It's time to start planning your future

The ad that has actor Irrfan Khan ideating over inflation and increasing cost, nudging his friends to work out the cost of living after they retire, does bring home a point. Once you absorb this point, you need to figure out how much and where to invest. Says Kartik Varma, CEO of financial advisory firm iTrust: "Mindless investments create more confusion than solutions. Know what your goal is and what instruments will help you attain it."

Invest regularly. Begin by putting away a small percentage of your salary every month. Says Pune-based financial planner Veer Sardesai: "A young married couple should save at least 25 per cent of their take-home salary. Before marriage, more can be saved and that early start helps greatly."

Be goal-based. How you invest your savings is just as important. Make clear-cut goals so that you can take a call on various investment options. Even as you increase investments, a balance between assets has to be maintained always so that an adverse effect on one asset class doesn't bring down the entire pack.

Goals differ for everyone but two goals, kid's future and your retirement, are common. We take a closer look at these.

Kid's future

At present, a good MBA course costs Rs 10 lakh (Rs 1 million). Eighteen years from now, at 5 per cent increase every year, imagine what the cost would be. Saving well in advance makes absolute sense. Says Kanwar Vivek, CEO, Birla Sun Life Distribution: "You need to start investing at least 15 per cent of your savings for your child."

Now, if you invest only in debt products that give 6-8 per cent return, you will fall short. Go debt for stability and equity for high returns. In debt, open a Public Provident Fund account in your kid's name. You could then buy a unit-linked insurance plan for kids. These not only increase your insurance cover, but also take care of your child's needs if you are not around.

The advantage with investing early is that you can stay invested for the long run. And, equity as an asset class, exploits this advantage well as, over the long term, the volatility tends to get ironed out. So, if your kids are young, try to put a large chunk of your investments into equity. In addition to Ulips, you could also look at index mutual funds, especially exchange-traded funds, and other kinds of equity MFs to enhance your equity portfolio. Since saving for your child is an ongoing process, you could start MF Systematic Investment Plans.

Retirement planning

Taking care of your own future is as important as taking care of your kid's future. Retirement can be a harsh truth, and planning for it is an absolute essential; the earlier the better.

Start with deciding on the retirement age. The next step is to assess current income and expenses and derive a monthly income required post retirement. Keep this target in mind and save accordingly.

We recommend a diversified portfolio across MFs, stocks, pension plans, PPF and National Savings Certificates. If starting young, go heavy on equity and gradually move towards debt as you near retirement. If you are in the thirties, you could begin with a 65:35 equity-debt ratio and gradually reduce equity exposure to, say, 10 per cent when you are about five years away from retirement.

Since you are investing for the long term, look at products that also have a tax advantage for saving for long durations.

Gold and real estate can also be considered as they help in diversifying the portfolio and are good long-term hedges against inflation, a constant threat. Says Vivek: "We recommend having about 10 per cent in gold as it is an excellent hedge against inflation and is inversely proportional to other asset classes."

Instead of buying physical gold, go for paper gold in the form of gold exchange-traded funds. You could have a portion in physical gold for easy liquidity.

Estate planning

Financial planning does not stop at asset allocation and a portfolio shuffle. You need to have a mechanism to ensure a smooth transfer of your assets after your demise.

A joint account works on the concept of 'either or survivor'. For a couple this means that either of the spouses can operate the account. It is best to have a nominee also for a joint account. The same holds true for most other investment instruments.

Says Sardesai: "In addition to having a nominee or a joint owner, each individual must make a Will at the earliest. It can be a simple one written on a plain piece of paper stating that in the event of his or her death, everything will go to his or her spouse."

Make sure the Will is witnessed by two individuals whom you trust and who will ensure devolvement of your assets as mentioned in the Will. If the Will gets challenged in the court, the witnesses' words will protect the Will's sanctity. Assign in your Will a beneficiary of your assets, like a house or antique furniture, while you are acquiring them.

Disputes over the assets of a deceased are common. "Making a Will is not very popular in India. It is a simple document that saves the inheritor of your assets a lot of trouble," says Vivek.

Clearly, dreaming of the future cannot be enough. Planning is what will make the dreams come true.