1. Financial Planning for Executives
Dr.Prakash.K.Vadavadagi
SEBI Resource Person
Associate Professor
BV.V.Sangha’s Institute of Management Studies,
Bagalkot.
2. Need for financial education
Deterioration of personal finances
Proliferation of new and complex
financial products
3. Agenda
• Introduction
• Financial planning
• 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 FINANCIAL PLANNING?
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 planning process
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
9. 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!
10. Identify gaps or issues
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 financial plan
Financial
goals
Risk taking
ability
Financial plan can be prepared after assessment of income, expenditure,
assets, liabilities, risk taking ability and financial goals
15. Objectives Incorrect approach Correct 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 achieve goals
Arrange goals in order of their time
to reach (short term, followed by
medium term and lastly long term)
Plan investments for each goal.
19. 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
• 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
Risk category Instruments
Low risk Cash, bank FD
Medium risk Debentures, bonds, fixed
income mutual funds
High risk Equity shares, equity mutual
funds
21. The power of compounding
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
25. WHAT IS INFLATION?
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
26. Effects of Inflation
Item Price 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 for Financial 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 your age 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
• One should 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 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
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
43. Savings & investment related products
Bank deposits
Small savings schemes
Bonds / debentures
Company fixed deposits
Mutual funds
Equity shares
44. What kind of returns 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
Life insurance
Term life insurance
Endowment policies
Annuities / Pension plans
ULIPs
Health insurance
Comprehensive health insurance
Hospitalisation policy
Critical illness plan
46. Insurance - The Changes
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.
48. New Health Insurance Scheme
• 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 vs Health
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.
51. • Steps to avoid excess debt:
– Set debt limits
– Shop carefully for debts
– Don’t give into temptation
– Automatically have money go towards your
bills
53. 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!
57. Selection of intermediary
• Registration with regulator or a body
approved by regulator, e.g. AMFI or stock
exchange
58. Steps to become securities 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 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)
Editor's Notes
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
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.
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..
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.
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.
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
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!
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
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?
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.
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.
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
Let us now understand the relationship between risk and return.
“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”
Some examples of low, medium and high risk investments are shown on the slide
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
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%
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
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
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
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
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.
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.
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
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.
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.
Let us now have a look at various products – the components of a financial plan
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
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
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
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
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.
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!
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?
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.
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.
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.)