Intro to financial planning

PERSONAL FINANCIAL PLANNING is the conceptualization and implementation of a comprehensive financial plan for the achievement of a person’s total financial objectives. The areas covered by a normal personal financial plan are:


Health Insurance should be compulsorily taken. The entire family must be covered by health insurance. We advise choosing family floater policies which cover a maximum of four members of a family, with any one person entitled to make use of the entire cover, should the need arise. ‘Personal accident’ and ‘critical illness’ riders may be taken if necessary.

Life Insurance: If an individual has no financial dependents, life insurance is not necessary and will be a waste of money. If there are financial dependents, the quantum of life cover required must be calculated. Thereafter, it is advisable to take only a pure term life insurance cover, to the extent life insurance is required.

Property Insurance: Protection against losses caused by earthquake, fire, damage from other causes, breakdown, burglary, etc., may be taken if required, and to the extent required.


Ensure that an amount equal to at least 12 months’ normal living expenses is deployed in highly liquid avenues like money market accounts (called ‘liquid funds’ in India), short-term mutual funds, short-term floating rate mutual funds, ‘flexi’ bank deposits, etc.

This builds an excellent buffer in case of unexpected shocks like job/earnings loss, change of residential status, migration to a different country, unforeseen but necessary expenditure, etc. The fund will help to tackle such unexpected and adverse financial situations and will help avoid sudden financial burdens on the family.

An emergency fund is your private insurance policy and your first line of defence, and it is extremely important that an emergency fund be utilized only in an emergency.


Never expect either the government or your employer to provide for your retirement. You are responsible for your financially comfortable retirement. No one else is. There is a wrong notion that planning for retirement should start when a person approaches retirement. Nothing can be farther from the truth. Retirement planning must start as soon as a person starts earning. The best “private” retirement plan would be a sustained systematic investment into well diversified equity linked savings scheme (ELSS) mutual funds or index funds. So long as interest on the Public Provident Fund (PPF) remains tax-free, this would also be an excellent retirement avenue for the conservative investor. Employees who are eligible for Employees’ Provident Fund (EPF), should make the maximum possible contributions to the EPF.

From the financial year 2005-06 onwards, Section 80C of the Income-Tax Act, 1961, provides an excellent opportunity to build a tax-advantaged retirement fund of up to Rs 1 lakh per annum, using among other things, PPF and ELSS. While the exemption under Section 80C may be a sweetener, it should be borne in mind that a retirement fund is of vital importance in its own right, whether or not there is a tax benefit attached to it.

Just as an emergency fund must be utilized only in an emergency, withdrawals from a retirement fund must be contemplated only upon retirement. The solitary exception to this rule is if the family or any of its members is threatened with a life-and-death situation, and emergency funds and insurance have already been exhausted.


Investment can be for parking funds, to earn regular returns and for growth. Use savings accounts, ‘flexi’ accounts, liquid, short-term and short-term floating rate mutual funds, for short duration parking of funds.

Use Post Office Monthly Income Scheme, 8% Taxable Government of India Savings Bonds, 9% Senior Citizens’ Savings Scheme (for persons of 60 years and above only), bank fixed deposits, short and long-term floating rate mutual funds, fixed maturity plans of mutual funds, and structured withdrawals from PPF accounts, to earn regular returns.

One should invest in a very well diversified equity portfolio of blue chip stocks and/or use systematic investment and systematic transfer plans into mainline diversified equity mutual funds, for wealth enhancing (growth) investments. The real estate market is also a good, long-term and wealth-enhancing avenue of investment.

However, real estate suffers from some drawbacks such as poor liquidity, difficulties in verification of title, requirement of large amounts of capital for a single purchase, high registration costs, menace of black money in real estate transactions, problems arising out of absentee landlordism, etc.

Real estate mutual funds should be available in India before long, at which time systematic investment and systematic transfer plans into these funds can certainly be considered.


It would be very prudent to have no debt at all, except perhaps a housing loan, if needed. Get rid of dangerous, high cost, open-ended debt like credit card debt, personal loans, cash credits and overdrafts. Use only term loans, that too sparingly, and only for the acquisition of vitally important assets such as a residential house.


Everyone must aspire to a dwelling. This is the only area where we will not object to a loan being taken for acquiring an apartment or house. Today, housing loans are freely available and there are substantial tax advantages attached to the repayment of principal and the payment of interest on these loans. However, it should be remembered that the acquisition of a residential house is important in its own right, regardless of any tax advantage attached to it. If the individual has need for commercial premises for his own use such as an office, shop or showroom, steps may be taken over time to acquire the ownership of such premises


Vehicle purchases, children’s education, children’s marriage, family vacations, etc., can be provided for through a general investment account, following a simple asset allocation plan. When in doubt, maintain a 50:50 balance between debt and equity in this account, and rebalance it at annual intervals. Do not neglect succession and estate planning. Prepare a will. Ensure that all bank accounts and investments are either in joint names or with nominations registered.

Ensure that the spouse and / or family are kept aware of investments, insurance policies, retirement benefits, tax matters, etc. Regularly review investments. Make changes only when required. Do not constantly tinker with investments. Ensure that all adult family members apply for and obtain an election identity card, a passport, a driving licence and an income-tax PAN card.

Know your client (KYC) registration formalities for mutual fund investment, and the opening of a client and demat account with a member of a recognized stock exchange and depository participant respectively, may also be completed, if required.