Financial Planning and Portfolio Construction
This domain tests whether you can quantify goals, sequence the financial planning steps correctly and translate a plan into an allocation with a rebalancing discipline.
Build the plan
- Quantify every goal in future rupees by inflating today's cost at a realistic rate; assign each a horizon and priority.
- Before investing surplus: an emergency fund of roughly three to six months' expenses, adequate pure-protection health and term cover, and a plan to retire expensive debt.
- Bucket goals by horizon: short-term in liquid and debt instruments, medium-term in hybrids or accrual debt, long-term in equity.
Construct the portfolio
- Strategic asset allocation follows horizon and risk profile; tactical tilts should be limited, deliberate and documented.
- Diversify across and within asset classes; correlation matters. Unsystematic risk can be diversified away, market risk cannot.
- Rebalance to pre-set bands (for example ±5 percentage points) or on a calendar; this enforces selling what has risen and buying what has fallen.
- Account for costs and taxes, which decide net rather than gross returns.
Worked example
A ₹1 crore goal in 20 years at an expected 10% p.a. needs a monthly SIP of about ₹13,200, because the annuity factor ((1+0.10/12)^240 − 1)/(0.10/12) ≈ 759. If the client stated the goal in today's rupees and inflation is 6%, the target becomes ₹1 crore × 1.06^20 ≈ ₹3.21 crore, requiring roughly ₹42,200 a month. Reasoning: an uninflated goal under-saves by about two-thirds.
Traps that cost marks
Using a nominal goal; mixing insurance with investment; ignoring inflation in the return assumption instead of working in real terms; never rebalancing; spreading across too many funds without added diversification; leaving near-term goals in volatile assets.