Professional Documents
Culture Documents
planning is the process of successfully meeting financial needs of life through the proper management of finances.
is your roadmap to Financial Health, & Sustainable Wealth creation.
It
If
Inadequate
It
Different
asset classes give better return for specific time duration. of portfolio return will depend on Asset allocation only.
94%
Hood and Beebower : Determinants of Portfolio Performance, 1986, 1991: Asset Allocation helps explain over 93% of a portfolios performance.
Art
Financial Planning Insurance
Equity
Commodities
Real Estate
situation.
What
How
Wealth
Simply
put, How much money you need? & When you need the money? (Time horizon)
Specific
Mandatory Goals:-
(1) (2)
(3)
(4)
(5)
Children education Children marriage Retirement Planning. Pension. Purchase of residential premises. Purchase of vehicle.
Up gradation of Residence. Luxury Car. Purchase of Luxury items at Home. Vacation Abroad. Wealth creation Crorepati, Billionaire. Charity Religious or Social. Inheritance Estate planning. Early Retirement - Financial freedom.
Goal setting
Specify amount required & approximate time period when money required.
(1)
(2) (3) (4)
Types of goals.
Short term Goals 1-2 years. Medium term goals 3-5 years. Long term goals 5-10 years. Distant goals > 15-20 years.
Risk Profile
(1) (2)
Strong correlation between risk & reward. Aim of financial planning is to get maximum return with minimum risk.
Risk Profile
Financial Capacity
(1)
(2) (3)
(4)
Income status, more important Net Saving status. Age:- Younger the age higher is risk taking capacity. Dependents in family. Liabilities, Loans taken.
Risk Profile
Mental capacity Temperament. How will you react to temporary fall in value of your investment?
(1) (2) (3)
Risk Profile
Technical
Knowledge.
Even if financial & mental capacity strong, technical knowledge required to invest in Shares, Art Painting, Real Estate. Either take professional help or take Mutual Fund route.
Do & Don'ts
Dont
buy on tips, impulse or under influence of left behind feeling. Dont chase last year topper Stick to your asset allocation.
Basic
aim of Financial planning is to get sufficient fund at specific time for defined financial goal, not to get Super high return.
Children Marriage
25 yrs
35 yrs
Over 25 - 30 yrs
Earning Years
Age 60 yrs
Retirement Age
Type of Assets
Assets Cash, Savings a\c, Floating rate mutual fund. Ideal for short term goals. (2) Income generating Assets Bank F.D.,PPF, NSC, Bonds. Ideal for medium term goal. (3) Capital appreciation Assets Equity- Shares, Real Estate, Gold, Art. Ideal for long term goal.
(1) Liquid
INVESTOR PROFILE
Mona, Joydeep ( Age 28 years ) Financial Goals Investment Strategy Planning to purchase a house Aggressive Growth Portfolio in the next 5 - 8 years Short-term Bonds 10% 15% Planning for family in 2 years time. Creating long-term wealth for retirement
Stocks 75%
INVESTOR PROFILE
Investment Strategy
Balanced Portfolio Stocks 60% Short-term 15%
Bonds 25%
INVESTOR PROFILE
Maura & Akash Chaudary Financial Goals Retired Regular Income Medical Costs Investment Strategy
Conservative Portfolio Stocks 15%
Bonds 45%
Thumb rule 2
Risk of capital loss in Equity investment almost zero if invested for > 5 years but as high as 30% in 3 months.
Emergency Kit
Before
planning new investment, it is very important to prepare emergency kit to Protect your Current financial status. is first & vital step in any financial planning.
Insurance
Insurance
Aim
Personal
Risks. Loss of income. Property Risks. Damage to property. Liability Risks. Losses due to damage to others.
Financial protection to your dependents in case of your premature death. Life of earning member of family, ONLY, should be insured.
Insurance
should be taken for financial risk protection only NOT for Investment or Tax planning. Insurance is very bad investment product .
Term Insurance It is purest form of insurance & so best. Most of us need only this insurance. Whole life policy. Pension Schemes.
Do not buy Endowment, Money back, Capital protection plan, Children plan or Unit Linked Plans ULIP. Best option is Term Insurance + PPF / ELSS scheme of mutual fund.
How much?
Need based calculation. 200*Monthly home expense + Loan taken + Pending Financial goals - Current value of your financial assets (excluding your residential premises). You must take Term insurance = Loan taken.
Pays sum assured on accidental death + pays income loss due to Partial or permanent disability due to accident. (2) Mediclaim Insurance. ICICI Lombard has family Mediclaim policy. (3) Critical illness Insurance Available as rider with life insurance.
risk insurance. (1) Business assets. Damage may be due to Natural calamities, fire, theft. (2) Vehicles Comprehensive cover. (3) Personal assets Householder Policy. Insurance against damage to Residential Property.
Liability Insurance
Professional Third
Term
Indemnity insurance.
(2)
Capital This
additional or Alternate income will supplement your business income, increase cash available for investment & when it crosses your professional income you will achieve financial freedom.
If
your all saving is diverted to these investments you will have lesser & lesser cash available for actual investment.
your professional income decreases you will be in trouble.
When
investment which brings cash inside your pocket is Asset. investment which takes out cash from your pocket is Liability.
The
Balance
Cash Management
Thumb
rule No.3 15-20% of your take home cash should go to income generating investments.
EMI should not exceed 30% of your take home cash.
Your
During
early stages of life allocate higher portion to Assets. Ideally your Alternate income should fund your Luxury, Liabilities.
Delay
Investment
Step
Step Step Step
1 Asset Allocation
2 Provision for Insurance 3 Cash flow planning 4 Actual investment.
Investment Options
(1) Govt. Assured return schemes. (2) Bank Deposits. (3) Bonds. (4) Company deposit, debentures. (5) Mutual fund Debt schemes
Pros. (1) Safe Capital protected. (2) Tax rebate on investment. PPF, NSC. (3) Tax free return. PPF, Mutual fund. Cons. (1) Low return difficult to beat Inflation. (2) Lock in period. Tips PPF is best investment for long term investment. Floating rate funds best for short term investment. Senior citizen scheme best for retirement planning. Always calculate post tax, inflation adjusted return.
rule 4.
When interest rates are rising invest in Floating rate schemes & take Fixed rate loans.
When interest rate is falling invest in Long term Income or Gilt funds & take floating rate Loans.
Income Schemes
P.P.F. Return % Tax-free Rebate on Investment Liquidity 8% Yes Yes 50% withdr awal after 5 years N.S.C. 8% NO Yes 6 year lock in K.V.P. 8% NO NO BANK F.D. 6-8% NO Yes if >5 year Floating rate Funds 5-6% Yes No
fund Equity shares with high dividend yield Rented real estate Suitable for moderate risk profile & investors near retirement age.
Capital Appreciation
Equity
shares - Direct, IPO, Mutual fund, PMS. Real estate Gold Art paintings
Equity
& Real Estate are best long term Wealth creator & Equity is most tax efficient investment.
Speculative investment
Trading
in equity shares. Derivative trading Commodity trading Very risky product. No speculator has become Billionaire. Only brokers make money. Never trade with borrowed money.
Mutual Fund
What is Mutual fund? (1) Fund collected from different investors for common purpose, managed by Professional manager & Income distributed to investors in proportion to their investment. Investors allotted Units for investment. Initial price is always Rs. 10 per unit.
(2)
(3) Market price of unit is called NAV. Market value of investment / Units allotted = NAV
management
tax benefits.
Liquidity. Systematic
Debt schemes ideal for regular income, capital protection & short term goals.
(a) Debt oriented. 40% investment in equity. (b) Equity oriented. 65% or more investment in equity.
Best for medium term financial goals 2-4 years. Best for beginner in equity market investment.
(a) Diversified Equity schemes. Flexi cap diversified equity scheme is best investment for Wealth creation.
( b) ELSS - Equity linked saving scheme. Best for tax planning. (c) Sector Thematic funds. (d) Index fund. (e) Exchange traded funds.
(4)
Specialty funds.
Plans Options
Dividend
plan
Ended Ended
How to invest?
Lump
sum investment.
S.I.P.
S.T.P.
If
Fund Selection
Say
Existing
Diversified mutual Fund schemes having consistent performance during last 5 years.
Beware of Agents/ Brokers advise:(a) NFO At par offer, Low NAV. (b) Dividend declared. (c) Churning Profit booking.
Not > 10 schemes 4-5 Diversified Equity funds. 1 ELSS scheme 1 Balanced scheme 1 MIP 1 Floating rate scheme 1-2 Sectoral or Midcap scheme.
Diversified Mutual fund. (1) HDFC Equity, (2) Reliance Vision, (3) Reliance growth, (4) SBI Magnum Contra. (5) DSP ML Equity.
ELSS (1) Magnum tax gain (2) HDFC Tax Saver. Sectoral & Midcap (1) DSP ML TIGER, (2) Reliance Diversified power sector, (3) SBI Magnum global (4) Sunderam Select Midcap fund. Exchange traded. Nifty BeES, Banking BeES.
Balanced (1) HDFC Prudence (2) Magnum Balanced. MIP (1) HDFC Long Term MIP, (2) ICICI Prudential Income Multiplier.
Model Portfolio
Profile Equity Equity Balanc MIP, Diversif Midcap ed Bond ied Sector Fund Fund Age 20-30 Dependent 35-40% 35-40% 20% 1-2 Age 30-40 302030% Children in school 35% 25% Floating rate Fund 10%
10%
3035%
2530% 1020%
1015%
2030%
10%
20% 3040%
1020%
10% 20%
planning is legal. Purchasing power of Unaccounted money will slowly go down. No cash transaction possible in Mutual fund.PAN card copy required. Make maximum use of tax free income limit Create multiple heads of income tax payer. ELSS investment can be used for income tax planning & wealth creation.
free income limit:Male Individual & HUF. 1,10,000. Female individual 1,45,000. Senior citizen (>65 years age) 1,95,000.
Only
Up
If male tax payer or HUF has income of 2.5 lac & 1 lac invested under sec. 80C then tax payable is only Rs. 4000. For female tax payer only 500 & For senior citizen nil up to 2.95 lac income.
If Husband, Wife, HUF & Parent or Major child has income of 2.5 lac each, & they invest Rs. 1 lac each under sec. 80 C, total tax payable will be only 8,500 on total 10 lac taxable income. 4 lac will be compulsory invested each year.
Long term capital gain. Equity scheme / shares. > 1year. Tax free. Real Estate, Gold. > 3 years. 20% with indexation or 10%. Debt scheme of mutual fund > 1 year. 10%. Short term capital gain. Equity scheme / shares. 10%. Real Estate, Gold < 3years & Debt scheme of mutual fund < 1 year will be added to business income.
Retirement Planning
Retirement doesn't mean stoppage of work, it means freedom from compulsion to work for money Financial freedom. Why? To maintain same life style even after retirement Life expectancy is increasing. 80+ age not unusual. Female spouse will live 5 years more then male. Inflation will make difficult to maintain same level of living standard. You & your spouse may not like to remain dependent on children. We dont have govt. social security scheme.
Falling Interest
Rate Scenario
Phase III
Childs Education
Housing
Earning Years
Age 60 yrs
Retirement Age
How Much?
If retirement <10 years away 250*Existing monthly expense If retirement between 10 20 years form today 350*existing monthly expense If retirement > 20 years from today 500*existing monthly expense + Add provision for pending financial goals (children education, marriage etc.)
How?
Start
early Retirement planning starts the day you get your first income. Invest regularly Small amount invested regularly. Stay invested. Power of compounding. Best options are P.P.F., Pension schemes of insurance co., Equity mutual fund & Real estate.
Asset allocation
Maximum equity allocation in % = 100-age in years. As your retirement time comes near shift to debt schemes. 10-20% in floating rate scheme for emergency expenses.(2-3 months expenses). Up to 15 lac in senior citizen scheme for 9% assured regular income. P.P.F. 20% for 8% tax free return. MIP 20% & Balanced scheme 20% for regular income + capital appreciation. 10-30% in Equity scheme for wealth creation.
Wealth creation
Equity & Real estate are best asset classes for wealth creation. Real Estate - Problems (1) Unaccounted money. (2) Lump sum investment of large amount. (3) Title problems. (4) 10-12 year cycle, so poor Liquidity. Invest only if ready to stay invested for 10 years. (5) Maintenance charges. (6) Entry load- Reg. fees & Exit load capital gain tax Advantages. (1) One good investment can change your financial life. (2) Shortly mutual funds will be available.
Equity
In long run equity gives best tax free return. Sensex multiplied 180 times in last 29 years, that is >18% compounded return. Mutual funds have done still better. Value of Reliance Growth scheme multiplied 48 times in 12 years. (>35% compounded return). Time in market is important not timing the market. Risk of capital loss zero if invested > 5 years. 20000 monthly SIP in Reliance Growth scheme created wealth of 3 crore in 12 years. >5 mutual fund schemes created wealth of >2 crore. Even small amount can be invested.
56.6
60.7
31.6
-39.6
66.3
72.1
38.3
-42.7
53.6
57.8
26.9
-34.7
70.3
62.9
32
-46
43.2
46.7
24.8
-18
Magic of Compounding
Compounding is called eighth wonder of world. Rule of 72 72/ Interest rate = No. of years required to double money. 72/ No. of years required to double money = % interest return.
If you earn 24% compounded return your money double in 3 years, multiplies 10 times in 10 years, 100 times in 20 years & 1000 times in 30 years. Average return of diversified mutual fund is >24% in last 14 years.
350,000
330,000
300,000
Assuming an annual savings of Rs. 10,000 in an instrument providing return of 9.5% p.a.
Start Early
Your Twin Age : 25 years Age : 25 years Start : Today Start : at age 30 Invest : 5 years Invest : 30 years Amount : Rs 10,000 p.a. Amount : Rs 10,000 p.a. Redemption on Redemption on retirement (age 60) retirement (age 60) Value at 60 - 51 lakhs. Value at 60 50 lakhs.
You
53,973 10 YRS.
116,525 20 YRS.
10 yrs
20 yrs
30 yrs
40 yrs
In short term market is like Voting machine, in long run it is like weighing machine. Bull will climb staircase but bear will always jump through window. Tops & bottoms are for fools & liars. Most important organ for investment is stomach.
Conclusion
Investing is not Rocket Science. Keep it simple. Start investing early in life. Save & invest regularly, systematically. Stay invested for long term till your goal achieved. Stick to asset allocation. Monitor 3-6 monthly. If necessary take expert help. You have worked hard to earn money, now make the money work hard for you.
Self help
Self help is best help. Devote some time for your financial planning. Magazines:(1) Mutual fund insight from Valueresearch Co. (2) Outlook Money from Outlook Express group. Websites:(1) moneycontrol.com Personal finance section & Mutual fund section. Portfolio can be created & maintained. (2) valueresearchonline.com best analysis of mutual funds, rating, & mutual fund portfolio analysis.
Thank You