SIP if salaried, STP if businessperson

Do you know your financial goals ? What amount would you want to retire with? How many years will you work for? Should you save more now or enjoy the life and take international holidays, high-end gadgets, etc. What would your 70-year old say to his 25-year self while advising on money matters?

More often than not, when financial planning is discussed what is talked of and practiced are thumb rules. If a person is below the age of 30, the risk profile would be aggressive and there would be a higher allocation towards equity. On the other hand, to a 60-year old, a fixed-income portfolio is suggested. If small kids are there,  recommendation for a child plan becomes imperative. To a person nearing retirement,  MIPs and pension plans are recommended and this is done without delving into the multiple parameters which impact risk profile of a client.

We believe financial planning is much more than generalising and compartmentalising people based on their age, income and net worth. No two individuals are in the same position and hence the approach of model portfolio is fruitless.

During the earning life stage of a client, few financial goals are common like income protection for family by way of insurance cover, asset building for different financial goals - property, children education, holidays, contingency planning and more. But, what has to be unique is the approach to solution.

Priority of different goals is something which varies from one individual to another. Asset allocation would also differ depending on the time horizon, past experience or lack of it in equity markets and attitude towards volatility in investment returns.

The source of income of an individual is another determinant while devising a financial plan. The cash flows are quite different for an individual in service, business or independent professional like a doctor or lawyer, both on the income side and the cash outflow planning.

Systematic investment plans are the go-to option for the salaried whereas parking lump sum money into liquid and then investing through systematic transfer plan (STP) would be more suitable more for someone running a business with irregular cash inflows.

The other set of financial planning requirement comes when approaching retirement and then the actual retirement. It is most critical because in the absence of a right plan, a client could face risk of insufficient funds to lead his life that too at a stage in life when he may not be able earn.

The first question to consider at this stage is - Do I have a second income like pension, rental income or royalty income? If the answer is yes, the thumb rule of 100 minus age for equity allocation will not hold true.

A second income greatly increases risk appetite for a client. Another situation in which a client could look at large equity allocation as against the convention is for the money he wishes to bequeath. Since this money is meant for next generation and not required to be utilised in short to medium-term equity, returns can give big boost to the corpus and benefit the recipients.

Financial planning is neither an art nor science. It is a proactive planning of your future needs and wants, thereby diversifying your investments in equal part, similar to how we diversify our risk in investment portfolio.

The key point to remember is to have a good planner; creating a balanced portfolio so that one can enjoy life, see the world, spend some money and continuously investing towards his life goals.

PRUDENT PLANS

• Financial planning is much more than generalising and compartmentalising people based on their age, income and net worth. No two individuals are in the same position and hence, the approach of model portfolio is fruitless
   
• Priority of different goals is something which varies from one individual to another
   
• Asset allocation would also differ depending on the time horizon and other factors

The writer is head products, preferred services, Anand Rathi Shares and Stock Brokers Ltd