Financial Planning

What is Financial Planning?

Financial Planning is an exercise aimed at
identifying all the financial needs of an individual
and translating these needs into monetarily
measurable goals at different times in the future.
Financial Planning ensures that right amount of
money is available in the right hands at the right
time in the future to achieve an individual’s financial
goals
 Objectives Of Financial Planning
• Identifying the requirement for money for different purposes
and prioritising them

• Converting these requirements into specific needs, in terms of

money, and the time when it is required

• Taking stock of the investors’ current financial position to

ascertain their net worth and net income / expenses

• Planning savings and investments in a manner that would

enable the investors to achieve their pre-determined goals

• Optimising returns through adequate diversification in sync

with the investors’ risk – return frame work
 Why do we need Financial Planning?
 To fund our future needs through right mix of investments

 To protect our future from unforeseen contingencies

 To maintain the same standard of living even after retirement

 To enable risk management through diversification

 To choose assets commensurate with the investors’ life and wealth

stages

 To beat the ravages of inflation

Inflation erodes the value of your money
80000 74,726
70000
60000 55,839
50000
Future Value

41,727
40000 31,180
30000 23,300
20000
10000 5 10 15 20 25
0
No of Years

The slide illustrates the value of Rs 1 Lakh at different stages assuming an

average inflation rate of 6%
 Can you do your own Financial Planning?
• Will your family be financially secure in the event of your unfortunate
illness / demise?

• Will the stream of cash flows arising from your asset holdings be sufficient
to match the expected liability structure?

• Are your finances inherently tax efficient?

• Have you made adequate provisions for your children’s education and
marriage?

• Are you confident enough to enjoy your post-retirement life?

If your answer is NO to any one or all of the above questions, you

need a specialist to handle your finances...
 Asset Allocation Strategies
Conservative Moderate
20% Equities 10%
30% 45% Equities

Bonds
Bonds

Cash/Money
Cash/Money
Market
Market
45%
50%

Aggressive
10% Equities
15%

Bonds

Cash/Money
75% Market
 Comparison Of Investment Options
Return Safety Volatility Liquidity
Equity Moderate to High Low High Low to high

Bonds Moderate to High High Moderate Moderate

Bank Deposits Low to High High Low High

PPF Moderate High Low Moderate

Life Insurance Low to Moderate High Low Low

Gold Moderate High Moderate Moderate

Real Estate Low to High Moderate High Low

Mutual Funds Moderate to High High Moderate High

 Investment Life Cycle
Emergencies????
Retirement
Kid 2’s
Marriage
Kid 1’s
Marriage
????
House
Income

Kid 2’s
Car College
Kid 1’s
College

Kid 1
Kid 2

Marriage

Savings / Investing
Working Life 60 Retired Life
75 +
0 Birth and 25
Education Age
 Asset Allocation
In simple words, it means determining the percentage
of the total investments to be made in equities, bonds
and money market / cash instruments.

Empirical studies indicate that over 94% of the returns

on a managed portfolio can be attributed to the right
mix of asset allocation

Here we seek to address the basic questions

of how, where and when to invest taking in to
consideration the market conditions and the
investors’ risk-return frame work
Wealth Creation Stage
Financial Goals
Planning to purchase a house in
the next ten years

Creating long-term wealth for

retirement / house
Aggressive Growth Portfolio

Cash
10% Bonds
15%

Age – Up to 30 Years Equity

75%
Wealth Management Stage
Financial Goals
Providing for children’s education
(5 - 8 years)

Planning for children’s marriage

(15 - 20 years)

Planning for retirement

Balanced Portfolio
Cash
20%

Equity Bonds
Age – 30 to 55 Years 30%
50%
Wealth Preservation Stage
Financial Goals
Making provisions for
higher life expectancy,
medical emergencies and
financial independence
Conservative Portfolio

Bank
Equity Deposits
20% 40%

Bonds
Age – 55 Years & Above 40%
 Concept of Mutual Funds

Mutual Fund is an instrument where a number of

investors contribute to form a common pool of
money. This pool of money is invested in
accordance with a pre-determined objective. The
ownership of the fund is thus joint or “Mutual” and
the fund belongs to all the investors in the same
proportion as the amount of contribution made by
each one of them
 Why Mutual Funds?
• Mutual Funds provide the services of experienced and skilled
professionals backed by a dedicated research team

• They enable efficient risk management by diversifying across a wide

variety of sectors and companies

• They are less expensive vis-à-vis direct investment in equities as they

seek to reap the benefits of economies of scale

• Performance and other investment details of individual schemes are

disclosed on a regular basis

• Mutual funds facilitate investment of small amounts in a number of

schemes to suit the investors’ risk - return framework
How Do Mutual Funds Work?
Step 1 : Make

MF
investments

Step 5: Returns provided to investors

Step 2: Money
is invested

Investor community
Step 4: Expenses
deducted
from the returns

Step3:
Assets
provide
returns

Earnings to the
Fund House/
Distributor Various Assets
Risk-Return-Time Horizon Scale
Time

SECTOR

EQUITY

RETURN
BALANCED

DEBT

RISK
Systematic Investment Plan (SIP)

The Smart Investors’ Preference

 Why SIP?
The Formula For Creating Wealth

Start Early
+ Invest Regularly Create Wealth
Myth : Timing is essential to generate high returns
Reality: It is the time and not the timing that matters

Is it worth the risk or the tension?

Who can time the market to perfection?
Not even the experts can !!
It is the small drops that make an ocean!!

We earn regularly; We spend

regularly
Shouldn’t we also invest
regularly?
 What Is Systematic Investing?
• It simply means investing ‘Fixed Amount’ every
month

• A method of investing regularly to benefit from the

stock market volatility

• The first step that may take you a long way towards
achieving your financial goals and objectives…
 Why Should One Invest Systematically?
• To imbibe financial discipline

• To eliminate the need to time the markets

• To successfully achieve the financial goals

and objectives

• To harness the power of compounding by

investing with a long term perspective
 Why Systematic Investment Plan?
Rupee Cost Averaging Works
Fluctuating Markets Declining Markets Rising Markets

Systematic Purchase Units Systematic Purchase Units Systematic Purchase Units

Investing Price bought Investing Price bought Investing Price bought

100 20 5 100 25 4 100 5 20

100 10 10 100 20 5 100 10 10

100 5 20 100 12.50 8 100 20 5

100 10 10 100 10 10 100 20 5

100 20 5 100 5 20 100 25 4

500 65 50 500 72.50 47 500 80 44

Avg NAV : Rs 13.00 (65/5) Avg. NAV : Rs 14.50 (72.50/5) Avg. NAV : Rs 16.00 (80/5)
Avg. Unit Cost : Rs 10.00 Avg. Unit Cost : Rs 10.64 Avg. Unit Cost : Rs 11.36
(Rs 500/50) (Rs 500/47) (Rs 500/44)
 Power Of Compounding
“ The most powerful force in the universe is the power of
compounding “
-Albert Einstein

If you invest Rs 1000 for 50 years at 10% returns p.a., you would
receive Rs 100 every year for 50 years. So WITHOUT any
compounding you would have Rs 6000 (initial investment Rs
1000 + interest for 50 years Rs 5000) at the end of 50 years.
However WITH compounding, the same Rs 1000 at 10% returns
p.a. would mount up to Rs 1,17,391 at the end of 50 years
 Power Of Compounding
Rs 5000 invested per month

Rate of Value at the Value at the Value at the Value at the

Return end of 3 yrs end of 5 yrs end of 10 yrs end of 15 yrs

10% 2,08,909 3,87,185 10,24,225 20,72,352

12% 2,15,384 4,08,348 11,50,193 24,97,901

15% 2,25,578 4,42,873 13,76,085 33,42,534

 Equity Markets & SIP
• Equity markets are synonymous with uncertainty and

volatility

• The average investor invariably suffers from such

market gyrations

• SIP - A strategy of not only preserving capital but

also translating into substantial creation of wealth
in long run

“If you want to stay calm and sail smoothly in

turbulent times GO FOR SIP”
Financial Planning Through Insurance
“Insurance is not for the one who passes away, it is for those
who survive”

- Anonymous
 Why do we need Insurance?
• To ensure adequate coverage and protection against the risks
and uncertainties of life

• To ensure a decent standard of living to the dependants in the

event of unexpected demise of the bread winner

• To provide a feeling of security and financial support during

critical hours and periods of crisis in life

• Reduced mortality rates, increased life expectancy and rising

medical and hospitalisation expenses

• Emergence of nuclear family system – reduced dependency on

other family members
Insurance = Investment + Assurance

Life Insurance

Unit Linked
Term Endowment
Insurance Plans
Insurance Plans
(ULIPs)
Term Insurance
• Sum assured is payable only at the death of the policy holder

• Provides only risk cover with no savings elements

• Low Premium & High Coverage

Endowment Policy
• In this policy the insured amount is payable at the end of specified
period or upon the death of the insured person whichever is earlier.

• Moderate Premium

• High Bonus

• High Liquidity

• Savings Oriented
 Unit Linked Insurance Plans
A policy, which provides for life insurance where the policy value at any time
varies according to the value of the underlying assets at the time. Investors can
also take a SIP route of investment. ULIP distinguishes itself through the
multiple benefits that it provides to the consumer. The plan is a one-stop
solution providing:
• Investment and Savings
• Life protection
• Flexibility
• Adjustable Life Cover
• Tax benefit (as per Section 80C of Income Tax Act)
• Transparency

• Options to take additional cover against

- Death due to accident
- Disability
- Critical Illness
- Surgeries
Insurance – Buy a policy, buy peace of mind

General
Insurance

Health Vehicle Property

Insurance Insurance Insurance
 Need for Health Insurance
• Reduced human mortality rates and increasing life spans due to
advancements in medical science

• Rising hospitalisation and medication expenses

• Compensates the loss of income to the family due to

accident/disability to the earning member

Vehicle & Property Insurance

• Covers the risk of loss/damage to your movable and immovable
assets

• Also provides adequate coverage to any financial liability arising

from the risk of loss/damage to the life and property of third parties
 Tax Planning With Mutual Funds
• The Equity Linked Savings Schemes (ELSS) are equity-oriented
schemes that offer the twin benefits of tax savings and the potential to
earn higher returns

• The traditional products such as post-office schemes and bonds do

not offer high returns and are not tax efficient

• ELSS power packs both these benefits with a minimal lock-in period of
three years

• Under section 80C of Income Tax Act, investment made in ELSS up to

Rs 1lakh qualifies for deduction

• An investor can either make a lump sum investment or choose to take

the SIP route to counter market volatility
 Illustration assuming Rs 1000 per month SIP
Period Total Inv.(Rs) Value*(Rs) % Return**
Last 1 Year 12,000 14,996 49.70
Last 2 Years 24,000 26,103 8.30
Last 3 Years 36,000 41,827 10.00
Last 5 Years 60,000 97,424 19.50
Since Inception*** 1,15,000 4,71,390 28.30

* As on 30/06/2009

** For growth option on a compounded annual

basis
*** Launched – November 1999
 Personal Income Tax Structure 2009-10
Total Income(Rs) Tax Rates
Upto 1,60,000 Nil
1,60,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
5,00,001 and Above 30%
Note :
• In case of resident women below age of 65 years, the basic exemption limit is
Rs 1,90,000/-
• In the case of resident individual of the age of 65 years and above, the basic
exemption limit is Rs 2,40,000/-
• The Finance Bill 2009 has abolished surcharge
• Education cess is applicable at 3% on income tax
 Tax Slab 2009 - 10
Equity Oriented Schemes
Short Term Long Term Capital Dividend Dividend
Capital Gains Tax Gains Tax Income Distribution Tax
Resident
Individual/HUF 15% Nil Tax Free Nil
Resident Partnership
Firm /AOP/BOI 15% Nil Tax Free Nil

Domestic Companies 15% Nil Tax Free Nil

NRIs
15% Nil Tax Free Nil
 Other Schemes
Dividend Distribution
Dividend Distribution
Short Term Long Term Capital Dividend Tax - Other than
Tax - Liquid/Money
Capital Gains Tax Gains Tax* Income Liquid/Money market
market Schemes
Schemes
Resident
Individual/HUF As per slab 10% Tax Free 14.16% 28.33%
Resident Partnership
Firm /AOP/BOI 30% 10% Tax Free 22.66% 28.33%

Domestic Companies 30% 10% Tax Free 22.66% 28.33%

NRIs
As per slab 10% Tax Free 14.16% 28.33%

* The Finance Bill 2009 has abolished surcharge in case of Resident Individuals, HUF,
Partnership Firms, AOP, BOI on the amount of income tax. For others including
corporate bodies, 10% surcharge on tax payable
Secondary and Higher Education Cess: To be levied at the rate of 3% calculated on tax
payable plus applicable surcharge
 Bank FDs vs. Debt Funds
Investors in higher tax brackets are better off investing in debt funds as
against bank FDs as debt funds are inherently more tax efficient

For example consider an investor in the highest tax bracket. Interest from
his investment in bank FDs would attract the maximum marginal tax rate
(inclusive of cess – 30.90%) applicable to him. If a one year bank FD fetches
around 10%(pre-tax), his post-tax returns would be a meager 6.91%

As opposed to this, if he had invested in a short term debt fund (dividend

option) which also delivers close to 10% average annualized returns (over 1
year period) and distributes it among the unit-holders in the form of
dividends. The dividend income will be tax-free in his hands but the mutual
fund will be paying a dividend distribution tax of 14.16% (which is indirectly
borne by the investor). So he will be getting a net effective return of 8.58%
p.a. which is much higher as compared to the post tax returns on FDs
 However, if the investor invests in a debt fund with growth
option, then the tax treatment becomes slightly different. For
example, let’s assume he invests in an Bond Fund for two years.
Appreciation in the NAV of a debt fund is treated as capital gains.
Now, at the time of redemption, returns from debt funds are
taxed as Long Term Capital Gains (LTCG) if invested for more
than a year. Now, based on the option he chooses, LTCG is either
taxed @ 11.33% without indexation or 22.66% with indexation.
Both the options are certainly better than the tax treatment of
FDs where he pays tax at the rate applicable to his marginal
income

Moreover, just by investing for a little over 12 months in debt

funds at the end of the financial year, one can reap double
indexation benefits thereby further reducing his/her tax liability
Put simply, for similar pre-tax returns, debt funds provide better
post tax returns as compared to FDs. Moreover, no TDS is
deducted by mutual funds in case of resident individuals
 Golden Rules Of Investing
• Invest early, regularly and systematically for a longer period

• Ensure adequate liquidity for contingencies of life

• Ensure adequate diversification by investing across asset

classes and time horizons

• Do not attempt to time the market. Patience is the key

• Be realistic in expectations of returns

• Balance investments in accordance with your risk-return

framework
Factors necessitating Financial Planning
Rising Life
Inflation Expectancy

Financial
Planning

Protection against Balanced Asset

Uncertainty Allocation
Thank
You..
 PPT
By
Aaryendr