Financial Planning by Nirmal Jain
Dhan ki Baat debuts with IIFL Chairman Nirmal Jain who talks about the importance of financial planning and its benefit for long term wealth creation.
How to do Smart Financial Planning
Be it going on a vacation, or a medical emergency, proper financial planning helps you to sail through thick and thin with ease. Whether your financial goals are for short term plans such as buying a house or accessories, or long term ones such as retirement planning, a smart financial plan will ensure that you achieve them while keeping the contingencies of life at bay.
Making a financial plan is an important step to channelize your savings. Here is how you go about making a smart one that promises substantial capital gain.
Set Financial Goals
Whether you are saving for a medical emergency, or a big event such as marriage, your investment goals should be specific. They should offer expected returns within the given time frame. And most importantly they should be realistic and achievable, considering the current market and economy.
Save first, spend later
Often youngsters have the habit of spending more than saving. It is advised to allocate certain specific part of your income towards savings, and then spend from the remaining. Regular savings will only help you benefit from the power of compounding in investments.
Balance out the risks
Life is full of ups and downs, and so are investments linked to markets. The mantra for steady returns is balancing the risks appropriately. Every investment carries an underlying risk. The best way to manage the risk is to diversify the investments through various asset classes such as financial products, real estate, gold, and more.
Diversify your investment
At times you may require money for emergencies, and at times you would wish to multiply the money by harnessing the favorable conditions in the market. For this, you diversify the investments into fixed income and equities.
- To get assured returns and liquidity for emergencies, invest in money market, debt instruments, corporate FDs and fixed deposits
- For aggressive returns, investment in stocks is recommended. You can reduce the risk through investment in equity mutual funds.
Hedge the Risk with Insurance
Life is uncertain, and any unfortunate incident might leave your loved ones without a bread winner. To ensure that they do not suffer from financial struggles in your absence, a life insurance policy is recommended. To soften the impact of medical emergencies, choose a health insurance plan.
Compounding acts as a powerful force in the world of investment. To make the best of it, start investing early, and save regularly. Only then you would be able to build a great portfolio.
Not everyone is an expert in making a smart financial plan. We at IIFL recommend that you take help of financial advisor, refer to our blogs, and then decide on how to go about investments. This way you would be able to achieve your financial goals comfortably.
Mr. Nirmal Jain, Founder and Chairman of IIFL Group, is a first generation entrepreneur, who is credited with building one of the largest financial services groups in India in just about two decades. He is a PGDM (Post Graduate Diploma in Management) from IIM, Ahmedabad, a rank holder Chartered Accountant and a Cost Accountant.
Nirmal began his career in 1989 with Hindustan Lever Limited (HUL), the Indian arm of Unilever. In 1995, he founded his own equity research company, which is today known as India Infoline or IIFL Group. The company's pioneering work in equity research had set new standards. In 1999, he launched the website www.indiainfoline.com where he made available his research free on the Internet. Nirmal is one of India's first and most successful internet entrepreneurs who not only survived the dot com bust, but also disrupted the Indian equity broking industry with the introduction of cutting edge technology and affordable brokerage. Many attribute him for the taking equity investing to masses through technology access and bringing brokerage cost to reasonably levels.
In 2000, the company forayed into the transaction space, with launch of online trading portal. Under his leadership, the company started diversifying the business model by adding multiple business streams while remaining focussed on the core domain of financial services. Over the years, IIFL forayed into life insurance & mutual fund distribution, Institutional Equities business, Consumer Finance business and Wealth Management businesses. IIFL also expanded globally and has regulated subsidiaries in eight major global financial centers. Nirmal has steered IIFL to one of India's leading financial services groups. He has led the company through financial turmoil, regulatory upheaval and stiff competition from deep-pocketed institutional players.
Under Nirmal's visionary direction, today IIFL has a market capitalization of over Rs 21,000 crores and is backed by marquee global investors like Fairfax Group, private equity major General Atlantic and UK government's private equity fund - CDC Group. IIFL Group has a customer base of four million across 8 countries. The NBFC operation has over 1,100 branches mostly in smaller towns and rural locations. The wealth business manages and advises over Rs 120,000 crores of assets and has over 10,000 wealthiest families as clients. IIFL Institutional Equities caters to over 400 global funds.
Ask an Expert
Should I invest in mutual funds or directly go with stocks based on suggestions?
Your investments should depend on your risk taking capacity, income, and prevalent market conditions. Your investment should be a mix of equity and debt instruments so that you can meet your goals and any unexpected emergencies. Equity investments are recommended for wealth creation in long-term. So, if you have good knowledge about equity market and can spend time on analyzing stocks then you can invest directly in equities. Otherwise you should invest in mutual funds preferably via SIPs.
How to manage investment risk?
Firstly, every person should have a health insurance and life insurance because medical bills can wipe-out your savings and sudden death can leave your family without a bread winner.
Risk management is an important process of investing and it should be done as per the age, income, and risk appetite of an investor. Every investor should have an emergency fund for rainy days. An investor should invest in liquid funds to create emergency funds. In addition, investors should diversify their investments across different asset classes to reduce the investment risk.
Are savings accounts good for saving money?
Savings accounts offer return of 3.5 to 4%, which can’t beat inflation. This means your money losing value every year. So, you should invest in liquid funds, you may get returns that are over inflation, along with the liquidity. So its not recommended to keep your money stagnant in bank accounts.
How to maximize returns over savings (FDs)?
Indians have a tendency to save significant portion of their income. However, we primarily put our savings in bank FDs, even for 7-10 years. So, to maximize the returns over the savings, it is recommended to invest in equity market, directly or via mutual funds. Historically, it has been seen that equities outperformed banks FDs and inflation. Salaried person can invest in mutual funds via SIPs.
What is the right amount to start investment with?
You may start an SIP with an amount of Rs. 500 and then increase the amount as your salary rises. The small amount of investment can make you millionaire over a long period. We also advise to start early, even with a small amount, you will experience the power of compounding and will have significant amount of corpus.
What are the reasons to invest?
Generally, people invest in market to meet financial goals; one may invest to avoid financial troubles during a rainy day or emergencies such as hospitalization. One may need to invest for important days in life such as marriage of loved one, buying a home, or other important item. The reasons to invest are many. So as per the reasons, one must choose the avenue of investment. For short term goals, investment in liquid funds or instruments that can be redeemed easily is important. Similarly, for long term goals such as retirement, it is necessary to invest in capital appreciating avenues. At last, diversify your investments as per the need and risk appetite.
How to manage liquidity for emergencies?
To meet the need of funds during emergencies investor should invest in liquid funds. Liquid funds are low risk debt mutual funds and they are highly liquid. Some funds are even offering redemption within 30 minutes pertaining to certain limits.
Why to invest at an early age?
Investments at early age, even of small amount, can significantly change your life and can bring you ahead of other who will start later. The magic that will create the difference is - Power of Compounding. In layman term compounding mean returns over returns. If you start an SIP of Rs 500 per month at the age of 20 and continue it for 40 years, assuming 12% return, you can make ~Rs 60 lakh. And if you delay it by 5 years the corpus will be only ~Rs 32 lakh.
How to manage risk in mutual funds?
Every investment carries risk, be it in mutual funds or direct stocks. In order to manage risks, one needs to diversify it by investing in different avenues. Depending on your age, your risk profiles should vary.
For instance, if you are in your 20s, more than 80% of your investment should be diverted towards equity linked instruments, and the remaining to be invested in balanced funds and debt funds. As the age increases, you can increase your allocation to debt fund and balanced funds.