Financial Planning

What is Financial Planning?

Financial Planning is an exercise aimed at identifying all the financial needs of an individual and translating these needs into monetarily measurable goals at different times in the future. Financial Planning ensures that right amount of money is available in the right hands at the right time in the future to achieve an individuals financial goals

Objectives Of Financial Planning

Identifying the requirement for money for different purposes and prioritising them Converting these requirements into specific needs, in terms of money, and the time when it is required Taking stock of the investors current financial position to ascertain their net worth and net income / expenses Planning savings and investments in a manner that would enable the investors to achieve their pre-determined goals Optimising returns through adequate diversification in sync with the investors risk return frame work

Why do we need Financial Planning?

To fund our future needs through right mix of investments To protect our future from unforeseen contingencies To maintain the same standard of living even after retirement To enable risk management through diversification To choose assets commensurate with the investors life and wealth stages To beat the ravages of inflation

Inflation erodes the value of your money

80000 70000 Future Value 60000 50000 40000 30000 20000 10000 0 5 10 15 No of Ye a rs 20 7 4 ,72 6 55 ,8 39 4 1 ,7 2 7 3 1,1 8 0 2 3,3 0 0 25

The slide illustrates the value of Rs 1 Lakh at different stages assuming an average inflation rate of 6%

Can you do your own Financial Planning?

Will your family be financially secure in the event of your unfortunate illness / demise? Will the stream of cash flows arising from your asset holdings be sufficient to match the expected liability structure? Are your finances inherently tax efficient? Have you made adequate provisions for your childrens education and marriage? Are you confident enough to enjoy your post-retirement life?

If your answer is NO to any one or all of the above questions, you need a specialist to handle your finances...

Asset Allocation Strategies

C o n s e rv a tiv e
30% 20%
Eq u it ie s Bo n d s C a s h /M o n e y M ark e t

M o d e r a te
10 % 45%
Eq u itie s Bo n d s C a s h /M o n e y M ar k e t

50%

45 %

Aggressive
15% 10%
Eq u itie s

Bo n d s

75%

C as h /M o n e y M ar k e t

Comparison Of Investment Options

Return
Equity Bonds Bank Deposits PPF Life Insurance Gold Real Estate Mutual Funds
Moderate to High Moderate to High Low to High Moderate Low to Moderate Moderate Low to High Moderate to High

Safety
Low High High High High High Moderate High

Volatility Liquidity
High Moderate Low Low Low Moderate High Moderate Low to high Moderate High Moderate Low Moderate Low High

Investment Life Cycle

Emergencies????
Kid 2s Marriage Kid 1s Marriage

Retirement

????

Income

House Car Kid 1s College Kid 2s College

Kid 1

Kid 2

Marriage

Savings / Investing
0
Birth and Education

25

Age

Working Life

60

Retired Life

75 +

Asset Allocation
In simple words, it means determining the percentage of the total investments to be made in equities, bonds and money market / cash instruments. Empirical studies indicate that over 94% of the returns on a managed portfolio can be attributed to the right mix of asset allocation

Here we seek to address the basic questions of how, where and when to invest taking in to consideration the market conditions and the investors risk-return frame work

Concept of Mutual Funds

Mutual Fund is an instrument where a number of investors contribute to form a common pool of money. This pool of money is invested in accordance with a pre-determined objective. The ownership of the fund is thus joint or Mutual and the fund belongs to all the investors in the same proportion as the amount of contribution made by each one of them

Why Mutual Funds?

Mutual Funds provide the services of experienced and skilled professionals backed by a dedicated research team They enable efficient risk management by diversifying across a wide variety of sectors and companies They are less expensive vis--vis direct investment in equities as they seek to reap the benefits of economies of scale Performance and other investment details of individual schemes are disclosed on a regular basis Mutual funds facilitate investment of small amounts in a number of schemes to suit the investors risk - return framework

How Do Mutual Funds Work? MF

Step 1 : Make investments Step 5: Returns provided to investors Step 2: Money is invested

Investor community
Step 4: Expenses deducted from the returns Step3: Assets provide returns Earnings to the Fund House/ Distributor

Various Assets

Risk-Return-Time Horizon Scale

Time
SECTOR

EQUITY

RETURN
BALANCED

DEBT

RISK

Systematic Investment Plan (SIP)

The Smart Investors Preference

Why SIP?
The Formula For Creating Wealth

Start Early

Invest Regularly

Create Wealth

Myth : Timing is essential to generate high returns Reality: It is the time and not the timing that matters Is it worth the risk or the tension? Who can time the market to perfection? Not even the experts can !!

It is the small drops that make an ocean!!

We earn regularly; We spend regularly Shouldnt we also invest regularly?

 It simply means investing Fixed Amount every month A method of investing regularly to benefit from the stock market volatility The first step that may take you a long way towards achieving your financial goals and objectives

What Is Systematic Investing?

Why Should One Invest Systematically?

To imbibe financial discipline To eliminate the need to time the markets To successfully achieve the financial goals and objectives To harness the power of compounding by investing with a long term perspective

Why Systematic Investment Plan?

Rupee Cost Averaging Works
Fluctuating Markets
Systematic Investing Purchase Price Units bought

Declining Markets
Systematic Investing Purchase Price Units bought

Rising Markets
Systematic Investing Purchase Price Units bought

100 100 100 100 100

20 10 5 10 20

5 10 20 10 5

100 100 100 100 100

25 20 12.50 10 5

4 5 8 10 20

100 100 100 100 100 500

5 10 20 20 25 80

20 10 5 5 4 44

500

65

50

500

72.50

47

Avg NAV : Rs 13.00 (65/5) Avg. Unit Cost : Rs 10.00 (Rs 500/50)

Avg. NAV : Rs 14.50 (72.50/5) Avg. Unit Cost : Rs 10.64 (Rs 500/47)

Avg. NAV : Rs 16.00 (80/5) Avg. Unit Cost : Rs 11.36 (Rs 500/44)

Power Of Compounding
The most powerful force in the universe is the power of compounding

-Albert Einstein

If you invest Rs 1000 for 50 years at 10% returns p.a., you would receive Rs 100 every year for 50 years. So WITHOUT any compounding you would have Rs 6000 (initial investment Rs 1000 + interest for 50 years Rs 5000) at the end of 50 years. However WITH compounding, the same Rs 1000 at 10% returns p.a. would mount up to Rs 1,17,391 at the end of 50 years

Power Of Compounding
Rs 5000 invested per month
Rate of Return Value at the end of 3 yrs Value at the end of 5 yrs Value at the end of 10 yrs Value at the end of 15 yrs

10% 12% 15%

2,08,909 2,15,384 2,25,578

3,87,185 4,08,348 4,42,873

10,24,225 11,50,193 13,76,085

20,72,352 24,97,901 33,42,534

Equity Markets & SIP

Equity markets are synonymous with uncertainty and volatility

The average investor invariably suffers from such market gyrations SIP - A strategy of not only preserving capital but also translating into substantial creation of wealth in long run If you want to stay calm and sail smoothly in turbulent times GO FOR SIP

Financial Planning Through Insurance

Insurance is not for the one who passes away, it is for those who survive - Anonymous

Why do we need Insurance?

To ensure adequate coverage and protection against the risks and uncertainties of life To ensure a decent standard of living to the dependants in the event of unexpected demise of the bread winner To provide a feeling of security and financial support during critical hours and periods of crisis in life Reduced mortality rates, increased life expectancy and rising medical and hospitalisation expenses Emergence of nuclear family system reduced dependency on other family members

Insurance = Investment + Assurance

Life Insurance

Term Insurance

Endowment Plans

Unit Linked Insurance Plans (ULIPs)

Term Insurance
Sum assured is payable only at the death of the policy holder Provides only risk cover with no savings elements Low Premium & High Coverage

Endowment Policy
In this policy the insured amount is payable at the end of specified period or upon the death of the insured person whichever is earlier. Moderate Premium High Bonus High Liquidity Savings Oriented

Unit Linked Insurance Plans

A policy, which provides for life insurance where the policy value at any time varies according to the value of the underlying assets at the time. Investors can also take a SIP route of investment. ULIP distinguishes itself through the multiple benefits that it provides to the consumer. The plan is a one-stop solution providing: Investment and Savings Life protection Flexibility Adjustable Life Cover Tax benefit (as per Section 80C of Income Tax Act) Transparency Options to take additional cover against - Death due to accident - Disability - Critical Illness - Surgeries

Insurance Buy a policy, buy peace of mind

General Insurance

Health Insurance

Vehicle Insurance

Property Insurance

Need for Health Insurance

Reduced human mortality rates and increasing life spans due to advancements in medical science Rising hospitalisation and medication expenses Compensates the loss of income to accident/disability to the earning member the family due to

Vehicle & Property Insurance

Covers the risk of loss/damage to your movable and immovable assets Also provides adequate coverage to any financial liability arising from the risk of loss/damage to the life and property of third parties

Tax Planning With Mutual Funds

The Equity Linked Savings Schemes (ELSS) are equity-oriented schemes that offer the twin benefits of tax savings and the potential to earn higher returns The traditional products such as post-office schemes and bonds do not offer high returns and are not tax efficient ELSS power packs both these benefits with a minimal lock-in period of three years Under section 80C of Income Tax Act, investment made in ELSS up to Rs 1lakh qualifies for deduction An investor can either make a lump sum investment or choose to take the SIP route to counter market volatility

Reliance Growth Fund SIP returns as on 30/04/10 Period SIP start date Current NAV(as on 30/04/10) Total no. of units Invested amount Present value Yield Present value if invested in index Yield from index 1 year 1/5/2009 457.79 3 year 1/5/2007 457.79 5 year 1/5/2005 457.79 Since inception 8/10/1995 457.79

32.45 12000 14854.17 49.66% 13611.53

115.41 36000 52834 27.07% 45909.2

237.27 60000 108618.57 24.21% 89311.34

6199.99 175000 2838271.40* 33.75% 682803.21

27.28%

16.75%

16.08%

17.05%

*Past performance is not indicative of the future

Personal Income Tax Structure 2009-10

Total Income(Rs)
Upto 1,60,000 1,60,001 to 3,00,000 3,00,001 to 5,00,000 5,00,001 and Above
Note : In case of resident women below age of 65 years, the basic exemption limit is Rs 1,90,000/ In the case of resident individual of the age of 65 years and above, the basic exemption limit is Rs 2,40,000/ The Finance Bill 2009 has abolished surcharge Education cess is applicable at 3% on income tax

Tax Rates
Nil 10% 20% 30%

Tax Slab 2009 10

Equity OrientedmLSchemesitiv lid e n d S h o r t T e r o n g T e r m C a pD a
C a p it a l G a in s T G xa in s T a x a R e s id e n t In d iv id u a l/H U F 15% N il N il N il N il In c o m e T ax F re e T ax F re e T ax F re e T ax F re e N il N il N il N il

D iv id e n d D is t r ib u t io n T a

R e s id e n t P a r t n e r s h ip F ir m /A O P /B O I 15% D o m e s t ic C o m p a n ie1s5 % N R Is 15%

Other Schemes
R e s id e n t In d iv id u a l/H U F As p e r s la b R e s id e n t P a r tn e rs h ip F irm /AO P /B O I 30% D o m e s tic C o m p a n ie s 3 0 % N R Is As p e r s la b 10% 10% 10% 10% T ax Fre e T ax Fre e T ax Fre e T ax Fre e 1 4 .1 6 % 2 2 .6 6 % 2 2 .6 6 % 1 4 .1 6 % 2 8 .3 3 % 2 8 .3 3 % 2 8 .3 3 % 2 8 .3 3 %

D iv id e n d D is tr ib u tio n D iv id e n d D is tr ib u t l S h o r t T e rm L o n g T e r m C a p itaD iv id e n d T a x - O th e r th a n T a x - L iq u id /M o n e C a p ita l G a in s T a xG a in s T * x In c o m e L iq u id /M o n e y m a r k e t a m a rk e t S c h e m e s S che me s

* The Finance Bill 2009 has abolished surcharge in case of Resident Individuals, HUF,
Partnership Firms, AOP, BOI on the amount of income tax. For others including corporate bodies, 10% surcharge on tax payable Secondary and Higher Education Cess: To be levied at the rate of 3% calculated on tax payable plus applicable surcharge

Bank FDs vs. Debt Funds

Investors in higher tax brackets are better off investing in debt funds as against bank FDs as debt funds are inherently more tax efficient For example consider an investor in the highest tax bracket. Interest from his investment in bank FDs would attract the maximum marginal tax rate (inclusive of cess 30.90%) applicable to him. If a one year bank FD fetches around 10%(pre-tax), his post-tax returns would be a meager 6.91% As opposed to this, if he had invested in a short term debt fund (dividend option) which also delivers close to 10% average annualized returns (over 1 year period) and distributes it among the unit-holders in the form of dividends. The dividend income will be tax-free in his hands but the mutual fund will be paying a dividend distribution tax of 14.16% (which is indirectly borne by the investor). So he will be getting a net effective return of 8.58% p.a. which is much higher as compared to the post tax returns on FDs

However, if the investor invests in a debt fund with growth option, then the tax treatment becomes slightly different. For example, lets assume he invests in an Bond Fund for two years. Appreciation in the NAV of a debt fund is treated as capital gains. Now, at the time of redemption, returns from debt funds are taxed as Long Term Capital Gains (LTCG) if invested for more than a year. Now, based on the option he chooses, LTCG is either taxed @ 11.33% without indexation or 22.66% with indexation. Both the options are certainly better than the tax treatment of FDs where he pays tax at the rate applicable to his marginal income Moreover, just by investing for a little over 12 months in debt funds at the end of the financial year, one can reap double indexation benefits thereby further reducing his/her tax liability Put simply, for similar pre-tax returns, debt funds provide better post tax returns as compared to FDs. Moreover, no TDS is deducted by mutual funds in case of resident individuals

Golden Rules Of Investing

Invest early, regularly and systematically for a longer period Ensure adequate liquidity for contingencies of life Ensure adequate diversification by investing across asset classes and time horizons Do not attempt to time the market. Patience is the key Be realistic in expectations of returns Balance investments in accordance with your risk-return framework

Factors necessitating Financial Planning

Inflation Rising Life Expectancy

Financial Planning

Protection against Uncertainty

Balanced Asset Allocation

Thank You..