How to Create a personal financial roadmap


Why should you have an investment plan?

Planning your investments is the key to any successful investment. How to plan your investments is a critical piece of your investment Puzzle. Whether you plan for Mutual fund investment or any other type of investment it is always good to understand the core concepts of what is investment planning. If you don’t have a solid plan for your investment then there is a high chance of failure to fulfilling your investment goal. Without a solid investment plan, you can not fulfill your investment goal.


What is investment planning?

Investment planning is a process to measure your current financial condition and the future financial goals that you want to achieve in a predefined time frame. Why it is important to measure your current financial health because your risk-taking capacity, your current age, and your present income are the factors in how you achieve your future goals. All these factors are interrelated to your current income.

If you do not focus on your current financial health then you could not align your goals to your investment and with your risk profile. It is a part of the investment planning process. Investment planning will help you to achieve your goal smoothly without exposure to too much risk. Good investment planning will help you to choose the best investment assets and minimize the underlying risk of investment so that you could achieve your financial goal.

In short, a good investment plan could help you in any area of your investment such as it helps to limit your risk exposure, asset allocation as per your goals, Diversification, rebalancing, and any future tax implication of your investment.


How to plan your investment (Investment planning process)

The process is more or less almost the same as any type of investment. These step-by-step guides give you a clear understanding of what is investment planning.

  • Decide your financial goals
  • Evaluate your comfort zone in taking on risk
  • Choose the right financial Asset or instrument to invest
  • Consider an appropriate mix of Investment
  • Consider rebalancing your portfolio occasionally
  • Consider a Systematic Investment Plan 
  • Create and maintain an emergency fund
  • Consider Tax Implications on Your Investment


How to avoid mistakes when Decide Your Financial Goals

Before planning your Investments, you need to be clear and specific about your short-term as well as long-term goals. It is the basic element of an investment planning process. Your goal should be crystal clear in terms of the maturity amount and time frame. The maturity amount means how much money need to fulfill your goal when the time comes. If your goal is not realistic and clear enough then everything down the line will mess up because your goal is a decided factor of many things related to your investment.

For instance, which type of instrument do you need to choose to achieve your goal, what will be the risk profile of your investment, etc? Now how to decide all these, we will discuss it later. So whenever you decide your goal, you should be specific on two things. Every goal you decide on must have two components, I am repeating these your goal must have two components:

  1.  Time duration: You have to be specific about the time duration of your investment. But keep in mind that it should be realistic so that your desired amount can be achieved considering your risk profile and realistic expected return on the instrument you have invested in.
  2. Maturity amount: You need to calculate your inflation-adjusted maturity amount, it is crucial to consider inflation when calculating your maturity amount. It does not matter how much will be the maturity amount because your maturity amount can be achieved by adjusting your risk profile and time duration. 

For any long-term goal, you can use SIP. SIP is considered the best long-term tool, so you need to focus on your long-term objectives preferably. You can plan to invest money based on multiple goals. Here are a few examples of goals which is very common.

  • Retirement planning. (Write down the time duration, and maturity amount to achieve this goal)
  • Children’s education and their marriage. (Write down the time duration, and maturity amount to achieve this goal)
  • Family vacation. (Write down the time duration, and maturity amount to achieve this goal)
  • Buying a House etc. (Write down the time duration, and maturity amount to achieve this goal)

Your goals and your age will be the deciding factor as to how much Debt and Equity Investments you can afford to make.


Evaluate your comfort zone in taking on risk

One of the most important elements of the investment planning process is to figure out and calculate your risk-taking capacity. Know your Risk appetite, Evaluate how much risk you are willing to take as per your current income, and financial condition – low risk, moderate risk, or high risk. Before Investing, you need to understand completely your needs and time horizon. Here I am giving you a few outlines of how to measure your risk tolerance so that you can sustain long enough with your investment plan and achieve your investment goal.

Your risk tolerance somehow correlated to your age i.e. at a young age you can take high risks because you have enough time to stick to your investment. But, as you grow up in years, you normally tend to shrink your risk area and start looking for safer investment options. Simply, the longer the investment horizon, the lower the investment risk because you have enough time to absorb the market fluctuation. So, here is an outline to figure out your risk profile.

  1.  Any Investment duration of fewer than three years consider as high risk
  2.  Any Investment duration greater than five years consider a moderate risk
  3.  Any Investment duration greater than seven-year considers as low risk or stable investment.

Now it is quite easy for you to categorize your goal as per the risk profile. Another risk comes with the financial product or instrument you are invested in, depending upon your age and the time duration of the investment, you must carefully choose. 


How to Choose the right financial Asset or instrument to Invest

There was a time when people could not think beyond investing only in traditional assets and investment vehicles like property, gold, or fixed deposit scheme in the bank. But now the situation is changed, you can invest in various investment vehicles that are also easily available to you. You have to choose as per your risk-taking capacity and your goal requirement.

Figure out the different kinds of funds or instruments available and choose the one that best suits you to fulfill your goal. Do some detailed research, based on past performance, market trends, and returns generated over the previous years. Although, you cannot rely completely on past performance since they are just indicative factors and not any kind of assurance to yield high returns. For your better understanding, I am giving you an outline idea of the nature and risk associated with some very popular investment assets. This will give you a fairly understanding.

Stocks: This is a high-risk investment option even if you lose all of your investment capital if you are not an expert in this field. To invest in this you need to be an expert professional to analyze the company’s financial, overall micro economy and macro economy at that time, and many other aspects. If you consider investing in this then you need to go professional who can help you with this. There is another way to invest in stock we are going to talk about that next.

Investment Fund (Mutual Fund, Index Fund, Exchanged Traded Fund): This is relatively less risker than stock but the only condition is you need to stick to your investment for a sufficient amount of time to get a good percentage of return. Now understand the risk and behavior of these funds, especially the mutual fund.

  1. When you invest in a mutual fund you get the exposure to invest in stocks because mutual funds invest your money in various large companies’ stock.
  2. Expert professionals have handled your money, they make the decision and manage your investment.
  3. These funds are very transparent in nature and monitored by the financial authorities so very low chances of fraud.
  4. There is an option to invest in the SIP mode of investment which helps you to money cost averaging which helps you to lower the market risk. Later in this blog, I discuss more about these.
  5. As you come to know now fund manager is investing your money in various companies’ stocks, it eventually diversified your investment and lowers the risk of your investment.

Also, there are other benefits there are various types of mutual funds available at present like Equity funds, debt funds, and Hybrid Funds (mix of equity and debt), further equity funds also have three types blue chip funds, mid-cap funds, and small-cap funds. Now as per your risk model and your goal requirement you can choose any of them. I already discussed in detail How to choose them as per risk and your requirement in what it means by an ideal portfolio section of our blog.


Bonds: In a nutshell, Bonds are like a loan you gave to the government or any company, and in return, you will get a fixed percentage of interest. Short-term bonds usually get 2 to 4 percent and for long terms bonds, you may get a 5 to 6 percent return maximum. This is quite a stable and secure investment option for the limited opportunity for growth but is more secure. This type of product is very suitable to balance the portfolio, in fact, many even use it for rebalancing their portfolios which helps to reduce the volatility of stock market swings.


Annuities: This is basically a contract between an individual investor and an insurance company where the investor bounds to pay a lump sum at a time in exchange for periodic payments guarantee to the investor at the age of retirement. In the past, annuities plan has a bad reputation for locking investors in high-commission paying contracts that ended up being harmful to the investor. But at the present time new regulator is in place and the overall direction of the industry, these investment options can be a good option for those who want a stable income after age of retirement. You could consider a few percent of your overall portfolio value to invest in these relatively low-risk investments.


Unit-linked Insurance Plan: Basically this is the combination of Insurance and investment. Due to the dual-benefit nature of these types of plans, they are not really good options for investment. If you go through the details of these types of plans then the majority of them provide a maximum return between 5 to 7 percent, usually around 6.67 percent. It is far better to go for pure-term insurance and invest in mutual funds by SIP. I have already discussed these in detail in the post Guaranteed or assured plans are really good options for investment.


Public Provident Fund: This is the most popular investment option among the average working people. This is a very low-risk income and the interest is also quite stable almost 6 to 7 percent but there is a cap on this investment, you can not invest more than 1.5 lack per annum. Also, the maturity amount is tax-free. Definitely, you could include this product in your portfolio for the stability of your overall performance of the portfolio.

So in the end, we can sum up that when considering the risk of an investment we consider these things

  1. Your current age
  2. Your Investment tenure
  3. Your Investment option ( Financial product or Instrument)

For more details about various risk types and the way to reduce investment risk visit the, what are the Risks of Investment section. It’s better and advisable to start investing at an early age, to get maximum returns and build a good investment portfolio.



how to plan your investment



Consider an appropriate mix of Investment as per your investment horizon

You should include various asset categories. When the investment returns go up or down under different market conditions, different asset categories help investors to protect from any major losses. Historically it has been found that all of these major asset categories – stock, bonds, and cash – have not moved up or down at the same time. Market conditions that cause one asset category to move down or generate poor returns often cause the other category to perform well. By investing in more than one asset you significantly reduce your risk of losing money and your overall investment return have a smooth ride. If one asset category return falls then you will be in a position to counterbalance the losses with better investment returns from other asset categories.

Asset allocation is a very much important part of the investment planning process because it has a major impact on whether you will meet your financial goal or not. If you are not willing to include enough risk in your long-term portfolio, your investment may not earn enough return to achieve your goal. For example, If you are saving for a long-term goal, such as retirement then it is a good idea to include at least some good stock or stock mutual funds in your portfolio.

As per your investment time horizon and your risk profile, you should choose the investment vehicle. You should not put your all money in a single instrument or vehicle, It should be a mix of various investment products. Further, Diversification of Funds is the key to Reducing your losses and getting maximum returns in the long run. Split your investments in a variety of Mutual funds i.e. you can focus on different asset classes like Debt and Equity as per your risk profile. Not only is your mutual fund investment should be diversified, but you should also consider that your whole portfolio should be diversified. 



Consider rebalancing your portfolio occasionally

You should consider rebalancing your portfolio occasionally.  By rebalancing you bring your portfolio to your original asset allocation condition. By doing this you will ensure that your portfolio does not overemphasize one or more asset categories and at the same time you ensure that your portfolio brings back to a comfortable level of risk. As per the expert’s view you should consider rebalancing your portfolio every six or twelve months of interval. The advantage of these methods is the calendar is a reminder for you to do the task.

Another recommendation is that when the relative weight of an asset in your portfolio increase or decrease more than a certain percentage that you have identified in advance. The advantage of this method is that your investment tells you when you need to rebalance your portfolio. In either case, rebalancing is another important part of the investment planning process and works best when done on a frequent basis.



Consider Systematic Investment Plan (SIP) – Rupee cost averaging

Generally, SIP is considered best for Long term Investments but you need to be more specific as to how much duration you want to invest your money. Your investment duration is based on your financial goals and your current age. It Can vary anything from a short duration of maybe 3 years to a very long duration of say 20 years. This is a matter of personal choice and depends on individual goal preferences. SIP is a very popular tool, in fact, it works like a charm when used for purchase cost averaging for any long-term investment. For more details information on SIP check our blog post SIP is really a good choice.



Create and maintain an emergency fund

It is always good to create and maintain an emergency fund. Most Intelligent investors put enough money in their saving account or liquid fund or short-term debt fund to cover an emergency, like sudden unemployment. It is important because in this situation you don’t need to pull out money from your investment or from someone else. It is a good idea to have at least six months of their income in saving so that you know it will absolutely be there when you need it.


Consider Tax Implications on Your Investment

Also, make yourself aware of Taxes on mutual funds or any other investment to help you in your tax planning. Don’t hesitate to take the help of an experienced Fund Advisor/Financial Advisor if you have any doubts. It’s your money and you have every right to know where and how you are putting it. For more information check the tax benefit section of the post Investing in Best Mutual Fund


Objectives of Investment Planning

The objectives of investment planning are to help you to understand safety, capital growth, income, and any tax implication in the future of your investment. This is why you should have a solid investment plan always. Otherwise, why should you have an investment plan needs? Almost all of these objectives we already discussed above. If you still have queries then write in the comments section.