that their clients have a solid ring fencing in the form of will and trust. The transmission of wealth from one generation to another should be as smooth as possible, to minimise lengthy legal ordeals. A private trust which includes all the investments and holdings of a person and guarded by a registered will is free from all forms of litigation and hassles.

Being prepared for any challenge is the best way to make sure a smooth and happy life and thus the points discussed above should be followed to achieve maximum from your life.

The writer is head - products, Anand Rathi Preferred Services