Financial Planning Guide 2025

Chapter 3

Q1. What are the different elements of investing to consider to achieve financial goals?

Financial goals are an essential component of any financial plan, and to achieve them, one needs to save and invest money, keeping in view the thumb rules. One of the basic thumb rules states that saving at least 20% of your monthly income is enough to reach most of your financial goals. However, savings are not enough; you must invest correctly, which can only help you achieve your financial goals and build wealth over time.

Secondly, when you start investing in these goals, you need to set and prioritize them first. The question we are trying to address here is which financial goals should be given the top priority. Suppose you are investing in two goals: a European tour for your family and your children’s higher education. Which one gets priority?
Once you have prioritized your goals, there are four elements to consider when you start investing.

Time Value of Money: You may have heard the phrase ‘Time is Money. Now you will see exactly how true this is.

Let’s say that, for example, you have won Rs 50 lakh in a lottery. Given a choice, would you accept the ₹50 lakh as a lump sum immediately? Or would you prefer to receive it in equal yearly installments of Rs. 5 lakh over the next 10 years?
If you are like most people, you will have taken the money immediately. And this is the right decision.

This is because of the Time Value of Money (TVM).

FV = PV x (1+R)N
FV: Future Value
PV: Present Value
R: rate of return
N: Number of periods for which the money is invested

Money available today is worth more than money available at a later date because it can be invested and earn a return/interest.

So, for example, if you had Rs. ₹ 50 lakh is available today, and you have invested it in a 1-year Bank Fixed Deposit offering 7.50%. Then, in one year, your money would be worth ₹53.75 lakhs.

In your day-to-day life, the money you can save and invest is the Present Value in your equation. R is the available market rate of interest – this is not in our control – available investments offer specific, approximate rates of return, and what you can do is choose your investment instrument carefully.
The best thing you can do that is within your control is to increase your N, i.e., extend your investment time horizon. The earlier you start investing, the higher your N will be, and the greater your money will be. Future Value

Disciplined and Regular Investing: One of the most convenient and easiest ways to accumulate wealth is by investing regularly and in a disciplined manner. This can be done for any asset class. For example, when investing in fixed income, you can opt for a recurring deposit or invest in mutual funds, whether equity or debt, which can be done with systematic investments.
But if investing over a long period, the asset class that may be able to grow your wealth the most is equity. Often, when investing, investors seek the perfect entry and exit points in the market, which amounts to nothing more than market timing. However, it is often challenging, if not impossible, to accurately predict market fluctuations and thus know exactly when to enter and exit.
The benefits of investing via a Systematic Investment Plan (SIP) are as follows.

Your investment can be as low as Rs. 100 per installment – no need for a lump sum of wealth to be accumulated and invested.
It is essential to invest regularly to stay focused when investing and to keep investing into the right instrument. Investing via an SIP teaches the very good habit of discipline in investing. It ensures that you will save a certain amount of money every month to invest, thanks to the Electronic Clearance Service (ECS) facility. It ensures that your investments go in regularly regardless of the state of the markets.
It removes the need to time the market. Since you invest on a fixed date every month, you will benefit from rupee cost averaging over long time periods.

So remember, the SIP route will help you answer the question of ‘when to invest’ in the markets. You only need to be very regular with your investments and remember that market lows will help you buy more units. This is when your SIP will give you the maximum benefit.
We have now seen how giving your investments the gift of time and investing regularly and in a disciplined manner can be beneficial for your financial goals, helping your financial plan stay on track. Let’s move on to identifying what can harm your financial plan.

How can inflation impact your financial Plan?

Purchasing power is the number of goods or services that one unit of currency can buy. It is literally the power to acquire.

For example, one rupee can purchase significantly less today than it could have twenty years ago. If your income stays the same, but the prices of goods or services increase, then the purchasing power of your income is reduced. This increase in the price level is called Inflation.

Your real income refers to your income, adjusted for inflation. Thus, inflation is the increase in prices that erodes the purchasing power of your money. And this is, by far, the most important thing to consider when building your financial plan.

Let us try to see where inflation has affected our financial goals with a scenario.

Mr. Gupta has a 6-year-old daughter. He plans to send his daughter to college for graduation at the age of 18 and post-graduation at the age of 21, for which he will spend Rs. 10 lakhs and Rs. 25 lakhs, respectively.

What corpus does Mr. Gupta need to accumulate for his daughter’s educational goals?

Assuming that inflation in college fees is approximately 10% p.a:i If Mr. Gupta’s daughter goes to college at age 18 i.e. in 12 years, college fees at that time will be approximately Rs. 31.40 lakhs.

This is the amount Mr. Gupta needs to accumulate in 12 years to send his daughter to the same standard of college education available today, which costs Rs. 10 lakhs.

Similarly, for his daughter’s post-graduation, in 15 years, Mr. Gupta needs to accumulate approximately Rs. 1.04 crore to give the same level of post-graduation education available for Rs. 25 lakhs today.

Build Wealth with wise investing.

Rome was not built in a day. Similarly, it is not possible to accumulate enough wealth to achieve financial goals overnight. Achieving a financial goal is a gradual process with a series of considered investment decisions.

Almost everyone can accumulate significant wealth over a long period via wiser investment and it doesn’t take a considerable lump sum of money to start investing; all it takes is good sense and some portion of your income over a long period of time.

Wise Investing is not about timing markets or investing in debt when interest rates are at alltime high. It’s about being disciplined with investments. Wise investing is all about having a peaceful sleep at night after investing. It is also about knowing that you are steadily working towards building the level of wealth you require to achieve all your financial goals.

Here are a few points to be kept in mind before investing:

Realistically assess what your investible surplus is – the amount of money you have left after you have set aside enough to run your house and maintain a contingency fund. You will need to take a good look at your finances and the disposable income you have available.
Assess your risk appetite and your risk tolerance. You may be the risk taker who would risk a 50% loss if the upside means a 50% gain. But can your finances tolerate this level of risk? Or would it be financially easier to handle a smaller gain that comes from risking less?
Consult with an unbiased advisor before investing. This is the best way to gain a professional perspective on the investments you are considering. Ask your advisor what would be a good investment for you to make, considering the various financial goals you want to achieve.
Be sure to diversify your investments and avoid putting all your money in one place. Diversifying your portfolio across different asset classes, such as equity, debt, property, and gold, is a good way to reduce exposure to the risks associated with any single asset class.
Lastly, to build your wealth, invest your money first and spend what you have left. This is a much better approach than doing things the other way around.

Importance of Asset Allocation

As the phrase suggests, it means allocating your investments across various investment avenues or assets so that the poor performance of any one asset does not affect the overall performance of the entire portfolio. Different asset classes are correlated with one another to varying degrees. For example, when equity does well, debt or gold may not do well, and vice versa. It is this different correlation that makes asset allocation such a critical component of financial planning.

Asset Allocation depends upon the following factors:

Your risk profile (appetite and tolerance
Your financial goal time horizon

Typically, determining the correct asset allocation for you is best done by your financial advisor or Planner.

What is your risk appetite and risk tolerance?

The second step in building your wealth through wise investment is to invest continuously, keeping your risk profile in mind. Your risk profile consists of two components: your risk appetite and your risk tolerance. Often in financial planning, we hear the phrase ‘risk appetite’. But what does this mean, and is it all that we need to consider? Risk appetite refers to the amount of risk an individual is willing to accept. Risk tolerance, on the other hand, indicates how much risk our finances can handle.

The two might be very different.

For example, Mr. Patel might be a young man, married with a child on the way. His risk appetite may be high. This may be based on his investment tendencies; if he has performed well with equity in the past, he is likely to continue doing so in the future, and hence has a high appetite for risk. However, based on his financial situation, which comprises factors such as the level of contingency he maintains, if he has any EMIs that are eating into his income, and so on, his risk tolerance might be very low indeed. You should assess your risk profile to understand where you stand in terms of your risk appetite and tolerance.

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