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May 17, 2000

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Earlier: • The crux of retirement planning

Rohit Sarin

Everybody makes investments. At least that's what they claim. But its surprising how few are able to grow their investments to a level where they can be utilised for meeting certain financial goals.

The reason is simple. No one plans investments with a particular goal in mind. Instead, all investment decisions are based on either getting a tax rebate u/s 88 or a result of the herd mentality (My friend is investing in it and so it must be good……!).

That brings us to what financial planning actually is. It is basically a process that helps us identify and invest to achieve certain financial goals.

Identify financial goals

This is the first step towards successful financial planning. Your goals could be as varied as buying a house or a vehicle, saving for your child's higher education or even marriage. Saving for retirement is also a financial goal.

Identify the time period to achieve them

Generally, goals will dicatate how much time you have to invest as each goal would need to be achieved at a different stage of life. Your goals can be either very short-term or long-term. Since the time period available for each would differ, this would also influence which assets your money can be channelised into.

Identify appetite for risk

This makes investments all the more tricky since risk and returns from a particular investment are always directly proportional. Greater the risk, higher the returns and vice versa. So the amount of investment that has to be done for a specific time horizon to a achieve a similar finance goal would differ from person to person.

Develop the investment plan

So your financial plan is complete. You are aware of your goals, how long it will take to achieve them and how much of a risk are you willing to take to achieve them. Now you need to develop an investment plan. This will be your guideline into which instruments you should be parking your funds and how regularly.

This amount of regular investments to be done as per the investment plan would again be different for different individuals - the thumb rule being that lower the investment time horizon and appetite for risk higher would be the investment required to achieve the said financial goal.

Subsequent pieces take into account three individuals of ages 25, 30 and 35. Four common goals are assigned to each of them: house purchase, child education, child marriage and retirement planning.

Since each individual needs to achieve each of the above goals, he or she will have to save for each one of them simultaneously till the respective target ages.

Next: • Getting ready for retirement

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