Imagine going on a road trip to an uncharted territory and the first thing that strikes the mind is setting up the map. Thanks to modern technology, all it takes is specifying the next destination and the navigation system effortlessly steers you along the most optimal route. In a similar vein, financial planning begins by assessing your current financial situation and the destination i.e. your financial aspirations.
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It's like setting the coordinates for your financial journey. Whether it's buying a home, funding your child's education, ensuring a comfortable retirement, or pursuing any other life aspirations, financial planning creates a detailed blueprint for achieving them. In simple words, it is a strategic approach that guides you on your journey to achieving various life goals.
While this approach may sound straightforward, it comes with a multitude of real-world challenges. It is crucial to understand that financial goals fall into three main categories; Short-term goal such as buying a car, medium term goal such as international family vacation and long term goal such as building a corpus for retirement. Investors commonly intertwine these goals, which can lead to a lack of separate planning for respective goals.
The second key concern revolves around insufficient understanding of Mutual Funds and their potential in successfully executing a financial plan. Mutual funds are collective investment vehicles that pool money from different investors and invest in various asset classes such as equities, debt, commodities etc. It is vital to recognize that mutual funds offer a comprehensive solution for all your financial planning requirements. Let us now understand how Mutual Funds and its tools can unlock your financial success.
The very first step of planning is goal setting followed by aligning investments to each of the goals decided. Mutual Funds offer baskets of investment products each tailored to different risk levels and goals. For instance, Debt or Arbitrage funds are typically lower-risk options suitable for short-term investment goals.
On the other hand, for medium to long-term goals, equity or hybrid funds have proven to be the appropriate choice. Mutual Funds also make it easy to adjust the investments based on life stage. Depending on your age, investment duration and risk tolerance, you can define the asset mix with appropriate Mutual Funds, thereby creating a well-diversified portfolio.
The second aspect of financial planning addressed by Mutual Funds is affordability. The concept of ‘small investments becoming big in the long term’ is a fundamental principle of investing and wealth building. With mutual funds offering various options of Systematic Investment Plans (SIPs), Top-ups and Systematic Transfer Plans (STPs), one can keep on adding modest investment amounts which over the long term not just aids in wealth creation but also mitigates market volatility risks.
Further, Mutual Funds play a pivotal role not only in wealth accumulation and preservation, but also in wealth distribution. Through Systematic Withdrawal Plan (SWP), investors can receive regular cash flow serving as an additional source of income when required. In case of an emergency, the best part about Mutual Fund investments is that they can be liquidated, providing access to the invested capital instantly. Moreover, one can subsequently recommence the investment once the stability is restored.
Even when it comes to taxation, Mutual Funds emerge as one of the most tax-efficient investment products. For instance, in equity-oriented funds, one pays a 10% tax on the profits exceeding Rs. 1 lakh in a financial year, while Short-Term Gains are taxed at 15% if the investment horizon is less than 12 months. On the other hand, tax on Debt-oriented funds is based on an individual's income tax bracket.
It is imperative to bear in mind that financial planning is an ongoing journey rather than a fixed destination. As time progresses, investors should reassess their portfolio in line with the remaining investment duration and evolving needs. With Mutual Funds, you can easily track and adjust your portfolio online to accommodate the changing requirements, providing a highly flexible approach that sets them apart from other investment options. In summary, the convenience, transparency, diverse product offerings, cost-effectiveness, and digital tools like STP and SIP calculators have made investing and financial planning easier and more accessible with Mutual Funds.
Author's note:
Shailly Seth is Founder and CEO of 12 months.in. The views mentioned above are personal and do not represent that of CNBC-TV18 or its management. This is a partnered post.
Disclaimer: Mutual Fund investmentsare subject to market risks. Please approach your financial planner before taken any investment decision.
(Edited by : Jerome Anthony)
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As an expert and enthusiast, I have access to a wide range of information and can provide insights on various topics. While I have personal experiences or opinions, I can provide factual information and answer questions based on available sources.
In this article, the author discusses the importance of financial planning and how mutual funds can help in achieving financial goals. Let's break down the concepts mentioned in the article and provide information on each of them.
Financial Planning:
Financial planning is a strategic approach that helps individuals or households manage their finances and achieve their financial goals. It involves assessing the current financial situation, setting financial goals, and creating a detailed plan to achieve those goals. Financial planning takes into account factors such as income, expenses, investments, savings, and risk tolerance. It helps individuals make informed decisions about their finances and guides them on their journey towards achieving various life goals.
Mutual Funds:
Mutual funds are collective investment vehicles that pool money from different investors and invest in a diversified portfolio of securities such as stocks, bonds, and other assets. They are managed by professional fund managers who make investment decisions on behalf of the investors. Mutual funds offer a convenient and accessible way for individuals to invest in a diversified portfolio without directly buying individual securities. By investing in mutual funds, individuals can benefit from professional management, diversification, and the potential for higher returns .
Goal Setting and Asset Allocation:
One of the key steps in financial planning is goal setting. This involves identifying specific financial goals such as buying a home, funding education, or saving for retirement. Mutual funds offer different types of investment products tailored to different risk levels and goals. For short-term goals, lower-risk options such as debt or arbitrage funds may be suitable. For medium to long-term goals, equity or hybrid funds may be appropriate. Depending on factors like age, investment duration, and risk tolerance, individuals can define the asset mix with appropriate mutual funds to create a well-diversified portfolio.
Affordability and Systematic Investment Plans (SIPs):
Mutual funds also address the aspect of affordability in financial planning. The concept of "small investments becoming big in the long term" is fundamental to investing and wealth building. Mutual funds offer various options like Systematic Investment Plans (SIPs), Top-ups, and Systematic Transfer Plans (STPs). These allow individuals to make regular investments in small amounts over time, which can aid in wealth creation and mitigate market volatility risks.
Wealth Accumulation, Preservation, and Distribution:
Mutual funds play a pivotal role in wealth accumulation, preservation, and distribution. Through investment in mutual funds, individuals can accumulate wealth over time. Additionally, mutual funds offer features like Systematic Withdrawal Plans (SWPs), which allow investors to receive regular cash flow as an additional source of income when required. In case of emergencies, mutual fund investments can be liquidated, providing access to the invested capital instantly. Moreover, individuals can recommence their investments once stability is restored.
Tax Efficiency:
Mutual funds are considered one of the most tax-efficient investment products. The tax treatment of mutual funds depends on the type of fund and the holding period. For equity-oriented funds, long-term capital gains exceeding Rs. 1 lakh in a financial year are taxed at 10%, while short-term gains are taxed at 15% if the investment horizon is less than 12 months. Debt-oriented funds are taxed based on an individual's income tax bracket.
Ongoing Financial Planning:
It is important to note that financial planning is an ongoing journey rather than a fixed destination. As time progresses, investors should reassess their portfolio in line with the remaining investment duration and evolving needs. Mutual funds provide online tools and platforms that allow investors to easily track and adjust their portfolios to accommodate changing requirements. This flexibility sets mutual funds apart from other investment options.
In summary, financial planning is a strategic approach that helps individuals achieve their financial goals. Mutual funds offer a comprehensive solution for financial planning requirements by providing a range of investment products tailored to different risk levels and goals. They offer affordability, diversification, tax efficiency, and flexibility, making them a popular choice for individuals seeking to achieve their financial aspirations.
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