Need for Financial Planning-II : 19th Oct 2013
This is continuation of my previous post last week , I explained to you the basics of the plan and in this session I will tell you how do we allocate and what are the rules we need to follow to achieve this . Once you have decided the plan and the period its time to act on it .
What options do you have
I have categorized them as below
Low Risk : Life Insurance ,Bank Accounts , Fixed Deposit , Government Bonds , Postal Deposit , PPF , EPF , Gold .
High Risk : Equity Mutual Funds , Stocks , Forex .
Medium Risk: Property , Balanced Mutual Funds .
Although buying Property is safest bet today I have put it under medium Risk as it is associated with mortgage Loans as liability to a person . Unless paid in full it is always taxing to an individual in the form of EMI .You should also be aware of a monster i.e. inflation . Inflation eats away our buying potential year on year . It means INR 100 is not INR 100 every year it goes down in value .E.g. Compare college fees when you were in college than today and you will find the difference . Your money should always grow more than inflation.
Gold and Silver are also tradable on the exchange in the form of ETF[non deliverable format ] where you actually do not posses Gold / Silver but is electronically traded in the form of units equal to value of Gold/Silver .
How do you allocate....
100 - your age = That money should go in High Risk / Medium Risk . And as year goes on you need to slowly put money from High Risk to Low Risk or invest more in Low Risk .
E.g. if you are 28 then 72% of your money should be in High / Medium Risk , by the age of 60 only 40% of your money should be in High / Medium Risk.
Always keep some allocation in Life Insurance . I have also categorized them as below if possible
Age 25-30 : Sum Assured should be 25 Lac INR.
Age 31-35 : Sum Assured should be 50 Lac INR.
Age 36-41 : Sum Assured should be 1 Crores INR.
Life Insurance is under 2 categories Term Insurance and Whole Life
Term Insurance : You are covered till the period of your insurance but you don't get anything after the term ends . E.g. Premium will be 5000 INR yearly for sum assured of 35 Lac INR @Age 32 for 20 years . In an unexpected event between Age 32 - 52 your family gets 32 Lac INR . After end of 20 years you don't get anything from the insurer.
Whole Life : You are covered till the period of your insurance and you get back the money you invested plus Bonus accumulated over the term .E.g. Premium will be 25000 INR yearly for sum assured 10 Lac INR @Age 32 for 15 years . In an unexpected event between age 32-47 your family gets 10 Lac INR . After end of term you get 10 Lac INR + survival benefits + bonus .
Many of them do not believe in Life insurance as they see no benefit in it , my answer to those people is do not look Life Insurance as an benefit , it is only to cover risk in this uncertain world . I have another option for such people to meet retirement , child education and other expenses .
Buy land [N/A Plot] [not residential property like 1BHK etc.] and sell it during that time . Do not be emotional to the property as it was bought for a specific purpose. Many of them are emotional when it comes to sell property but not in the case of Insurance , hence I prefer Insurance , FD, Bonds, PPF over buying property .
Quick Formulas on Investing .
As mentioned above
1) 100 - Your Age : Money should go in High/Medium Risk
2) Future Value of Money = Present Value of Money multiplied by 1 plus the rate times the time
F = P*(1 + r)n
3) Double your money in years = 72 / Interest Rate
In my further articles I will discuss on basics of Mutual Fund , ETF and Futures and Options .
Happy Trading .
What options do you have
I have categorized them as below
Low Risk : Life Insurance ,Bank Accounts , Fixed Deposit , Government Bonds , Postal Deposit , PPF , EPF , Gold .
High Risk : Equity Mutual Funds , Stocks , Forex .
Medium Risk: Property , Balanced Mutual Funds .
Although buying Property is safest bet today I have put it under medium Risk as it is associated with mortgage Loans as liability to a person . Unless paid in full it is always taxing to an individual in the form of EMI .You should also be aware of a monster i.e. inflation . Inflation eats away our buying potential year on year . It means INR 100 is not INR 100 every year it goes down in value .E.g. Compare college fees when you were in college than today and you will find the difference . Your money should always grow more than inflation.
Gold and Silver are also tradable on the exchange in the form of ETF[non deliverable format ] where you actually do not posses Gold / Silver but is electronically traded in the form of units equal to value of Gold/Silver .
How do you allocate....
100 - your age = That money should go in High Risk / Medium Risk . And as year goes on you need to slowly put money from High Risk to Low Risk or invest more in Low Risk .
E.g. if you are 28 then 72% of your money should be in High / Medium Risk , by the age of 60 only 40% of your money should be in High / Medium Risk.
Always keep some allocation in Life Insurance . I have also categorized them as below if possible
Age 25-30 : Sum Assured should be 25 Lac INR.
Age 31-35 : Sum Assured should be 50 Lac INR.
Age 36-41 : Sum Assured should be 1 Crores INR.
Life Insurance is under 2 categories Term Insurance and Whole Life
Term Insurance : You are covered till the period of your insurance but you don't get anything after the term ends . E.g. Premium will be 5000 INR yearly for sum assured of 35 Lac INR @Age 32 for 20 years . In an unexpected event between Age 32 - 52 your family gets 32 Lac INR . After end of 20 years you don't get anything from the insurer.
Whole Life : You are covered till the period of your insurance and you get back the money you invested plus Bonus accumulated over the term .E.g. Premium will be 25000 INR yearly for sum assured 10 Lac INR @Age 32 for 15 years . In an unexpected event between age 32-47 your family gets 10 Lac INR . After end of term you get 10 Lac INR + survival benefits + bonus .
Many of them do not believe in Life insurance as they see no benefit in it , my answer to those people is do not look Life Insurance as an benefit , it is only to cover risk in this uncertain world . I have another option for such people to meet retirement , child education and other expenses .
Buy land [N/A Plot] [not residential property like 1BHK etc.] and sell it during that time . Do not be emotional to the property as it was bought for a specific purpose. Many of them are emotional when it comes to sell property but not in the case of Insurance , hence I prefer Insurance , FD, Bonds, PPF over buying property .
Quick Formulas on Investing .
As mentioned above
1) 100 - Your Age : Money should go in High/Medium Risk
2) Future Value of Money = Present Value of Money multiplied by 1 plus the rate times the time
F = P*(1 + r)n
3) Double your money in years = 72 / Interest Rate
In my further articles I will discuss on basics of Mutual Fund , ETF and Futures and Options .
Happy Trading .
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