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9 components of a complete financial plan

Don't invest in something just because others are. Your investment returns depend on your risk-taking capacity.

, ET Online|
Updated: Aug 10, 2019, 04.25 PM IST
ET Online
Write down your strategy and prepare your portfolio accordingly, said Chauhan, CFP at the ET Wealth Investment Workshop held in Noida.
While every investor's financial strategy may differ, there are 9 elements that are essential to make a complete financial plan, according to Neeraj Chauhan, Certified Financial Planner. Chauhan, who is also Founder and Director, The Financial Mall, a financial advisory services firm based out of Delhi, was speaking at the ET Wealth Investment Workshop held last week in Noida.

The 9 essential components of a complete financial plan, as explained by Chauhan, are:

1. Adequate insurance

Most people overlook this aspect while charting out their financial plan. Be it health insurance or life insurance, make sure you have sufficient cover in your plan. Buy a policy depending on your needs, lifestyle and whether you have dependents.

2. Adequate contingency fund
In case of a job loss or market uncertainty or any such unforeseen event, having a decent amount in your liquid fund or fixed deposit or savings bank account will help you sail through these hard times when there is no cash coming in. Chauhan added that he advises that a person's contingency or emergency fund should equal six-nine months of that individual's income.

3. Know your risk profile
Understand what kind of investor you are- aggressive, conservative or moderate and prepare your portfolio accordingly. Do not go by the 'one size fits all' formula. Also, do not invest in something just because others are doing it. Your investment returns depend on your risk-taking capacity so keep that in mind.

4. Know your investment objective
Citing an example, Chauhan explained that if your risk profile is that of an aggressive investor but your goal is not that big or can be achieved with less-risky investments that generate less returns, then there is no need to take very high risks. It will be unfortunate if you miss out on meeting the goal because you took a big risk in the equity market and you lost out as the market crashed.

It may also happen that you are conservative in terms of risk-taking but your goal cannot be achieved without taking some amount of risk. In this case, you need to take some amount of calculated risk to achieve the goal. Thus, your objective or goal and the kind of risk you have to take go hand in hand.

5. Create a written strategy
Why are you investing? What's your reason behind investing? How much will your debt-equity allocation be? How do you plan to rebalance it? What is the timeline for you to achieve your goals. Write down your strategy and prepare your portfolio accordingly.

6. Balanced asset allocation
Your asset allocation should be balanced so that your portfolio's exposure to market risk is reduced.

7. Diversify your investments
Diversify your investments to further strengthen your portfolio as this helps in tackling risk. Invest across asset classes so your loss in any one asset class will be minimized.

8. Rebalance periodically
Keep reviewing your portfolio, at regular time intervals and re-balance as and when required. Make sure it is not too skewed towards any one asset class and lacking in another.

9. Ignore market noise
Finally and most importantly, Chauhan said that investors should ignore market noises unrelated to investment fundamentals and not panic. Many market dips have happened, domestically and even internationally. However, investors have made decent returns despite such dips. You will too if you stay calm and stay invested.

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