A Guide to Personal Financial Planning

By August 30, 2016 Literature

The  domestic  and  work  related  responsibilities  of  most  investors  do  not  permit them  to  go  deep  into  the intricacies  of  investment,  insurance,  finance,  real  estate  and  taxation.   Common investors   require  investment  advice  that  is  simple,  effective,  easily  understood  and  easily  remembered.   Few  sectors  are  witnessing  such  explosive  growth  as  the  financial  services  sector.   There  is  a  crying  need  for  properly  trained  financial  advisors  in  India  today.

Unfortunately,   there is a tremendous dearth of such advisors.   Most  so  called  advisors  are  nothing  but  agents  who  in  collusion  with  the  corporations  they  represent  or  work  for,  generate  and  use  a  lot  of  hype  to  aggressively  sell  financial  products  and  services  to  gullible  investors  and  customers,  whether  or  not  such  products  and  services  are  advisable  for  them.   As  a  result,  experiences  of  the  common  investors  in  investment,  insurance,  real  estate  etc.,  have  been  far  from  pleasant.   The  disaster stories  of  how investors  have  lost  tons  of  money  in  imprudent financial  adventures  are  too  numerous  and  well  known  to  be  recounted  here.

PERSONAL FINANCIAL PLANNING is the conceptualisation and implementation of a comprehensive financial plan for the achievement of a person’s total financial objectives.

The areas covered by a normal Personal Financial Plan are:


1.1 Health Insurance should be compulsorily taken. The entire family must be covered by health insurance. We advise choosing family floater policies which cover at least four members of a nuclear family, with any one person entitled to make use of the entire cover, should the need arise.  ‘Personal accident’ and ‘critical illness’ riders may be taken if necessary.

1.2 Personal Accident Insurance should be taken only by earning members of the family to cover the risk of partial and permanent disability.

1.3 Critical Illness Insurance should be taken for all the family members to cover the risk against costly treatment of terminal deceases.

1.4 Life Insurance:  If an individual has no financial dependents, life insurance is not necessary and will be a waste of money. If there are financial dependents, the quantum of life cover required must be calculated. Thereafter, it is advisable to take only a pure term life insurance cover, to the extent life insurance is required.

1.5 Property Insurance:  Protection against losses caused by earthquake, fire, damage from other causes, breakdown, burglary, etc., may be taken if required, and to the extent required.

1.6 House Hold Insurance to cover the risk of fire and burglary of electronic goods, furniture, interiors, etc., may be taken if required, and to the extent required.


Ensure that an amount equal to at least 12 months’ normal living expenses is deployed in highly liquid avenues like money market accounts (called ‘liquid funds’ in India), short-term mutual funds, short-term floating rate mutual funds, ‘flexi’ bank deposits, etc.

This builds an excellent buffer in case of unexpected shocks like job/earnings loss, change of residential status, migration to a different country, unforeseen but necessary expenditure, etc.

Investment in any short-term debt fund with monthly or quarterly capital appreciation transfers to an equity index fund or diversified equity fund would be an excellent strategy for an emergency fund.  An emergency fund is your private insurance policy and your first line of defence when tackling an unexpected, adverse financial situation.

It is important that an emergency fund be utilised only in an emergency.


Never expect either the government or your employer to provide for your retirement. You are responsible for your financially comfortable retirement.  No one else is. There is a wrong notion that planning for retirement should start when a person approaches retirement.  Nothing can be farther from the truth. Retirement planning must start as soon as a person starts earning.  As the old Chinese proverb states, do not wait until you are thirsty, to dig a well.

The best “private” retirement plan would be a sustained systematic investment into a well-diversified portfolio of blue chip stocks, diversified equity mutual funds, equity index funds, and, resources permitting, real estate.

So long as interest on the Public Provident Fund (PPF) remains tax-free, this would also be an excellent retirement avenue for the conservative investor. Employees, who are eligible for the Employees’ Provident Fund (EPF) benefit, should make contributions to the EPF at least to the extent of matching contributions by the employer.

From the financial year 2014-15 onwards, Section 80C of the Income-Tax Act, 1961, has provided an excellent opportunity to build a tax-advantaged retirement fund up to Rs 1.5 lakhs per financial year (presently), using among other avenues, PPF and ‘equity linked savings schemes (ELSS)’ of mutual funds.

While the exemption under Section 80C may be a sweetener, it should be borne in mind that a retirement fund is of vital importance in its own right, whether or not there is a tax benefit attached to it.

Just as an emergency fund must be used only in an emergency, withdrawals from a retirement fund must be contemplated only upon retirement. The solitary exception to this rule is if the family or any of its members is threatened with a life-and-death situation, and emergency funds and insurance have already been exhausted.


Everyone must aspire to owning a dwelling. This is the only area where we will not object to a loan being taken for acquiring an apartment or house. Today, housing loans are freely available and there are substantial tax advantages attached to the repayment of principal and the payment of interest on these loans.  However, it should be remembered that the acquisition of a residential house is important in its own right, regardless of any tax advantage attached to it.

If the individual has need for commercial premises for his own use such as an office, shop or showroom, steps may be taken over time to acquire the ownership of such premises. Additional real estate investments may be undertaken only if the individual has specialized knowledge and a keen interest in real estate investments.


It would be very prudent to have no debt at all, except perhaps a housing loan, if needed.  Get rid of dangerous, high cost, open-ended debt like credit card debt, personal loans, cash credits and overdrafts.

Use only term loans, that too sparingly, and only for the acquisition of vitally important productive assets such as a residential house or truly useful higher education.


Investment can be for parking funds, to earn regular returns and for growth. Use savings accounts, ‘flexi’ accounts, liquid, short-term floating rate mutual funds for short duration parking of funds. Use Post Office Monthly Income Scheme, Taxable Government of India Savings Bonds, Senior Citizens’ Savings Scheme (for persons of 60 years and above only), bank fixed deposits, short and long-term floating rate mutual funds, fixed maturity plans of mutual funds, and structured withdrawals from PPF accounts, to earn regular returns.

Invest in a very well diversified equity portfolio of blue chip stocks and/or use systematic investment and systematic transfer plans into mainline diversified equity mutual funds, for wealth enhancing (growth) investments. Real estate is also a good, long-term, wealth-enhancing avenue of investment.

However, real estate suffers from some drawbacks such as poor liquidity, difficulties in verification of title, requirement of large amounts of capital for a single purchase, high registration costs, menace of black money in real estate transactions, problems arising out of absentee landlordism, etc.

Real estate mutual funds should be available in India before long, at which time systematic investment and systematic transfer plans into these funds can certainly be considered.


Vehicle purchases, children’s education, marriages and family functions, family vacations, down payment on real estate purchase, renovation of real estate assets, etc., can be provided for by setting up a general investment fund, following a simple asset allocation plan.  When in doubt, maintain a 50:50 balance between debt and equity in this account, and rebalance it at annual intervals.

Do not neglect succession and estate planning.  Prepare a will.

Ensure that all bank accounts and investments are either in joint names or with nominations registered.

Ensure that the spouse and / or family are kept aware of investments, insurance policies, retirement benefits, tax matters, etc.

Regularly review investments. Make changes only when required. Do not constantly tinker with investments.

Ensure that all adult family members apply for and obtain an income-tax PAN card, an election identity card, a passport, a driving license and (if necessary) an Aadhaar card.

Know your client (KYC) registration formalities for mutual fund investments may be undertaken and completed. The opening of client and demat accounts with a member of a recognised stock exchange and depository participant respectively may also be completed, if direct equity investment is contemplated.


Very few common people have a clue about what their investment objectives should be. Others have fancy, unrealistic and often unworkable objectives, completely out of touch with the reality of their income, assets and economic prospects.  Our task is to enlighten investors about what their objectives should be, prioritize these objectives and implement them through a viable and workable financial plan, after taking into consideration their situation, income and assets.

Where investment objectives of a normal client are concerned, we go beyond simple investment objectives and try to implement financial planning objectives. We advise drawing up, implementing and then adhering to a financial planning plan of action, the highlights of which are:

  • Take health insurance cover for the entire family, preferably on a family floater cover basis.
  • Take personal accident cover to the extent required only for bread winners of the family.
  • Take critical ill insurance cover to the extent required for the entire family.
  • Take pure term life insurance cover only if required, to the extent required only for bread winners of the family.
  • Take property insurance cover and house hold insurance cover only if required, to the extent required.
  • Establish a family emergency fund, equal to at least one year’s normal living expenses.
  • Plan for retirement, NOW. Make maximum possible contributions to your EPF, if you are employed and eligible for EPF. Your EPF contribution must at least equal the maximum matching contribution of the employer. Open PPF accounts for all members of the family and ensure that at least the minimum annual contribution is made to them. Start systematic investments into equity or equity mutual funds. In equity mutual funds, ensure that at least half of your investments go into low-cost index funds. Reserve at least 10% of your take home income for retirement funding.
  • Acquire a house especially if you have not done so already and are not likely to inherit one. Attempt this only after five years of uninterrupted earnings from employment, profession or business.
  • Get rid of debt, especially unproductive and open-ended debt. Ensure that monthly repayment of all loans put together does not exceed 25% of net family income.
  • Build a general investment fund across different types of asset classes. Always diversify. When in doubt go for a 50:50 rebalancing strategy between equity and debt for your general investment fund. Allocate at least 15% of net income to a general investment fund. Have a good idea of your financial objectives which must be met by your general investment fund.
  • Learn to differentiate between short-term and long-term monetary needs and invest accordingly. Its short-term debt for short-term needs, and equity and/or real estate for long term needs.
  • Guard against hype, excitement and costs in investment and insurance.
  • Keep your documents in order and review your finances and financial papers at least once a quarter. Ensure that all investments are in joint names or with nominations registered. Don’t neglect tax work. Be tax-efficient wherever possible.
  • Don’t neglect estate and succession planning. Make a Will.
  • Ensure that every adult family member has a passport, an income-tax PAN card, a voters’ identity card, a driving license and (if necessary) an Aadhar card. Examine whether family members need to complete KYC formalities for mutual fund investment, and / or open client accounts with a member of the BSE / NSE and open demat accounts with a depository participant.



Mr. Gerard Colaco
Partner, Colaco & Aranha,

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