A simple Financial Planning Roadmap

Step 1: Check Insurance requirements

1. Check Health Insurance for you and family. If your company provides a decent amount, well and good. Otherwise, get one.

2. Do you have people who depend upon your income?

3. For most new young unmarried starters, the parents are usually not dependent on them for income (there are exceptions).

4. While for married people, the exceptions will be inverted. So, if someone is dependent on you for your income, get a decent life cover, preferably through an online term insurance plan (works out the cheapest).

5. If both you and your spouse are working, then the overall amount of insurance requirement decreases.

   A short list of good providers is Aegon Religare, Aviva, ICICI, HDFC, in no particular order. There are others too. LIC does not have, and most probably will not have an online plan (don't ask me why) LIC also has now (since May 2014).

Step 2: Check Level of Emergency / Contingency Funds (Basket 1)

Start putting money in a short-term debt fund / liquid fund / FDs partly and cash in savings account partly. Amount should be decent enough to manage your next 6 months discretionary and non-discretionary “normal” expenses. Also, every 6 months to 1 year, try to increase this amount little by little. In case you use it for any reason, then fill it up ASAP.

Step 3: Short-term goals coming up in next 2-3 years (Basket 2)

Examples like holidays, birthday celebrations, school fees, downpayment for home, etc. The idea is that you cannot take risk with the principal amount, but still you will be happy in having a better return than keeping cash in savings account. Good instruments for this are short-term and income debt funds. Plus RD / FD for people having otherwise either 0 or 10% income tax slabs.

Step 4: Longer Term Goals (Basket 3)

All your long term goals including child education, marriage, retirement, foreign holidays 10 years down the line, etc come into this Basket.

Identify the combination and the allocation percentages of various asset classes, according to this post.

A good (minimum, I would say) start is to have a 50:50 equity-debt allocation. For less conservative, this canbe modulated to 60:40 or 70:30. For very aggressive, it can even be increased to 80:20. Identify a single diversified equity fund for the equity allocation. Later on, you can start adding more funds, or direct stocks or international stock/funds, as per knowledge increase and comfort zone. Identify a single decent debt fund (I will stress on having a debt fund, rather than a PPF because of the latter's illiquidity, but YMMV). Endowment / money-back policies, PPF, PF, NSC, etc also come under this basket only because of their lock-ins.

Periodic Reviews:

1. Every month, quarter, 6 monthly or yearly, sit and check the various goals under Baskets 2 and 3.

2. Make accordingly provisions for those requirements.

3. Check the valuations of Basket 3 assets. See if they have strayed much more than your original intended allocation pattern.

4. Eg, you started with 60:40, but currently because the markets have performed well, the percentages have skewed to 70:30. Then you need to either put money slowly into the lesser asset (in this case, debt has gone down, so add more money to your debt asset instruments.

5. On the other hand, if markets have gone down, then you will need to put money into the equity portion. Doing it slowly month by month is not a bad idea at all. The other option of shifting money from debt fund to equity or vice versa is ok too but that just increases the tax liability (in most cases). And if you are using PPF / endowment policies, then this is not possible too.

In general, your money management should work in this way:

1. Basket 1- sufficient/insufficient. If it is insufficient, next month's income goes into filling it or you shift money from basket 2 to basket 1. Otherwise, next step.

2. Basket 2 – sufficient/insufficient. If if it is insufficient, then fill this up back again either using income or from basket 3 funds. Otherwise, next step.

3. Basket 3 – check asset allocation values. Balance by adding to the lower allocation asset Till the time they are upto the desired values. This may take months of investing in equity followed by months into debt or equal amounts in both as per different conditions.

4. Whenever, there is an acute short-fall, then money should go from Basket 2 > Basket 1. OR Basket 3 > Basket 2. If you are feeling the need of getting money from Basket 3 > Basket 1 (in simpler terms, money from longer term goals / equity for day-to-day expenses, then something is seriously wrong and you need to correct course).

What not to do:

1. Monitoring the performance of your equity fund month over month. Checking their star rating. If you have selected a decently performing fund, then you do not need to change the fund as per its star rating.

2. Selling Equity funds/stocks, because they have moved up, even though, your intended asset allocation is within the initial limits.

A simple example of Selection using Direct Investing in a single AMC with a netbanking facility bank.

Basket 1 – Liquid fund + Cash

Basket 2 – Income Opportunities fund

Basket 3 – Dynamic Bond fund and a plain vanilla multicap / flexicap equity fund.

Additional benefits:

1. Lesser expense ratio for all funds by use of Direct Investing.

2. Easy switching of money from one basket to another.

3. Easy buy / redemption using netbanking.