In the last blog in this series, I mentioned 5 learnings of personal financial planning. In this blog, I mention 6 more learnings I had in financial planning. I have continued numbering the learnings from point 6 , as this blog is extension of previous blog.
6. Know your own financial risk profile and risk appetite: In cricket, the risk taking approach changes from time to time. In a limited overs’ game, risk depends on several factors such as condition of the pitch, opposition’s score, a weaker bowler, number of batsmen left to bat, number of overs left and run target to achieve.
Similarly, there are general guidelines about financial risk profile of a person his or her age, his or her risk appetite and stability of income etc. However, each individual’s specific risk profile is different. For risk profile, factors such as your age, your financial liabilities and responsibilities, your income, your own physical health condition and finally your risk appetite all matter.
In summary, what is true of finger prints is partially true of risk profiles as well. No two persons’ risk profiles are exactly identical. Two 25-year-old budding executives with identical qualification and take home salary may have totally different risk profiles. Analyse your risk profile well.
7. Make your financial decisions with open eyes: Financial literacy can help you to be successful with flying colours in the exam of life. Read reputed magazines, blogs, consult a renowned financial expert. However, have some financial basics known to yourself and final decision should be based on your own conviction and not just “hearsay”.
8. Understand why insurance is necessary: Never consider insurance products as investment or money appreciation products. However, evaluate and do invest in appropriate insurance products to cover your risks of life, health or whatever risk you are covering.
9. Public Provident Fund (PPF): This product is one of the rare financial products in India that falls into low risk category and gives you a fairly decent 8.1% tax free interest and tax free returns on maturity. The product has a tenure of 15 years. You can open PPF account in several public sector and a few private banks.
If you continue to make regular investment in PPF without withdrawals for 15 years, you can have substantial tax free corpus at the end of 15 years. One point to note is that from April 2016, the government will review the PPF interest rate every 3 months and the rate can go higher or lower based on how government bonds perform.
10. Evaluate the financial institution: Never fall prey to the lure of phenomenal interest rates or returns. Evaluate the financial institution and product properly where you are making the investment. There are independent credit rating agencies such as ICRA Limited, who rate a financial product of an institution. Pay heed to the evaluations.
11. Each investment comes with different return and risk potentials. The table below gives various aspects about various investments. However point to remember is that each investment varies in returns and risk profiles from time to time. Keep an eye on latest trends.
Note1: Take note of the word “potential”. Investments in products such as shares, mutual funds, real estate and gold, be aware that past performance is no indicator of future performance.
I hope you find these learnings useful for your own study of your personal financials primer. Take professional advice, do your own study and analysis, invest wisely, and start early. Do not wait till last over in the game of life to score that financial winning stroke. All the very best for a convincing victory.
Do you have any experiences to share of your own on personal financial planning? Do share with GFM readers.