Download to read offline
Uploaded byPrakash Vadavadagi
Financial_Planning_for_Young_Investors.ppt
This document provides an overview of financial planning for executives. It discusses the need for financial education due to complex financial products and deteriorating personal finances. The document outlines an agenda for financial planning topics including goals, risk vs return, compounding, inflation, savings vs investments, and various financial products. It defines financial planning as a process to help investors reach their desired financial position. Key aspects of the planning process include identifying goals, income/expenses, gaps, and preparing a plan to bridge gaps.
More Related Content
Similar to Financial_Planning_for_Young_Investors.ppt
Financial_Planning_for_Young_Investors.ppt
- 1. Financial Planning forExecutives Dr.Prakash.K.Vadavadagi SEBI Resource Person Associate Professor BV.V.Sangha’s Institute of Management Studies, Bagalkot.
- 2. Need for financialeducation Deterioration of personal finances Proliferation of new and complex financial products
- 3. Agenda • Introduction • Financialplanning • SMART goals • How to achieve your goals • Risk v/s return • The power of compounding • Inflation effects on investments • Savings v/s investments • Loans v/s investments • Savings and investment related products • Protection related products • Borrowing related products • Investment strategies • How not to lose money • How to begin investing • Advantages of financial education • Investor protection and grievances
- 4. WHAT IS FINANCIALPLANNING? Financial planning is a process laid down to help an investor reach from the current financial position to the desired financial position.
- 5. The financial planningprocess Review periodically Implement the plan Prepare a plan to bridge the gaps Identify gaps Identify goals and risk appetite Gather financial data
- 6. Gathering financial data What is the source of income and what is its nature ◦ Monthly Salary ◦ Business Income How much are your monthly expenses
- 7.
- 8. Identify Goals Your goals Shortterm Medium term Long term
- 9. Goals can beshort 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!
- 10. Identify gaps orissues Are there any expenses which have to be met on a priority, due to which plan may have to be changed Are there any liabilities which are already existing or worse still, may crop up suddenly?
- 11. Prepare the financialplan Financial goals Risk taking ability Financial plan can be prepared after assessment of income, expenditure, assets, liabilities, risk taking ability and financial goals
- 12.
- 13.
- 15. Objectives Incorrect approachCorrect approach Specific I need money to pay my college fees I will save Rs. 50,000 to pay my college fees in a year’s time Measurable I will pay off my debts In the next six months, I will return Rs. 3,000 I owe to my friends Attainable I will save money I will save Rs. 2000 every month by cutting down on eating out and partying Realistic If I save money, I will be rich If I save regularly, need not borrow more money, I can pay off my debts by next year and will have enough savings till I begin to earn Time-bound I will save money for my vehicle I will save Rs. 10000 a year for the next 2 years for my vehicle
- 16. How to achievegoals Arrange goals in order of their time to reach (short term, followed by medium term and lastly long term) Plan investments for each goal.
- 17. Implementing the plan,the real challenge
- 18.
- 19. Risk and Return Riskand investing go hand in hand Risk increases as the expected potential return increases No-risk, what’s that? Manage the risks • 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”
- 20. Risk v/s returns Riskcategory Instruments Low risk Cash, bank FD Medium risk Debentures, bonds, fixed income mutual funds High risk Equity shares, equity mutual funds
- 21. The power ofcompounding How many if you have heard of Albert Einstein? Do you know what he called the eighth wonder of the world? – The power of compounding Why? Let us understand with the help of an example
- 22. 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
- 23.
- 24.
- 25. WHAT IS INFLATION? Whenyou are planning your investment, it is critical that you take into account the effects of inflation on your investments. At its most basic level, inflation is simply a rise in prices. Inflation erodes purchasing power of money What Re. 1 can buy today is more than what the same Re. 1 can buy after 1 year. This means purchasing power of rupee has gone down. Conversely it means you need more rupees tomorrow to buy the same thing which you can buy today for Re. 1
- 26. Effects of Inflation ItemPrice in 2001-02 Price in 2018-19 Sugar (1 kg) Rs. 16 Rs. 40 Cooking oil (5 liters) Rs. 290 Rs. 900 Rice (1 kg) Rs. 14 Rs. 50 Petrol ( 1 liter) Rs. 33.46 Rs. 104
- 27. Rule of 70 •Divide 70 by current inflation rate to know how fast the value of your investment will get reduced to half its present value. • Inflation rate of 7% will reduce the value of your money to half in 10 years.
- 28. 4% Rule forFinancial Freedom • Corpus Reqd = 25 times of your estimated Annual Expenses. • Eg- if your annual expense after 50 years of age is 500,000 and you wish to take VRS then corpus with you required is 1.25 cr. • Put 50% of this into fixed income & 50% into equity. • Withdraw 4% every yr, i.e.5 lac. • This rule works for 96% of time in 30 yr period
- 29. 100 minus yourage rule • This rule is used for asset allocation. Subtract your age from 100 to find out, how much of your portfolio should be allocated to equities • Suppose your Age is 30 so (100 - 30 = 70) • Equity : 70% • Debt : 30% • But if your Age is 60 so (100 - 60 = 40) • Equity : 40% • Debt : 60%
- 30. 10-5-3 Rule • Oneshould have reasonable returns expectations • 10℅ Rate of return - Equity / Mutual Funds • 5℅ - Debts ( Fixed Deposits or Other Debt instruments) • 3℅ - Savings Account
- 31. 50-30-20 Rule -about allocation of income to expense • Divide your income into • 50℅ - Needs (Groceries, rent, emi, etc) • 30℅ - Wants (Entertainment, vacations, etc) • 20℅ - Savings (Equity, MFs, Debt, FD, etc) • At least try to save 20℅ of your income. • You can definitely save more
- 32. 3X Emergency Rule •Always put at least 3 times your monthly income in Emergency funds for emergencies such as Loss of employment, medical emergency, etc. • 3 X Monthly Income • In fact, one can have around 6 X Monthly Income in liquid or near liquid assets to be on a safer side
- 33. 40℅ EMI Rule •Never go beyond 40℅ of your income into EMIs. • Say you earn, 50,000 per month. So you should not have EMIs more than 20,000 . • This Rule is generally used by Finance companies to provide loans. You can use it to manage your finances.
- 34. Life Insurance Rule •Always have Sum Assured as 20 times of your Annual Income • 20 X Annual Income • Say you earn 5 Lacs annually, u should at least have 1 crore insurance by following this Rule
- 35. Basics of Savingsand 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
- 36. Price of procrastination Twin brothers: Anil and Sunil Anil saved from the age 25 years till 35 years. He did not withdraw till 60 Sunil started saving at 35 years, but continued till 60 years Both saved Rs. 50,000 per year and earned 10% p.a. on their investments
- 37. Price of procrastination Twin brothers: Anil and Sunil Amount accumulated at 60 years Rs. 86 lacs Rs. 49 lacs
- 38. CHOOSING THE RIGHTINVESTMENT OPTIONS
- 39.
- 40.
- 41. • Before youborrow: – Financial strength – Credit card debt and personal loans – Low interest rates – Tax benefits – Loan for investments
- 42.
- 43. Savings & investmentrelated products Bank deposits Small savings schemes Bonds / debentures Company fixed deposits Mutual funds Equity shares
- 44. What kind ofreturns investors can expect in todays context? Sr no Product/ investment Scheme Indicative expected returns Level of risk 1 Savings Bank 4% Very Low 2 FD of Bank 7% to 8% Very Low 3 FD of Corporates 10 % - 11% Medium to High 4 Corporate Debentures 9% Low to Medium 5 Non-ULIP Insurance products 5%-6% Very Low 6 Mutual Funds ( Div, Equity) 12% - 18 % Medium to High 7 Mutual Funds - Debt 10%-11% Low to Medium 8 Mutual Funds - Liquid 5%-7% Very Low 9 Direct Equity Investment 15 to 20 % Very High 10 Gold 5 to 10% Medium
- 45. Protection Related Products Insurance Lifeinsurance Term life insurance Endowment policies Annuities / Pension plans ULIPs Health insurance Comprehensive health insurance Hospitalisation policy Critical illness plan
- 46. Insurance - TheChanges Term Insurance Plan • Term plans are the most basic form of life insurance. • Provides life cover. • Most affordable form of life insurance as premiums are cheaper. • The sum assured is paid if the policyholder expires over the policy term. • If the policyholder survives, there is no pay out.
- 47.
- 48. New Health InsuranceScheme • Health Insurance of Upto Rs. 5,00,000 per family. • Check your eligibility by calling on Toll Free number 14555. • You may check the same through web link: - Log in to https://mera.pmjay.gov.in
- 49. Critical Illness vsHealth Insurance Particul ars Critical Illness Insurance Health Insurance Meaning It is a policy to cover life threatening diseases like tumor, permanent paralysis, etc. It is a comprehensive cover that includes hospitalization expenses. Benefits Hospitalization is not required because diagnosis is enough to get critical illness benefits. The insured receives the entire amount at once. The insured can reimburse hospitalization expenses by submitting bills. He can also opt for cashless facility at network hospitals. Coverage It has restricted coverage because it covers only 6-12 diseases. It offers an extensive coverage, including hospitalization expenses. Tenure It is taken for a long duration, usually 15-20 years. It is an annual contract, wherein the policy must be renewed after 1 year.
- 50. Borrowing Related Products Personalloans Home loans Reverse mortgage Loan against securities Credit card debt
- 51. • Steps toavoid excess debt: – Set debt limits – Shop carefully for debts – Don’t give into temptation – Automatically have money go towards your bills
- 52. How not tolose money
- 53. Ponzi schemes Ponzi schemespromise 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!
- 56.
- 57. Selection of intermediary •Registration with regulator or a body approved by regulator, e.g. AMFI or stock exchange
- 58. Steps to becomesecurities market investor Know Your Client (KYC) form and documents PAN Card Personal identification proof Address proof Demat accounts & trading accounts required for equity investing For investing in MF, demat is optional
- 59. Regulators Various regulatorsin 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)
Editor's Notes
- #3 It is said that an informed investor is an empowered investor. The world of money is simple and complex at the same time. It is simple for those who try to understand the situation at hand and take time to think before making a decision. It is complex for those who are not keen on doing the required homework. Financial education helps one understand critical concepts related to money matters. It also makes one aware of the road-blocks and pot-holes on the road to one’s life’s financial journey. Being able to plan your finances is one immediate benefit of financial education. 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
- #4 Spend 2 minutes outlining the agenda. Tell them what the program is going to cover. Put the participants at ease. Ask them to jot down any questions that they might have, which can be taken up at the end of the program. Also request them not to interrupt you in-between the program.
- #5 Financial planning is a process laid down to help an investor reach from the current financial position to the desired financial position. Let us understand this through an exercise..
- #6 Financial planning is a process, and like any other process, it has certain steps. In various discussions, you may come across more or less number of steps, but the broader framework would remain same. Having a process helps keep our emotions in check and maintain discipline. A disciplined approach helps an investor stay the course and reach the desired financial destination without deviations from the path. In the first step, it is important to gather financial data to see where we are currently. It is important to know where we are and where we desire to reach in order to make a plan. Even for a small objective like going from one place to the other, one needs to know what these both places are: the starting point and the end point – and only then can one decide what kind of vehicle one needs to take, how long the journey would be, what are the possible difficulties along the road and how to prepare for the journey. Same principles apply to financial planning as well. We will spend more time on the goals in the next few slides, but identification of the financial goals helps us arrive at the next step, which is to identify the gaps. Once we know what the gaps are, we can then plan to fill those up. This is a crucial step and takes up maximum amount of time. However, no plan can succeed if the first three steps are not taken well. A plan on paper is of no use. It has to be implemented or put in practice. At the same time, it is also important to understand that no plan about future can always be correct. We need to regularly review the plan and check the progress.
- #7 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
- #8 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.
- #9 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
- #11 Having taken stock of the situation and then identifying the goals, one can see the gaps. Example of unforeseen liabilities can be – heart attack to main earner of family, leakage in the bathroom of the person staying above your house, due to which there is leakage in your bathroom and there is also the risk of electric shock!
- #12 Financial plan can be prepared after assessment of income, expenditure, assets, liabilities, risk taking ability and financial goals
- #13 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
- #14 A critical step in managing your finances is to be able to identify your goals. The goals should be SMART. What are SMRT goals? Does anyone know?
- #16 Your goals have to be Specific, Measurable, Attainable, Realistic and Time-bound. Many people make the mistake of setting general goals, which more often than not, will not materialise.
- #17 Ask students to segregate various goals and attempt to build a roadmap for reaching using various Asset Classes. Many students may not be aware of detailed differences. Here we introduce equities, debt, gold etc. We do no go into too much of technicalities but just highlight the main features of each class. The following two points need to be explained with examples of asset classes Short term goals cannot be achieved by investing in risky avenues which by definition are long term in nature Long term goals cannot be funded by investing in short term avenues as they may not generate enough returns Equities are risky in short term due to volatility but have generated stellar returns @ ~ 12% historically over the long term. Cash/ Bank FDs are safe but do not generate returns.
- #18 Preparing plan is simple, implementing it regularly is the real challenge Where is the money invested – in which asset class – determines the potential returns the investor can expect Avoiding risky investments may lead to compromising of goals
- #19 Let us now understand the relationship between risk and return.
- #20 “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”
- #21 Some examples of low, medium and high risk investments are shown on the slide
- #22 How many if you have heard of Albert Einstein? Do you know what he called the eighth wonder of the world? – The power of compounding Why? Let us understand with the help of an example
- #23 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%
- #25 Ask the participants, “Do you know the rule of 72?” This rule tells you how much time is taken to double your money given the interest rate @ 9% per year, your money will double in roughly 8 years @ 10% per year, your money will double in approximately 7 years 72 divided by the interest rate = no. of years it takes to double your money
- #26 When you are planning your investment, it is critical that you take into account the effects of inflation on your investments. At its most basic level, inflation is simply a rise in prices. Inflation erodes purchasing power of money What Re. 1 can buy today is more than what the same Re. 1 can buy after 1 year. This means purchasing power of rupee has gone down. Conversely it means you need more rupees tomorrow to buy the same thing which you can buy today for Re. 1
- #27 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
- #36 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 to 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
- #37 Anil and Sunil, twin brothers, started working in the same year. Anil started saving Rs. 50,000 every year from the age of 25 years till the age of 35. He did not save anything thereafter, but also did not touch the savings till his retirement age. Earning the average rate of return of 10% p.a., he accumulated a sum of over Rs. 86 lacs at the age of 60 years by saving Rs. 5 lacs. Sunil wanted to enjoy life and he spent all he earned. He did not save anything initially. He started saving Rs. 50,000 every year at the age of 35 years and continued this till 60 years. Earning at the rate of return of 10% p.a., he accumulated little over Rs. 49 lacs by saving Rs. 12.50 lacs. In spite of saving more money (Rs. 12.50 lacs against Rs. 5 lacs), Sunil ended up with less money at retirement. The earlier one starts, the better it is. As the popular saying goes, early bird catches the worm.
- #38 Anil and Sunil, twin brothers, started working in the same year. Anil started saving Rs. 50,000 every year from the age of 25 years till the age of 35. He did not save anything thereafter, but also did not touch the savings till his retirement age. Earning the average rate of return of 10% p.a., he accumulated a sum of over Rs. 86 lacs at the age of 60 years by saving Rs. 5 lacs. Sunil wanted to enjoy life and he spent all he earned. He did not save anything initially. He started saving Rs. 50,000 every year at the age of 35 years and continued this till 60 years. Earning at the rate of return of 10% p.a., he accumulated little over Rs. 49 lacs by saving Rs. 12.50 lacs. In spite of saving more money (Rs. 12.50 lacs against Rs. 5 lacs), Sunil ended up with less money at retirement. The earlier one starts, the better it is. As the popular saying goes, early bird catches the worm.
- #40 The choice of investment options will depend upon personal circumstances as well as general market conditions. Based on those two factors, one would like to strike a balance between the following three: Safety Liquidity, and Returns
- #41 People do not know whether they should avail a loan or build investments to achieve their financial goals. Both the options are different and should be availed appropriately.
- #42 These points must be considered to evaluate whether to go for a loan: Whether you should take a loan depends on your financial strength. A bank or a lending agency looks at your repayment ability. You must know your repayment ability before you borrow. You also need to look at various liabilities that you may have Credit card debt and personal loans are unsecured and hence they carry a very high rate of interest. Costly loans should be avoided as much as possible If you have a loan with low interest rate and tax benefits, e.g. home loan, it may be advantageous to go for a loan If you have an investment plan where you can earn high rate of return, you may borrow money and invest. However, please be careful to asses the risks carefully.
- #43 Let us now have a look at various products – the components of a financial plan
- #44 Let us start with the investment related products. Pages 18 to 24 of the booklet give elaborate explanation of each of the products Please mention the need for dematerialisation for investing in equity Do not spend too much time on the slide. Ask the participants to read the booklet at their convenient time
- #46 From investments, let us move on to protection related products. These products protect one against the adverse financial impact of uncertain eventualities of the future. Pages 25 and 26 of the booklet give elaborate explanation of each of the products Do not spend too much time on the slide. Ask the participants to read the booklet at their convenient time
- #51 While investments help us to meet our goals in future, there could be situations where you might need money right now, but have yet not accumulated enough to fund the goal. Here comes the role of borrowing related products. Pages 27 to 29 of the booklet give elaborate explanation of each of the products Do not spend too much time on the slide. Ask the participants to read the booklet at their convenient time
- #52 Excess debt is hazardous to your financial health. Please consider following steps to avoid excess debt: Set debt limits Decide your debt limits. Setting such a limit helps you keep your debts under control Shop carefully for debts If you need loan, it helps to do comparison shopping. Even after taking a loan, it is a good idea to check once a year to ensure you are still enjoying the best possible options Don’t give into temptations Getting a new mobile phone every now and then or buying that designer dress may be tempting, but borrowing for that may not be a good idea Automatically have money go towards your bills Set automatic bill payment mechanism directly from your account
- #53 Updating oneself with the current happenings is a must for every investor as he will then be aware of various events in the financial markets. In addition to this, there are various matters that need to be looked into to keep a check on your portfolio. If you do not, then you may end up losing your money.
- #54 Ponzi schemes are when investors are promised huge returns which are unrealistic and at very low risk. The question to be asked is why is the person approaching us when there is such a fantastic opportunity!
- #57 The brings us to the final step in understanding the procedure for purchase of financial products – especially securities market products. There are various channels through which these products can be purchased: Intermediaries / distributors Brokers Internet Stock exchanges Mutual fund companies Which channel to be used for what?
- #58 Deal only with an intermediary that is registered with the regulator or an entity that is approved by the regulator. If you deal with any unregistered entity, the risk increases as in case of a dispute, the legal course that you have to take would be longer. A registered entity is also required to comply with regulations that protect the interests of investor.
- #59 Now you are ready to invest in securities markets. But before you sign the cheque, some formalities are required. The first and foremost, you need to have PAN card and comply with the KYC (Know Your Client) norms. Various documents like PAN Card, address proof, telephone/electricity bills etc. need to be submitted while opening a demat form. Similarly there could be requirement of Know Your Client (KYC) form to be filled in some cases. Mutual funds investing does not require demat account except for a special type of mutual fund known as Exchange Traded Funds (ETFs). However, if you wish to buy units of open-end mutual funds through stock exchange platform, a demat account s a must.
- #60 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.)