Embrace financial planning

Suparna / 22 Mar 2012

In today’s complex financial environment, investing money judiciously to ensure that

you have enough at every
stage of your life is becoming increasingly
challenging. Financial planning
can play an important role here. Having [PAGE BREAK]
a financial plan in place and a strategy
to implement it would mean that you
will be able to allocate appropriate
funds for all your requirements.
In other words, financial planning
helps you make informed money
management decisions to secure your
future. It helps a great deal in achieving
your financial goals as well as meeting
personal priorities by taking into
consideration factors such as the available
resources, responsibilities, risk
appetite and lifestyle. A financial plan
lays down the allocation of savings
across various asset classes to achieve
an appropriate risk-reward balance.
There are certain basic requirements
for approaching financial planning.
These include defining and setting
quantifiable goals, incorporating risk
management, understanding the effect
of each financial decision and being
realistic in terms of expectations.
Establish Goals
To develop an effective plan, you
must list out your goals, i.e. your
short-term, medium-term and longterm
goals, and assign a time horizon
to each of them. Thereafter, you need
to quantify these goals so as to set a
target that needs to be achieved over a
pre-decided time horizon.
Remember that when you invest
for the long-term, inflation is a bigger
risk than the risk to capital. Therefore,
while working out long-term targets such as your child’s education or your
retirement planning, you must consider
the impact of inflation. If you fail
to do so, the corpus that you achieve at
the end of the tenure could be substantially
inadequate. To achieve a positive
real rate of return, i.e. the return minus
inflation over time, equity and equityrelated
instruments must be the mainstay
of your long-term portfolio. Similarly, to achieve medium- and
short-term goals, the focus should be on
hybrid and debt instruments respectively.
The key consideration while investing
for these goals should be capital
protection and tax efficiency of returns.
Prioritise Risk Management
Before starting your investment
process, you must ensure that you have
covered your risks adequately. These
would include risks to your life, health
and property. Buying the right insurance
policy is equally important.
Remember, paying too much premium
for a policy that does not provide
adequate insurance makes you
compromise on what you achieve over
time. For example, a term insurance
plan scores over traditional and unit
linked insurance plans, both in terms
of the quantum of insurance cover as
well as costs. Therefore, it is always advisable to separate your insurance
needs from your investment needs.
Don’t forget to build a surplus equivalent
to six months of your monthly
expenses. This emergency fund will
ensure that you don’t disturb your
investment process for various goals
when faced with the vagaries of life.
It is equally important to ensure that
your risk management process is periodically
and systematically reviewed to
further reduce risk.
Follow Asset Allocation For Success
As is evident, goal-based investing
can help you a great deal in ensuring
that you invest with a clear time horizon
and avoid making abrupt changes
in your portfolio. The asset allocation
process, which is an integral part of
financial planning, largely determines
the level of risk and the likely returns
from your portfolio.
You need to be careful to avoid
underestimating risk and/or overestimating
rewards from your investments.
By correctly estimating the risks associated
with each of the investment
options, you can improve your chances
of building greater wealth. The right
way to succeed is to invest like an optimist
and manage risks like a pessimist.
Make Tax Planning A Part Of Your
Financial Plan
By making tax planning an integral
part of your financial plan, you will
not only pay lesser taxes but will also
realise the full potential of tax savings
instruments. Besides, investing in taxefficient
instruments like mutual funds
would go a long way in improving
your real rate of return.

Financial Information (Rs Crore)
	Ranbaxy	DRL
Particulars	CY2011	9MFY12
Total Income	10161.41	7015.29
Total Expenditure	8936.48	5607.19
Operating Profit	1224.93	1408.1
Interest Expense (Gain)	434.01	-7.77
Tax	196.93	336.65
Net Profit (Loss)	-2899.73	1083.5
Equity Capital	211	84.76
EV/EBITDA	11.8x	12.6x

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