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Financial planning & Investor awareness
- 1. I M POSSIBLE 2 I M POSSIBLE Bibek Prajapati (FCMA, CS , MBA, M COM, ). My kind request for you Please like , subscribe ,comment and don’t forget to share Pray to God for the success in Life Thank You
- 2. Agenda • Meaning • Need for Financial planning • Importance of understanding household finances • Savings and investment related products • Insurance Coverage • Need and importance of PAN card • Understanding Ponzi schemes • Nominee and his rights • Women centric products • Education planning for children • Security tips on ATM card and PIN • KYC • A housewife’s guide to investing in gold • Advantages of financial education
- 3. Meaning of Home Makers- A “Home-maker” means those who manage housework, house-keeping & other house hold management .
- 4. Need for financial education • Deterioration of personal finances • To understand new and complex financial products • Protect Investor
- 5. Advantages of Financial Education • Helps to secure financial future • Prepared for financial emergencies • Protection from marketing fraud • Disciplined approach to money • Setting a good practice for family. • Learn Money Management Skill.
- 7. Gathering financial data What is the source of income and what is its nature ◦ Monthly Salary ◦ Business Income How much are your monthly expenses
- 8. Exercise
- 9. Savings • Old Theory:- Savings = Income – Expenses • New Concept :- Income –saving = Expenditure
- 10. • Maintain a household budget. • Understand and estimate your current spending patterns (Constant Debits & Changing Debits). • Understand everything and why it is important. • Gradually share with your partner some financial responsibility. • Discuss contingency plans. Importance of understanding household finances
- 12. Smart goals
- 13. SMART GOALS • Goals are dreams with deadlines • Converting dreams into SMART goals
- 15. DIFFERENCE BETWEN NEEDS AND WANTS :- • Remember: – Needs are basic necessities one cannot wish away – Wants make life more comfortable, but can wait
- 16. Basics of Savings and Investment • Savings – Short term – Value remains stable – Lower returns over long term • Investing – Long term – Value moves up and down in short term – Potentially higher returns over long term
- 17. Time value of money The value of the money today is not the same as it will be in the future
- 18. Rule 72 72 divided by the interest rate = no. of years it takes to double your money
- 19. The eighth wonder - compounding Rs.1 lac invested @ 10% Year Simple interest @ 10% p.a. Compound interest @ 10% p.a. 1 1,10,000.00 1,10,000.00 2 1,20,000.00 1,21,000.00 3 1,30,000.00 1,33,100.00 4 1,40,000.00 1,46,410.00 5 1,50,000.00 1,61,051.00 20 3,00,000.00 6,72,749.99 25 3,50,000.00 10,83,470.59 30 4,00,000.00 17,44,940.23
- 20. Effects of Inflation Item Price in 2001-02 Price in 2009-10 Sugar (1 kg) Rs. 16 Rs. 40 Cooking oil (5 liters) Rs. 290 Rs. 500 Rice (1 kg) Rs. 14 Rs. 35 Petrol ( 1 liter) Rs. 33.46 Rs. 48.83
- 21. Inflation Effects on Investments Investment Initial investment Rs. 1,000 Interest on investment 5% p.a. Value after a year Rs. 1,050 Inflation 6% p.a. Your expenses after a year Rs. 1,060
- 22. Budgeting :- • Budgeting is the process of tracking, planning and controlling the inflow and outflow of money – Inflow of money = income – Outflow of money = expenses
- 23. • Benefits of budgeting – Checks or balances to prevent overspending – Unexpected need for funds – Discipline – Helps maintain standard of living
- 24. • Steps for budget planning – Calculate your income – Determine your bill for essentials – Note down your total debts – Determine your bill for non-essentials – Calculate your savings
- 25. 3 pillars of investment Investments Safety LiquidityGrowth
- 26. Identify Goals Your goals Short term Medium term Long term
- 27. Risk v/s returns Risk category Instruments Low risk Cash, bank FD Medium risk Debentures, bonds, fixed income mutual funds High risk Equity shares, equity mutual funds
- 28. Investment options • Short term – Savings bank account – Short Term Bank FD • Long term – Equity shares – PPF/MIS – Bonds and debentures
- 29. Prepare the financial plan Financial goals Risk taking ability
- 31. Risk and Return Risk and investing go hand in hand Risk increases as the expected potential return increases No-risk, what’s that? Manage the risks
- 32. Asset allocation Time frame Risk tolerance Personal circumstances Asset allocation strategy :-
- 34. Savings & investment related products Bank deposits :-(Savings,FDs,RD,TD) Government Schemes :-( NSC,PPF,POS,ELSS,I B) Bonds / debentures:-(Tax saving or Income) Debenture (FCD,PCF ,NCD) Company fixed deposits Mutual funds:-( Equity, Fixed-income, MM Funds, Open ended and close ended MF) Advantage:- ( Transparent, Liqidity,Less Brokerage, Diversified, Prof management) Equity shares
- 36. Protection Related Products • Car Insurance • House Fire & Burglary Insurance • Health insurance • Comprehensive health insurance • Hospitalizations policy • Critical illness plan • Specific condition coverage • Life insurance • Term life insurance • Annuity • ULIP • NPS-2009
- 37. Borrowing Related Products • Personal loans -Interest rate 14-18 % pa -Not advisable Except For emergency Requirement • Housing Loan -Bank Finance 70 -80% of Property -Min lock in Period of 3 Years or More -Heavy penalty charge for repayment • Reverse mortgage • Loan against securities • Credit card debt -Interest rates 18-36% ,pa & Heavy penalty .
- 38. Need and Importance of a PAN Card • How to get a PAN Card? -Application for PAN (Form 49A)in Any IT pan service centre(UTIISL) - Web site (www.incometaxindai.gov.in , www.utiisl.co.in ) • It is necessary to quote the PAN in many important transactions -Sale or purchase of Immovable property / vehicle >= Rs 5 Lacks -Time deposit with any banking company or Post office Saving > Rs 50 k -Cash payment >=50 k for purchase of Bank draft, pay order or claque -Opening a bank accounts. - Application for issue of credit cards -payment for purchase of M F units or company shares .= Rs 50 k - Change in D mat Accounts , Bank detail etc.
- 39. KYC (:-know your customer guidelines):- • Objective -Safeguards banks from acting as chain in money laundering activities -Helps banks to know more about the clients & keep check • When Does KYC applies -Opening a new Accounts or subsequent accounts where document as per KYS not submitted earlier -Opening a locker Facility - Non account holders who approaches bank foe higher value transaction • Elements -Customer Acceptance policy -customer Identification procedures -Monitoring transactions -Management of risk
- 40. Steps to avoid excess debt • Set debt limits • Shop carefully for debts • Don’t give in to temptation • Automatically have money go towards your bills
- 41. Understanding ‘Ponzi’ schemes • How to spot one? • The ultimate unravelling of a Ponzi scheme • Examples of Ponzi schemes • Ponzi schemes promise high returns and low risk • Initial investors may get high promised returns • Money from initial investors is given to new investors – thus it is only rotation of funds, not investment of funds • If its too good to be true – its probably not true. It’s a Ponzi!
- 42. Nominee and his rights • What are rights of a nominee over an asset? • Does the asset become his own when he dies? • What is the procedure for making a claim? • What happens when there is no nominee at all?
- 43. Women Centric Products • Special health insurance plans • Bank accounts with special benefits for women • Women debit cards • Credit cards for women • Loan schemes for women
- 44. Taxation for home makers • DT (IT, WT,GT) • IT ( CE,CD,ST,CST,VAT) • DT –IT (Sly, HP, B/P, CG &OS) • IT Rates - Income Rate (%) Up to 200000 Nil 200001-500000 10 500001-1000000 20 Above 1000000 30
- 45. Education planning for children • Insurance policies • Investment products
- 46. Security Tips on ATM card and PIN • Do not keep the PIN issued by the Bank together with your ATM Card. • Change your PIN immediately when using your ATM Card for the first time and destroy any documents containing PIN information. • Do not write down your PIN. You should memorise it. • Do not send your PIN via email/SMS and never use the same PIN to access other services. • Do not write down your PIN on the card face and do not disclose your PIN to anyone including any joint account holder.
- 47. Security Tips on ATM card and PIN • Do not, under any circumstances, disclose your PIN to anyone who claims to represent the Bank or who claims to be the Bank's employee or other authorised person, or the police. • Do not use combinations that are readily accessible/deducible such as your identity card number, telephone number, date of birth etc. • For security reasons, change your PIN regularly • If your ATM Card is lost or stolen, please inform your bank immediately. • Keep the helpline no. and card no in a separate place so that you can block the card operation. • CC No for – • SBI- 1800112211 . PNB – 18001802222
- 48. A household’s guide to investing in Gold • Gold and stock market • Gold ETFs – Advantages – How to invest
- 49. Investment commandments • Clear and reasonable goals • All investments carry risk • Diversify to reduce risk • Select appropriate asset mix • Recognise limits of your knowledge • Do your homework • Income-tax is payable on investment returns • Avoid investing on basis of hot tips and rumours • Don’t follow advice you do not understand • Say “NO” if you are not convinced • Don’t take risks you cannot afford or are not comfortable with
- 50. Regulators Various regulators in Indian financal markets are: ◦ Securities & Exchange Board of India (SEBI) ◦ Reserve Bank of India (RBI) ◦ Forward Markets Commission (FMC) ◦ Insurance Regulatory & Development Authority (IRDA) ◦ Ministry of Corporate Affairs (MCA) ◦ Ministry of Finance (MoF)
- 51. Investor protection:- • Nature of Grievance • In case of Public issue, Non receipt of -Refund order -Interest on delayed refund or allotment advice -Share certificates • Listed security ,non receipt of the certificated after -Transfer ,Transmission &Conversion -Endorsement -Consolidation, splitting &duplicates • Regarding listed Debentures ,non –receipt of -Interest due -Deposits in CIS & units of MF - FD in bank & Finance Companies • Can be taken up with -SEBI -MCA -ST -SEBI -MCA -ST -SEBI -SEBI -RBI
- 52. I M POSSIBLE 54 I M POSSIBLE Bibek Prajapati (FCMA, CS , MBA, M COM, ). My kind request for you Please like , subscribe ,comment and don’t forget to share Pray to God for the success in Life Thank You
Editor's Notes
- Spend a few minutes explaining the agenda as well as the objective of the session. Ask the participants to write down the questions that they may have and not ask during the presentation
- The pressing need for financial education comes from two areas. Deterioration of personal finances. Living beyond means, Credit card debt, and Risky investments. Proliferation of new, and often complex, financial products that demand more financial expertise of consumers. Add to that the turbulent market conditions and changing tax laws
- Lack of financial knowledge can affect an individual’s or family’s ability to save for long-term goals and make them vulnerable to severe financial crisis By incorporating contingencies in your financial plan you are ready to face unseen circumstances head on People who are financially literate are reluctant to buy financial products that they do not understand and thus do not fall for marketing gimmicks Financial education is effective at moving people closer to their goals Helps people from overspending and inculcates a habit of savings and investments You become more aware of questionable lending practices adopted by banks and other lenders to sell their products Improves various other aspects of life Give you better control over your financial life So, let us understand what financial planning means
- Financial planning is a process laid down to help an investor reach from the current financial position to the desired financial position. As we can see in this slide, the process, like any other process, has certain steps. These steps are: Determine current financial situation Develop financial goals Identify alternative courses of action Evaluate alternatives Consider: Life situation Personal values Economic factors Assess: Risk Opportunity cost Create and implement financial action plan Review and revise the financial plan
- Knowing salary & expenses act as first step for planning Even basic needs cannot be met, even if there is a handsome salary but expenses are higher than the income. Knowing the income and expenses help in proper planning
- Ask students to fill in the details and find out whether they are in plus or minus at the end of the month. Tell them to be honest and serious in entering values. If they are able to save even a small amount, they are on the right track. The next important is to actually stick to what values they have entered in the sheet and IMPLEMENT the plan.
- Specific Measurable Achievable Realistic Time-bound
- Let us see the difference between SMART and not SMART goals
- Zig Ziglar, one of the greatest motivational speakers and trainers has said, “Goals are dreams with deadlines”. Let us now understand how to convert dreams into goals. Let us do the exercise III in the booklet
- Next step now is to divide the goals among the four quadrants based on their importance and urgency. Let us do activity IV in the booklet.
- Now that we have helped Mrs. And Mr. Singh with prioritising their family’s goals, let us now do the same exercise for our own families. Turn to exercise V in the booklet.
- Your Parents were right: money doesn’t grow on trees. It actually grows on other money – which is where we get the old saying, “It takes money to make money”. Money does have an amazing ability to make more money. The good news is it doesn’t take much money to make this happen. Savings = Investing Saving is what people usually do to meet short term goals. Your money is very safe in a savings account, and it is usually earning a small amount of interest. It’s also easy for you to get to your money when you need Investing means you’re setting your money aside for longer – term goals. There’s no guarantee that the money you invest will grow. In fact, it is normal for investments to rise and fall in value over time. But in the long run, investments can earn a lot more than you can usually make in a savings account For one, saving or investing money for your financial goals makes you less tempted to spend it. But the best reason for investing is that your money is actually making money for you. Any interest or investment gains get you that much closer to your financial goals. And you didn’t have to do anything for it! Start saving early and you'll be prepared when you need it, whether you're saving for a home, a child's education, or your retirement. If you start saving in your 20s, you'll be off to a great start. If you don't, you'll play catch-up for the rest of your life Youngsters have an advantage that older people don’t have: time. When they understand this concept and use time in their favour, young people have a much better chance of pursuing their dreams and reaching their financial goals
- Explain how interest is earned on interest and how this effect will keep accumulating over longer period of time. Take he number in year 2. in case of simple interest, the investor earns Rs. 10,000 every year on his original investment of Rs. 1 lac. However, in case of compound interest, he also earns on the Rs. 10,000 earned in the first year and hence the difference. See how the gap between simple and compound interest widens as time goes. In case of equities there is no fixed interest earned as in case of FD, but the capital appreciation by way of change of prices can be used to calculate the rate at which money has grown, e.g. Nifty was @ 1000 in Nov ’95 and is @ 5000 in Jun ’10. That is in a period of 14.5 years, Nifty has grown 5x. Using the formula for compound interest, A = P * (1 + r) ^ n, where P = 1000, A = 5000 and n = 14.5, we can solve the equation for R, which will come to be ~ 12%
- See how the prices of various household items have grown over the years Over time, as the cost of goods and services increase, the value of a rupee is going to go down because you won’t be able to purchase as much with those rupees as you could have in the last month or last year
- Inflation is greatly feared by investors because it grinds away the value of your investment. Example:- If you invest Rs.1,000 in a one year fixed deposit that will return 5% over that year, you will be giving up Rs.1,000 right now for Rs.1,050 in 1 year. If over the course of that year there is an inflation rate of 6%, your expenses which were Rs.1,000 in the previous year will increase to Rs.1,060 at the end of the year. Thus even after investing your money for 1 year you are worse off compared to the previous year because the returns delivered by your investments has been below the inflation rate Steps that an investor can take to avoid the adverse effects of inflation:- Try to determine your “real rate of return” which is the return you can expect after factoring in the effects of inflation. In addition to being aware of the current rate of inflation, it is crucial to be aware of what inflation rate the experts are anticipating. Both the value of current investments and the attractiveness of future investments will change depending on the outlook for inflation. Also remember fixed income investments are particularly vulnerable to the effects of inflation. If you are locked into a particular interest rate, and inflation increases your earnings will not keep up and you will earn a negative return.
- Income may come from one’s profession, job, business or it can come from investments. Expenses are something that needs no explanation or introduction. Right from school fees to lunch fees at school, from buying text books to buying the basket ball, from eating out at restaurant to movies, from Barbie dolls to game boys, all activities involve expenses. Some of these expenses can be avoided, some can’t, which we saw in prioritising earlier.
- Safety: Will you get your principal amount back? Liquidity: Will you get the money when you need without loss? Growth: Will you get more than you invested? How much? Many Indian kids have a habit of saving money in a piggy bank. If not, at least they have heard of the same. Take them to exercise IX. Now let us understand the most important institution related to money – the bank.
- The next step is to define investment objective or financial goals Goals can be short term (upto 3 years), medium term (3 to 5 years) or long term (upwards of 5 years) Each goal must have a target amount and a target date Goals without amounts and dates are likely to be missed! Exercise: List 5 short term, medium term and long term goals We will discuss more about the goal setting exercise in a while
- Some examples of low, medium and high risk investments are shown on the slide
- Financial plan can be prepared after assessment of income, expenditure, assets, liabilities, risk taking ability and financial goals
- An important part of preparation of a financial plan is assessment of risk taking ability. Understand the risk taking ability Income & Expenditure and Assets & Liabilities play a very important role in an individual’s risk taking ability High income does not necessarily mean high risk appetite if the person also has large amount of liabilities Low income used judiciously to build assets, can increase risk appetite For two college going students will the risk taking ability be same if one’s father is the richest businessman in town and the other’s father has expired 5 years back and their family is dependent on the investments made by his father. Ask students to come out with reasons why each student’s risk taking ability will be different
- “High risk high returns” does not mean by taking high risks one is assured of high returns; it only means that the possibility of high returns exists. Conversely low risk low returns means that if one takes low risks….one should be satisfied with low returns! Risk and investing go hand in hand Risk increases as the expected potential return increases Even “no-risk” products such as savings accounts and government bonds carry the risk of earning less than the inflation rate It is crucial to manage your risk The phrase “high risk high returns” must be changed to “high risk high potential returns”
- Asset allocation involves tradeoffs among three important variables: your time frame your risk tolerance, and your personal circumstances Depending on your age, lifestyle, family commitments and financial goals, the asset allocation will vary
- A self-portrait helps you know where exactly you stand financially. A self-portrait comprises of knowing the details of: Your financial goals Your assets Your liabilities Your estimate of future income, and Your estimate of future expenses While one has to take account of the assets and liabilities as it is in the present; the goals, income and expenses pertain to the future. One needs to assume the rate at which the three change in value. You need to assume at what rate do you think your long term income will grow as well as the rate at which you think the value of goals and the expenses change. Remember the discussion about time value of money and inflation earlier!
- Let us start with the investment related products. Pages 12 to 18 of the booklet give elaborate explanation of each of the products Also mention that in order to invest in shares one needs to have a demat account. For this purpose, please explain dematerialisation of shares and the depository system as mentioned on pages 28 and 29. Do not spend too much time on the slide. Ask the participants to read the booklet at their convenient time
- A Ponzi scheme is a fraudulent investment operation that promises high rates at little risk to investors. The scheme pays the promised return to old investors out of the money received from new investors. As long as new investors keep coming in, the cycle goes on. Refer pages 26 and 27 of the book.
- Here are the ten commandments of investing: Establish clear and reasonable goals before investing All investments carry risk. As expected / potential return increases, so does the risk. Diversify to reduce risk. Diversification is a proven strategy to reduce the risk associated with single instruments Select appropriate asset mix of debt, equity and cash equivalents Recognise limits of your knowledge. Avoid investments you do not understand Do your homework. There is no substitute. Be sure to know where you are investing and what is the likely financial impact It is what you get in hands after the taxes that matters Avoid investing on basis of hot tips and rumours Don’t follow advice you do not understand Say “NO” if you are not convinced. You have right to ask questions before signing the cheque Don’t take risks you cannot afford or are not comfortable with
- There are various regulatory agencies that work for the interest of the investors. Page 31 in the booklet elaborates the SEBI framework for redressal of investor grievances. (Request the participants to read the same at their convenience.)