IMPORTANT FACTORS FOR FINANCIAL PLANNING
As stated earlier, we have only three basic investment options namely::
- Insurance
- Debts (Safe Investments)
- Equity (Risky investments)
We now need to understand, how to make our financial planning such that on one hand we can reduce the sufferings in the event of any untoward happenings and on the other hand meet all our life responsibilities and objectives successfully. Risk coverage should be the top priority and Insurance products are available for that. Hence we are left with only two i.e. Debt products and equity products. Inflation is an important aspect to be considered while making investment decisions. For easy understanding, we can now remember the two products as follows:
- High safety- low return product (Debt Products)
- Low safety -high returns products (Equity products)
Now look at the following table:
| |
Corpus at the end of 30 years, if savings grow at an average annual compounding rate of |
| Savings per Month |
8% |
11% |
14% |
| @ Rs. 3000/- |
Rs. 45,00,000/- (Forty Five lakhs) |
Rs. 84,90,000 (Eighty four lakhs ninety thousands) |
1,66,00,000/- (One Crore sixty six lakhs) |
As per past data of more than 10 years, we can assume that debt products may earn 8% and equity products 14% average annual returns. With this knowledge, if we strive to achieve the target of 11% average annual returns on our total assets by diversifying it between the two, we can double our corpus in 30 years with the same amount of savings as is evident from the above table.
It can be made possible by understanding the various savings and investment products from the perspective of its long term return potential. This knowledge would help deploy our savings in correct instruments for the correct needs.
Average inflation for the past 27 years as per cost inflation index published by Government of India (Up to 2007-2008) is 6.52%. An investment earning lesser than the inflation is actually not earning any return, if viewed from time perspective. Hence earning inflation beating returns should be the key focus for all investment decisions.
