Financial planning


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Financial planning

  1. 1. Financial Planning
  2. 2. What is Financial Planning? Financial Planning is an exercise aimed atidentifying all the financial needs of an individualand translating these needs into monetarilymeasurable goals at different times in the future.Financial Planning ensures that right amount ofmoney is available in the right hands at the righttime in the future to achieve an individual’s financialgoals
  3. 3. 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
  4. 4. 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
  5. 5. 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%
  6. 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...
  7. 7. 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
  8. 8. Comparison Of Investment Options Return Safety Volatility LiquidityEquity Moderate to High Low High Low to highBonds Moderate to High High Moderate ModerateBank Deposits Low to High High Low HighPPF Moderate High Low ModerateLife Insurance Low to Moderate High Low LowGold Moderate High Moderate ModerateReal Estate Low to High Moderate High LowMutual Funds Moderate to High High Moderate High
  9. 9. Investment Life Cycle Emergencies???? Retirement Kid 2’s Marriage Kid 1’s Marriage ???? HouseIncome 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
  10. 10. Asset Allocation In simple words, it means determining the percentageof the total investments to be made in equities, bondsand money market / cash instruments. Empirical studies indicate that over 94% of the returnson a managed portfolio can be attributed to the rightmix of asset allocationHere we seek to address the basic questionsof how, where and when to invest taking in toconsideration the market conditions and theinvestors’ risk-return frame work
  11. 11. 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%
  12. 12. 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%
  13. 13. 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%
  14. 14. Concept of Mutual Funds Mutual Fund is an instrument where a number ofinvestors contribute to form a common pool ofmoney. This pool of money is invested inaccordance with a pre-determined objective. Theownership of the fund is thus joint or “Mutual” andthe fund belongs to all the investors in the sameproportion as the amount of contribution made byeach one of them
  15. 15. 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
  16. 16. 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
  17. 17. Risk-Return-Time Horizon Scale Time SECTOR EQUITY RETURN BALANCED DEBT RISK
  18. 18. Systematic Investment Plan (SIP) The Smart Investors’ Preference
  19. 19. Why SIP?The Formula For Creating WealthStart Early + Invest Regularly Create Wealth
  20. 20. Myth : Timing is essential to generate high returnsReality: 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 !!
  21. 21. It is the small drops that make an ocean!!We earn regularly; We spend regularly Shouldn’t we also invest regularly?
  22. 22. 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…
  23. 23. 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
  24. 24. Why Systematic Investment Plan?Rupee Cost Averaging Works Fluctuating Markets Declining Markets Rising MarketsSystematic 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)
  25. 25. 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
  26. 26. Power Of CompoundingRs 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
  27. 27. 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 inturbulent times GO FOR SIP”
  28. 28. Financial Planning Through Insurance “Insurance is not for the one who passes away, it is for those who survive” - Anonymous
  29. 29. 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
  30. 30. Insurance = Investment + Assurance Life Insurance Unit Linked Term Endowment Insurance Plans Insurance Plans (ULIPs)
  31. 31. 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 CoverageEndowment 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
  32. 32. Unit Linked Insurance PlansA policy, which provides for life insurance where the policy value at any timevaries according to the value of the underlying assets at the time. Investors canalso take a SIP route of investment. ULIP distinguishes itself through themultiple benefits that it provides to the consumer. The plan is a one-stopsolution 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
  33. 33. Insurance – Buy a policy, buy peace of mind General Insurance Health Vehicle Property Insurance Insurance Insurance
  34. 34. 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 memberVehicle & 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
  35. 35. 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
  36. 36. 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 annualbasis*** Launched – November 1999
  37. 37. 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
  38. 38. Tax Slab 2009 - 10Equity Oriented Schemes Short Term Long Term Capital Dividend Dividend Capital Gains Tax Gains Tax Income Distribution TaxResidentIndividual/HUF 15% Nil Tax Free NilResident PartnershipFirm /AOP/BOI 15% Nil Tax Free NilDomestic Companies 15% Nil Tax Free NilNRIs 15% Nil Tax Free Nil
  39. 39. 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 includingcorporate bodies, 10% surcharge on tax payableSecondary and Higher Education Cess: To be levied at the rate of 3% calculated on taxpayable plus applicable surcharge
  40. 40. Bank FDs vs. Debt Funds Investors in higher tax brackets are better off investing in debt funds asagainst bank FDs as debt funds are inherently more tax efficient For example consider an investor in the highest tax bracket. Interest fromhis 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 fetchesaround 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 (dividendoption) which also delivers close to 10% average annualized returns (over 1year period) and distributes it among the unit-holders in the form ofdividends. The dividend income will be tax-free in his hands but the mutualfund will be paying a dividend distribution tax of 14.16% (which is indirectlyborne 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
  41. 41. However, if the investor invests in a debt fund with growthoption, then the tax treatment becomes slightly different. Forexample, 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 aretaxed as Long Term Capital Gains (LTCG) if invested for morethan a year. Now, based on the option he chooses, LTCG is eithertaxed @ 11.33% without indexation or 22.66% with indexation.Both the options are certainly better than the tax treatment ofFDs where he pays tax at the rate applicable to his marginalincome Moreover, just by investing for a little over 12 months in debtfunds at the end of the financial year, one can reap doubleindexation benefits thereby further reducing his/her tax liabilityPut simply, for similar pre-tax returns, debt funds provide betterpost tax returns as compared to FDs. Moreover, no TDS isdeducted by mutual funds in case of resident individuals
  42. 42. 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
  43. 43. Factors necessitating Financial Planning Rising Life Inflation Expectancy Financial Planning Protection against Balanced Asset Uncertainty Allocation
  44. 44. ThankYou..
  45. 45. PPT ByAaryendr