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What is Financial Planning ?

 Financial planning is the process of
successfully meeting financial needs
of life through the proper
management of finances.

 Itis your roadmap to Financial

Health, & Sustainable Wealth
Why you need Financial Planning?

 Life without Financial planning is

like Unplanned Vacation.

 If you wish to achieve your

financial goals successfully &
peacefully you must plan your
financial life.
Problems of Random investment
 Wrong selection – flavor of the month.

 Wrong timing – mostly near top.

 Short term investment.

 Inadequate investment.
Who needs Financial Planning?
 Whatever may be level of your
income or assets , you need
financial planning.

 Itis myth that only rich people

need financial planning.
How to do Financial Planning?
 By scientific Asset Allocation.
What is Asset Allocation?
 Investingpredefined percentage
of your savings in different Asset
Why Asset Allocation so
 Diversification.
 Thumb rule No. 1
Never put all your eggs in one basket.

 Differentasset classes give better return

for specific time duration.

 94%of portfolio return will depend on

Asset allocation only.
Financial Planning and Asset Allocation

Significance of Asset Allocation

Significance Relative to Return
Brinson, Hood and
Beebower :
Determinants of
Performance, 1986,
1991: “Asset
Allocation helps
explain over 93% of a
Financial Planning and Asset Allocation

Asset Classes to Invest


Art Debt

Mutual Funds
Insurance Equity

Commodities Real Estate

How to do Asset Allocation
 Determine the Current financial

 Whatyou wish to achieve?

Your Financial Goals.

 How much risk you wish to take?

Your Risk Profile.
Step 1 – Current Status
 Findout Net saving available for

 Wealth accumulated till today.

Step 2 – Goal Setting
 What is your intention of investment?

 Simplyput, How much money you need?

& When you need the money? (Time

 Specificfinancial goals are vital to

financial planning.
Financial Goals - Examples
 Mandatory Goals:-

(1) Children education

(2) Children marriage
(3) Retirement Planning. Pension.
(4) Purchase of residential premises.
(5) Purchase of vehicle.
Optional Goals:-

(1) Up gradation of Residence.

(2) Luxury Car.
(3) Purchase of Luxury items at Home.
(4) Vacation Abroad.
(5) Wealth creation – Crorepati, Billionaire.
(6) Charity – Religious or Social.
(7) Inheritance – Estate planning.
(8) Early Retirement - Financial freedom.
Goal setting
 Specify amount required & approximate time
period when money required.

 Types of goals.

(1) Short term Goals 1-2 years.

(2) Medium term goals 3-5 years.
(3) Long term goals 5-10 years.
(4) Distant goals > 15-20 years.
Risk Profile
 Two types of Risk in any investment.
(1) Risk of Purchasing power loss.
(2) Risk of Capital loss.

Strong correlation between risk &


Aim of financial planning is to get

maximum return with minimum risk.
Risk Profile
 Financial Capacity
(1) Income status, more important Net
Saving status.
(2) Age:- Younger the age higher is risk
taking capacity.
(3) Dependents in family.
(4) Liabilities, Loans taken.
Risk Profile
 Mental capacity – Temperament.
How will you react to temporary fall in
value of your investment?

(1) Risk averse , Conservative.

(2) Moderate risk taking personality.
(3) Aggressive investor.
Risk Profile
 Technical Knowledge.

Even if financial & mental capacity

strong, technical knowledge required
to invest in Shares, Art – Painting,
Real Estate.
Either take professional help or take
Mutual Fund route.
Do & Don'ts

 Don’t buy on tips, impulse or under

influence of ‘left behind’ feeling.
 Don’t chase last year topper
 Stick to your asset allocation.

 Basic aim of Financial planning is to get

sufficient fund at specific time for defined
financial goal, not to get Super high return.
Financial Planning and Asset Allocation


Phase I Phase II Phase III
Dependant Phase Accumulation phase Distribution Phase
Child’s Marriage
Child’s Education



25 yrs 35 yrs Over 25 - 30 yrs

Birth & Education Earning Years Retirement Age

22 yrs 60 yrs
Type of Assets
 Assets – Cash, Savings a\c,
(1) Liquid
Floating rate mutual fund. Ideal for
short term goals.
 (2) Income generating Assets – Bank
F.D.,PPF, NSC, Bonds. Ideal for
medium term goal.
 (3) Capital appreciation Assets –
Equity- Shares, Real Estate, Gold, Art.
Ideal for long term goal.
Financial Planning and Asset Allocation


Financial Planning and Asset Allocation


Mona, Joydeep ( Age 28 years )

Financial Goals
Investment Strategy
•Planning to purchase a house Aggressive Growth Portfolio
in the next 5 - 8 years Short-term Bonds
•Planning for family in 2 years 10% 15%

•Creating long-term wealth for
Financial Planning and Asset Allocation


Sheela, Shekhar ( Age 37 years ) and two kids

Financial Goals
Investment Strategy
•Has a housing loan Balanced Portfolio
•Providing for children education Stocks Short-term
(7-10 years) 60% 15%
•Planning for child’s wedding
•(15 - 20 years)
•Take care of old parents
•Planning for retirement
Financial Planning and Asset Allocation


Maura & Akash Chaudary

Investment Strategy
Financial Goals Conservative Portfolio
Retired 15%
Regular Income
Medical Costs
Tips for asset allocation
 Thumb rule 2
100-Age in years = Maximum %
allocation to Equity.

Equity will give highest return in long run but

Equity is very risky product for < 2 years horizon.

Risk of capital loss in Equity investment almost

zero if invested for > 5 years but as high as 30%
in 3 months.
Emergency Kit
 Before planning new investment,
it is very important to prepare
emergency kit to Protect your
Current financial status.

 Insurance is first & vital step in

any financial planning.
 Aim– Financial Compensation for any
unexpected loss. Cover the Risk.

 Personal Risks. Loss of income.

 Property Risks. Damage to property.
 Liability Risks. Losses due to damage
to others.
Life Insurance - Basic
 Aim – Financial protection to your
dependents in case of your premature
death. Life of earning member of family,
ONLY, should be insured.

 Insurance should be taken for financial risk

protection only NOT for Investment or Tax
 Insurance is very bad investment product .
Which type of Policy?
 Term Insurance
It is purest form of insurance & so best. Most of
us need only this insurance.

 Whole life policy.

 Pension Schemes.

 Do not buy Endowment, Money back, Capital

protection plan, Children plan or Unit Linked Plans
 Best option is Term Insurance + PPF / ELSS
scheme of mutual fund.
How much?
 Income based calculation.
10 times your annual gross income.

Need based calculation.

200*Monthly home expense + Loan taken +
Pending Financial goals
- Current value of your financial assets
(excluding your residential premises).

 You must take Term insurance = Loan taken.

General Insurance policies
 Personal Risk protection
(1) Accident Insurance.
Pays sum assured on accidental death + pays
income loss due to Partial or permanent disability
due to accident.

(2) Mediclaim Insurance.

ICICI Lombard has family Mediclaim policy.

(3) Critical illness Insurance

Available as rider with life insurance.
General Insurance cont.
 Property risk insurance.
(1) Business assets.
Damage may be due to Natural calamities,
fire, theft.
(2) Vehicles
Comprehensive cover.
(3) Personal assets – Householder Policy.
Insurance against damage to Residential
Liability Insurance
 Professional Indemnity insurance.

 Third party insurance for Vehicle.

 Term
insurance equal to loan
Cash Flow Management
 Income – Business Expense
= Take home cash.
 Take Home Cash – Home expense
- Taxation
- Interest & Installment payments
on loan taken

= Saving ( cash available for

Cash Management, Options
 (1)
Investment in Income
generating assets.

 (2)
Investment in Expense
generating assets ( ? Liabilities).
Income Generating Assets
 Regular
Income in form of Interest ,
Dividend , or Rent .

 Capital Gain from investment .

 Thisadditional or Alternate income will

supplement your business income, increase
cash available for investment & when it
crosses your professional income you will
achieve financial freedom.
Expense generating Investment
 Residentialhome, Vehicles, Ornaments,
Over insurance.

 Ifyour all saving is diverted to these

investments you will have lesser & lesser
cash available for actual investment.

 When your professional income decreases

you will be in trouble.
Financial definition of asset, liability.
 Theinvestment which brings cash inside
your pocket is Asset.

 Theinvestment which takes out cash from

your pocket is Liability.

 Balance investment in both classes.

Cash Management
 Thumb rule No.3
15-20% of your take home cash should go to
income generating investments.

 Your EMI should not exceed 30% of your

take home cash.

 During early stages of life allocate higher

portion to Assets.
 Ideally your Alternate income should fund
your Luxury, Liabilities.

 Delay expenses, DO NOT delay Investments.

 Step 1 Asset Allocation

 Step 2 Provision for Insurance

 Step 3 Cash flow planning

 Step 4 Actual investment.

Investment Options

 Capital protection + Income generation.

(1) Govt. Assured return schemes.

(2) Bank Deposits.
(3) Bonds.
(4) Company deposit, debentures.
(5) Mutual fund Debt schemes
Income generating investments
o Pros.
(1) Safe – Capital protected.
(2) Tax rebate on investment. PPF, NSC.
(3) Tax free return. PPF, Mutual fund.
o Cons.
(1) Low return – difficult to beat Inflation.
(2) Lock in period.
o Tips
PPF is best investment for long term investment.
Floating rate funds best for short term investment.
Senior citizen scheme best for retirement planning.
Always calculate post tax, inflation adjusted return.
Income generating Investment.
 Thumb rule 4.

When interest rates are rising invest in

Floating rate schemes & take Fixed rate

When interest rate is falling invest in Long

term Income or Gilt funds & take floating
rate Loans.
Income Schemes
P.P.F. N.S.C. K.V.P. BANK Floating
F.D. rate Funds
Return % 8% 8% 8% 6-8% 5-6%

Tax-free Yes NO NO NO Yes

Rebate on Yes Yes NO Yes if No
Investment >5 year
Liquidity 50% 6 year 7.5 Lock in No lock in
withdr lock in years as per
awal lock in term of
after 5 F.D.
Income Generation + Capital

 MIP & Balance schemes of mutual

 Equity shares with high dividend yield
 Rented real estate
 Suitable for moderate risk profile &
investors near retirement age.
Capital Appreciation
 Equity shares - Direct, IPO, Mutual
fund, PMS.
 Real estate
 Gold
 Art – paintings

 Equity & Real Estate are best long

term Wealth creator & Equity is most
tax efficient investment.
Speculative investment
 Trading in equity shares.
 Derivative trading
 Commodity trading

Very risky product. No speculator has

become Billionaire. Only brokers
make money.
Never trade with borrowed money.
Mutual Fund
 What is Mutual fund?
(1) Fund collected from different investors for
common purpose, managed by Professional
manager & Income distributed to investors in
proportion to their investment.

(2) Investors allotted Units for investment. Initial

price is always Rs. 10 per unit.

(3) Market price of unit is called NAV.

Market value of investment / Units allotted = NAV
Mutual fund Advantages
 Diversification

 Professional management

 Income tax benefits.

 Liquidity.

 Systematic
regular investment of small
amount possible.
Mutual Fund Types
 (1) Debt Schemes.
(a) Floating rate scheme.

(b) Income or bond schemes.

(c) Gilt schemes.

(d) MIP – 5 to 30% investment in equity.

Debt schemes ideal for regular income, capital

protection & short term goals.
Mutual fund Types cont.
 (2) Balance Schemes

(a) Debt oriented. 40% investment in equity.

(b) Equity oriented. 65% or more
investment in equity.

Best for medium term financial goals 2-4

Best for beginner in equity market
Mutual fund Types cont.
 (3) Equity schemes

(a) Diversified Equity schemes.

Flexi cap diversified equity scheme is best
investment for Wealth creation.

( b) ELSS - Equity linked saving scheme. Best

for tax planning.
(c) Sector – Thematic funds.
(d) Index fund.
(e) Exchange traded funds.
Mutual fund Types cont.
 (4) Specialty funds.

(a) Exchange traded Gold fund.

(b) Real estate fund.

(c) Art fund.

Plans – Options
 Dividend plan

(1) Dividend Payout.

(2) Dividend Reinvestment.

 Growth plan.
best plan for wealth creation.
Mutual Fund Types
 Close Ended

 Open Ended
How to invest?
 Lump sum investment.

 S.I.P. Systematic Investment Plan

 S.T.P. Systematic Transfer plan

 Ifyou invest directly at fund office or

online there is no entry load.
Fund Selection
 Say NO to NFO New fund offer

 Existing Diversified mutual Fund schemes

having consistent performance during last 5

 Beware of Agents/ Brokers advise:-

(a) NFO – At par offer, Low NAV.
(b) Dividend declared.
(c) Churning – Profit booking.
Ideal portfolio Type
of Floati
Bala Equity
nced schemes
 Not > 10 schemes
Rate matur sche
4-5 Diversified Equity fund ity mes
funds. funds
1 ELSS scheme
1 Balanced scheme Best for <1 1-22-4 > 5 years
1 MIP Time year years
1 Floating rate scheme Horizon s
1-2 Sectoral or Expected 5 – 6 7 – 8 10 – > 15 %
Midcap scheme. return % % 12
Risk of Zero Almo 5 – 20 – 30
capital st 10 % in
loss zero % first 3
up to years.
4-5 star funds
 Diversified Mutual fund.
(1) HDFC Equity, (2) Reliance Vision,
(3) Reliance growth, (4) SBI Magnum Contra.
(5) DSP ML Equity.

(1) Magnum tax gain (2) HDFC Tax Saver.

 Sectoral & Midcap

(1) DSP ML TIGER, (2) Reliance Diversified
power sector, (3) SBI Magnum global
(4) Sunderam Select Midcap fund.

 Exchange traded. Nifty BeES, Banking BeES.

4-5 star funds - Continue
 Balanced
(1) HDFC Prudence
(2) Magnum Balanced.

(1) HDFC Long Term MIP,
(2) ICICI Prudential Income Multiplier.
Model Portfolio
Profile Equity Equity Balanc MIP, Floating
Diversif Midcap ed Bond rate
ied Sector Fund Fund Fund
Age 20-30 Dependent 35-40% 35-40% 20% 10%
Age 30-40 30- 20- 30% 10%
Children in school 35% 25%
Age 40-50 Children in 30- 10- 20- 10% 10-
college 35% 15% 30% 20%
Age 50-60 Children 25- 5-10% 20% 20% 10%
marriage Higher 30%
> 60 years Retirement 10- 30% 30- 20%
planning 20% 40%
Income Tax Planning - Tips
 Tax planning is legal.
 Purchasing power of Unaccounted money
will slowly go down.
 No cash transaction possible in Mutual
fund.PAN card copy required.
 Make maximum use of tax free income
 Create multiple heads of income tax payer.
 ELSS investment can be used for income
tax planning & wealth creation.
Income Tax calculation
 Taxfree income limit:-
Male Individual & HUF. 1,10,000.
Female individual 1,45,000.
Senior citizen (>65 years age) 1,95,000.

 Only 10% tax on income between Tax free

limit & 1,50,000.

 Up to 1 lac rebate for 80C investment.

Income Tax calculation
 If male tax payer or HUF has income of 2.5 lac
& 1 lac invested under sec. 80C then tax payable
is only Rs. 4000.
For female tax payer only 500 &
For senior citizen nil up to 2.95 lac income.

 If Husband, Wife, HUF & Parent or Major child

has income of 2.5 lac each, & they invest Rs. 1
lac each under sec. 80 C, total tax payable will
be only 8,500 on total 10 lac taxable income.
 4 lac will be compulsory invested each year.
Capital Gain Tax
 Long term capital gain.
Equity scheme / shares. > 1year. Tax free.
Real Estate, Gold. > 3 years. 20% with
indexation or 10%.
Debt scheme of mutual fund > 1 year. 10%.

 Short term capital gain.

Equity scheme / shares. 10%.
Real Estate, Gold < 3years & Debt scheme of
mutual fund < 1 year – will be added to business
Income Tax Planning Tips
 Multiple heads of Tax payer in family.
 Gift to parents & major children is tax free,
clubbing free, without any limit.
 Give loan to spouse at low interest rate, instead
of gift to avoid clubbing of income.
 Take maximum advantage of Tax free income.
(1) Long term capital gain on shares & equity
mutual fund.
(2) Dividend from mutual funds & shares.
(3) P.P.F. interest. Tax free bond interest.
(4) Agriculture income.
Income Tax Planning Tips
 Home loan.- Principle payment eligible for
80C rebate, Interest deducted from income up
to 1.5 lac per year per head.
 Real estate – buy cheap , sell at highest
possible price after 3 years.
 Capital gain tax can be saved by investing in
Capital gain bonds up to 50 lac.
 Up to 1 k.g. gold per married women & 500
gram gold per unmarried women in family ,
will be allowed during income tax search.
Retirement Planning
 Retirement doesn't mean stoppage of work, it
means freedom from compulsion to work for
money – Financial freedom.
 Why?
 To maintain same life style even after retirement
 Life expectancy is increasing. 80+ age not unusual.
Female spouse will live 5 years more then male.
 Inflation will make difficult to maintain same level
of living standard.
 You & your spouse may not like to remain
dependent on children.
 We don’t have govt. social security scheme.
Financial Planning and Asset Allocation

Why retirement planning

Protect Post-
Increasing life Retirement
expectancy Lifestyle

Retirement Plan -
Protection for An essential need Increasing
Spouse Cost of
/Dependents Health

Falling Interest Breakdown

of traditional
Rate Scenario support systems
Financial Planning and Asset Allocation


Phase I Phase II Phase III

Child’s Marriage
Child’s Education



25 yrs 35 yrs Over 25 - 30 yrs

Birth & Education Earning Years Retirement Age

22 yrs 60 yrs
Financial Planning and Asset Allocation

Why retirement planning

If Inflation is 5%, then the amount required to meet expenses……

Amount in Rs. Today In 10 years In 15 years In 20 years

Monthly expenses 30000 49000 62000 80000

Medial costs 500000 800000 1000000 1300000
Marriaage 1000000 1600000 2100000 2700000

Particulars 20 years 15 years

Monthly expenses 80000 62000
Rate of return 7% 7%
Investment corpus required 1.40 crore 1.06 crore
How Much?
 If retirement <10 years away
250*Existing monthly expense
 If retirement between 10 – 20 years form
today 350*existing monthly expense
 If retirement > 20 years from today
500*existing monthly expense
Add provision for pending financial goals
(children education, marriage etc.)
 Start early
Retirement planning starts the day you get
your first income.
 Invest regularly
Small amount invested regularly.
 Stay invested.
Power of compounding.
 Best options are P.P.F., Pension schemes of
insurance co., Equity mutual fund & Real
Asset allocation
 Maximum equity allocation in % =
100-age in years.
 As your retirement time comes near shift to debt
 10-20% in floating rate scheme for emergency
expenses.(2-3 months expenses).
 Up to 15 lac in senior citizen scheme for 9%
assured regular income.
 P.P.F. 20% for 8% tax free return.
 MIP 20% & Balanced scheme 20% for regular
income + capital appreciation.
 10-30% in Equity scheme for wealth creation.
Wealth creation
 Equity & Real estate are best asset classes for wealth
 Real Estate - Problems
(1) Unaccounted money.
(2) Lump sum investment of large amount.
(3) Title problems.
(4) 10-12 year cycle, so poor Liquidity. Invest only
if ready to stay invested for 10 years.
(5) Maintenance charges.
(6) Entry load- Reg. fees & Exit load – capital gain tax
(1) One good investment can change your financial life.
(2) Shortly mutual funds will be available.
 In long run equity gives best tax free return.
 Sensex multiplied 180 times in last 29 years, that is
>18% compounded return.
 Mutual funds have done still better. Value of
Reliance Growth scheme multiplied 48 times in 12
years. (>35% compounded return).
 Time in market is important not timing the market.
 Risk of capital loss zero if invested > 5 years.
 20000 monthly SIP in Reliance Growth scheme
created wealth of 3 crore in 12 years. >5 mutual
fund schemes created wealth of >2 crore.
 Even small amount can be invested.
Mutual fund returns
Fund name 1 year return 5 year return Since inception Worst 3 months
Start date annualized % return % return

Reliance growth 76.9 72.6 37 -45


Reliance Vision 56.6 60.7 31.6 -39.6


SBI Magnum 66.3 72.1 38.3 -42.7

Contra- July 99

HDFC Equity 53.6 57.8 26.9 -34.7


DSP ML Equity 70.3 62.9 32 -46

April 97

HDFC Prudence 43.2 46.7 24.8 -18

Jan 94
Magic of Compounding
 Compounding is called eighth wonder of world.

 Rule of 72
72/ Interest rate = No. of years required to double
72/ No. of years required to double money =
% interest return.

 If you earn 24% compounded return your money

double in 3 years, multiplies 10 times in 10 years,
100 times in 20 years & 1000 times in 30 years.
 Average return of diversified mutual fund is >24%
in last 14 years.
Financial Planning and Asset Allocation


The Power of Compounding

Savings Returns *


350,000 330,000 300,000

Saves from age Saves from age Saves from age

25 to 60 27 to 60 30 to 60
Assuming an annual savings of Rs. 10,000 in an instrument providing return of 9.5% p.a.
Financial Planning and Asset Allocation

Amount required to be saved monthly:-

Rs. 100 lakhs :-

Financial Planning and Asset Allocation

Start Early

You Your Twin

 Age : 25 years Age : 25 years
 Start : Today Start : at age 30
 Invest : 5 years Invest : 30 years
 Amount : Rs 10,000 p.a.
Amount : Rs 10,000 p.a.
 Redemption on
retirement (age 60) Redemption on
 Value at 60 - 51 lakhs. retirement (age 60)
Value at 60 – 50 lakhs.
Financial Planning and Asset Allocation


40 YRS.

(Assuming inflation @ 8% p.a.)

Rs. 25,000 today 30 YRS.

20 YRS.
10 YRS.

10 yrs 20 yrs 30 yrs 40 yrs

Financial Planning and Asset Allocation

Estimating Future Needs

Rs. 20 lakhs today:-

Wealth creating ideas
 Be fearful when others are greedy, be greedy
when others are fearful.
 Invest when discount sale is on.
 Price is what you pay, value is what you get.
 Purchase share of business not share
 Look at P/E ratio not absolute level of index.
 Wealth creation is art of purchasing 1 rupee
for 40 paisa.
Stock market quotes
 In short term market is like Voting machine,
in long run it is like weighing machine.

 Bull will climb staircase but bear will always

jump through window.

 Tops & bottoms are for fools & liars.

 Most important organ for investment is

 Investing is not Rocket Science. Keep it simple.
 Start investing early in life.
 Save & invest regularly, systematically.
 Stay invested for long term till your goal
 Stick to asset allocation.
 Monitor 3-6 monthly.
 If necessary take expert help.
 You have worked hard to earn money, now make
the money work hard for you.
Self help
 Self help is best help.
 Devote some time for your financial planning.
 Magazines:-
(1) Mutual fund insight from Valueresearch Co.
(2) Outlook Money from Outlook Express group.
 Websites:-
(1) moneycontrol.com Personal finance section &
Mutual fund section. Portfolio can be created &
(2) valueresearchonline.com best analysis of mutual
funds, rating, & mutual fund portfolio analysis.
Thank You