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The Importance of Financial Planning in India: Save Tax, Reduce Debt & More!

Category : New to Investing October 25, 20245 minutes read

Most people grapple with these money-related worries at some point. The solution lies in understanding the importance of financial planning and engaging in investment plans. The advantages and objectives of financial planning are:

  • Debt Reduction
  • Lower Risk
  • Tax-Saving
  • Achieve Goals
  • Disciplined Investing
  • Create an Investment Portfolio
  • Create Emergency Fund
  • Protect from Inflation
  • Creation of a Retirement Corpus
Why is financial planning important?

Personal finance planning is important because it enables you to manage finances efficiently, reduce debt, save for goals, invest wisely, be prepared for emergencies, secure the future, retire comfortably and gain peace of mind by removing money stress.

How do you plan daily expenses?

Track all expenses for a month to understand spending patterns. 
Categorise expenses as essentials, discretionary entertainment, travel, etc. 
Set limits for each category based on income and allocate a specified amount per category.
Use budgeting tools to plan expenses and track money spent against budget.

How do you determine risk tolerance?

While starting an investment plan it is necessary to assess risk tolerance. Investors must consider their dependents, income stability, investment knowledge, and ability to withstand volatility and remain invested when their portfolio declines to gauge risk tolerance. Your age, investment horizon and financial goals also impact risk tolerance.

What is the best way to manage my investments?

The best approach is to invest across assets – equity, debt, gold, etc. suited to your risk profile. Have a long-term strategic asset allocation and rebalance periodically. Invest through SIPs in mutual funds. Review portfolio performance regularly and make changes if required.

What are the objectives of financial management?

Key objectives of financial management are capital budgeting, financing decisions, investment decisions, cash management and risk management to potentially maximise wealth. It aims to optimise the use of available funds to generate increasing profits.

Introduction

Before deep-diving into the importance of financial planning it is necessary to understand, what is financial planning

Financial planning simply means estimating your future income, expenses, and savings. It involves setting financial goals, both short and long-term, and crafting strategies to achieve them. The aim is to manage your money effectively and be prepared for emergencies and big-ticket expenses.

Some of the objectives of financial planning are:

  • Setting short, medium and long-term financial goals.
  • Analysing current financial situations.
  • Estimating future income and expenses.
  • Developing and implementing strategies to achieve those goals through proper management of finances.

It covers all critical areas of personal finance, like budgeting, banking, insurance, investments, and tax planning. Grasping the importance of personal finance planning is essential for investors seeking to meet their financial goals.

A sound financial plan is important for every individual as it acts as a roadmap for organising finances and using money optimally to realise goals. Proper financial planning can potentially increase savings, reduce debt, save taxes, provide funds for emergencies, tackle inflation, and create a retirement corpus. In short, financial planning empowers you to take charge of your financial future.

What are the Advantages of Financial Planning?

To grasp the importance of financial planning it is necessary to understand its benefits. Exploring the benefits of personal financial planning can lead to a more organised and confident financial life and allow investors to make more conscious financial decisions. Some of the advantages of financial planning include:

Debt Reduction

A financial plan helps you identify expenses which can be reduced or eliminated so that funds can be directed towards debt repayment. Debt planning may also help reduce interest costs and become debt-free more quickly.

Lower Risk

One of the biggest advantages of financial planning is the reduction of risk. Since financial planning comprehensively evaluates income, expenses, insurance coverage, investments, etc., it may enable you to mitigate potential risks through appropriate asset allocation, diversification, hedging strategies, and contingency planning. 

Tax Savings

Tax planning is an integral part of financial planning. It helps utilise deductions, exemptions and tax-saving investments optimally to reduce tax liability. Understanding the significance of a financial plan is crucial for long-term tax savings and financial stability.

Learn more about how to save tax in India.

Achieve Goals

The financial planning process starts with identifying your goals, quantifying the amount required to achieve each goal, and determining target dates. The financial plan outlines the savings and investments required to build a corpus to realise different goals. This is among the major benefits of financial planning.

Disciplined Investing

A financial plan encourages disciplined investing by allocating specific amounts for investments through (SIP) Systematic Investment Plans. This helps counter emotional decision-making and invest consistently towards goals. 

Investment Portfolio

The importance of financial planning is highlighted in investment portfolio management. The investment portfolio is structured based on time horizon, risk profile and goals to provide appropriate diversification across asset classes to potentially allow investors to meet their financial goals.

Emergency Funds

By accounting for contingencies and insurance, a financial plan ensures the availability of funds to meet unexpected expenses and prevent dipping into long-term investments to access funds during emergencies.

Inflation Protection

One significant benefit of a financial plan includes inflation protection. Financial planning helps hedge savings and investments against inflation through real estate, gold, stocks, etc, to preserve purchasing power.

Retirement Corpus

The importance of financial planning is highlighted by the creation of a retirement corpus. It is important for all individuals to start financial planning for retirement in India early. Investing towards retirement in a phased manner may enable you to accumulate an adequate retirement corpus through compounding.

Looking to start investing and planning for your retirement? Invest in Bandhan Retirement Fund today.

Key Takeaways:

Financial planning can have several benefits for investors. Good financial planning may enable you to reduce debt. Moreover, financial planning may reduce overall portfolio risk through diversification. Efficient tax planning may also help lower tax liability and achieve financial goals. Additionally, disciplined investing through SIPs may give investors the benefits of Rupee Cost Averaging (RCA). Through financial planning, investors create an emergency fund and create a retirement corpus. Lastly, financial planning may also enable investors to protect their assets from inflation through assets such as real estate, gold, stocks, etc.

How to Start Financial Planning?

Now that we understand the importance of financial planning, let’s look at ways to start a financial plan. Here are some key steps to start financial planning:

Set Financial Goals 

It is necessary to be aware of the objectives of financial planning before getting started. Define short, medium and long-term goals with target amounts and timelines. This could include saving for vacations, school/college fees, buying a house, starting a business, planning for retirement, etc. 

Assess Current Financial Situation

Make a list of all your assets and liabilities, and calculate your net worth. Evaluate income, expenses, insurance coverage, investments, and tax payments to get a holistic overview of your finances.

Evaluate Risk Profile

Assess financial responsibilities, ability to tolerate loss, age and income stability to determine your risk tolerance and Investment horizon.

Choose Investment Strategy 

Since there are different types of financial planning, you need to formulate an investment strategy aligned to goals, risk profile and time horizon. For example, for retirement goals, adopt a long-term strategy with higher exposure to growth assets like equity.

Explore Investment Options 

Evaluate various investment options like mutual funds, stocks, bonds, bank FDs etc., in terms of returns, taxation, liquidity, risk and costs. Consider investing across assets to create a diversified portfolio.

Decide Investment Approach

Choose an investing approach – lumpsum or systematic investment plan (SIP), depending on funds availability. SIP instils discipline and averages purchase cost.

Track and Monitor Investments

Review portfolio periodically to examine performance and make necessary adjustments based on changing goals or market conditions. Rebalance to maintain target asset allocation.

Create a financial plan and invest in mutual funds to meet your investment goals. Explore schemes on Bandhan Mutual Fund.

Mutual Funds for Financial Planning

Mutual funds may be suitable investment vehicles that help investors achieve different financial goals across varying timeframes. Here’s a detailed look at how mutual funds can aid financial planning:

Goal Planning

One of the many benefits of using mutual funds for personal finance management is being able to accurately identify the risk levels and investment horizon. Mutual funds offer a wide variety of schemes that may be suited for specific investment horizons and risk – short, medium and long-term. For instance, liquid and ultra-short-duration funds are suitable for goals within 1 year. Short duration, corporate bond and banking & PSU funds can be considered for 1-3 year goals. Equity funds, hybrid funds and debt funds with moderate to long duration can achieve 3-5 year and 5-10 year goals. Equity funds are ideal for very long-term goals like retirement. Appropriate mutual fund schemes can be selected based on the timeline for each financial goal.

Tax Saving

The significance of a financial plan is highlighted by tax-saving mutual funds such as ELSS. Equity Linked Savings Schemes (ELSS) allow tax deduction from total income up to ₹1.5 lakhs in a financial year under the Section 80C provision under the Income Tax Act (1961). This helps reduce tax liability. Moreover, ELSS has a relatively shorter lock-in period of 3 years compared to other common tax-saving instruments like PPF, NSC, and bank FD. 

Professional Management

Mutual funds provide the benefit of professional expertise in managing investments. Funds are managed by AMCs and their teams have knowledge, experience and skills to research markets, analyse securities and make investment decisions. Mutual funds may be a preferable option for beginner investors with minimum knowledge. Other than index funds, most mutual funds adopt an active investment strategy. This level of active investing is difficult for a retail investor. So, mutual funds offer a low-cost way to avail the services of investment management experts.

Diversification

The importance of financial planning cannot be understood without considering the relevance of diversification. Diversification allows the investor to potentially reduce risk and potentially benefit from the performance of different market caps, asset classes and sectors. Mutual funds invest in a basket of equity shares, debt instruments, derivatives, etc., to create a diversified portfolio spread across sectors, market caps, asset classes, credit ratings etc. This may potentially reduce risk by avoiding concentration in a single security. Exposure is provided to a wide range of companies, industries, maturity periods, geographies, etc. Diversification helps contain potential downside risk events in certain securities/sectors from severely impacting overall portfolio returns.

Read more about the benefits of portfolio diversification!

Liquidity

Open-ended mutual fund schemes allow entry and exit for investors at any point based on that day’s Net Asset Value (NAV). The units can be redeemed on an ongoing basis on any business day. Closed-ended funds allow redemption only at maturity. But they are listed on stock exchanges where units can be sold. This liquidity makes mutual funds a highly flexible investment option.

Low Investment Amount

The minimum investment amount for investing in mutual funds through a Systematic Investment Plan (SIP) is generally ₹500 per month. Through lumpsum investment, the minimum investment is ₹500-5000 for most funds. This low threshold enables even those with smaller disposable incomes to consider mutual funds and avail the potential benefits of a financial plan from diversification.

Systematic Investment

SIP or systematic investment plan facility allows periodic investments in mutual funds, usually monthly. SIP amount can be as low as ₹500, making it suitable for regular savings. Investing an unvarying amount at fixed intervals instils discipline and helps weather market fluctuations through rupee cost averaging and the power of compounding. This aids in achieving long-term goals.

Learn more about the benefits of Systematic Investment Plans in India. 

Regulation

SEBI (Securities and Exchange Board of India) regulates mutual funds and formulates policies for investor protection. Funds must make extensive regulatory disclosures on performance, portfolio, fees/expenses, schemes, etc. This system of governance and transparency assures investors.

To summarise, mutual funds offer appropriate solutions for varied timeframes and financial goals through extensive scheme choices, liquidity, diversification, professional management, low cost and systemic investing. Hence, they may be a suitable vehicle to channel savings towards financial planning.

Conclusion

  • The importance of financial planning cannot be overlooked. It is crucial to effectively manage money for future goals. It empowers you to take control of your finances and work towards realising your dreams and goals.
  • The advantages of having a financial plan include debt reduction, lowered risk, tax-saving, achievement of goals, disciplined investing, creation of an investment portfolio and emergency funds, inflation protection and creation of a retirement corpus.
  • The key is to start early, set clear goals, assess your current financial situation, determine risk appetite and investment horizon, explore various investment options suited to your needs and monitor progress periodically. Investing across assets, market caps and sectors may help minimise risk through diversification.
  • Stay invested for the long term to benefit from compounding. Utilise the expertise of financial advisors and mutual funds for managing your investments if you lack time or knowledge. Be disciplined and patient in your investment approach.

Frequently Asked Questions

Personal finance planning is important because it enables you to manage finances efficiently, reduce debt, save for goals, invest wisely, be prepared for emergencies, secure the future, retire comfortably and gain peace of mind by removing money stress.

  • Track all expenses for a month to understand spending patterns. 
  • Categorise expenses as essentials, discretionary entertainment, travel, etc. 
  • Set limits for each category based on income and allocate a specified amount per category.
  • Use budgeting tools to plan expenses and track money spent against budget.

While starting an investment plan it is necessary to assess risk tolerance. Investors must consider their dependents, income stability, investment knowledge, and ability to withstand volatility and remain invested when their portfolio declines to gauge risk tolerance. Your age, investment horizon and financial goals also impact risk tolerance.

The best approach is to invest across assets – equity, debt, gold, etc. suited to your risk profile. Have a long-term strategic asset allocation and rebalance periodically. Invest through SIPs in mutual funds. Review portfolio performance regularly and make changes if required.

Key objectives of financial management are capital budgeting, financing decisions, investment decisions, cash management and risk management to potentially maximise wealth. It aims to optimise the use of available funds to generate increasing profits.

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