Basic Training

At the core, financial planning is about you engaging with your money which can add context to your life to make fully informed decision on what is financially right for you and your family. First thing first – financial planning is not about buying financial instruments such as stocks, pensions or bonds. Products may be the pieces in the jigsaw but, as important as they can be, they are not the whole picture. Likewise, financial planning is not a onetime exercise; it is an ongoing process to help you make sensible decisions about money, starting with helping you articulate the things that are important to you.

Things could be aspirations or material things such as having financial freedom or buying a sedan two years from now. But, mostly, the important things in life that you seek are is achieving peace of mind. Financial planning involves thinking about how your family would manage in your absence, manage your expenditure, providing for your future needs, children’s education or just passing on wealth to your family. The complexity of addressing so many needs can be overwhelming, it is also something that you will need help with before you can try to manage it al l on your own.

The process of financial planning starts by assessing your current financial situation, based on which you should create a budget that will give you a snapshot of where you need to check spending and increase savings. Based on this information, you could set your financial goals, which should have a definite timeline and value that could be further categorized into short-, medium- and long-term goals. Next, you will need to assess your risk tolerance to select the right mix of financial products to invest in to achieve your financial goals. Once you implement the plan, it is important that you regularly review and adjust your financial plan to changing situations in life.

Fund Deployment

You need life insurance if anybody is depending on you and would be in financial trouble if you could no longer provide for them. Needless to say, the need becomes much more pressing if you’re about to go into a combat zone. While, the army does provide you with insurance, it would be wise to take one independently. Same is the case with health insurance, even if you are enrolled with the government-provided health insurance scheme, which can also be taken by ex-servicemen at a cost. Having set your based, all other financial goals will revolve around how you invest your money.

Investment Planning entails a lot of aspects, but to put it simply; it is about choosing the most appropriate investment solutions, understanding the risks associated when investing, optimizing taxes and achieving diversification in your investment choice. Considering all the challenges that a person in the armed forces faces, the best investment avenue available to them is mutual funds. Just like the army, mutual funds are investment products that operate on the principle of ‘strength in numbers’. They collect money from large group of investors, pool it together, and invest it in various securities, in line with their objective.

Whether you want to invest in stocks, bonds or a combination of the two, mutual funds have an option that matches the investment risk that you can take as well the financial goals that you may have. Moreover, mutual funds are convenient, easy to understand and include features that are suitable to investor needs and preferences (See: Why Mutual funds?). Investments in mutual funds take away the hassles of direct investments in stocks and bonds, which could also limit your exposure to these assets. In contrast, mutual funds offer you a wide exposure to a variety of asset classes at a small cost.

Tactical Moves

At the same time mutual funds are not magic investment vehicles that do it all. You will have to come to terms with the fact that they assure neither returns nor the value of your original investment. Although these are inherent risks; these can be managed. In fact mutual funds offer several features that make them a powerful and convenient wealth creation vehicle. The systematic investment plan (SIP) is a perfect tool for people who have limited monies to investment and have a fixed financial goal.

One benefit of SIP that is less appreciated is rupee cost averaging. Basically, when the markets dip, you get to buy more units in the fund in which you have invested and get fewer units when the markets are up. Over long periods, this effectively means that you have a lower average cost per unit over a period of time. So, by investing a specific amount every month; you can plan for and may meet your financial goals, be it your child’s education, marriage or for a comfortable retired life. When investing for long-term financial goals, choose a diversified equity fund, as equity has the potential to generate higher returns in the long term.

An aspect of financial planning that can be handled with investments in mutual funds is unique situations that are faced by those in armed forces (See: Special Situation). For instance, many early retirees struggle, even though they get a good corpus on retirement, as they don’t know what to do with the money. Mutual funds come in handy in such instances with the option to invest in lump sum or regularly through SIP. Then there are options such as STP (Systematic transfer plan), through which you can transfer funds from one mutual fund scheme to another.

STP could be a smart tool to de-risk your investment portfolio as you grow older and approach retirement. By initiating an STP from equity-oriented funds to less volatile debt instruments; you could benefit from the impact of swings in the markets, and at the same time have the corpus to meet your retirement. Similarly, you could use SWP, which is the opposite of a SIP and is a facility by which you can withdraw a certain amount of money from your existing investments in mutual funds at periodic intervals.

SWP is very useful tool to create an income stream for those who have savings and investments and have stopped earning an income in their retirement, by redeeming a fixed sum each month. However, remember that when initiating an SWP from equity fund, units held for less than one year attracts short-term capital gains.Short-term capital gains (STCG) is at a concessional rate of 15 per cent, whereas long term capital gains (LTCG) in equity fund is at the rate of 10 per cent (without indexation benefit) on gains exceeding Rs 1 Lakh provided transfer (after 12 months) of such units is subject to STT. In case of debt funds, the LTCG tax is 20 per cent with indexation, while STCG is as per one’s income tax rate. However, withdrawals of units held for more than a year will not be subjected to any tax as these fall under the long-term capital gains bracket, which is nil in case of equity investments.

Like a battle zone, your financial life is a maze, wherein a personal financial plan is the map and compass that can help guide you through that maze. Use the various options available to wade your way through this maze and come out unscathed, realizing your financial goals.