2013 managing personal finance

423 views

Published on

Published in: Economy & Finance, Business
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
423
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
19
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

2013 managing personal finance

  1. 1. Personal Finance Is it possible to pre-plan and manage it efficiently ? RAM KUMAR KAKANI LBSNAA MUSSOORIE
  2. 2. Why are personal finances important? Absence/ shortage of money can lead to an acute sense of insecurity It can be a tremendous distraction from our normal work Realization normally comes quite late Thus, Clarity helps 9/23/2013RKK/LBSNAA 2
  3. 3. General Rules Money makes money When you have got a little, it is often easy to get more. The great difficulty is to get that little – Adam Smith from the Wealth of Nations Therefore, what is important for us? 9/23/2013RKK/LBSNAA 3
  4. 4. Savings – The Indian Story 9/23/2013RKK/LBSNAA 4
  5. 5. Savings – The Indian Story 9/23/2013RKK/LBSNAA 5
  6. 6. A “Rs. 1” Investment in different types of portfolios: 1926-2011 (Year end 1925 = Rs. 1) 9/23/2013RKK/LBSNAA
  7. 7. Annual Average Returns in India: 1979-2012 Returns on Investment in … Bank Savings 3% Insurance 5% Inflation 8% Fixed Deposits/Bonds 12% Shares of Large firms 17% Shares of Small firms 22% 9/23/2013RKK/LBSNAA 7
  8. 8. Annual Average Returns in India: 1979-2012 Shares of Large Companies: 1 145 (33 years, 1979-2012) Fixed Deposits (of private companies): 1 34 (33 years, 1979-2012) Fixed Deposits of Banks: 1 17 (33 years, 1979-2012) But, try looking at the yearly rates of return in each of the cases The most fluctuating will be stocks i.e., stock returns vary widely over time. 9/23/2013RKK/LBSNAA 8
  9. 9. Ratan Tata, Ram Kakani, Rickshawalla … Expectedreturn Risk Ratan Ram Rickshawalla Please note that (a)“Risk” here is “Perceived Risk” (b) “Expected Return” is NOT “Actual Return” (c) “Investment Decisions” are made based on the “Expected Return”
  10. 10. Risk and Return …. Expectedreturn Risk Insurance PPF, FDs Lottery Ticket Please note that (a) As Risk Increases “Actual Returns” significantly differ from “Expected Returns” (b) Thus, it is important to not get carried away by High Risk Instruments Large Stocks Inflation Small Shares
  11. 11. Principles of Saving Have just the right amount in liquid investment + Rest in long term deposits/ investments Do not let money be idle Decide your saving goals and an apt asset allocation: ♦ risk profile (risk averse, balanced, aggressive) ♦ return expectation ♦ investment horizon ♦ financial goals Avoid Asset-Liability mismatch Retirement_Planning.xlsx 9/23/2013RKK/LBSNAA 11
  12. 12. Marketing by Financial Services Industry – A Note of Caution Flattery is praise insincerely given for an interested purpose  HW Beecher Example 1: Ponzi Scheme Example 2: Lottery Ticket 9/23/2013RKK/LBSNAA 12
  13. 13. What Multiplies MONEY? The Power of Compounding Money attracts money - strong brotherhood Earn interest & interest on interest The Early Bird Gets the Worm Those who save early benefit more from compounding 9/23/2013RKK/LBSNAA 13
  14. 14. The Power of Compounding (1000 Rs, 10% interest) Simple Interest Compound Interest Year Starting Balance + Interest = Ending Balance Starting Balance + Interest = Ending Balance 1 1000 + 100 = 1100 1000 + 100 = 1100 5 1400 + 100 = 1500 1464 + 146 = 1610 10 1900 + 100 = 2000 2358 + 236 = 2594 20 2900 + 100 = 3000 6116 + 612 = 6728 50 5900 + 100 = 6000 106,718 + 10672 = 117,390 100 10,900 + 100 = 11000 12,527,829 + 1,252,783 = 13,780,612 9/23/2013RKK/LBSNAA 14
  15. 15. Investment Options Fixed / Term Deposits and PPFs Equity Debt Insurance Mutual Funds (Equity / Balanced) Real Estate Precious Metals – Gold / Silver 9/23/2013RKK/LBSNAA 15
  16. 16. Insurance Avoid investing in ‘investment’ type of insurance schemes … in other words, prefer – pure risk instruments Protection for the family Compulsory regular savings Tax Benefits 9/23/2013RKK/LBSNAA 16
  17. 17. Equity Markets – Getting Started Start early and invest regularly Stick to shares matching your risk profile (for example, if you are okay with taking risk … then go for small/medium sized companies) Liquidity is the single most important factor especially during volatile periods When there are gains, separate out money for taxes There is no substitute to experience Whenever you lose money, take stock of the reasons 9/23/2013RKK/LBSNAA 17
  18. 18. Equity Markets – Some Thumb Rules Never invest in businesses you don’t understand Avoid investments in companies with a shady management record Understand a company’s financials and corporate characteristics before investing Invest when others are exiting / avoiding (bear sentiment) Exit when others are investing (bull sentiment) Be patient 9/23/2013RKK/LBSNAA 18
  19. 19. Advantages of Equity Investment Capital appreciation Annual Dividends Loans against equity shares Marketability of equity shares Long term capital gains abolished Shareholding in demat form 9/23/2013RKK/LBSNAA 19
  20. 20. Investing in Mutual Funds Mutual Funds are investment conduits which pool the savings of many individual investors and combine them into a fairly large and well diversified portfolio of investments. Many types: Equity Balanced Index 9/23/2013RKK/LBSNAA 20
  21. 21. Advantages of Mutual Funds Expertise of professional management Spread of risk Freedom from emotional involvement Automatic re-investment of dividends and capital gains Liquidity Freedom from housekeeping Income tax exempt 9/23/2013RKK/LBSNAA 21
  22. 22. Public Provident Fund Maturity for 15 years, 5 year extensions, up to a maximum of 30 years Min. Rs. 500 p.a.; max Rs. 100,000 p.a. 8.8% interest rate (compounded annually) Loan facility Tax benefits - Maximum 9/23/2013RKK/LBSNAA 22
  23. 23. Real Estate Plan in the next 4 to 9 years to have your own house or apartment Investments in real estate are not liquid Facilitates diversification of portfolio besides sense of security; may also bring in rental income Do not make investment on the basis of hype… time your entry correctly Avail loan from Govt. on easy terms 9/23/2013RKK/LBSNAA 23
  24. 24. Gold The Annual Return (compounded) since 2000 works out to 16% Has outperformed other asset classes in the last one decade … However, past need not reflect the future Provides an excellent hedge against inflation 9/23/2013RKK/LBSNAA 24
  25. 25. Asset Allocation Age Band (yrs) Risky Instruments (%) Safe Instruments (%) 18-25 85 15 26-35 75 25 36-45 65 35 46-55 55 45 56-65 45 55 >65 35 65 9/23/2013RKK/LBSNAA 25
  26. 26. Take homes Every time you invest, clearly write down the reasons for the same Cash (and to some extent precious metals) are the best (unwritten) insurance products Do not roll over your credit card bills Never extend your investment portfolio beyond 10-15 products (including Shares, Mutual Funds, Insurance, Real Estate etc.) Review your portfolio – every quarter (not every day) 9/23/2013RKK/LBSNAA 26
  27. 27. Take homes Never Put off financial planning Appreciate the power of compounding Never Live beyond your own means Never invest (or blow up money) by borrowing Do not rely too much on tips i.e., investment advisory services Do not have unrealistic expectations 9/23/2013RKK/LBSNAA 27
  28. 28. Take homes Never put more than one-fourth of your money in one investment product Never invest in avenues where you’re either not sure of the business model or it’s too complicated Never be a part of Ponzi Schemes, Pyramid Schemes, Lottery Tickets etc. Do you think money can buy you happiness? My take … impossible 9/23/2013RKK/LBSNAA 28
  29. 29. THANK YOU 9/23/2013RKK/LBSNAA 29

×