Have you ever wondered why financial planning is important? In a nutshell to create a rich and secure future for you and your family.
We all have dreams, be it buying a car, owning a house (or two), going for a world trip, having enough means to provide for your child’s higher education or even comfortable retirement. But, how many of us pen down these goals and actually strive to achieve these goals. I am afraid, not many.
This is when appropriate financial planning comes into the picture. Adequate financial planning is the first step towards achieving your life goals. Let’s understand this better
What is financial planning?
Contrary to common belief, financial planning does not end at just investing in mutual funds. A process that gets you closer to your goals. Financial planning lets you manage your finances in such a way that it links to your goals. The entire process of financial planning should aid to answer 2 questions, namely:
- Where are you today? – your current personal balance sheet
- Where do you intend to be tomorrow?- finances linked to your goals
- What should you do to get there? – the investment strategy and asset allocation that will help you to achieve your goals
To develop a financial plan, you need to consider various factors. Firstly, your investment objective or the purpose for which you are making the investments. Second, the time period you plan on achieving these goals. This is an important factor as it will help you decide the type of mutual fund you should invest in. For instance, if you are planning to invest for a long tenure, equity mutual funds can be your go-to option. Another important factor to consider is your risk profile. As a general rule of investment, the longer the tenure of the investment, the higher the ability to absorb risks. Also, one of the most important factors that investors often overlook is the rate of inflation. The level of inflation has the potential to deplete your returns on investments significantly. What we mean is that today’s expense of Rs5000 would be around Rs9000 in 10 years from now, provided that the inflation rate stays at 6% per annum.
How mutual fund investments are used as a financial planning tool?
Contrary to widespread belief, mutual funds are not an asset class. They are vehicles that permit you to achieve your financial plan. In terms of risk-return perspective, you have the option to invest in mutual funds that can be risky as you want them to be, such as sectoral funds, if you want to invest in a safer avenue, you may want to resort to liquid funds. If you are planning to invest for a long-term, you can consider investing in equity funds.
Try to invest in products that you understand properly and has a good track record. What are you waiting for? Invest in mutual funds online today and take a step close to your dreams. Happy investing!
