How To Start Financial Planning

Modified: 08-Jun-21

This post is in response to the query that I got from a friend who read my post on Investment Books for Beginners. He wanted guidelines for managing his own finances. 

My friend is an IT professional who after a few years of job decided to manage his finances. He read about financial planning online and hired services of a financial adviser. He is not satisfied with the adviser and decided that he needs to take charge of his investments. It is the right decision. The earlier taken the better. 

This post outlines a basic approach to financial planning for a young person in his/her initial stages of career who is a naive in finance until now. 


Insurance is the first thing one should have. It includes accident, health and life insurance. Please do not confuse insurance with investment. Keep it simple and pure insurance. We would discuss investments later. 

1) Accident Insurance: 

I think it is the first insurance each one of us should buy. It becomes useful if you meet some accident and suffer serious injuries. There are multiple coverages offered by different insurers. One should focus at Accidental Death, Permanent Total Disability and Permanent Partial Disability. 

What is the sufficient cover amount? There are diverse views. I believe that the cover amount should be such that when invested in bank fixed deposits (FD), it should replace your current salary. If your monthly income is Rs. 20,000 then you need Rs. 240,000 as annual income from insurance amount. Considering SBI FD interest rate of 8.50%, you would need Rs. 28,23,529 to replace your current salary. This cover amount is about 140 times your monthly salary. 

Many general insurance companies offer accident insurance but most of them put a limit on maximum cover from paltry 500,000/- to 25,00,000/- or about 24 times of monthly salary. I find Apollo Munich and Tata AIG as good ones. They are reputed insurers who provide you with higher cover options at competitive premiums. 

As you grow old, responsibilities & earning power increase and accordingly you should keep increasing the cover amount by upgrading the same policy or taking additional policies. 

You need to check the insurance cover, which you have as part of group insurance scheme of your employer and deduct it while buying accident insurance cover yourself. 

2) Health Insurance:

It is the next important form of insurance. First, you need to check about the group health insurance scheme from your employer. Most companies have group insurance for all employees that usually cover each employee (& his dependent family) for about Rs. 4 to 5 lac. If your employer has this policy, you need not worry a lot. Just cover yourself for contingent periods when you are switching jobs. If employer of your spouse covers you as part of its insurance scheme and both of you do not plan to change jobs at same time, you may avoid buying any additional health insurance. 

If you are self-employed or your employer does not have a health insurance for its employees, you must buy health insurance for yourself and your family. A cover amount of about Rs. 2 lac for individual and Rs. 5 lac for family should suffice till you reach about 40 years of age. After that you should increase cover amount. 

I find Apollo Munch and Star Health Insurance as good companies for health insurance. 

3) Life Insurance:

It is one of the most mis-sold financial product in India and probably worldwide. It is the most popular form of insurance to an extent that for many people insurance means ‘Life Insurance’. However, not everyone needs life insurance at every stage in life. It is a tool to help your dependents when you are no longer with them. If you have no dependents, you do not need life insurance. 

You should take life insurance only when you have taken a loan, have a non-working spouse or have dependent children &/or parents. If you are a bachelor or a DINK (double income no kids), you do not need life insurance and should not buy it. Most common sales argument by any life insurance salesman is that you should buy insurance at an early age so that you get the benefits of lower premium. This is only a sales gimmick. The analysis reveals that insurance bought at younger age if you do not need it, is actually a costly option. You may read about it here:

Should you buy life insurance at an early age to benefit from lower premiums?

Premiums paid for the period when you do not have any dependent make early insurance purchase the costliest proposition. Therefore, young age should not be the only reason to buy life insurance. 

i) How much insurance cover you should have?

It depends on your commitments. It should always be at least equal to your existing loans and the amount needed to replace your monthly salary (as calculated under Accident Insurance section above). 

ii) Term Insurance:

You should take only term insurance. Term insurance is a pure insurance scheme where you pay premium to insurance company and in case of your death, it pays the insurance amount to your dependent. If you survive the insurance period then you or your dependent do not get any money. This is the way pure insurance works and it should be like this. 

Term insurance is very cost effective and leaves lot of money in your hands, which if you put in bank FDs (riskless investment) you would earn a lot more than insurance cum investment plan of life insurers.HDFC Life offers term insurance of Rs. 30,00,000 for a duration of 30 years for a 25 years old non-smoking male person for an annual premium of Rs. 3,990 (product: Click-2-Protect, date: July 29, 2014). Good news is that the premium of pure term life insurance have been falling in India over last decade and are expected to fall further. You may read about it here:

Life Insurance Premiums are declining! Will this trend continue?

There are many good life insurers in India e.g. LIC, SBI Life, HDFC Life and ICICI Prudential. LIC is the most famous but is among the costliest. Rest three are also equally good and offer good plans at competitive prices. 


Once insurance requirements are completed, you should think about investments. There are many investment options available for a common person like Debt (FDs), Equity (Stocks, Mutual funds), Real Estate, Gold etc. These options are called Asset Classes.

1) Debt investments:

These include bank FDs, post office deposits, public provident fund etc. They are very safe and provide returns of about 8%-10% per year.

2) Equity investments:

These include stocks, mutual funds and unit linked insurance plans (ULIP).

i) Stocks:

Buying stocks directly requires a fair bit of hard work from the investor. One needs to learn an approach to select stocks. You may use some parameters in my post Stock Selection Strategies, to select good stocks to invest. But if you are not comfortable with investing in stocks directly, then you should invest in stock markets via mutual funds. 

Read: Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

ii) Mutual Funds:

There are many websites, which help you in analyzing mutual funds like Value Research, Moneycontrol, Morningstar. You should choose any two good equity funds (Diversified funds or Large Cap funds) and invest monthly. All mutual funds provide option of investing monthly by systematic investment plans (SIP).

You should always choose direct plans of mutual funds schemes and avoid regular plans. For comparison you may read this post:

You should always invest in Direct Plans of Mutual Funds. Here is the reason why.

iii) ULIPs:

ULIPs are insurance products which invest people’s money in share markets. These are the most mis-sold products in India and you should never invest in them. Innocent people have lost more money in ULIPs than anywhere else. Main reasons for losses are very high commissions and hidden charges. (Read: Investors lost ₹1.5 trillion due to insurance mis-selling)

3) Real Estate:

It is a very high-ticket investment, which we usually buy taking a loan. As the loan amount is substantial, any opinion on real estate as part of portfolio is appropriate only after looking at complete financial position of a person. We should always consider that it is a risky investment, which many times, becomes highest part of our total investments. Any wrong decision can put all our savings in danger.

4) Gold:

We can invest in physical gold and keep it in locker or buy it online via mutual funds and keep it in demat account with a bank.

We should always divide our investments among these different investment options. This is called Asset Allocation. Amount of money, which should be put in each asset class differs from person to person. For each person, asset allocation changes at different life stages. 

Mutual Funds vs Direct Equity: What should an investor choose?

Thank you Sir for the insightful article. One question I have. Rather doing all these due diligence would it be better for any retail investor deploy her money through MF route? Because if she is not able to generate a return more than well performing MF then, would it make sense to spend enough effort to this process?

It would be really helpful if you can spend few minutes and clarify if I’m thinking pessimistically and/or I’m missing something.

Thank you once again for this article!

Author’s Response:


Thanks for writing to me! I am happy that you found the article useful.

If an investor believes that she does not have time to do stock analysis on her own, then she may utilize the services of mutual funds (MF) or portfolio management services (PMS).

However, if the investor has the time & can put in required efforts to do her own stock selection, then she can capitalize on the multiple advantages that being a retail investor brings to her. This is in addition to the savings on the annual expense ratio of about 2%, which MF and PMS charge, which amounts to a very significant sum over long periods.

You may get the idea about the advantages, which retail investors enjoy over institutional investors as below:

Read: Selecting Safe Stocks to Buy for Retail Investors

A) No dependence on equity portfolio/markets for day to day living expenses:

A retail investor does not have to depend upon her earnings from equity portfolio to meet her day to day expenses like rent, EMI, children school fee, kitchen expenses etc. Her salary from the day time job is most of the times sufficient for these expenses. She does not need to get under stress if a company in her portfolio does not declare a dividend in any quarter. Whereas a full-time investor might face cash shortfall in meeting her household expenses, if her portfolio earnings are not as per expectations.

B) Gets investible funds at every month-end:

A retail investor, if she manages her household expenses well, is able to save some surplus funds at the end of every month from her salary. This surplus or savings provide her regular source of funds, which she can invest in her equity portfolio. The fact that these funds are not dependent upon the performance of equity markets, empowers the retail investor to have the discipline of investing regularly irrespective of market performance. She can easily invest this additional money in new opportunities, without unnecessary churning in her equity portfolio.

A full time investor, whose only source of income is from equity markets, does not enjoy this benefit of regular source of funds every months for deployment in her equity portfolio. A full time investor might have to churn her portfolio i.e. sell existing stocks to generate funds, in case she finds an attractive opportunity in the equity markets. This portfolio churning might or might not prove to be a successful decision every time.

C) Can take long-term investment views:

A retail investor does not have to prove her portfolio performance to anyone. She is not being judged by markets/third parties based on the performance of her equity portfolio. As a result, a retail investor can afford to stay calm and behave in a peaceful manner irrespective of equity market results. She can easily focus her aim at the long term performance of the companies in her portfolio as she is not being questioned about her portfolio on a regular basis.

An institutional investor does not enjoy such freedom. The fund management team is continuously under scrutiny for the performance of the funds that are under their management. Most of the institutional investors, mutual funds (MF), private equity (PE) funds etc. have to disclose their performance to their investors regularly (daily for MFs, quarterly for PE etc.). The fund manager is continuously under pressure to showcase good performance whenever she sends out the periodic performance report to the investors. Even otherwise, large investors of the funds keep on calling/enquiring the fund managers about performance of their money.

Such continuous monitoring of performance, many a times, leads to short term defensive investment approach by fund managers, which is focused on avoiding tough questions from investors.

D) Can benefit from bear phases/lower stock prices by buying more:

As mentioned above, a retail investor is not answerable to anyone for her investment decisions. She can take her portfolio decisions without the need of such decisions looking justifiable to others. This ability gives an immense power to the retail investor to benefit from bear markets when she can add on to her favourite stocks, which are available at cheap prices. She can keep on buying stocks despite a continuous decline in stock prices.

An institutional investor does not have this unrestricted freedom. As mentioned above, all her decisions have to be approved by a board of trustees and have to be justified to large investors. In such a situation, institutional fund managers, most of the times avoid buying stocks when prices are falling as the fund manager might have to face tough questions on underperformance of the fund if the stock price of her newly bought companies does not recover soon enough.

E) Hold back buying when stock prices are high:

A retail investor does not have an obligation to invest her surplus funds in the equity markets as and when she get the salary. The retail investor can hold back the buying decision and sit on cash until she believes that the stock prices are available at attractive levels.

Many institutional investors like mutual funds, do not have such freedom. Mutual funds have to invest a certain portion of their funds in equities, which is determined by their fund guidelines/prospectus. E.g. if a mutual funds has the mandate of investing 90-100% of its funds in equities, then it has to keep at least 90% of funds invested in equities all the time irrespective of valuation levels of stocks in the markets.

Such mandated guidelines create hard times for mutual fund managers, who face fund movements at precisely the wrong times. Most of the mutual funds see higher investment by investors in bull markets when stock prices are rising. As a result, to maintain the minimum equity investment proportion, the mutual fund manager has to invest the fresh funds in stocks despite high valuations.

On the contrary, many a times investors withdraw their funds from mutual funds in bear markets. The fund manager to meet the fund requirement of redemptions has to sell the stocks when the stock prices are falling.

As a result, the mutual fund managers end up buying stocks in rising markets and selling stocks in falling markets. This is buying high and selling low, which is against the key principle of equity investment, which says that investors should buy low and sell high.

A retail investor is spared this forced buy high and sell low situation faced by mutual funds, as she does not have any obligation to invest funds available to her as she does not have a mandated equity allocation to be followed all the time irrespective of market valuation levels.

You may read more about the key guidelines for retail investors while investing in direct equity in the following article:

Read: 3 Guidelines for Selecting Stocks Ideal for Retail Equity Investors

Hope it clarifies your queries!

All the best for your investing journey!


Dr. Vijay Malik

Related Query:

Respected Vijay sir,

After getting through your investments and stock selection, I came to know that you are investing in small cap stocks which are hidden gems. Is small cap stocks investing via SIP better than investing directly as they have some peculiarities like:

  1. they are high risk
  2. highly illiquid
  3. highly volatile
  4. less information public available

In such a situation how an investor can invest large amount of money even though it might be a fundamentally sound company, of course there are positives like

  1. huge growth potential
  2. low valuations
  3. early entrance advantage
  4. under researched
  5. emerging sectors

But small caps are double edged swords so going via mutual funds sip will benefit monthly saving investments in case of ups and downs in markets

Author’s Response:


Thanks for writing to me and providing your inputs!

I believe that for stocks in any market cap segment the main difference between mutual funds and the direct stock investing is that in direct stock investing, an investor has full control over the stocks that she is buying in her portfolio and saves on the expenses related to fund management. There are many other key differences like mutual funds face redemption when markets fall and are not able to deploy funds at the very time when stocks become cheap, which hurts portfolio return over long time. On the contrary, while directly investing in stocks, an investor can take her decision without any such pressure and can earn returns as per her effort and conviction.

Nevertheless, market has a place for all kinds of investors. Some investors prefer to choose mutual funds and some investors choose direct stock investing. I believe that a person does not need to have a background in finance for becoming a successful stock market investor provided he/she is willing to put in the required time and effort for learning about stock analysis. Therefore, I recommend direct stock investing approach to investors.

Hope it clarifies your queries!

All the best for your investing journey!



Clarifications about Gold ETF (Exchange Traded Funds)

Dear Sir, I am planning to invest in gold because of its present low rate. I want to buy an exchange traded fund (ETF). Regarding an ETF, I have a few doubts. Kindly clarify:

  • Are there any parameters to value gold like P/E, P/BV ratios of stocks?
  • Where do gold ETF managers invest our money? I mean in commodity market or physical gold or anywhere else?
  • If they invest in physical gold, where do they store that much gold quantity?
  • How to believe the managers of ETF or trust behind it (I mean are they really investing or running fake ETF)
  • Where can I check the quantity of Gold that an ETF is having?

Thanking you sir.

Author’s Response:

  1. Gold does not generate any cash flow like companies. So P/E etc. does not apply to it.
  2. As far as I know, ETF managers invest in physical gold.
  3. ETFs keep the gold in secure vaults.
  4. All ETFs are SEBI regulated and regularly audited. Chances of fraud are very low.
  5. You may not be able to check the quantity in person. However, the annual report of the ETF management company should have the details about the amount of gold they have.



I would write another post on asset allocation sometime later. Until then dividing your investments equally between debt, mutual funds, real estate and gold can be a good option and you may also read suggested investment books. Also give comments and let me know how you find these guidelines.

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