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Planning Wealth

          Matching life and wealth cycle is the right way to maximise your asset allocation and earnings,advises Jagendra Kumar               

Life cycle can be broadly divided into phases: birth and education,earning years and retirement.On an average,the first stage lasts for 22 years,the second for 38 yrs and he last for 25-30 yrs.The earning year is when income and expenses are the highest.The retirement stage is when incomes are low and expenses are high.Financial planning involves in identifying the varying needs for money.

For example needs such as buying an own house,educating the children or planning for retirement .Planning is saving and investment in a manner that enables an investor to achieve the prespecified goal.For example ,deciding to save Rs 5000/- a month and investing it in an index fund with re-investment option,towards the child education,is an example of saving and investing for a financial goal.

The ojjective of financial planning is to ensure that investments are driven by pre determined and well thought out financial goals,and that the investements are suitable and adeqaute to meet thses goals.

Life cycle and Wealth Cycle are supplement to each other.At certain point of time ,the right direction in the appropiate amount needs to be decided. All the future needs are invisible and unpredictable.but by all means future liabilities have to be met with at the respective stages.

All future contingencies are uncertain in terms of size amount nad date.As a prudent man all the possible steps can be taken in accordance with capability and suitablility.Life cycle, as is commonly known is divided in various segments and co-related to various factors of life cycle besides the routine requirement.Wealth cylcle is merely a provision to support and make confident.In reality,it is the wealth cycle that changes the life cycle and life style of a person.

Be a professional planner

A professional financial planner understands the universe of investment options.he is well informed on the risk and return attributes of these options.He use this knowledge to be able to advice investors in financial planning and enables them to choose investment options that suit their needs best.While doing this,he also builds in the clients ability to save,appetite for risk,requirements for cash flows and tax stats.

He is able to create investment portfolios that help investors meet their financial goals,after taking into account these factors specific to investors.To be a good financial planner,following traits are required:

• Sound understanding of the universe of investment products,their risk and return attributes past performance and the behaviour of portions of asset classes.
• Good grounding in tax planning and estate planning.
• Ability to convert life cycles of investors into needs and preferences for financial products.
• Organized approach to work and ability to professionally manage ones business.
• Ability to understand and work with investors and excellent communication and interpersonal skills.

Life cycle stages

Professional goals and plans depend to a larger extent on the income,expenses and cash flow requirements of individuals. It is wel known that the age of the investor is an important determinant of financial planners have segmented investors sccording to certain stage in their life cycle as folows:

A model portfolio

Asset allocation defines the process of deciding the composition of a portfolio.In order to achieve the goals of a financial plan,investors should allocate their funds to equity debt and othet asset  classes,according to the risk and return features of these classes.

Among the various assets allocation  strategies the age,risk,profile and prefrences plays the vital role.Investors who follow a fixed asset allocation strategy tend to maintain a fixed ratio between the various asset classes that have choosen.For example ,an investor has choosen to have in equity and 70% in debt will find that his allocation to equity has automatically gone up,when he equity markets are booming.if he follows a fixed allocation strategy,he will relies the profits and the ratio back to 40:60. This is a disciplined approach and helps the investor to book profit in a raising market and increase holding in a failing market.An  investors who follows a flexible asset allocation strategy will not do  any re-balancing of his portfolio,and allows the allocation to change with changes in the market prices.If the rate of the return on an equity portfolio,investors will find that their equity allocation has increased over time.In case of investor in a distribution phase (with more investments in equity) the ratio of equity will go up faster in case of an investor in an accumulation phase(with lesser allocation to equity) the value of equity will increase but at a lower rate.Bogle' suggest a rule of thumb for asset allocation that "debt should be equal to his age,increasing as he ages."

Wealth cycle stages

Wealth cycle refers to using a generalised approachto saving and investment as basis of classification,rather than age or life stage. Needs are generally classified into protection needs and investment needs.Protection needs have to be primarily taken care of,to protect the living standards,current requirements and survival requirements of investors.Needs for regular income,need for retirement income and need for insurance cover are protection needs.Investment needs are additional financial needs that have to be served through saving and investments.These are needs for children's education,housing and  children's professional growth.There are investors who have ample wealth and hence their individual needs like asset purchase,children's welfare,retirement etc. can be accomplished even without a financial plan or goal based investing.They do not need to plan specifically for individual goals. Wealth creating affluent investors are still in the phase of increasing their wealth and do not mind taking risk for this purpose.While wealth preserving affuent investors preserve the wealth created by them and hence do not wish to take risk.

Life cycle is rarely effected by place of climates.The main criteria's are availability of products and purchasing power in accordance with the age factor.A professional financial planner undertstands the universe of investment options.He is well informed on the risk and return arttributes of these options. The methodology used for valuing instruments with credit risk,is based on the estimation of the spread of portfolio.In the recent findings,it is found that beginners are following the footsteps of FIIs. they find that this way chances of making money are better.This style of investing views each financial goal distinctly and m makes a separate asset allocation and investment strategy or accomplishing each financial goal. A typical example of this would be investing by an investor specificaaly for goals like marriage,purchase of ouse,and children's higher education and retirement fund. Though fund manager maybe investing in the equity markets,it can be seen that each one of them shows a preference for certain kind of stocks.For example,some funds tend to focus on large and liquid companies. Some tend to be primarily invested in smaller companies with greater promise of appreciation,but limited liquidity.These preferences of fund managers for choosing securities with certain characteristics called "style".Fund management styles are he most important differentiates in the performance in funds.