Basis Of Finanacial Planning


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Basis Of Finanacial Planning

  1. 1. SUBMITTED TO: Mr. Himal ParikhSubmitted by : Prashant Maharshi
  2. 2. FINANCIAL PLANNING Financial planning is the long-term process of wisely managing one’s finances so one can achieve his financial goals. It is your roadmap to Financial Health, & Sustainable Wealth creation.
  3. 3. WHY FINANCIAL PLANNING ISNEEDED? Life without Financial planning is like Unplanned Vacation. Manage one’s finances for the achievement of goals. Emergency cash requirement. Determining capital structure. To maximize Return on Investment at minimum level of risk. To minimize and defer income taxes and other government levies.
  4. 4. WHAT ARE COMMON EXCUSES FORNOT PLANNING FINANCES? Lack of money. No need of life insurance. Too young to think about retirement planning. Child’s education is more important then retirement planning. Only rich person can make will.
  5. 5. WHAT IS THE PROCEDURE OFFINANCIALPLANNING? Measure financial health Financial goal setting Risk Profile Decide Investment areas
  6. 6. HOW TO MEASURE FINANCIALHEALTH? Before person start financial planning he/she has to determine their financial health. Three simple personal finance rule with which a person can start with:a) Calculate debt to income ratio. Debt to Income Ratio= Total monthly outgoing on liabilities(EMIs) Total monthly income from fixed resources Debt to Income ratio should not be higher then 30%.
  7. 7. Cont…b) Calculate Savings to Income Ratio Savings to Income Ratio= Total monthly savings Total monthly income One should save atleast 20% of their monthly income.
  8. 8. Cont…3) Contingency Reserve One should set aside 6 to 24 months of living expenses Contingency fund to be used only at the time of emergencies.
  9. 9. FINANCIAL GOAL SETTING Mandatory Goals  Purchase of home  Child’s Education  Purchase of car  Retirement  Child’s Marriage
  10. 10. FINANCIAL GOAL SETTING CONT… Optional Goals  Up gradation of Residence.  Luxury Car.  Purchase of Luxury items at Home.  Vacation Abroad.  Wealth creation  Charity  Inheritance – Estate planning.  Early Retirement
  11. 11. Table showing some of the financial goalsaccording to their priority GOAL PRIORITY TIME TILL GOAL OCCURS Child’s College High 9 Years Education Child’s Marriage Medium 12 Years Retirement High 15 Years Foreign Vacation Low 16 Years
  12. 12. RISK PROFILE Inflation risk Loss of purchasing powerPrimary long-term riskPrimary short-term risk Volatility risk Instability of investment Business risk Inherent risks of a particular business Market risk Likelihood that the market as a whole will fall Liquidity risk Risk of not being able to access money when neededOther risks Interest rate risk Loss of principal on fixed- rate investments due to rising interest rates Currency risk Investment’s value will be affected by changes in exchange rates
  13. 13. HOW ARE THESE RISKS MANAGED? Inflation risk Invest in stocksPrimary long-term risk Volatility risk Hold investments for thePrimary short-term risk long-term Business risk Diversify within an asset class Market risk Diversify among asset Liquidity risk classes Diversify among assetOther risks Interest rate risk classes Currency risk Have an emergency fund “Ladder” portfolios Diversify among countries or hedge
  14. 14. ASSET CLASSES TO INVEST Equity Insurance Debt Financial Planning Real Gold Estate
  15. 15. EQUITY Equity Mutual Fund Equity Shares Investment in equity is risky person should invest in equity depending upon their Risk appetite and risk tolerance.
  16. 16. DEBT Public Provident Fund (PPF)  Gives 8% tax free return.  Minimum investment of Rs.500.  Lock in period 15 years.  No risk involved. Recurring Deposit  High in safety.  Not allowed to withdraw before certain period.  They are taxable.  Expected return between 6-7% depending on term.
  17. 17. DEBT Post Office Schemes  Offer 8% of savings  Returns are taxable and most schemes have a lock in. Debt-Based Mutual Fund  Investment through Systematic Investment Planning  Dividends are tax free.  Capital gain tax applies at the time of selling of units.
  18. 18. REAL ESTATE Real estate is profitable option to invest one’s money in but it is not risk free. Risk involved in real estate investment are  Getting bad tenant.  Market decline.
  19. 19. GOLD Physical gold Gold ETFs Gold FUND OF FUND (FOF) E-Gold
  20. 20. GOLD Gold is risky as gold price can fluctuate sharply. Therefore only 10-15% of the portfolio should be allocated in gold. Physical gold is more risky then gold ETFs, E-Gold and Gold FOF. Unlike other type of gold investment physical gold is not price transparent. Buy back of physical gold is not on market prices but after deducting high making charges.
  21. 21. INSURANCE Aim of insurance is to cover the risk and provide financial compensation for any unexpected losses. Such as:  Personal Risks-Loss of income.  Property Risks- Damage to property.  Liability Risks- Losses due to damage to others.
  22. 22. INCOME SCHEMES P.P.F. N.S.C. BANK Floating rate F.D. Funds Return % 8% 8% 6-8% 5-6% Tax-free Yes NO NO Yes Rebate on Yes Yes Yes if >5 year No Investment Liquidity 50% 6 year lock in Lock in as per No lock in withdrawal term of F.D. after 5 years
  23. 23. WHAT ARE HURDLES IN FINANCIALPLANNING? Lack of funds. Lack of knowledge regarding financial assets. Misguiding Schemes. Difficulty in finding appropriate financial planner.
  24. 24. 5 DO’s OF FINANCIAL PLANNING  Emergency Cash  Medical Insurance & Life Insurance  Child Education Fund  Retirement Fund  Make a Will
  25. 25. HOW TO RAISE EMERGENCY CASH?  Credit Card  Loan Against Securities  Selling Assets  Personal Loan  Advance Against Salary  Borrowed From Friends & Relatives
  26. 26. 8 DON’T’s OF FINANCIAL PLANNING  Don’t think credit  Don’t delay investment  Don’t ignore inflation  Don’t be careless in the market  Don’t dip into that retirement fund  Don’t cash your Employees Provident Fund  Don’t ignore tax saving tools  Don’t economize on insurance
  27. 27. HOW TO CHOOSE FINANCIALPLANNER?  Understands Your Planner’s Personality  A Planner helps you to make planned investment  Understand the Expertise of your planner  Is your planner proactive?  Is he well-versed with tax laws?
  28. 28. CONCLUSION Keep investment simple. Start investing early. Invest regularly. Monitor investment every 3-6 months. Stay invested for long time. Take experts help.
  29. 29. Thank You…