Financial planning: What are common mistakes to avoid

Financial planning is a detailed process of understanding one’s financial status and milestones and then coming out with a comprehensive solution. However more often than not, financial planning is looked at more from a quick fix solution. I often come across people asking me which product I should invest in. The question is not about where to invest, but why to invest, which will decide your asset allocation. However the habit of jumping to fast solutions sometimes end up having adverse consequences. The common mistakes which I have come across while people plan their finances are as under:-

1) Current status and Way ahead:-
Financial planning can often be compared to a long distance travel. The first thing we do when we plan our travel is understand which places we want to go to. Then we decide on the affordability of the same. Then we decide on the mode of transport, whether the travel has to be completed by plane, bus, train etc. Then finally we buy the ticket and get our travel plans implemented. Similarly in financial planning; the first step should be to understand where I want to go, as in to decide your goals or milestones to be achieved. The second step should be to understand your current financial position which is your assets, liabilities, cash flows, taxation etc. to exactly know where you stand as of today. The third step should be to choose the asset class and products if required to reach the goal. Finally, the plan needs to be implemented because “A financial plan not implemented is a futile excersise”. However we more often than not first choose a product and get impressed with its features and invest in it not realising whether the same fits into our scheme of things. So it’s like first choosing our mode of transport and then deciding on the location.

2) Listen to advice, implementation can wait:-
In the process of financial planning, we come across a few people who are very excited about the whole exercise initially.  They are keen to take advice and understand their financial status from a financial planner. However, taking advice is just a small percentage of the entire financial planning exercise. The process actually starts after the plan is presented. The implementation is of crucial importance because, a delay in the same will affect the effectiveness of the suggestions and achieving one’s milestone could become difficult.  Similarly regular financial plan reviews are extremely crucial because there would be changes in one’s goals, incomes and expenses. One needs to know where he has reached in comparison to his goals in the financial planning excersise.

3) Emotional planning for logical decisions:-
Financial planning deals a lot with financial behaviour of the individual.  We often see people investing in markets at the highest point and refrain from investing when valuations are indeed attractive. Similarly we tend to follow fads a lot, so if gold or real estate seems to be doing well we end up allocating a major part of our portfolio towards such assets.  This hampers our portfolio allocation. However what causes a real dent in our path to effective financial planning is our expenses which are more often than not driven by emotional needs. It can be a small purchase in a shop or a big purchase like buying your home. We tend to base decisions on emotional counts. We often come across cases where the budget to buy a car was Rs. 4 lacs but ended up spending more than double the amount. Another common example is that of home rennovation which always over shoots the monetary limits assigned. So every time there is a cash outflow its extremley important to ask whether what we are giving into is a need or a desire.

4) Short term memory :- 
I often conduct corporate seminars on financial planning and I have seen a trend in the questions asked by particpants at various market conditions. When markets are doing well the questions are more about assets which are growth oriented and less biased towards security of ones asset class. Similarly when markets start tapering down everyone is on look out for guranteed return products. This is a problem, as our portfolio needs to be well balanced and has to be reviewed from time to time. We tend to forget the past as to how certain assets behaved and tend to focus all our attention only looking at the immediate present. This can prove expensive in the long run.

The mistakes mentioned above are just a few of the several mistakes which we do in managing our finances. These errors, if not tended to, can lead to bigger financial blunders in the long run. However it is never too late to try and get your finances in place. All it requires is a proper guidance and a strong financial discipline.

How to control your money

With a constant surge in the cost of living, people are finding it more and more difficult to live within their means. Our incomes are barely sufficient to provide for our expenses and saving money is the last thing people can think of. The commonly asked question in such a scenario is “How do I save money when I am struggling to make ends meet?”

Here are some tips which can be followed to control our expenditure. One cannot expect to save money immediately one starts following them, but these simple steps can certainly help in curtailing one’s outflows.

1. Give yourself a budget
The word “budget” can send shivers down your spine, but let us ensure you that it isn’t as scary as it sounds. It simply means to give yourself a benchmark figure so that you can monitor whether you can stay within the limits. 
For e.g. If one currently requires Rs. 30,000 to run the household, he/she should ensure that they withdraw only the required amount and not more than that. Once we have only the stipulated amount of Rs. 30000, we can then slot it into various categories such as grocery, fuel, medical expenses etc.
Having excess liquid cash at one’s disposal doesn’t always work to their advantage. It gives one the message that they can spend more than what they actually need to.

2. Itemize your expenses
Most of the expenses of a household are due at the start of the month for eg. Grocery, Society maintenance and so on. The trick is to note down each and every item of expenditure so that you don’t lose track of what you’ve spent. You can either maintain a notebook or an excel sheet depending upon your convenience.

At the end of the month, when you see your expense list in black and white, that’s when you realize how well you’ve done through the month. You might have spent far less than what you provided for or you might have exceeded your monthly budget. But this will give you an idea and a reminder to do better in the following months.

3. “If you buy things you do not need, soon you will have to sell things you need” Warren Buffet
With the nature of products available in the markets and the ever-increasing number of shopping malls, one needs the strength of elephants to say NO to their wants. Before purchasing any product, always ask yourself one question “Is this a need or a desire? Most of our so-called needs turn out to be stuff which we don’t need at all. At the moment of purchase, they seem like commodities we cannot live without and we convince ourselves to buy them. But when it actually comes to using it, half of the people don’t know why they bought so much stuff and the other half don’t know where all the stuff has gone. For eg. Clothes and accessories- the more we have of them, the less we feel contended. Ask yourself whether you visualize wearing this often or you can do without buying it.

4. Keep your credit card out of reach of yourself
This may sound like a funny disclaimer but it actually works. The amount of cash we carry when we go shopping can be limited, but we also carry with us some plastic cards which are free to carry but are really expensive when used. The limits on these cards are thousands and sometimes even lakhs of rupees. People, many-a-times swipe their cards for stuff they probably don’t need and are in a fix when the bills arrive. Credit/ Debit cards are not always dangerous. Sometimes urgent medical or other unforeseen expenses can be met with, with the help of these cards. But when they entice you into spending money, that’s when you need to lock them up in the cupboard. Credit Card companies offer cards and high limits on them because it is their job to ensure that you spend money, so that they can retain their jobs. But remember that, the person paying these bills is none other than you yourself. The interest charged on outstanding payments is a whopping 36% p.a. which is added to the bill on non-payment. If you already are in such a situation, we would advise you to settle this as soon as possible.

5. Monitor Yourself
At the end of every month compare your expectation with reality. At first, it may seem depressing but as the months go by and you see results in the form of surplus money, you will thank yourself in the long run. The money thus saved can go into something more productive in the future.

Always remember, curbing a lavish lifestyle may seem difficult but not having one is worse. So the next time you go shopping you know what to do.
   
The writer is Head Admin Team at MSVentures Financial Planners.

Why can a financial plan only be custom-made

We have always come across people saying that no two persons can have the same set of Fingerprints. This theory remains unchanged even in case of financial planning. Financial planning, in common terms, is a roadmap which ensures that you reach your destination without any difficulties.

There are several reasons why a financial plan can never be the same for two people.

1. Milestones Vary
When a person approaches a certified financial planner to sort out his economic life for him, the first question that he would be asked is “What are your goals?” It simply means that he has to list out his objectives in order of priority.

For eg. An average individual, Mr. A, who is a married 35 year old having one child may have goals like Child’s Education, Child’s Marriage, Buying a House, providing for Retirement etc. as against Mr. B who is a 55 year old who would have objectives such as ensuring Medical and other health securities for him and his family, ensuring a comfortable retired life etc. 
This goes to prove that everyone has different goals in different orders of importance and the goals can also differ for the same person at various intervals.

2. Time Span Differs
With varying goals of individuals, the time frame of goals also differs. This means, that when a financial questionnaire is presented to the individual for filling up his details, he will have to list his personal details along with the goals for which he is investing for. Each of the goals will have a specific time frame attached to it i.e. in terms of days, months or years. Depending upon the severity of the goal, the financial plan will change over a period of time. Similarly, as goals change, the time frame attached to it will also differ for every individual.

3. Risk Appetite Divaricates  
A financial plan is a process which can be exercised on individuals from all walks of life. Some may be salaried, some professionals and others may be businessmen. With every changing individual and occupation, the risk taking ability varies. The financial planner first ensures that the individual and his family have the pre-requisite emergency funding for all contingencies and then proceeds with his plan execution. With the amount required for various goals in tow, the client can take calculated risks after consulting his financial planner as against a person whose basic funds are not allocated in accordance with the goals.

4. Current Financial Position   
The prevailing financial position of the client also determines the shape his financial plan will take. Current financial situation involves a thorough analysis of the assets which the client holds, the asset class, whether the individual is actually holding a white elephant in the name of “asset” and so on. Simultaneously the liabilities of the individual also causes a shift in the financial plan viz.a.viz the nature of the liabilities and what portion of the net worth it is eating into. The resources, in relation to the debt and the current income of the client and his family put together will help mould the final layout of the financial plan.

A financial plan is not only about showing the mirror to the person, it also involves incorporating the changes in the above factors from time to time in order to give him a comprehensive solution that helps him achieve his goals.

The writer is Head Admin Team at MSVentures Financial Planners.

Why tax benefits may not be available in some cases

Most people believe that all that they have to do for the purpose of claiming a deduction is to complete the process required and then the benefit will be available to them. While this might be true for most situations there are some cases where the individual could find themselves being unable to claim the deduction as there are several conditions that need to be fulfilled. This is especially true when they relate to those that are claimed under Section 80. Here is a look at a situation where this would happen and how the individual can ensure that they are not trapped in such a position.

Common benefits
There is a benefit of Rs 1 lakh of deduction that is available for making investments in specified instruments like Public Provident Fund, National Savings Certificates, Senior Citizens Savings Scheme, life insurance premium and so on under Section 80C. Other benefits include those for medical insurance premium payment, treatment of specified diseases, donations etc. Most people undertake the required action and then believe that the benefits will come to them in their tax calculations. However there are some situations where this might not be possible because these variations are clearly outlined as those that will restrict its applicability. There are some common situations when  this might actually be visible.

Short term capital gains
The taxpayer could be an individual and there could have been short term capital gains that have been generated during the year. This would have to be short term capital gains from equities or equity oriented mutual funds. The other condition is that there should also be a securities transaction tax that has to be paid on the transaction. This would make the applicable rate of tax on the amount of gains that have been earned at 15 per cent so this is a situation where some difference will be seen in the applicability of the deductions. The conditions state that when there are such gains then the deduction from Section 80C to Section 80U is not available for these gains. This will bring a long list of deductions from medical insurance premium to treatment of specified diseases and even donations under this restriction and would turn out to be a tough proposition for many people.

Applicability
There are a couple of situations under which you could find that the benefit is limited. The first is where there is a position where most of the income is from short term capital gains. This could be the situation for a senior citizen who might have some small amount of regular income but could have ended up with a large short term capital gains either because the markets were good or because they ended up selling some bonus shares where the cost is zero. In this case they would need to pay the required tax and not have the benefit of the deduction for which they might have made the investment.

The other situation when this could possible happen is where there is income being earned but at the same time this is not very high and then there is a large amount of one time short term capital gains earned. In such a situation once again the individual would find that they are not able to make use of the deduction for which they had planned.

One of the ways in which this situation can be tackled is to look at the overall position right at the beginning before any transaction is made and hence this will give an idea about the taxability that would arise. This is a good way of going about the process as there would be some additional planning that can be undertaken when there is a possibility that the benefits could end up being disallowed.

The author can be contacted at arnavpandya@hotmail.com

Why tax benefits may not be available in some cases

Most people believe that all that they have to do for the purpose of claiming a deduction is to complete the process required and then the benefit will be available to them. While this might be true for most situations there are some cases where the individual could find themselves being unable to claim the deduction as there are several conditions that need to be fulfilled. This is especially true when they relate to those that are claimed under Section 80. Here is a look at a situation where this would happen and how the individual can ensure that they are not trapped in such a position.

Common benefits
There is a benefit of Rs 1 lakh of deduction that is available for making investments in specified instruments like Public Provident Fund, National Savings Certificates, Senior Citizens Savings Scheme, life insurance premium and so on under Section 80C. Other benefits include those for medical insurance premium payment, treatment of specified diseases, donations etc. Most people undertake the required action and then believe that the benefits will come to them in their tax calculations. However there are some situations where this might not be possible because these variations are clearly outlined as those that will restrict its applicability. There are some common situations when  this might actually be visible.

Short term capital gains
The taxpayer could be an individual and there could have been short term capital gains that have been generated during the year. This would have to be short term capital gains from equities or equity oriented mutual funds. The other condition is that there should also be a securities transaction tax that has to be paid on the transaction. This would make the applicable rate of tax on the amount of gains that have been earned at 15 per cent so this is a situation where some difference will be seen in the applicability of the deductions. The conditions state that when there are such gains then the deduction from Section 80C to Section 80U is not available for these gains. This will bring a long list of deductions from medical insurance premium to treatment of specified diseases and even donations under this restriction and would turn out to be a tough proposition for many people.

Applicability
There are a couple of situations under which you could find that the benefit is limited. The first is where there is a position where most of the income is from short term capital gains. This could be the situation for a senior citizen who might have some small amount of regular income but could have ended up with a large short term capital gains either because the markets were good or because they ended up selling some bonus shares where the cost is zero. In this case they would need to pay the required tax and not have the benefit of the deduction for which they might have made the investment.

The other situation when this could possible happen is where there is income being earned but at the same time this is not very high and then there is a large amount of one time short term capital gains earned. In such a situation once again the individual would find that they are not able to make use of the deduction for which they had planned.

One of the ways in which this situation can be tackled is to look at the overall position right at the beginning before any transaction is made and hence this will give an idea about the taxability that would arise. This is a good way of going about the process as there would be some additional planning that can be undertaken when there is a possibility that the benefits could end up being disallowed.

The author can be contacted at arnavpandya@hotmail.com

Petrol price to go up by 30 paise a litre, diesel 18 paise

Petrol price will be hiked by 30 paise per litre and diesel rate by 18 paise a litre after government decided to increase the commission paid to petrol pump dealers.
    
The Petroleum Ministry today decided to increase the dealer commission on petrol from Rs 1.499 per litre to Rs 1.799 a litre. The same on diesel has been hiked from 91 paise to Rs 1.09 a litre, official sources said.
    
They said the hike would be effective either today or from tomorrow, depending on when the ministry issues a formal letter to oil companies.
    
Petrol is currently priced at Rs 67.90 per litre in Delhi and diesel Rs 46.95. After the hike, petrol will cost Rs 68.2 per litre and diesel Rs 47.13 a litre.
    
The increase in dealer commission is the first since July 2011. In July, the commission was hiked by 28 paise on petrol and by 15.5 paise on diesel.
    
Federation of All India Petroleum Traders General Secretary Ajay Bansal said the hike is short of their demand of 67 paise increase in commission on petrol and 42 paise on diesel, considering steep hike in operating cost of a petrol
pump.
    
"A few of our operating costs like running pumps on generators, free services (like air and water) and increase in evaporation, seem to have not been taken into account while calculating the proposed commission," he said.
    
The Ministry, he said, has assured to look into these in two months time.
    
The government had earlier this month hiked commission paid to LPG distributors by Rs 11.42 per cylinder. Subsidised LPG in Delhi now cost Rs 410.42 per cylinder, up from Rs 399. 

The increase in commission paid to LPG dealers from Rs 25.83 per 14.2-kg cylinder to Rs 37.25 was effected from October 7.

Are gold bulls being set up for a major letdown?

Gold prices have fallen 5 percent in the space of just over two weeks on prospects for weak global growth and inflation, and commodity experts tell CNBC that with no major catalyst to drive prices back up, gold bulls targeting USD 2000 an ounce by year-end are in for a major let down.

After surging to a nine-month high of around USD 1,795 [at the beginning of October, the precious metal has fallen to around USD 1700 an ounce on Thursday.

A few months ago, traders were betting on a move up to USD 2000 on expectations that massive quantitative easing by major central banks would encourage spending and lift asset prices and gold, used as a hedge against inflation.

But this has not materialized and gold prices have weakened as a result, said UBS commodities analyst Tom Price.

“Instead of spending you have deleveraging going on, people are taking cash and paying down debt, that’s a bearish sign,” Price said.

Recent strength in the US dollar which has risen 0.5 percent against a basket of currencies in the last month, has also contributed to the sell down in gold, said Ric Spooner, Chief Market Analyst at CMC Markets Asia Pacific.

A strong dollar generally means lower gold prices. When the dollar strengthens, gold futures, which are traded in dollars, become more expensive for investors who use other currencies.

And, there is limited upside for the precious metal in the coming months, say analysts, given the bleak inflation outlook and growing risk aversion in global equity markets.

As investors look to move to the sidelines, they are likely to sell gold exchange traded funds (ETFs) and this will further weigh on gold prices, said Jonathan Barratt, CEO and founder of Barratt's Bulletin, a commodity newsletter in Sydney.

For instance the SPDR Gold Trust, one of the biggest ETFs, has fallen 3.6 percent over the past month. “The SPDR gold fund has more gold holdings than the French central bank, if investors decide to get out, you have physical sales which will impact the price of gold,” he said.

Barratt, who started scaling back his long position in gold two weeks ago, forecasts the precious metal will likely end the year below $1700, with $1635 the lower end of his target range.

Festive Season

While the festive season in the world’s top consumer of bullion, India, will provide some support to gold prices, it is unlikely to have a lasting impact, according to analysts.

The precious metal, which is widely regarded as a store of wealth by Indians, is traditionally gifted during weddings and religious occasions, particularly during the months of October and November.

“The Indian festival season is an important fundamental driver for gold, we will see a few weeks of gold buying, but weakness in the rupee which translates into higher gold prices, could limit buying this year,” said Price.

Barratt, who agrees that Indian buying will not be enough to counter selling by investors, says the next major risk event for gold will be the November 6 US presidential election.

“The election is a game changer, if we get an Obama win, gold prices will stay steady, but if (Republican challenger Mitt) Romney comes in, gold will edge lower,” Barratt said.

“If Romney wins, he will stop spending and we will get a new Fed chairman who won’t be aggressive in printing money,” he said, adding that this will lower inflation expectations further and cause a correction in gold prices.

Which MF works for you: Refer to PN Vijay's guidebook

Investments are all about matching risks and returns. Investors worry too much about returns but risks are also important. CNBC-TV18's special show Informed Investor gets PN Vijay, Portfolio Manager of askpnvijay.com to guide which type of mutual fund suits a young investor who has just started his earnings.

Vijay advises, "Ability to take risk depends on two factors; how much money you get and how much goes out. You must have some cash surplus. Normally you don’t make investments and then use it for daily bread."

Here is an edited transcript of his comments.

Q: What investment advice do you have for people who have just started earning? What steps should they take?

A: Investments are all about matching risks and returns. People think too much about returns but risks are also important. Your ability to take risk depends on two factors; how much money you get and how much goes out. You must have some cash surplus. Normally you don’t make investments and then use it for daily bread.

Second is age. when you are young, your income is good and that is the time to build wealth, build assets. In a country with 8 percent inflation it cannot lower than 6 percent because there is so much of growth and consumption. So many people are coming up the ladder. It makes sense to slowly build-up the portfolio of good property and good stocks because these are the only two assets where you can get inflation to work for you.

Q: A lot of people do not review their portfolio investments often and suddenly they loose a lot of value. What should they do at that point? Keep the faith or should they do something to asses their position?

A: Surely keep the faith. The thing about mutual fund is like asking whether dating a girl is good or not. A girl can either be most wonderful or most awful. This mistake I find not only in a young investor but also in experienced ones as well. I have invested in mutual funds and have lost a lot of money. Now mutual funds can be the safest. If you are in a liquid fund or a fixed maturity plan (FMP) it is the safest. It is money in the bank. If you have invested in small cap sector fund it is the riskiest. So, mutual fund is a generic name.

Equity mutual funds, sectoral mutual funds, diversified mutual funds and to some extent balanced mutual funds are exactly like equity shares. FMPs, liquid funds are exactly like bank deposits. You get certain tax benefits and certain other things, complications but generally income funds swing with interest rates. It is important to look at your mutual fund portfolio.

Find out how much risky is equity, how safe is debt and make the choice, within that choose some good mutual funds. But on a personal note, I prefer well picked portfolio, diversified portfolio of stocks better than intermediation of equity mutual funds because the cost of that intermediation is somewhat high.

Bajaj Finance sees FDI in retail boosting consumer loans.

Bajaj Finance Ltd expects foreign direct investment in retail to provide a boost to its business of lending for consumer durables according to chairman Sanjiv Bajaj, MD, Bajaj Finserv. The company, which is focused on consumer lending, is specialising in the area of consumer durables and has seen a 33% growth on amount deployed in consumer loans in the first quarter.

Speaking to ToI, Bajaj said FDI in retail would bring in the much required efficiency in supply chain and expand the market. "We have already seen this happen with the existing large format stores, they have only expanded the market for retail" he said. He added that large stores also provide a boost to lending business by aggregating customers.

For the quarter ended September 30, Bajaj Finance posted a 48% rise in net profit which touched Rs 129 crore from Rs 87 crore a year ago. The company's net interest income rose 36% to Rs 442 crore.

Effective Asset Allocation: For your Financial Wellness!

Our health requires proper mix of  various food items to get us balanced doses of  protein, vitamin, iron and other minerals in the body to remain physically fit  and helping us fight health related risks.  Same holds good for our  financial wellness too, we need to diversify our money into various  instruments by taking into perspective our  risk taking ability, to enable us maximize returns thus wading the risk of sacrificing our  financial health.

Studies have shown that proper asset allocation is more important to long-term returns than specific investment choices. But since guessing which asset category will do best at a certain point of time is very difficult, thus it makes sense to divide your investments among various asset categories. But right understanding of this strategy holds the  key to investment success.

Here I will comprehend Asset Allocation for all you investors.

Asset allocation means diversifying your money in various asset classes. The goal is to help reduce risk and enhance returns. Establishing a well-diversified portfolio may allow you to avoid the risks associated with putting all your eggs in one basket.

 Important variables affecting  your Asset Allocation:
 
1. Prioritizing  goals:

Prioritization makes it  imperative that you have clearly earmarked goals.  Time management teaches that you should prioritize your goals / objectives which will help you to analyze that you are working upon important goals instead of getting caught into minor things. This will make sure that your money is parked  for significant purpose.

2. Risk Tolerance:

Risk tolerance depends on your age, income and financial goals. For instance, the risk which can be taken by a 30 year old cannot be taken by a person who is on the verge of retirement. As a 30 year old person generally has a longer time frame to make up for any losses he / she may incur on his / her portfolio.

3. Duration of goals:

Time Horizon is another crucial factor, which one should look at. Knowing that  time horizon is extremely important when it comes to choosing the type of investments you want to make and  asset allocation you want to do. As you need to take proper medicine for a particular  duration to  recover fast, similarly you need to fix  the time horizon  for a particular goal, so that you are able to build the  desired corpus  for that  goal in the stipulated time frame.  When you have longer time horizon, you can have aggressive asset allocation with more exposure to equity, but if time period is short then you cannot afford to do so.

I am sure that after keeping these aspects in mind you can have balanced  asset allocation.  But that's no all, we still have one important thing to take into account, namely, Inflation. While doing all this exercise to grow our fund with best asset allocation by taking into account above mentioned all three variables, we should also consider inflation for the same. So that optimum growth of your corpus may is not in doldrums. 
          
Returns also depend on your Asset Allocation:

For  tenure of Investment - 10 - years and above:

Assets	Allocation	Underlying Returns	Weighted Average Return
Debt & Equivalents	30%	8.00%	2.40%
Equity & Equivalents	70%	15.00%	10.50%
Gold Fund	0%	8.00%	0.00%
Total	100%		12.90%

Keeping other things same if allocation changes:

Assets	Allocation	Underlying Returns	Weighted Average Return
Debt & Equivalents	30%	8.00%	2.40%
Equity & Equivalents	50%	15.00%	7.50%
Gold Fund	20%	8.00%	1.60%
Total	100%		11.50%

Looking at above example we can understand the importance of smart asset allocation to maximize the returns. But there is a twist in the story.

The  allocation depends on the category of your portfolio, classified as:

Aggressive portfolio: This portfolio suggests that maximum portion is invested into equity say  70%,  20% into debt instrument and 10% into gold. Mostly this portfolio is recommended in case of longer time horizon.

Moderate portfolio: This portfolio implies that equity portion is 60%, debt portion is  25% and 15 % is  gold. This portfolio would seek to provide regular income with moderate protection against inflation.

Conservative portfolio: This portfolio entails that equity portion is 30%, debt Instruments 60% and 10 % is  gold. This portfolio appeals to people who are risk averse.

The question remains, how to select the category?  So to answer that, as one joins the gym for physical fitness, same way  it is advisable to opt proper guidance from Certified Financial Planner who is an expert and knowledgeable enough to help you to maintain  sound financial health.

Our health requires proper mix of  various food items to get us balanced doses of  protein, vitamin, iron and other minerals in the body to remain physically fit  and helping us fight health related risks.  Same holds good for our  financial wellness too, we need to diversify our money into various  instruments by taking into perspective our  risk taking ability, to enable us maximize returns thus wading the risk of sacrificing our  financial health.

Studies have shown that proper asset allocation is more important to long-term returns than specific investment choices. But since guessing which asset category will do best at a certain point of time is very difficult, thus it makes sense to divide your investments among various asset categories. But right understanding of this strategy holds the  key to investment success.

Here I will comprehend Asset Allocation for all you investors.

Asset allocation means diversifying your money in various asset classes. The goal is to help reduce risk and enhance returns. Establishing a well-diversified portfolio may allow you to avoid the risks associated with putting all your eggs in one basket.

 Important variables affecting  your Asset Allocation:
 
1. Prioritizing  goals:

Prioritization makes it  imperative that you have clearly earmarked goals.  Time management teaches that you should prioritize your goals / objectives which will help you to analyze that you are working upon important goals instead of getting caught into minor things. This will make sure that your money is parked  for significant purpose.

2. Risk Tolerance:

Risk tolerance depends on your age, income and financial goals. For instance, the risk which can be taken by a 30 year old cannot be taken by a person who is on the verge of retirement. As a 30 year old person generally has a longer time frame to make up for any losses he / she may incur on his / her portfolio.

3. Duration of goals:

Time Horizon is another crucial factor, which one should look at. Knowing that  time horizon is extremely important when it comes to choosing the type of investments you want to make and  asset allocation you want to do. As you need to take proper medicine for a particular  duration to  recover fast, similarly you need to fix  the time horizon  for a particular goal, so that you are able to build the  desired corpus  for that  goal in the stipulated time frame.  When you have longer time horizon, you can have aggressive asset allocation with more exposure to equity, but if time period is short then you cannot afford to do so.

I am sure that after keeping these aspects in mind you can have balanced  asset allocation.  But that's no all, we still have one important thing to take into account, namely, Inflation. While doing all this exercise to grow our fund with best asset allocation by taking into account above mentioned all three variables, we should also consider inflation for the same. So that optimum growth of your corpus may is not in doldrums. 
          
Returns also depend on your Asset Allocation:

For  tenure of Investment - 10 - years and above:

Assets	Allocation	Underlying Returns	Weighted Average Return
Debt & Equivalents	30%	8.00%	2.40%
Equity & Equivalents	70%	15.00%	10.50%
Gold Fund	0%	8.00%	0.00%
Total	100%		12.90%

Keeping other things same if allocation changes:

Assets	Allocation	Underlying Returns	Weighted Average Return
Debt & Equivalents	30%	8.00%	2.40%
Equity & Equivalents	50%	15.00%	7.50%
Gold Fund	20%	8.00%	1.60%
Total	100%		11.50%

Looking at above example we can understand the importance of smart asset allocation to maximize the returns. But there is a twist in the story.

The  allocation depends on the category of your portfolio, classified as:

Aggressive portfolio: This portfolio suggests that maximum portion is invested into equity say  70%,  20% into debt instrument and 10% into gold. Mostly this portfolio is recommended in case of longer time horizon.

Moderate portfolio: This portfolio implies that equity portion is 60%, debt portion is  25% and 15 % is  gold. This portfolio would seek to provide regular income with moderate protection against inflation.

Conservative portfolio: This portfolio entails that equity portion is 30%, debt Instruments 60% and 10 % is  gold. This portfolio appeals to people who are risk averse.

The question remains, how to select the category?  So to answer that, as one joins the gym for physical fitness, same way  it is advisable to opt proper guidance from Certified Financial Planner who is an expert and knowledgeable enough to help you to maintain  sound financial health.