Posted on by LT COL SD SHARMA (Veteran)

FINANCIAL PLANNING BY DEFENCE PERSONNEL

Introduction

Money makes the mare go…. but this topic was considered taboo in defence parlance till recently. Personal Financial Planning is not taught in any course/school /college in the Army and that is why most of us do not know how to manage our hard-earned money. We spend prime time of our lives working and saving, but hardly spend any time planning on how to put that hard-earned money to work more effectively. A penny saved is a penny earned…. and if a penny saved in ‘good saving instrument’ earns two pennies or even more. This article is an effort to throw light on the process of personal financial planning.

Meaning of Financial Planning

Financial planning is a dynamic process of streamlining the income, expenses, assets and liabilities of an individual to ensure that an individual has adequate income or resources to meet current and future expenses. It involves investing of current income of the household so that it provides funds when there will be no or low income. There are three major components in financial planning process:-

  •      Current resources (CR)
  •      Investment options (IO)
  •      Financial Goals (FG)
  •      Financial Planning: CR + IO = FG

Need of Financial Planning

Financial planning ensures that the right amount of money is available at the right time to meet the various financial goals of the individual throughout his life span. It is required to recognise income and expense patterns, estimates of future goals, arriving at proper asset allocation and finding suitable products. It also helps individual to get financial independence and fulfil his dream/goals, plan his taxation, retirement and estate planning,

Types of Financial Planning     

Personal financial planning is of four types i.e. Insurance, Investment, Tax and Retirement & Estate Planning. We shall see it one by one.

Insurance

Insurance is the first and very important step to financial planning which provides protection against the loss of physical or income generating human assets. It removes the risks to the income of an individual from situations like loss of income, reduction in income or an unplanned and unexpected charge on income which will upset his personal financial situation. The amount of insurance required by each person differs from individual to individual as it is based on their assets and liabilities and their age and stage of life. Generally, for civilian, it is taken 10 to 12 times of one’s annual income.

Since, defence personnel and their dependents are entitled free medical facilities, cheaper household items in CSD canteens and pension benefits after retirement, an insurance cover of 5 to 6 times of one’s annual income is considered suffice for them; which is compulsorily provided to them by the Army Group Insurance (AGI). Hence, in my opinion, defence personnel in general, do not require any additional insurance cover. If someone feels that cover provided by the AGI is not sufficient, he should go for the Term Insurance policy as it has the lowest premium with the highest cover because it only covers the risk of death and there is no survival benefits to the insured person. Insurance is not a Saving Instrument. Insurance is also sold/taken as a way to save and invest. It is not advisable to take an insurance policy for investment purpose as it provides about 4% to 6% survival benefits including bonus whereas much better investment options are available in the market. So keep your insurance and saving separate.

Investment Planning

After insurance, investment planning is the next important step to financial planning. It involves estimating one’s ability to save and choosing the right assets in which such saving should be invested to achieve the financial goals considering his risk tolerance. One has to follow the following steps to carry out investment planning:-

  • Decide your financial goal in life such as self-marriage, purchase of conveyance, house, education & marriage of your child, corpus for retirement and so on.
  • Find out how much they cost, keeping inflation in mind.
  • Find out your risk appetite and allocate assets accordingly to achieve your financial goals.
  • Select right investment instruments as per your goals and  invest regularly.
  • Monitor and re-balance your portfolio at least once a year.

Investment Instruments

There are so many saving instruments in which one can invest his money after due consideration of risk and return profile, investment horizon, inflation and income tax. Based on the return and risk attributes, investment instruments can be broadly classified as under:-

Instruments Risk Return Remarks
Real Estate Cannot be defined. As per cycle of the sector Not for beginners.
Location Specific.
Less Liquidity.
Gold -do- -do-  
Debit Instruments
Saving Account,
Bonds, Fixed Deposit,
Recurring Deposit,
Government Securities,
Provident Fund, Debit Mutual Funds 		Nil Average Income-oriented asset.
Barely beat inflation
Equity
(Growth-oriented asset)
(a)       Stocks & Share Above
Avg.		Above
Avg. 		Knowledge and time
is required
(b)       Mutual Funds Below
Avg. 		Above
Avg. 		Knowledge and time is not required. Professionals manage the fund.

Inflation and Income Tax eat into Your Savings

Are you comfortable in investing your money in bank FDs, PF and other fixed income instruments? You neglect the combined damaging effects of Inflation and Taxation. Tax-free investments should generate at least 8% per annum to merely neutralize long-term inflation. Non tax-free investments should give at least following annualized returns to ‘break-even’:-            

  • 11.43%     if you are in 30% tax bracket
  • 10%         if you are in 20% tax bracket
  • 8.88%      if you are in 10% tax bracket

Your money actually grows only if you earn beyond this.

Equities – The Most Attractive Asset Class

Equities, which represent a growth-oriented asset have outperformed all other asset classes in the long run – globally as well as in India. In last thirty five years equity has given 24.83% return in India.

Mutual Funds (MF)

MF are investment products available to investors through which they can invest in an asset class of their choice such as equity, debt, gold or real estate. MF schemes are managed by experienced professionals and the MF industry is regulated by Government Regulators. Investors can start investing in MF with a small amount of Rs 500/- and even reduce risks by diversifying their portfolio. One can start investing in MF through Systematic Investment Plan (SIP) and take benefits of Averaging. Like equity, longer the time horizon of investment in MF, higher the return due to Compounding benefits. In nutshell, MF is the best investment instrument for defence personnel and laymen who want to take benefits of equity class while reducing its risks and do not have knowledge and time for investment.

Tax Planning        

You can increase your earnings by doing your Income Tax planning properly. Tax is deducted at source from the salary of employees. Complete income earned by a person is not taxable. There are certain exemptions and deductions from the salary to calculate the net taxable income. Details of the same are given below:-

  • Exemptions.  Incomes described in section 10 of the  Income Tax Act, are not included in the calculation of total income of an individual, for the purpose of determining tax liability.
  • Deductions.  The Income Tax Act allows certain deductions under chapter VI – A of the Income Tax Act that can be claimed for certain expenses or payments made by assessee from his total income.

Retirement and Estate Planning

Although defence personnel get pension after retirement but it might not be sufficient to maintain the same standard of living. One should ensure that there is an adequate income to meet the expenses in the retirement stage. We should compute the retirement corpus required taking care of inflation factor and start regular savings to meet it. Savings should start as early as possible so that smaller contributions made can also contribute to the required corpus. Investments  made  in the  accumulation  stage should be growth-oriented and investment made after retirement is income-oriented primarily.

During this phase, one should plan about orderly transfer of wealth to the next generation, in the event of death. Estate planning covers the structural, financial, legal and tax aspects of transferring & managing wealth in the interest of the intended beneficiaries. One should prepare Will before his death so that distribution of estate do not suffer due to lengthy legal procedures and administration costs and do not cause inconvenience and financial burden to the family.

Conclusion

Financial planning is not only about money but about life, about fulfilling your wishes, dreams and aspirations. It enables the individual to achieve almost all his rational goals irrespective of his group of income. Defence personnel, in general, do not require any additional insurance cover. Insurance schemes are not saving instruments as their returns are very less. Hence, do not mix insurance and saving. One can get benefits of compounding by long saving horizon. Start early is the mantra for wealth creation. MF is the best investment instrument for defence personnel who want to take benefits of Equity class while reducing its risks. Increase your risk tolerance if you want good returns on your savings. Increase your knowledge or take advice of reliable Certified Investment Adviser.

About the author

Lt Col SD Sharma was commissioned in 196 Medium Regiment. After successful completion of 35 prestigious years of service in the Indian Army, he superannuated on 31 Dec 2018. He is a Certified Investment Advisor Level – 2 (Highest level certificate in the field) by the Security and Exchange Board of India (SEBI) accredited by the Association of Mutual Fund in India(AMFI). He has been educating and advising defence personnel on Personal Financial Planning free of cost on investment matters for more than a decade.  He can be contacted at e-mail address ogfinserv@gmail.com or Mob No 8630011284 for any advice/lecture on the subject.

             

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