financial planning
Post on 08-May-2015
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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 individual’s 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
5 10 15 20 25
55,839
41,727
31,18023,300
74,726
0
10000
20000
30000
40000
50000
60000
70000
80000
No of Years
Futu
re V
alue
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 children’s 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
Conservative
50%
30%20% Equities
Bonds
Cash/MoneyMarket
Moderate10%
45%
45% Equities
Bonds
Cash/MoneyMarket
Aggressive
75%
10%15%
Equities
Bonds
Cash/MoneyMarket
Comparison Of Investment Options
HighModerateHighModerate to HighMutual Funds
LowHighModerateLow to HighReal Estate
ModerateModerateHighModerateGold
LowLow HighLow to ModerateLife Insurance
ModerateLowHighModeratePPF
HighLowHighLow to HighBank Deposits
ModerateModerateHighModerate to HighBonds
Low to highHighLowModerate to HighEquity
LiquidityVolatilitySafetyReturn
AgeAge
Inco
me
Inco
me
Savings / InvestingSavings / Investing
Kid 2Kid 2
Kid 2’s Kid 2’s CollegeCollege
Kid 2’s Kid 2’s MarriageMarriage
CarCar
HouseHouse
MarriageMarriage
Kid 1Kid 1
Kid 1’s Kid 1’s CollegeCollege
Kid 1’s Kid 1’s MarriageMarriage
Emergencies????Emergencies????
Birth and Birth and EducationEducation
0 2560Working LifeWorking Life 75 +Retired LifeRetired Life
????????
RetirementRetirement
Investment Life Cycle
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
Wealth Creation Stage
Financial Goals
Planning to purchase a house in the next ten years
Creating long-term wealth for retirement / house
Aggressive Growth Portfolio
Cash10% Bonds
15%
Equity75%
Age – Up to 30 Years
Wealth Management Stage Financial GoalsFinancial Goals
Providing for children’s education (5 - 8 years)
Planning for children’s marriage (15 - 20 years)
Planning for retirement
Balanced PortfolioCash20%
Bonds30%
Equity50%
Age – 30 to 55 Years
Wealth Preservation Stage
Financial GoalsFinancial Goals
Making provisions for higher life expectancy, medical emergencies and financial independence
Age – 55 Years & Above
Conservative Portfolio
Bank Deposits
40%Equity20%
Bonds40%
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-à-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
Investor community
Earnings to the Fund House/ Distributor
Step 4: Expenses deducted
from the returns
Step3: Assets provide returns
Step 2: Money is invested
Various Assets
Risk-Return-Time Horizon Scale
DEBT
BALANCED
EQUITY
SECTOR
Time
RETURN
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
Shouldn’t we also invest regularly?
What Is Systematic Investing?
• It simply means investing ‘Fixed Amount’ every It simply means investing ‘Fixed Amount’ every monthmonth
• A method of investing regularly to benefit from the A method of investing regularly to benefit from the stock market volatilitystock market volatility
• The first step that may take you a long way towards The first step that may take you a long way towards achieving your financial goals and objectives…achieving your financial goals and objectives…
Why Should One Invest Systematically?
• To imbibe financial disciplineTo imbibe financial discipline
• To eliminate the need to time the marketsTo eliminate the need to time the markets
• To successfully achieve the financial goals To successfully achieve the financial goals and objectivesand objectives
• To harness the power of compounding by To harness the power of compounding by investing with a long term perspective investing with a long term perspective
Why Systematic Investment Plan?
4772.50500
205100
1010100
812.50100
520100
425100
Units bought
Purchase Price
Systematic Investing
5065500
520100
1010100
205100
1010100
520100
Units bought
Purchase Price
Systematic Investing
4480500
425100
520100
520100
1010100
205100
Units bought
Purchase Price
Systematic Investing
Rupee Cost Averaging Works
Fluctuating Markets Declining Markets Rising Markets
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
33,42,53413,76,0854,42,8732,25,57815%
24,97,90111,50,1934,08,3482,15,38412%
20,72,35210,24,2253,87,1852,08,90910%
Value at the end of 15 yrs
Value at the end of 10 yrs
Value at the end of 5 yrs
Value at the end of 3 yrs
Rate of Return
Rs 5000 invested per month
Equity Markets & SIP
• Equity markets are synonymous with uncertainty and Equity markets are synonymous with uncertainty and volatility volatility
• The average investor invariably suffers from suchThe average investor invariably suffers from such market gyrationsmarket gyrations
• SIP - A strategy of not only preserving capital but SIP - A strategy of not only preserving capital but also translating into substantial creation of wealth also translating into substantial creation of wealth in long runin 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
Life Insurance
Term Insurance
Endowment Plans
Unit Linked Insurance Plans
(ULIPs)
Insurance = Investment + Assurance
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
General Insurance
Health Insurance
Vehicle Insurance
Property Insurance
Insurance – Buy a policy, buy peace of mind
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 the family due to accident/disability to the earning member
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
SIP with Sundaram BNP
Tax Saver Period Total Inv.(Rs) Value*(Rs) % Return**
Last 1 Year 12,000 14,996 49.70
Last 2 Years 24,000 26,103 8.30
Last 3 Years 36,000 41,827 10.00
Last 5 Years 60,000 97,424 19.50
Since Inception*** 1,15,000 4,71,390 28.30
Illustration assuming Rs 1000 per month SIP
* As on 30/06/2009
** For growth option on a compounded annual basis *** Launched – November 1999
Personal Income Tax
Structure 2009-10 Total Income(Rs) Tax Rates
Upto 1,60,000 Nil
1,60,001 to 3,00,000 10%3,00,001 to 5,00,000 20%5,00,001 and Above 30%
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 Slab 2009 - 10 Equity Oriented Schemes
Short Term Capital Gains Tax
Long Term Capital Gains Tax
Dividend Income
Dividend Distribution Tax
Resident Individual/HUF 15% Nil Tax Free Nil
Resident Partnership Firm /AOP/BOI 15% Nil Tax Free Nil
Domestic Companies 15% Nil Tax Free Nil
NRIs 15% Nil Tax Free Nil
Other Schemes
Short Term Capital Gains Tax
Long Term Capital
Gains Tax*Dividend Income
Dividend Distribution Tax - Other than
Liquid/Money market Schemes
Dividend Distribution Tax - Liquid/Money market Schemes
Resident Individual/HUF As per slab 10% Tax Free 14.16% 28.33%Resident Partnership Firm /AOP/BOI 30% 10% Tax Free 22.66% 28.33%
Domestic Companies 30% 10% Tax Free 22.66% 28.33%
NRIs As per slab 10% Tax Free 14.16% 28.33%
* 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, let’s 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
InflationRising Life Expectancy
Protection againstUncertainty
Balanced Asset Allocation
FinancialPlanning
Factors necessitating Financial Planning
Thank You..
PPT By
Aaryendr
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