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Difference between Portfolio Management and Financial Planning

dateKnowledge Centre Team dateApril 22, 2021 views421 Views
Difference between Portfolio Management and Financial Planning

Money may not buy happiness, but it sure can buy financial security and being financially secure is one step closer to happiness. In conclusion, money can buy a form of happiness, which is why you need to get into a habit of managing your finances. Whether you implement a few financial management hacks or you learn it the hard way – managing your money is one of the most important actions of your life. You must set short term as well as long term goals and then make money-related decisions. Make sure you adhere to the same. If you stick to an efficient system for the present as well as the future, you can enjoy your dream vacation while saving up for a future vacation.

We often find ourselves at crossroads between saving money for the future and investing it in the present market. Now, keeping aside a sum of money could be good for short term savings, but in the long term, it would be smarter to put that amount in the derivatives market to avoid facing loss because of the time value of money and inflation.

The interface of managing finances originates from the fact that a business starts and ends with money. You get to decide if money is going to make or break your business. This brings us to the most popular as well as essential concepts that everyone should be aware of in today's times: portfolio management and financial planning.

What is Portfolio Management?

Here, we're not referring to a job portfolio but a financial portfolio. A portfolio is a combination of different kinds of financial securities like shares, government bonds, debentures, units, and other such financial assets. Designing a financial portfolio is like playing with fire and having a bucket of water, that is, a plan B, on the side. It dabbles in the equity as well as the debt market.

The main objective of having a diverse investment portfolio is to reduce risk and maximize gains. For example, your investment portfolio should be able to help you save taxes.

Learn how to revisit your investment portfolio to save tax?

A financial portfolio sounds like a random mix of units. On the contrary, it is a carefully blended asset combination that is necessary for investors to keep track of their financial decisions and nullify risk while maximizing returns.

Now, portfolio management means choosing securities and making constant but necessary changes to the portfolio depending on the ongoing market situation. It is basically investing in the equity as well as the derivatives market and minimizing risk by allocating funds among various types of securities.

ULIPs for planning your retirement

Portfolio management is a dynamic process that needs constant attention and being up-to-date with the current market scenario at all times. Portfolio management ULIPs includes asset allocation, security selection, executing, developing, and implementing strategies, and performance evaluation.

Learn 4 ways of portfolio management in ULIPs.

A lot of times, people find it difficult to understand the markets and make wrong decisions. This is when a portfolio manager comes into the picture. A portfolio manager has to achieve a sound balance between the objectives of liquidity, safety and profitability. They have to master the art of switching between bonds and shares and identifying if the market is bullish or bearish.

What is Financial Planning?

Financial planning or strategic planning deceivingly sounds like an easy job. However, it involves analyzing the present and future situation, determining the direction of the firm and then developing means for achieving the target. This process sounds very straightforward but, in reality, is an enormously multi-faceted process.

Financial planning revolves around an environment of improbability. This calls for a systematic approach for identifying and analyzing external factors and matching them with the firm's financial capabilities. It involves establishing objectives, policy formulation, forecasting and formulation of procedures and helps in measuring the performance of every significant process, making worsening evident.

Let us take an example. Fatima recently started her job and her father advised her to start planning for her retirement. She took the conversation lightly and never thought of putting aside anything for her retirement. One day, when she lost her job, she realised, she doesnt have a financial plan. Her father was right after all. What will she do when she retires, which is years away. But how will she manage the expenses when she doesnt have an income stream? Had she started planning and streamlining her finances, it would have been easier for her to build a solid financial backup.

Here’s your step-by-step retirement planning guide.

For financial planning, one needs to draft the organization's objectives and list out all the possible course of actions. Then, one must collect data as to the alternative possibilities and then analyze the data. The final step would be summarizing the findings for decision-making and executing the decision accordingly. After this, one must compare the planned and actual results, take corrective actions and revise and reach the desired plan.

Difference between Portfolio Management and Financial Planning

There is a battle of the tenses when it comes to portfolio management and financial planning. Here's how the two differ:

  • Portfolio management is about the present. Here, you invest your money in different securities with a view to multiplying the amount and reinvesting it later. Financial planning is basically setting a future goal and planning your investment in order to achieve that particular goal.
  • Portfolio management focuses on meeting present or short term goals through stocks, bonds, mutual funds, exchange-traded funds or alternative investments. One has to plan, manage and budget his/ her funds for their estimated financial needs for financial planning.
  • For portfolio management, one needs an investment manager to help in managing their portfolio. A wealth manager helps with financial planning by giving advice and assisting in the enhancement of the overall financial situation of their client.
  • Portfolio management is basically an assessment of various components of the client's portfolio, which helps in making important investment and divestment decisions. On the other hand, a deep assessment of the client's overall financial standing is required for financial planning in order to develop long term financial goals.
  • A portfolio manager or investment manager is one who provides assistance in portfolio management and diversification, whereas a financial advisor or a wealth manager is one who provides assistance in financial planning tips.
  • Portfolio management is a dynamic process that needs constant attention. Financial planning is a lot less dynamic compared to portfolio management.

Be it portfolio management for the present or financial planning for the future, choosing the right plan from Canara HSBC Life Insurance can put an end to your investment problems. From saving plans, to retirement and pension plans – the right plan can help the boat sail smoothly. It is a one-stop solution to all your finance-related problems that allows you to keep your family financially secure.

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In order to understand ULIP NAV, you first need to understand how ULIPs work. In ULIPs, a portion of premium from different investors is accumulated to create one investment corpus. This money is invested in several different market instruments. So to divide the returns properly among all the investors, the fund manager divides the net asset value in to small units with a specific face value. NAV is the per market share value of a fund. To better understand the definition of NAV, take a look at the formula below -

Net Asset Value = [Assets-(Liabilities + Expenses)] / Outstanding Units

It's not risky to invest in ULIP if you chose a safer path. Risk factor in ULIPs depends on the investment option you choose. If you are not okay with sharp movements, then choosing a low risk investment is a better idea. For people with high risk appetite, it's good to choose equity funds while risk-averse investors can go for debt funds.

You can opt for settlement option if you want to take your fund value in periodic installments. With the settlement option, you can get your maturity amount in installment as per the frequency chosen by you over a maximum period of 5 years. You can choose complete withdrawal of fund value at any point of time. Although, you will not get any life cover during this period.

ULIPs are life insurance products that provide paths to invest. And just like other investment option, there's no guaranteed investment return in a ULIP. Although, if you like taking risks and want to earn more returns on your investment, then opt for equity funds.

At the time of maturity of ULIP policy, you will get the fund value on your prevailing NAV. Fund value is the number of units of policy multiplied by NAV (net asset value).

Value of the fund = Total units of policy x NAV (Net Asset Value)

Well, discontinuing your premium payment will disrupt your savings as well as financial goals. In such case, you can approach your insurance company and ask for the revival of discontinued policy within the stipulated timelines. Also, you will have to pay all the unpaid premiums.

ULIP plan is a combination of investment and insurance. Thus, one must hold this plan for a duration of at least 10 years so as to get investment benefits out of it. As an early exit will have its own consequences. ULIPs have a lock-in-period of 5 years. Thus, you may surrender your policy before the completion of 5 years, but you will be paid only after the end of 5 years.

Generally, minimum lock-in period for ULIP is 5 consecutive policy years. During this time period, if the policyholder discontinues or surrenders the policy, then he/she will not able to receive any payouts. Withdrawals are only allowed at the end of the lock-in period. In addition to this, if you surrender your policy before the lock-in period ends, then you will have to pay surrender charges as well. Also, it is advisable not to exit your plan after the completion of 5 years of lock-in period, because if you stay invested for a longer duration it will help you reap better benefits.

The amount that you pay towards the Unit Linked Insurance Policy is eligible for tax deduction as per Section 80C of the Income Tax Act, 1961. This means that the premium amount paid will be deducted under section 80C from your taxable income up to a maximum limit, which is currently ₹1.5 Lakhs. However, the aggregate amount of deductions under section 80C, section 80CCC and 80CCD (1) shall not, in any case, exceed ₹1.5 Lakhs. Also, upon the maturity of the policy, the payout amount you receive will be exempt from income tax, subject to the applicable provisions of Section 10(10D) of the Income Tax Act, 1961.

Here’re the following major benefits of buying ULIP

1. Tax Benefits – It helps you to reduce tax liabilities. This means you are liable to enjoy tax benefits on the premiums paid towards the policy as per Section 80C of the Income Tax Act.

2. Long-term growth– One of the major benefits of buying a ULIP plan is that it offers long-term benefits. ULIPs come with a lock-in period of 5 years which will keep you invested for a longer period.

3. Dual benefits – ULIPs not only offer life coverage but also come with a wide range of investment funds that will help you earn great returns. This includes balanced funds, debt funds or equity funds. You can invest in any of them depending on your need and risk appetite.

4. Flexibility – It gives you the flexibility to switch between funds basis your risk appetite. You could select multiple funds and different investment strategies.

5. Partial withdrawal option – It allows you to make partial withdrawal in case of any uncalled medical emergency or contingency after completion of lock-in period.

ULIP is a perfect investment option if you are looking for long term wealth creation. It could be buying your own house, a new car, going on a long vacation, or your child’s higher education or marriage, ULIP helps you to meet all your long-term financial goals. Moreover, it comes with a lock-in period of 5 years which keep you invested for a longer period and helps you earn better returns. The lock-in period is calculated from the date when the policy is issued.

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