sip project mera money

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ASummer Internship Project Report

OnGeneral Awareness & Emerging Concepts Of Financial

Planning

Submitted By,Bhatesa Sima Kiritbhai

Enrollment Number: 4740900157

Project GuideMr. Madhur Todi (Managing Director)

Submitted ToTHE NIS ACADEMYAnnamalai University

Masters of Business Administration (MBA)2009-2010

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PREFACEAll men can see is the victory, but what none can seeis the planning out of which the great victory evolved.

- Anonymous

Planning is the essential bridge between the present and future situations that

increases the likelihood of achieving the desired goals. Planning consists ofspecific tasks like forecasting future requirements, establishing goals and makingstrategies to achieve them.

In todays competitive world it had become difficult for people to maintain theirstandard of living. They are facing the problems, which are arising due to inflation,decreasing interest rates, volatility in the stock markets, scams in the banks andstock market, and many other changes in economy.

Society is changing fast and the joint family system is giving way to nuclear

families. In such a situations, an individual needs to provide for his ownretirement, childrens education and marriage, meeting debt obligations for housemortgages and other personal loans and for unforeseen mishaps. To overcomethese changes it has become necessary for an individual to do financial planning.

Financial planning is the road-map of achieving ones life goals through propermanagement of his/her finances.

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The concept of systematic financial planning is at the introduction stage in Indiawith comparison to countries like Australia, USA, UK, Canada, etc.

This project report speaks about the research done on General Awareness andEmerging Concept Of Financial Planning among the high net worth individualand upper middle class people of Ahmedabad.

The recommendation rest on the basis of findings from the research work done andconclusion derived there of.

This summer project was the essential part of the syllabus of an MBA programme,as the practical study checks out the application of theoretical knowledge inpractical world.

Last but not least, we have taken in this project report the latest issues andinformation about the financial planning, which are the best of our knowledge inthe topics covered; it is likely that some of the contents in this regard may undergochanges in the months/years to come. Naturally, in that event the contents of theproject report will have to be modified wherever required to reflect the emergingchanges. It is therefore expected that reader should go through the contents of theproject report with considering upcoming changes here after on the subject.

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ACKNOWLEDGEMENT

I would like to express our deep feeling of gratitude to the under mentionedofficials for their assistance, guidance and inspiration before and throughout theirproject.

Special thanks to respected Ms. Bina Patel, our project coordinator for showing usa proper way to walk on, for providing help and guidance throughout the project.She has always been the source of encouragement. She has ceaselessly guided usin all the aspects of the project, with her abundance amount of experience and finer

ideas.

I am very thankful to Mr. Madhur Todi, Managing Director Mera MoneyAdvisors Pvt. Ltd., for his help and advice throughout my project. His gentleness,availability and readiness to provide all the type of guidance, for understanding thetechnical things made this project successfully completed well within the time. Iwould like to thank, for his guidance whenever I called for.

Working on the project required hard work and concentration. What made ispossible is the support I received from those around us. I thank to all the members

ofMera Money Advisors Pvt. Ltd.For giving me guidance, encouragement and right path to work on. I would alsolike to thank our respondents without which the research work would not havebeen possible. I thank to authors of all the books as well as the owners of all theweb sites for providing the information, which I had required.

I thank everybody who has directly or indirectly helped us in this project to make itsuccessful.

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EXECUTIVE SUMMARY

Everybody has some goals in life that can be measured terms. These goals caninclude buying home, saving for childs education and marriage or planning forretirement.

In todays competitive world it has become difficult for the people to maintaintheir standard of living as the income has been limited but the expenses are risingday by day. The sources of generating the income have also become difficult.

While on the other hand the expectations of people are very high, due to which thesaving power of people has reduced considerably.

Life is full of significant chapters birth of child, education of children, wedding,retirement. An individual needs to flag these off with financial planning. Simplybecause financial planning plays a very essential role in these events.

The objective of the project was to see the awareness of financial planning amongthe people of Ahmedabad. I tried to extract the views of the people with the help ofquestionnaire and I also used the presentation slides prepared by us in English as

well as Gujarati on financial planning to make people understand about the conceptof financial planning. Presentation is the sort of summary of the project work.

This project in its endeavour provides a basic knowledge about the other areas offinancial planning, how they work, and the essence regarding how to getcontinuous peaceful life with the planned occasions.

The methodology through which information has been gathered is both primary aswell as secondary data. I have filled the questionnaire from the respondents by

going into areas that are being identified as strong potential. Following are theimportant out comes of the project:

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I found that all the people know the term financial planning but very fewpeople are doing the systematic financial planning or they have started todo so.

Society is changing fast and the joint family system is giving way tonuclear families. Therefore there has been a considerable increase inhousehold expenses.

I found that Life Insurance is the best vehicle as it gives return oninvestment with risk cover.

Most of the people are investing as per their own knowledge andaccording to the information, which they get from news channels,newspapers, other publication, friends, broker etc. In most of the casespeople do not try to know that the investment instrument is suitable tothem and the information which they received is either true or rumour.

People generally do not consider post tax real rate of return. Theynormally consider Coupon Rate, Interest Rate or Nominal Rate whilecalculating return.

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CONTENTS PAGE

PREFACEACKNOWLEDGEMENTEXECUTIVE SUMMARY

IIIIIV

MERA MONEY ADVISORS PVT. LTD. 10

CHAPTER 1 INTRODUCTION TO PROJECT1.1 Objectives1.2 Research Methodology

131415

CHAPTER 2 INTRODUCTION TOFINANCIAL PLANNING

2.1 Concepts Of Financial Planning2.2 Need Of Financial Planning2.3 Benefits Of Financial Planning2.4 Financial Planning Process For An Individual/Family2.5 Ideal Approach To Financial Planning

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19202122

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CHAPTER 3 DETAILS BE CONSIDEREDBEFORE DOING FINANCIALPLANNING

3.1 Family Details3.2 Assets And Liabilities3.3 Cash Flow Budgeting3.4 Other Important Parameters

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27282930

313234

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CHAPTER 4 ROOTS OF FINANCIAL PLANNING4.1 Desired Financial Goals4.2 The Inflation Devil4.3 Rapid Growth Through Power Of Compounding

4.4 Realistic Future Picture

CHAPTER 5 COMPONENTS OF FINANCIALPLANNING

5.1 Investment Planning5.2 Tax Planning5.3 Insurance Planning5.4 Retirement Planning

5.5 Estate Planning & Will5.6 Emergency Fund Planning5.7 Debt Planning5.8 Charity Planning

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CHAPTER 6 AWARENESS OF FINANCIALPLANNING IN AHMEDABAD

6.1 Primary Data Analysis6.2 Findings6.3 Suggestions

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87103104

BIBLIOGRAPHY 107

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ANNEXURE - Questionnaire

List Of The House Hold & OtherExpenses- List Of Source Of Income

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MERA MONEY ADVISORS PVT LTD.

Who They Are ?

Mera Money Advisors Pvt Ltd was incorporated in 2008 and all the clients ofDhanVyavastha were merged into the new company. In essence, the company hasits roots in the financial services industry since the last 5 years. As of March 31,2009, the company is managing more than Rs 70 Crores on behalf of more than1000 clients spread across Gujarat, Maharasthra and Delhi. Over the last one year,Mera Money has expanded its presence in Mumbai, Baroda, Surat, Delhi,Gandhinagar, Sabarmati apart from the Head office in Ahmedabad. Further, Mera

Money is targeting to have its branches in 100 cities within the next 3 years.

About The Director Of The CompanyMadhur Todi is the co-promoter and Managing Director of Mera MoneyAdvisors P Ltd, a wealth and risk management firm. Madhur Todis expertisein comprehensive financial planning is reflected in the firms emphasis on estateplanning, tax strategies, risk management, investment selection, businesssuccession and retirement planning. Madhur has been active in the financial

community of India after he returned from US in 2004. Madhur Todi is also avisiting faculty at Ahmedabad Management Association and gives lectures onfinancial planning and business succession. Currently pursuing his certifiedfinancial planner course, Madhur was quite active in the US business communityduring his stint for three years in the financial sector, consulting corporate and

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individuals on finance and investment planning. Madhur holds a Masters incommerce from HL College of Commerce, Ahmedabad as well as a double MBAfrom the Illinois Institute of Technology, Chicago USA with specialization inFinance and Information Management.

How are They different?

Mera Money is a leading provider of financial protection and wealth managementproducts and services including individual life insurance, long-term careinsurance, group life and health insurance, pension products, annuities and mutualfunds, to individual and group customers in India. If you are comparison shoppingamong advisors, it is very important to ask each of them the same questions.

Independent, Client-Centered Advice:

We provide unbiased, client centered advice for creating sustainable wealththrough a transparent yet ethical and regulatory compliances.

Qualified Advisors Providing Comprehensive Advice:

We have an experienced team of research personnel who study the marketand business environment and are the only professionals trained to integrateknowledge of estate planning, tax, investments, insurance, retirement, anddebt into advice driven by your goals.

High-Touch, Boutique Service:

Our clients share their goals and needs with us. We, in turn, use ourexpertise to seek out the most appropriate solutions for them. We don'twork with everybody. We limit the number of clients we work so we can

know them better. This allows us to be more attentive and provide betterservice.

Creating Awareness:

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The company regularly distributes informative newsletters on financialplanning and investment products to create awareness on personal wealthcreation. In order to inculcate the habit of savings and planning, MadhurTodi also holds lectures for students and working professionals on financialplanning and wealth management at AMA.

Services

Gold Fixed Deposits Real Estate/Property Equity and Debt based Mutual Funds

Life Insurance General / Non Life Insurance Overseas Investments

They specialize in:1) Identification of personal financial needs2) Developing strategies for individuals sustainable wealth

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creation and betterment of life.3) Execution of the developed strategies after discussions and4) Continuous monitoring of the clients investments in accordance

With the planned strategies.

Mera Money's motive is:

To provide unbiased and quality advisory to NRIs for all their Investments inIndia.To offer them best services and make their investment experience in India, as

hassle free and convenient, as possible.

CHAPTER 1

INTRODUCTION

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PROJECTCHAPTER CONTENTS

1.1 Objectives1.2 Research Methodology.

1.1 OBJECTIVES

1. To understand the General awareness and Emerging concept of FinancialPlanning in High Net Worth Individual and Upper Middle Class.

2. To establish the clarity regarding the need of FinancialPlanning to analyze the strategic benefits in todays globalscenario.

3. To gather insights about the traditional pattern of FinancialPlanning of High Net Worth Individual and Upper Middle

Class.

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4. To identify the investment pattern of High Net WorthIndividual and Upper Middle Class.

5. To identify the reasons why as an investors, High Net WorthIndividual and Upper Middle Class are loosing their moneyas well as not getting proper return form their hard earnmoney.

6. To know how High Net Worth Individual and Upper Middle Class are dealwith their financial future.

7. To make the respondent know about the outcome of theproject by distributing a Handbook to them by the company itself.

1.1 RESEARCH METHODOLOGY

RESEARCH DESIGN:Conclusive Descriptive Cross Sectional Multi Cross Sectional

1.1.1 DATA COLLECTION PLAN AND SAMPLINGDESIGN

Population : Ahmedabad City.

Sample : High Net Worth Individual and UpperMiddle Class

Elements : Government & Private Employees(Executives), Doctors, Advocates,

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Architects, Chartered Accountants,Brokers, Wholesalers, RestaurantOwner, Car Dealer.

Frame : Naranpura, Navrangpura, Drive-in,Ashram Road, C.G.Road, Satellite,Vastrapur, Ellisbridge, Panchvati,Jodhpur, Shivranjni, Shyamal CrossRoad.

Extent : Ahmedabad

Sampling Method : Stratified Random Sampling.

Data Collection : The market research report is based oncombination of primary and secondarydata sources. Primary data has beencollected through the method ofstructured questionnaire. Thequestionnaire has been designed with theaim of fulfilling the research objective.

1.1.2 SOURCES OF DATAInformation gathered in the project is mainly based on secondary data & primarydata.

1.1.3 PRIMARY DATA COLLECTIONPROCEDURE

Method : Field study was done to get better information and data fromthe High Net Worth Individuals and Upper Middle Class.

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1. High Net Worth individual (HNI) : A Respondent having a monthlyincome of more than Rs. 35,000/-.

2. Upper Middle Class : A Respondent having a monthlyincome of more than Rs. 15,000/-.

CHAPTER 2

INTRODUCTION

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FINANCIAL PLANNING

CHAPTER CONTENTS

2.1 Concept Of Financial Planning.2.2 Need Of Financial Planning.2.3 Benefits Of Financial Planning.

2.4 Financial Planning Process For AnIndividual/Family 2.5 Ideal Approach To Financial Planning.

2.1 CONCEPT OF FINANCIAL PLANNING

Looking Beyond The Nose Where Finances Are Concerned, is the mainconcept of financial planning. Basically financial planning is process of chartingout the money course of an individuals and his/her familys life. It is like having aFinancial Roadmap that guides an individual every step till he/she passes on the

baton to the next generation.

Structuring A Financial Plan Like A Pyramid That Gives Stability AndSolidity To Family. Most people think of financial planning as a complex

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Reality Of Financial Planning

Financial Planning is a common sense approach to managing finances to reachones life goals. It cannot change the situation over night; it is a life long process.

Remember that events beyond control such as inflation or changes in the stockmarket or interest rates and taxation will affect financial planning results.

2.1 NEED OF FINANCIAL PLANNING

Financial Planning helps an individual to take a BIG PICTURE for looking atwhere he/she is financially as perDESIRED FINANCIAL GOALS right now.

Financial planning provides direction and meaning to financial decisions.

It allows understanding how each financial decision could affect other areasof finances.

By viewing each financial decision as a part of a whole, one can consider itsshort and long-term effects on his life goals.

One can also adapt more easily to life changes and feel more secure that hisgoals are on track.

For example, buying a particular investment product might help anindividual save adequately to finance childs higher education or it mayprovide enough for a comfortable retirement.

2.1 BENEFITS OF FINANCIAL PLANNING

Financial planning works as an autopilot for an individual and his/her family, inrelevance to any financial decision for each and every predictable and upcoming

events or situation.

The Complete Picture:

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Financial planning helps an individual compile a complete financial picture anddetermine his/her objectives. As, at the time of diagnosing any disease, usuallyit involves a study of a complete medical history. Similarly, the financialplanning compiles a comprehensive and classified financial analysis of anindividual and his/her family. It helps an individual to understand how eachfinancial decision affects his/her lifes goals.

Analyses Every Aspects Of The Current Financial Situation :An individuals financial situation has many aspects (assets, income, loans,insurance, taxes to name a few), which will be benefited from the carefulscrutiny, through proper and systematic financial planning. It also analysesevery aspects in light of an individuals objectives as well as the Legal, Tax andEconomic environments.

Identifies Weaknesses And Better Solutions For It :The objective of financial planning is to help an individual make best use ofevery rupee by designing a strategy which will overcome any weaknesses in themanagement of his/her affairs and provide specific way to help him/her toachieve his/her financial objectives.

Reduced Stress :The unknowns and fears cause stress. By prudent financial planning anindividual know exactly what their money is doing. This knowledge and

understanding helps him/her feel more secure and less stressed.

2.1 FINANCIAL PLANNING PROCESS FOR ANINDIVIDUAL/FAMILY

Setting Up GoalsGoals are the milestones on a financial road map, without them, one will lose.Set specific targets of what an individual wants to achieve and when he/shewants to achieve those results. Be quantitative wherever possible. An individualmay dream of his/her goals but be in touch with ground reality. Not all can be aRockefeller and try to find which are the short-term goals and which are the

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long term goals. Ones goals may be spacious house, luxurious car, highereducation for children, peaceful retired life, wealth creation and so on.

Prioritise The Goals Some goals may be more important than other. Prioritise them, so that

the major portion of ones focus remains on most important goals. Forinstance, one might like to acquire a house in the next three years.This could mean an expense of around Rs 10 lakh as down payment.This being a high-priority goal, so ones investments should ideally befocused more on this rather than, say, on retirement.

Make Planning This phase involves proper management and planning of the

following mentioned components to achieve desired goals.

Investment Tax Insurance Retirement Estate Emergency fund Debt Charity Will

But, before management and planning of mentioned componentsone should go through the following steps:

(A) One Should Compare His/Her Existing Situation InAccordance With His/Her Desired Goals :

One should realistically see his/her current situation andcompare his platform with his/her desired goals and also tries

to find out that the goal setting should be rational.

(B) Prepare And Analysis The Budget : One should prepare his/her familys income and expense

budget. One should also try to elaborate deep study of source

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of total income and give more analytical focus on expenses.He/she should find out what should be access income toexpense, say saving and also focus on that it would besufficient for management as per goals.

(C) Make Necessary Adjustment : If the saving is not with the alignment of desired goals then

one should have three options are as follows:

First, one can try earning more.

Second, one could try and increase his/her work life.

Third, making some compromises in terms of reducing

current unnecessary expenses or re-evaluates his/hergoals.

Execute Plan Early And On Time In Life Financial planning is a perishable commodity. What is

available today may be gone tomorrow. Speed and timelinessof execution makes a difference between a millionaire and anaverage performer.

There is a myth that financial planning is for the elderly. Theearlier and individual start financial planning the better ofhim/her will be achieving his/her lifes goals. Its moreadvantageous to saves small amount of money regularly at ayounger age than to wait till one is much older to save largersums.

Review The Plans Once the plan has been implemented, it requires a periodicreview. This is imperative to adjust the plan to the changing

situation in ones life, financial situation and income levels.

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2.5 IDEAL APPROACH TO FINANCIAL PLANNING

To achieve the best results from financial planning, one should need to follow thebelow mentioned points as The Ideal Approach to avoid some of the common

mistakes.

Set Measurable Financial GoalsSet specific targets of what an individual wants to achieve and when to achieveit. For example, instead of saying, I want to give my children good educationor I want comfortable retired life, but one needs to quantify whatcomfortable and good means; so that he/she will know when he/she havereached the goals.

Understand The Effect Of Each Financial Decision.Each financial decision taken by an individual can affect several other areas ofhis/her life. For example, an investment decision may have tax consequencesthat are harmful to ones estate plans. Or a decision about childs education mayaffect when and how one can meet his/her retirement goals. Remember that allfinancial decisions are interrelated.

Re-Evaluate Financial Situation Periodically.Financial planning is a dynamic process. The financial goals may change overthe years due to changes in ones lifestyle or circumstances, such as aninheritance, marriage, birth, house purchase or change of job status. Revise thefinancial plan as time goes by to reflect these changes so that he/she stays ontrack with his long-term goals.

Start Planning As Early As Possible.Dont delay the financial planning. People, who save or invest small of moneyearly, and often, tend to do better than those who wait for it in life. Similarly, bydeveloping good financial planning habits such as saving, budgeting, investing

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and regularly reviewing the finance early in life, such individuals will be betterprepared to meet life changes and handle emergencies.

Be Realistic In The Expectations.Remember that the goals are realistic and attainable, other wise the entireexercise will be futile and frustrating.

For instance, A Mercedes S-600 costing Rs. 1 Crore may be an object of ones desire

but at a salary or income of Rs. 6 lakh per annum, it may not be a feasiblegoal.

One goal might to send his/her to medical college. If afterfactoring in inflation from right now, one expects this to

cost Rs 40 lakh when the child is 18, so discounting theRs 40 lakh at expected inflation rate; that is the amountone have to save of invest for.

One Should Be In Charge.If an individual is working with a financial planner, he/she should understandthe financial planning process and what the planner should be doing. Oneshould provide the planner all the relevant information of his/her financialsituations. One should ask questions about the recommendations offered to

him/her and play an active role in decision- making.

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DETAILS TO BE

CONSIDERED BEFORE

DOING

FINANCIAL PLANNING

CHAPTER CONTENTS

3.1 Family Details.3.2 Assets And Liabilities..3.3 Cash Flow Budgeting3.4 Other Important Parameters..

3.1 FAMILY DETAILS

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While doing financial planning one should consider the whole family, and so that oneshould consider and analyze the following details of a family;

Age And Size Of Family :The size (numbers of family members) of family is the most concern things;simultaneously the age of each family member is also one of the importantthings as the decisions regarding income and expenditure depend on them.

Health Status Of Family Members :Health status includes current health status as well as possible future status andhealth history of a family. It also considers the hereditary diseases like diabetes,heart problem, asthma, along with habits like smoking, chewing tobacco and

any other habits that affect health now or in future. These things give directionto plan for health related expenses or insurance premiums.

Family Structure And Life Style :It means family situation like joint family, nuclear family, widow etc. that alsoprovide situational guidelines while doing financial planning. Another mainthing is the life style of family. It could be orthodox, modern, conservative, andextravagant.

Employment Information :Employment information focus on individuals/familys value, life style,potential future earnings etc. It also includes status of individuals like FullyEmployed, Part Time, Self Employed, Unemployed, Early Retired or Student.

3.1 ASSETS AND LIABILITIES

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The another important aspect that should be considered while doing financial planning isgive detailed focus on Net Worth and also sort out income producing and non incomeproducing assets. This exercise gives benchmark for other way of income generation,maintenance of asset, liability/debt management etc.

Here ASSETS means

NET WORTH = TOTAL ASSETS TOTAL LIABILITIES

Non-Income Producing Assets Main Residence

Holiday HomeFarm & LandBusiness Interest

Collectibles & CommoditiesMotor Vehicles etc.

Income Producing Assets Investments

Rented Land, House, and Car etc.

Liabilities House Mortgage

Personal LoansVehicle LoansAny Other Borrowing Or Debts

3.1 CASH FLOW BUDGETING

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Detail information of income sources and expenses of a family reflect requirement of day-to-day cash requirement, expense cutting and increasing savings for investments.

One should look forthe household & other expenses, which give the idea for requiredcash outflow for different span of time.

And also look for sort-out sources of income of family that gives idea of total cashinflow per annum.

Means TOTAL INCOME TOTAL EXPENSE = TOTAL SAVINGS( which is for Liquid or Investment Accordingly )

( The above-mentioned list of Expenses and Income are gives in Annexure 2 and 3

respectively.)

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3.2 OTHER IMPORTANT PARAMETERS

Here one can sort-out various other parameters which vary and affect different person

differently as per his/her belief, nature and status, while dealing with financial matters,which are as follows:

Personal Attitude & Approach Towards Investment Risk Taking Ability Inflation Tax Advantage/Liabilities Security/Volatility Liquidity/Flexibility Income & Growth

Investment Experience Pension Plan Investment Time Horizon WILL

A will is the most important financial planning tool for most people. Manypeople fail to make a will or fails to keep their will up to date to reflect theircurrent circumstances. Detail discussion follows in chapter no 5 & topic 5.5.

So, one should go through above-mentioned parameter if found necessary tohim/her.

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CHAPTER-4

ROOTS

OF

FINANCIAL PLANNING

CHAPTER CONTENTS

4.1 Desired Financial Goals.4.2 The Inflation Devil.4.3 Rapid Growth Through Power Of Compounding.

4.4 Realistic Future Picture

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4.1 DESIRED FINANCIAL GOALS

DESIRED FINANCIAL GOALS ARE THE MILESTONE ON AFINANCIAL ROAD MAP; WITHOUT THEM ONE MAYLOSE.

As an individual thinks, its time to start planning to manage his/her finances likesavings, investments, or taxes. But first, there is a crucial exercise one shouldneed to carry out is: Determining the financial goals or to say DesiredFinancial Goals.

The goals are the milestones and an individual hopes to reach at the milestones inlife with the help of his/her existing and proposed financial resources. Thesemilestones could range from buying a microwave in the next six months toensuring a regular income at retirement and may also cover wealth creation fornext to next generation. Even an individual should identify his/her personalfinancial goals as well as his/her familys goals.

Generally the desired financial goals are : BUYING A HOME

CHILDRENS EDUCATION & MARRIAGE MEETING DEBT OBLIGATION & OTHER LOANS PAYMENT PEACEFUL RETIREMENT LIFE SAVING FOR CHILDREN MINIMIZING TAXES ESTATE MAXIMIZING LUXURIOUS CAR WORLD TOUR

These may be common goals in any individuals life; there is nothing new foranybody. The main thing is:

How one can make sure that he/she does not just setting goals, but reaching themas well.

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The following four points to be kept in the mind while developing and approachingdesired financial goals.

1) Plot The Goals :One should write down his/her goals in proper manner in physical form. Meansthe vocalizing is not enough. He/she should note down the goals, goes throughthem and give them the due seriousness.

2) Be Specific :One should not shot gun in air. Means goals need to be measurable. The fancycar is not anybodys specific goals. If he/she should target for a blue SkodaOctavia and so that he/she has a savings of Rs. 11 lakh is more specific targetin terms of money.

3) Visualise The Dreams :An individual should not say: We want an annual vacation. He/she should say: We want a skilling holiday in Manali.

These are the examples; that one should follow the mentioned example andshould adopt such visualize approach towards his/her desired goals, which canhelp an individual to take an initiative towards goals.

4) Time Horizon :The most important things are that the desired financial goals should be alsohave particular time horizon. The list of desired goals may be long one, so forbetter achievement of any goal at expected time and also for convenience, oneshould classify the desired goals into three main time-spans.

Short-Term Goals :Short-term goals are those goals that have to be reached within a year. AVacation at Manali in very next year, buying a home theatre within inthis Diwali, may figure in the list of short-term goals.

Medium-Term Goals :Medium-term goals are those goals that have to be targeted to achieve inone to five years away. Acquiring a house or a luxurious car can be come

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in the list of medium-term goals for the premium class or upper middleclass.

Long-Terms Goals :Long-term goals are those goals that are targeted in the more than fiveyears span of time. Childrens higher education in abroad, providing fordependent parents and retirement may figure in the list of long-termgoals.

1) Review The Desired Goals And Give Priority :One should review his/her goals regularly at particular span of time. He/shetries to know that his/her goals, planning and financial situation are up to mark.

If he/she finds that some changes or alteration is required then doesaccordingly. The most important thing is that he/she gives priority to thosegoals, which are most important & necessary & risk appetite.

4.1 THE INFLATION DEVIL

ONE MAY GO OUT OF SCREEN BUT THEINFLATION WONT.

Inflation, the rate at which the general level of prices for goods and services risescan steadily erode the purchasing power of income. That is why one shouldinvest a portion of his/her savings at a rate higher than the inflation rate torecover the loss of purchasing power. This means that over time a rupee will beable to buy a lesser amount of goods and services. If the inflation rate is 5%, thenRs.100 worth of goods will cost Rs.105 after a year.

No. Of Years

THE VALUE OF RS. 1,00,000 AFTER MENTIONED YEARS

INFLATION RATE ( % PER ANNUM )

2% 3% 4% 5% 6%

0 100000 100000 100000 100000 100000

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5 90573 86261 82193 78353 7472610 82035 74409 67556 61391 55839

15 74301 64186 55526 48102 4172720 67297 55368 45639 37689 3118025 60953 47761 37512 29530 2330030 55207 41199 30832 23138 17411

So, one should consider Inflation- The Devil as an indispensable factor whiledoing financial planning. To determine the future value of an individuals nest-eggor proposed nest-egg, one should consider the effect of inflation. Because if one fails

to consider the impact of inflation, the inflation will gradually erode an individualsstandard of living as specially retired life.

For instance,If we consider the inflation rate 6.5% and an individual of the age 30 today feels thathis/her retirement income requirement will be Rs.10,000 per month, now applyingthe inflation rate, at the age 60 when he/she will retired he/she required Rs.66,143per month. It is also important to consider that Rs.66, 143 per month is at thebeginning of the retirement period. Hence the planning must consider periodicalincrease in income to balance the effect of inflation.

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4.3 RAPID GROWTH THROUGH POWER OFCOMPOUNDING (WEALTH CREATION)

Every day that an individuals money is invested, is the day that his/her money isworking for him/her.

As an investor, one would always think of ways to maximize the wealth thathe/she already have, or in the event that he/she would seek to accumulate themaximum possible. It is an important, but not so implied, a need. That may bewealth creation. Basically it is in the simplest sense a desire to be rich, a desire tohave control over the aspects that affect financial life, a desire to commandrespect with the control of money power. So is it really a wrong thing to have adesire such as that? Absolutely not, if a wealth creation goal is set with the nobleperspective of making conditions better for own self, and through means, whichnecessitate a use of some investing and discipline.

THE CROREPATI :

For centuries, the Indian people could not even think about the very existence themore possibility- of an Indian Dream. But ironically, it was up to a former USPresident to define it. As a Bill Clinton put it in a speech- the dream of everyIndian is to become a Crorepati. That is the difference between India atindependence and the new India, at the turn of the millennium. What was oncenot even a possibility has now been given a shape- a magic figure- Rs.1 Crore.

How does one go about achieving this figure? Surprisingly, the road to Rs.1 croreis not as difficult as it may seem. The answer lies in a planned and disciplinedapproach towards savings and investment. From the age of 25, any personwould invest monthly, an amount as low as Rs.4360 at 8% per annum

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(Monthly compounding basis), he/she will be Crorepati at his/herretirement age (60 year). The secret lies in the power of compounding whereinterest on re-invested interest ensures that individuals savings grow at ageometric rate rather than at an arithmetic rate. The other thing at work is themagic of systematic investments. Rs.100 invested monthly would grow to anamount larger than a one-time Rs. 1,200 investments at the end of the year simplybecause of the interest earned on Rs.100 every month. Here, Rs.100 would grow toRs.1,245 at year-end at an interest rate of 8%.

Naturally, the value of Rs. 1 crore today would not be the same as that of Rs.1crore 35 years hence or even 5 years down the line because of inflation. However,the same strategy of planned and systematic investments, although with somewhathigher amounts of monthly savings, will ensure that the amount will be in the handof an individual at 35 years hence can still buy most of what a Crore can buytoday.

If an individual wants to be a Crorepati after mentioned year, then he/she has toinvest mentioned amount at 8% Rate Of Return at monthly basis.

Years 1015

20 25

30

35

Rs. 54,665 28,900 19,978 10,515 6,710 4,360

4.4 REALISTIC FUTURE PICTURE

Another most important scenario in financial planning is trying to see RealisticFuture Picture. While doing financial planning one should give more focus onfuture; so that he/she takes realistic future picture by eliminating or managing the

negative factors like inflation, falling interest rate, scams and takes advantages ofsystematic cutting of unnecessary expenses, regular saving and investment. Butwhat would be the benchmark in future, particularly at the time of retirement thatpicture one can see by only doing financial planning.

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For instance,

How much money as a principle will one need at the age of 60 years. That isshown in following table (Based on the capital relation method), which usesinterest return only to provide income. Principle is not liquidated and remainsavailable.

MonthlyRetirement

Income NeededIn Future

Capital Needed At Various

@ 6 % @ 8 % @ 10 %

Rs. 15,000 Rs. 30,00,000 Rs. 22,50,000 Rs.18,00,000

Rs. 20,000 Rs. 40,00,000 Rs. 30,00,000 Rs.24,00,000 Rs. 30,000 Rs. 60,00,000 Rs. 45,00,000 Rs.36,00,000

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CHAPTER 5

COMPONENTSOF

FINANCIAL PLANNING

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CHAPTER CONTENTS

5.1 Investment Planning.5.2 Tax Planning.

5.3 Insurance Planning5.4 Retirement Planning..5.5 Estate Planning & Will..5.6 Emergency Fund Planning.5.7 Debt Planning..5.8 Charity Planning..

COMPONANTS OF FINANCIAL PLANNING

To put a viable financial plan, one should first get the big picture. That is

Where the pyramid comes in. First, look at the base upon which allindividuals finances rests. The move up in layers till one reach the apex.One should look his/her finances in this structure.

Most of the people are generally doing is ad-hoc Investment Plannimgonly. Here we have mentioned components of a Planned approach to an

individuals entire financial life; say- insurance, taxation, housing,retirement, estate planning and so on. An individual has to plan before doingany things, which is concerned with his/her money. For instance, before savingan individual should know how much and for what goals he/she is saving. Thegoals could be either buying a house or a car, education of children, gettingthem married, going on vacation, and finally, having a comfortableretirement. These all-financial matters need involvement or to say integrationof following tools or to say components as follows:

INVESTMENT PLANNING

TAX PLANNING INSURANCE PLANNING RETIREMENT PLANNING ESTATE PLANNING & WILL

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EMERGENCY FUND PLANNING DEBT PLANNING CHARITY PLANNING

5.1 INVESTMENT PLANNING

Investment means putting money to work to earn more money from it.

If done wisely, it can help to meet the financial goals.

One does not require being wealthy to be an investor. Investing even asmall amount can produce considerable rewards over the long term,especially if done regularly. But one need to make decisions about howmuch he/she wants to invest and where to invest it.

Investment planning is necessary for all individuals to achieve theirfinancial goals. One has to plan his/her limited resources to avail themaximum benefit out of them. People should do investments to fulfil

major objectives like :

5.1.1 Objectives Of Investment Planning

To earn more income To meet required liquidity To reduce tax liability To get regular adequate income

To ensure smoother retirement life To create substantial corpus for next generation ( Wealth Creation )

Thus, Investment planning is the most important part of financialplanning, which is nothing but a holistic approach to meet life goals.

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The investment options depend on personal circumstances as well asgeneral market conditions. For the better result of investment exercise oneshould follow the following principles :

5.1.1 Five Important Investment Planning Principles

Start EarlyOne should start from Today, Because Tomorrow Never Comes.

Regular InvestingAs Regular As Ones Salary.

Allow PlanningDebt + Equity ( Optimum Combination )

Save Plus InvestAccording to, Safety + Liquidity + Tax Benefits

Proper Risk ManagementDiversification Of Investments With Regular Monitoring

5.1.1 Cash Flow Planning/ Regular Income Planning

Cash Flow Planning/Regular Income Planning is the proper planning of the flows oones money. In other words, it refers to the activity of planning out the flows ofmoney in such a manner that it becomes easy for an individual to meet his/herrequirements as and when they arise.

So does it involve looking at future cash flows/regular income only? Not really, Onshould always do a cash flow for himself/herself as on date, and he/she will realizethat he/she could have a potential savings amount within each month of the workinlife. This is the amount that he/she should look at saving for meeting financial goal

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Apart from the above, one should also look towards making a cash flow/regularincome for the same to what will be needed to withdraw in order to accomplishobjectives.

Hence, what a Cash Flow Plan/Regular Income Plan does is that it brings anindividual face to face with what one should ideally be saving, and investing in asystematic and regular manner, and what would it mean to him/her to withdraw frohis/her portfolio after a couple of years. It brings down in numbers what thefinancial future has in store for an individual, and gives a clear view (as is possiblewith inflation and the interest rate scenario)

Cash Flow Planning/Regular Income Planning is the first thing that should be doneprior to starting an investment exercise, because an individual will be in a position know how his/her finances look like, and what is it that him/her can be investedwithout a strain. It will also enable one to understand if a particular investment hasthe specific feature of maintaining his/her flows as and when they want them.

Need Of A Regular Income :

Simply put, for the same reason that there are expenses that happen regularly too!Many times we look at investments as a means to supplement the incomes that isbeing earned by us through our service or profession.

There could be events like receiving a lump sum like a bonus, which could be usedto add on to the income flows in the coming period. Or one could consider keepingretirement funds in such a manner that it generates an income that suffices the need

Whatever are the circumstances or need, the relevance of a regularreturn can never go down. In many case the regular returns are themeans to constant Profit booking, if one was to go on and try and

draw a conclusion.

Hence, in other words, regularity of income is the must for areplacement as well as supplementing of income need of individuals.For a regular income planning, it is advisable to get into investments,

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5.1.5 Steps Of Investment Planning :

The following steps would enable an individual to get started on path tobecoming a successful investor.

1. Identify Financial Needs And Goals :

The starting point of a sound investment decision is to begin with a clearunderstanding of financial needs and goals. Typically, any financial need or goalwould translate into determining the tenure of investment (investment horizon).

All investment needs and goals can therefore be translated into short-term (lessthan 1 year). Medium-term (more than 1 year) and long-term (more than 5 years)goals.

2. Understanding Investment Choices :

There are three basic investment categories: Equity, Debt and Cash. Anyinvestment can be classified into these categories. They are also known as threebasic asset classes. The key to investment success is in understanding how each

asset class performs over the various investment horizons, the choices withineach category and the risks involved in making investments decisions in each ofthese choices.

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Equity or stocks are ownership shares investors buy in a corporation. When onemakes equity investments. He/she becomes part-owner (to the extent of anindividuals shareholding) of the company-invested in. However, there is noparticular rate of return indicated while investing. The current value of holding isreflected in the price at which the stock/share is traded in the stock markets.Hence, these constitute a relatively riskier form of investment.

Debt instruments or bonds are loans investors make to corporations andgovernments. They promise a fixed return at the time of making the investment.Also the promise of getting the money back is dependent on who is making thepromise. In case of the governments, the promise will certainly get fulfilled, butif the issuer of debt is a company or an institution, the quality of the issuer needsto be adjudged, to ascertain its ability to keep the promise. Debt investment,therefore, provide with the promise that principal will be returned along with theinterest payable thereof.

Cash investment includes money in bank savings accounts and other liquidinvestment options.

Asset Classes Example

Cash

Savings deposits in a bank.Liquid Mutual Funds.O/D Against Long-term securities.

Precious Metal.

Debt

GOI Relief Bonds.Public Provident Fund.National Savings Certificate.Company Fixed Deposits.Debt-Based Mutual Funds.Debentures/Bonds.

Equity Equity-based Mutual Funds.Stocks/shares issued by variouscompanies.

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3. Decide an appropriate mix of various investment choices (AssetAllocation Plan) :

Making an asset allocation plan is all about determining the proportion ofinvestments in each of the three basic asset classes. This is to be done on thebasis of pre-decided formula according to various investment approachesdiscussed earlier i.e. aggressive, moderate and conservative. Whatever stage oflife an individual is at, one would need to invest part of his/her money forsecurity and liquidity, part of it for regular income and part of it for growth andcapital appreciation. The proportion however will vary based on individual goals,time horizons available to meet those goals and ones risk profile ( the tolerancereaction to any down turn in the stock/debt markets). The key to investmentsuccess lies in determining the appropriate mix of the above-mentioned

categories and not just the individual investments that are done within eachcategory.

4. Expenses which affect the yield of investment :

DIRECT EQUITY MUTUAL FUNDS OTHERS

BROKERAGE

DEMATE CHARGES

OTHER EXPENSES

ENTRY LOAD

EXIT LOAD

RECURRINGEXPENSES

ADVISORS FEE

FINANCIALPLANERS FEE

For instance,

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Here if an individual buys a scrip-say Bhuvan Tripura Ltd.; with an idea todouble his/her money. Here the bid price of her per share is only Rs. 0.45 andhe/she buys 100 shares, if the price of share goes to Rs. 0.45 to Rs. 0.90 thenhis/her money will be double. Thus is the general consideration. But is it true?

NO

Any layman asks, HOW?See the following;

PARTICULARS(QTY)

PER SHARE (RS.) DEMATECHARGES

TOTALRS.

TREADED BROKERAGE

BUY (100) 0.45 0.10 - 55

SELL (100) 0.90

0.10 25 55

PROFIT NIL

Here an individual sells for Rs. 90 of the share that he/she has already bought.But both the items when trades take place buy and sell. The brokerage is Rs. 0.10

* 100 shares (2 times) = Rs.20. And Demate charge at the time of delivery isRs.25. Such a way he/she does not get any thing.

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5.1.6 Risk vs. Return Relationship :

Risk v/s returns are essential for better investment planning as well as financialplanning. If an individual does not understand the risk v/s return relationship and

its importance, then it is quite likely that his/her investment returns will notmatch his/her risk profile. Consequently he/she does not match his/her hardearned money well and so a wasted opportunity, has even a small difference inhis/her investment returns (at the same level of risk) can make a BIG differenceto his/her financial wealth.

Every asset has risk attached to it.And, the higher the risk, the higher should be its expected returns.

For most people who invest in shares there is a good chance that an individual

has heard someone say this before : Just by the blue-chip stock, there is norisk at all. For most people who just put their money away in bonds or deposits,one of the main reasons for this probably is I dont want to take any risk atall, I just want my money safe.

Is investing in bonds or deposits completely risk free? Or investing in blue-chip stocks necessarily very low risk? Are these statements true?

NO

Whenever more than one outcomes is possible from an investment, there isalways some amount of risk only the level of risk is different as mention in abovefigure. While investing, risk is measured to evaluate the kind of returns anindividual should expect from the investment. Or his/her expectations should bebased on the level of risk he/she can bear. In principle, the higher the risk, thehigher the returns that should be required. Empirically returns across variousassets classes show that the investment in equity shares give the highest level ofreturns in the long term, followed by corporate bonds and deposits and lastlybank deposits and government debt. Not surprisingly, the level of risk is also in

the same order.

Different types of risk that involved in any investment are asfollows :

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Credit Risk :The risk is that the issuer of the security will default, or not repay theprincipal amount. Such type of risk is there in corporate bonds etc.

Liquidity Risk :The risk is that the security is not saleable or tradable in the market, inother words, money gets stuck unnecessarily creating an asset-liabilitymismatch. ( Valid for bonds, stocks etc.)

Market risk :The risk is that financial markets are volatile in nature. Volatility meanssudden swings in value from high to low, or the reserve. The more volatilean investment is, the more profit or loss one can make, since there can be abig spread between what is paid and what it is sold for. But one also has tobe prepared for the price to drop by the same amount. Valid for stocks,mutual funds etc.

Interest Rate Risk :This is part of market risk, which is valid for all market related debt basedinvestments. Depending on the interest rate movement in the economy, therates of interest on the investment instruments may go up or come downresulting in a subsequent reverse movement of their prices, thus creatingbig risk in times of economic uncertainty. (Valid for bonds, Governmentsecurities, mutual funds etc.)

5.1.7 Investment Approaches :

The options, which one chooses to put money, reflects the investment strategy he/sheis using whether he/she realize it or not. Most people adopt the followingapproaches :

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Conservative portfolio approach & its suitability :Take only limited risk by concentrating on secure, fixed-incomeinvestments etc. this portfolio is suitable for an investor if he/she is over 50and it would aim to keep his/her savings secure while at the same timewould generate enough income to help relax and enjoy retirement years.Moreover, since source of income after retirement may be limited, thesavings would need to go a long way. And the small equity part can assistin staying ahead of inflation.

CONSERVATIVE PORTFOLIO

CASH

10%

DEBT 60%

EQUITY

30%

Moderate portfolio approach and its suitability :Take moderate risk by investing in mutual funds, bonds, select blue chipequity shares etc. this portfolio is suitable for an investor if he/she is within35-50 years and is at peak earning years, might have to probably financechilds education and other social obligations. The extra debt portion willtake care of extra medium-term liabilities while equity piece continue toprovide the potential for long-term growth.

MODERATE PORTFOLIO

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CASH 10%

DEBT 40%

EQUITY 50%

Aggressive portfolio approach and its suitability :Take major risk on investments in order to have a high (above average)returns like speculative or unpredictable equity shares etc. this portfolio issuitable for young investors (less than 35 years), who are just starting out.Early in profession, retirement is still a long way off. Probably just marriedor planning a family, or perhaps building a home. The younger an investoris, the greater is his/her ability to withstand higher risk. The younger aninvestor is, the greater is his/her ability to withstand higher risk. The equity

part of the portfolio is meant for capital growth to meet the long-term goalswhile the debt portfolio is to provide for medium term needs.

AGGRESSIVE PORTFOLIO

CASH 10%

DEBT 25%

EQUITY 65%

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(A) EQUITY INVESTMENTSGenerally the equity instruments have following attributes; Equity may give higher return than any other investment option with high

risk. Equity is also having high liquidity. In long term equity enjoys growth for good investment and also enjoys long

term capital gain; which is another plus point for equity to avoid greater taxeffect.

THUMB RULES

Dont be speculative. Dont get panic when capital market crash, buy low & sell high (Regular

investment advisable) Invest for long term Go for growth, not for profit booking Invest in sector or company whose knowledge an individual have.

EVALUATION OF EQUITY SHARE INVESTMENT

Review:

Industry profile Management Past history Takeover activity Company gearing

Performance measures

(B) DEBT INVESTMENTS

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Generally the debt instruments have following attributes; Regular/Cumulative Income Risk is lesser Some investments income are tax free or rebatable or deductable Some of these investments are rated by credit rating agencies for risk

assessing purpose.

INSTRUMENTS IN THE INDIAN DEBT MARKETThe objective of the debt fund is to provide investors with a stable incomestream. Hence, a debt fund invests mainly in instruments that yield a fixed rate ofreturn and where the principal is secure. The debt market in India offers thefollowing instruments for investments by mutual fund.

Certificate Of DepositCertificates of deposit (CD) are issued by scheduled commercial banksexcluding regional rural banks. These are unsecured negotiablepromissory notes. Band CDs have a maturity period of 91 days to oneyear, while those issued by FIs have maturities between one and threeyears.

Commercial PaperCommercial paper (CP), is a short term, unsecured instrument issued bycorporate bodies (public & private) to meet short term working capitalrequirements. Maturity varies between 3 months and 1 year, thisinstrument can be issued to individuals, banks companies and othercorporate bodies registered or incorporated in India. CPs can be issuedto NRIs on non-repatriable and non-transferable basis.

Corporate DebenturesManufacturing companies usually issue the debentures with physicalassets, as secured instruments, in the form of certificates. They are

assigned a credit rating by rating agencies. Trading in debentures isgenerally based on the current yield and market values are based onyield to maturity. All publicly issued debentures are listed onexchanges.

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Floating Rate BondsThese are short to medium term interest bearing instruments issued byfinancial intermediaries and corporate. The typical maturity of thesebonds is 3 to 5 years. FRBs issued by financial institutions are generallyunsecured while those from private corporates are secured. The FRBsare pegged to different reference rates such as T-bills or bank depositrates. The FRBs issued by the government of India are in the form ofstock certificates or issued by credit ti SGL accounts maintained by theRBI.

Government SecuritiesThese are medium to long-term interest bearing obligations issuedthrough the RBI by the government of India and state governments. TheRBI decides the cut-off coupon on the basis of bids received during

auctions. There are issues where the rate is pre-specified and theinvestor only bids for the quantity. In most cases the coupon is paidsemi-annually with bullet redemption features.

A large part of the trading is concentrated in those governmentsecurities that are eligible for Repo transactions i.e. sale of a securitywith a parallel agreement to repurchase the same at a future date. TheRBI acts as the depositary, its public debt office maintaining as SGLaccount for various banks and financial institutions, and issues ortransfers the securities in the form of book entries made in SGL

accounts. If a fund does not have an SGL account, it may open aconstituent account with any RBI registered bank.

Treasury BillsT-bills are short-term obligations issued through the RBI by thegovernment of India at a discount. The RBI issues T-bills for differenttenures: 14 days, 91 days, 182 days and 364 days. These treasury billsare issued through an auction procedure. The yield is determined on thebasis of bids tendered and accepted.

Bank/Financial Institutional BondsMost of the institutional bonds are in the form of promissory notestransferable by endorsement and delivery. These are negotiablecertificates, issued by the financial institutional such as

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IDBI/ICICI/IFCI or by commercial banks. These instruments have beenissued both as regular income bonds ad as discounted long-terminstruments (deep discount bonds)

Public Sector Undertakings (PSU) BondsPSU Bonds are medium and long term obligations issued by publicsector companies in which the government share holding is generallygreater than 51%. Some PSU bonds carry tax exemptions. Theminimum maturity is 5 years for taxable bonds and 7 years for tax-freebonds. PSU bonds are generally not guaranteed by the government andare in the form of promissory notes transferable by endorsement anddelivery. PSU bonds in electronic form (demate) are eligible for Repotransactions.

(B) MUTUAL FUNDS

The situations could vary as per age groups, mindsets andrisk-taking ability, but the solution, in each case wantsmoney to grow. Most of the investors dont have sufficientknowledge about different investment options, financialinstruments nature, market information, analytical skills andtherefore their funds are lacking proper management and

diversification to get market-linked return with flexibility aswell as liquidity.These kinds of investors should prefermutual funds to channelise their funds properly.

Mutual funds are the unique instrument that offers anindividual professional management, diversification,fiexibility, liquidity and a chance to get market-linked returns.Mutual funds are indeed the best tool for wealth creation.Whatever other instruments can do, mutual funds can do too-and more efficiently.

Concept Of Mutual FundA mutual fund is a common pool of money into which investors place theircontributions that are to be invested in accordance with a stated objective.

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The ownership of the fund is thus joint or mutual the fund belongs to allinvestors. A single investors ownership of the fund is in the sameproportion as the amount of his/her contribution to the total amount of thefund.

Advantages of Mutual FundsIf mutual funds are emerging as the favourite investment vehicle, it isbecause of the many advantages they have over other forms and avenues ofinvesting, particularly for the investor who has limited resources available interms of capital and ability to carry out detailed research and marketmonitoring. The following are the major advantages offered by mutual fundsto all investors:

1. Portfolio Diversification

2. Professional Management3. Reduction/Diversification Of Risk4. Reduction of transaction costs5. Liquidity6. Convenience and fiexibility

Mutual Fund Classification OPEN-END FUNDS :An open-end is one that has units available for sale andrepurchase at all times. An investor can buy or redeemunits from the fund itself at a price based on the net assetvalue (NAV) per unit.

CLOSED-END FUNDS :Unlike an open-end fund, the unit capital of a closed-end fund is fixed,as it makes a one-time sale of a fixed number of units. Later on, unlikeopen-end funds, closed-end funds do not allow investors to buy or

redeem units directly from the funds. However, to provide the muchneeded liquidity to investors, many closed-end funds get themselveslisted on a stock exchange (s). Trading through a stock exchange enablesinvestors to buy or sell units of a closed-end mutual fund from each

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other, through a stockbroker, in the same fashion as buying or sellingshares of a company.

LOAD FUNDS :Marketing of a new mutual fund scheme involves initial expenses. Theseexpenses may be recovered from the investors in different ways atdifferent times. Three usual ways in which a funds sale expenses may berecovered from the investors are :

At the time of investors entry into the fund, by deducting aspecific amount from his initial contribution, or

By changing the fund/scheme with a fixed amount each year,during the stated number of years, or

At the time of the investors exit from the scheme, by deducting a

specified amount from the redemption proceeds payable to theinvestor.

Funds that charge front-end or deferred loads are calledLOAD FUNDS.

SEBI has defined a LOAD as the one-time fee payable bythe investor to allow the fund to meet initial issue expensesincluding brokers/agents/distributers commissions,

advertising and marketing expenses.

The load charged to the investor at the time of his entry intoa scheme is called a Front-End Or Entry Load. This isthe first case above. The load amount charged to the schemeover a period of time is called a Deferred Load. This isthe secondcase above. The load thatthe investor pays at thetime of his exit is called a Back-End Or Exit Load. Thisis the third case above. Some funds may also chargedifferent amounts of loads to the investors, depending upon

how many years the investor has stayed with fund; thelonger the investor stays with the fund, less the amount ofExit Load he is charged. This is called Contingent

Deferred Sales Charge.

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NO-LOAD FUNDS :

A no-load fund is one that does not charge a commission for entry or exit. Thatis, no commission is payable on purchase or sale of units in the fund. Funds thatmake no such charges or loads for sales expenses are called No-Load Funds.So the advantage of a no load fund is that the entire corpus is put to work.

MUTUAL FUND TYPES :Funds are generally distinguished from each other by their investment objectivesand types of securities they invest in. We now look at the major types of fundsthat are available under the general classifications:

A) By Nature Of Investments

B) By Investment ObjectiveC) By Risk Profile

According to the above mentioned Nature Of Investments, InvestmentObjectives and Risk Profile, the types of funds are:

1) Money Market Funds

2) Gilt Funds

3) Debt Funds (Or Income Funds)

a) Diversified Debt Funds

b) Focused Debt Funds

c) High Yield Debt Funds

d) Assured Return Funds

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4) Equity Fund

a) Aggressive Growth Funds

b) Growth Funds

c) Specialty Funds

i. Sector Funds

ii. Offshore Funds

iii. Small-Cap Equity Funds

d) Diversified Equity Funds

i. Equity Linked Savings Schemes

e) Equity Index funds

f) Value funds

g) Equity Income Funds

5) Hybrid Funds

a) Balanced Funds

b) Growth-and-income Funds

c) Assets Allocation Funds

1) Commodity Funds

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5.2 TAX PLANNING

Tax planning isnt just about saving tax, its not also about maximizing anindividual returns from investments. One should look for the best options in the

mart, which help one to do both.

Taxation is a fundamental element of virtually all financial planning consideration-Investments, Retirement Planning and Estate Planning.

Theii primary objective of Taxation Planning is to ensure the utilization of allavailable legal means to reduce or defer taxes. Accomplishing the objective oh taxminimization requires familiarity with basic income tax concepts and approachesto income Tax Planning.

Most of the people put their powers of deduction to the test as diligently as whenthey sit down to plan their taxes. The financial year-end is fast approaching, and ifan individual havent made those tax-saving investments already. Its time to getcracking. There are two things an individual should keep clear in mind those are :

He/she will have to dig deep into his/her pocket to fund his/her investments. Andso an individual needs to comprehend the myrid tax laws, rules and amendments,which help him/her to reduce their tax burden while investing or say throughinvesting.

Where the income levels exceed certain limits, tax Planning helps to reduce tax toan individual but it may not be possible to completely avoid tax. The good news isthat proper Tax Planning will help to improve the efficiency of his/herinvestments.

Also, since tax savings strategies in India are centered on making investments, ithelps an individual to save that much more every year. The news gets even better.In India there is a system of progressive Taxation, where taxes are levied as perslabs, and not at a flat rate. So an individual will find himself/herself in different

tax brackets depending on the total income that an individual earn which are asfollows:

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Tax Slabs : Tax

Up to Rs.50,000 Nil

Rs. 50,000 to Rs. 60,000 10 %

Rs. 60,000 to Rs. 1,50,000 20% + 2.5 % surcharge

Rs.1,50,000 and above 30% + 2.5 % surcharge

Heads of income that are taxable are : Income from Wages, Salaries, Fees, Commissions and any other earnings

for services Business Income Income From Property Capital Gains Income From Other Sources (i.e. Interest, Royalty, Winnings)

An individual should try to take the maximum tax benefit from the followingoptions :

Exempted Income Deductions (Standard Deduction, 80L, 80ccc(1), 80d) Rebates (Section 88)

1. Exempted Income

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Exempt income refers to those amounts or classes of income which, althoughreceived as income and so would otherwise be taxable, they are listed in thelegislation as exempt from income tax. Examples are :

Some social security payments like interest on PublicProvident Fund (PPF), Employee Provident Fund (EPF).

Interest on government of India Relief Bonds. Any Capital receipts from insurance companies. Interest on savings bank account with the post office.

2. Deductions (Standard Deduction, 80L, 80ccc(1), 80d,etc.)A deduction is a reduction from assessable income of anindividual. Tax is levied on taxable income, which comprises

ASSESSABLE INCOME ALLOWABLE DEDUCTIONStandard Deduction :Salaries employees are issued a salary certificate by their employers in form 16.Salaries employees are allowed a standard deduction at the rate of 33.33% ofsalary subject to the maximum limit as under.

Assessable Income Standard Deduction

1. Up to Rs.1,50,000 Rs.30,000 or 1/3rd of thesalary which ever is less.

2. From Rs.1,00,000 3,00,000 Rs.25,000

3. From Rs.3,00,000 5,00,000 Rs.20,000

4. Above Rs.5,00,000 Nil

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Pension PlansDeduction u/s 80ccc fromtaxable income up toRs.1,00,000/- p.a.

No assuredreturns

PPFRebate u/s 88 on investment upto Rs.70,000/-

Interest (8% now)revised every year

ELSSRebate u/s 88 on investment upto Rs.10,000/-

Equity linked,higher risk; noassured returns

NSCSRebate u/s 88 on investment upto Rs.70,000/-

Interest eligiblefor additionalrebate

InfrastructureBonds

Rebate u/s 88 on investment upto Rs. 1 lakh

Shortest (3 year)tenure

Post Office

Deposits

Savings account interest tax-

exempt; deduction u/s 80L forothers with no TDS

POMIS + RD

combo fetcheshighest assuredreturns

Life InsurancePlan

Differs from plan to plan andinsurer to insurer

High (but noassured) returnson offer fromunit-linked plans.

INVESTMENT RELATED TAX-BREAKS :

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If an individuals income is more than Rs.1.5 lakh and so, the governmentprovides some investment-related tax breaks in a mix of both long-termretirement and medium-term saving options. To facilitate capital creation aswell as to make the right balance between maximizing returns ininvestments in tax savings instruments with his/her need for cash to meetdaily needs.

Pension Plans Public Provident Fund Equity Linked Savings Schemes (ELSS)N National Savings Certificates Infrastructure Bonds

5.3 INSURANCE PLANNING

Insurance, in its purest form, is a risk management tool, a security blanket. Itprovides financial protection against unexpected events. When one buy insurance,he/she effectively transfers a portion of his/her risk to the insurer. This protection

comes at a price, but its a fraction of what one might otherwise find an individualburdened with. Whatever the life stages individual facing, the chances and thechanges, an individual must need insurance.

5.3.1 Need For Insurance

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Risks and uncertainties are part of lifes great adventure accident, illness, theft,natural disaster- they are all built into the workings of the universe, waiting tohappen.

Insurance then is mans answer to the vagaries of life. If one can not beat man-made and natural calamities, well, at least be prepared for them and theiraftermath.

Insurance is a contract between two parties the insurer ( the insurance company )and the insured ( the person or entity seeking the cover ) wherein the insureragrees to pay the insured for financial losses arising out of any unforeseen eventsin return for a regular payment of premium.

These unforeseen events are defined as risk and that is why insurance is called arisk cover.

Hence, insurance is essentially the means to financially compensate for losses thatlife throws at people corporate and otherwise.

The principle of insurance works on the concept of a large number of peopleexposed to a similar risk making a contribution to a common fund. Those whosuffer losses due to the occurrence of these events are compensated for them from

this fund.

5.3.2 Comparison of Life Insurance with other option for savings :

Life Insurance is the best vehicle with combination of risk coverand gives tremendous return as wealth creation form.

1. Protection2. Liquidity3. Tax Relief4. Money when needed

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5. Loans and mortgages available

1) Protection :Savings through life insurance guaranteed full protection against risk ofdeath of the saver. In life insurance the full sum assured is payable withbonus whenever applicable whereas in other savings schemes, only theamount saved with interest is payable.

2) Liquidity :Saving can be made in a relatively painless manner because of the easyinstallment facility built into the scheme.

3) Tax Relief :

Tax relief in IT and WT is available for months paid by way of premium forlife insurance subject to IT rates in force.

4) Money When Needed :A suitable insurance plan a combination of different plans can be taken outof meet. Specific needs are likely to arise in future.

e.g. Childrens educationStart in life

Marriage Provision orPeriodical needs for cash over a stretch of time.

5) Loans And Mortgages Available :Against the policy, loan from banks and other financial institutions aresanctioned. Means loans is available against the mortgage of policy.

Since a single policy cannot meet all the insurance objectives, oneshould have a portfolio of policies covering all the needs. So asper the main factor, namely age or say life cycle, thecircumstances are different for different time of span and so everyone needed different types of insurance as their profile which is

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very clearly shown in; Annexure 4

5.3.3 There are mainly two types of Insurance

1. Life insurance2. General Insurance

1. LIFE INSURANCE :

Life Insurance is mainly a risk management tool, meant to

offer financial protection to ones dependents in the

unfortunate event of his/her death. But if an individual insureadequately, his/her should enable their dependents, e.g. spouse,children, parents to maintain their current life style and pursuetheir life goals. Till such time as they are in a position to set upan alternative income stream by themselves. That is the basicpurpose of life insurance. The various life insurance plans are :

Whole Life PlansThe only class of Insurance policies, which gives cover through the lifetime,is a whole life plans. Typically, whole life plans are structure such thatpolicyholderhas the option to pay premium up to a certain age (referred toas the maturity age, which is generally 80-100 years) or for a specifiedperiod. On reaching maturity age, the insurer gives insured, the option toeither continue with the cover through life time (for which no furtherpremiums will have to be paid) or encase the maturity benefits (sum assuredplus bonuses). Some insurer do gives the option to encase the bonus duringthe later years, if it is desired.

Endowment PlansEndowment plans cover the risk of death, as well as it offers some return onthe premiums paid by an individual. So, if the person dies during the policyterm, his/her nominee gets the sum assured plus some returns. If the personsurvives up to the policy term, then also he/she will get the sum assured and

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returns back. As much as this money if one die, money if one livephilosophy is an enticing proposition, it comes at a price. High premiums,which drag down the returns from endowment plans, to barely 4-6 % a year.

In an Endowment plan, one pays premiums for pre-defined tenure and sumassured. The premium depends on ones age. A portion of this premium ispaid by an individual is invested by the insurer on him/her behalf.

There are two types of endowment plans, with the policyholder a share inthe insurers profits or not.

Without Profit Plans : These endowment plan dont offer a share in theinsurers profit available for a lower premium. They are structured in such away that if one outlives the

policy term, one get back the sum assured and a nominal return oninvestment termed as loyalty additions. This is basically a token one-timepayout, expressed as percentage of the sum assured, made to an individualstaying in the plan through its term.

With Profit Plans : With profit endowment plans offer relatively higherreturns than without profit plans, by sharing with the policy holder and theprofits earned by insurer from year to year. Depending on whether the returncarries assurances.

Money Back PlansMoney back plans are variants of endowment plans, with one basicdifference. Unlike endowment plans, where the survival benefits aredisbursed at the end of a policy term, the payback in money back plans isstaggered through the policy term. Typically, a part of the sum assured isreturned to an individual at periodic intervals through the policy tenure.

Unit Linked Insurance PlansA unique insurance plan where an individual gets freedom about his/her

money that where should his/her money should be invested. By the nature ofunit linked insurance plans are made for individuals who understandinvesting and the stock market but prefer to leave it to the experts to doactive money management; they are prepared to forfeit assurances on returns

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for a chance to take home more than what a conventional endowment planwould offer.

Unit linked plans also enable an individual to periodically monitor theperformance of his/her investment. Insurers declare the NAV of the variousplans periodically generally once in three months. After a lock- in period i.e.generally one year an individual can withdraw his/her units anytime, in partof in full at the then prevailing NAV. His/her life cover will be reducedaccordingly there is also facility of incremental investments any time, andadd a corresponding amount to his/her life cover.

Pension PlansPension plans are such investment options, which lets an individual to set upan income stream in his/her post retirement years by his/her routing savings

through an insurer, who invests it on his/her behalf for a fee. The precisereturns an individual will get depend on several factors: the age when anindividual begin investing, the contribution that an individual makes, theinvestment preference based on risk profile, the age at which an individualwants the money to start coming back to him/her, and the number of yearsfor which he/she wants the returns.

Pension plans facilitate disciplined, long term investing one of the pillars ofwealth creation. Each year, an individual set aside a certain, pre- specifiedsum towards his/her retirement fund. This money stays invested for a long

period of time, reaping the benefits of compounding.

Annuities/Childrens PolicyHere basically the nominee receives a guaranteed amount of money at a pre-determined time and not immediately on death of the insured. On survivalthe insured receives money at the same pre-determined time. These policiesare best suited for planning childrens future education and marriage costs.

Today, Life is highly competitive, education and setting in life entails highcosts. Parents needs, therefore to make provision in advance, for good

education for their children. Children also need financial support forentering business/career.

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In the event of unfortunate death during the term, after commencement ofrisk but before maturity, sum assured becomes payable together withguaranteed addition irrespective, of installment benefit received earlier.

Term Insurance PolicyA term insurance plan is a pure risk cover for a specified period of time. Itmeans, the sum assured is payable only if the policyholder dies within thepolicy term. For instance, if a person buys a Rs. 2 lakh policy for 15 years,his family is entitled to the money if he dies within that 15 yaer period.

What if he survives the 15 year period? Well, then he/she is notentitled to any payment; the insurance company keeps the entirepremium paid during the 15-year period.

So, there is no element of savings or investment in such a policy. It isa 100 per cent risk cover. It simply means that a person pays a certainpremium to protect his family against his sudden death. He/sheforfeits the amount if he/she outlives the period of the policy. Thisexplains why the term insurance policy comes at the lowest cost. Inrecent times, this kind of a policy hasnt found too many takers.Which is why insurers now offer this as a rider to other products; so,

Life insurance with no investment component. Contract cover the event of death within a specified period (hence

often referred to as temporary insurance)

Pays an agreed lump sum on death. No surrender value.

1. GENERAL INSURANCE :

Every asset has a value, and the business of general insurance is related to theprotection of economic value of assets. Assets would have been created by theefforts of owner, which can be in the form of building, vehicles, machinery, andother tangible properties. Since tangible property has a physical shape andconsistency, it is subject to many risks ranging from fire, allied perils to theftand robbery.

Concepts of insurance have been extended beyond the coverage of tangibleasset. Now the risk of losses due to sudden changes in currency exchange rates,

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political disturbance, negligence, and liability for the damages can also becovered.

But if a person judiciously invests in insurance for his property prior to anyunexpected contingency then he/she will be suitably compensated for his loss assoon as the extent of damage is ascertained.

The General Insurance Policies are:

Property InsuranceThe home is most valued possession. The policy is designed to cover thevarious risks under a single policy. It provides protection for propertyand interest of the insured and family.

Health InsuranceIt provides cover, which takes care of medical expenses followinghospitalization from sudden illness or accident.

Personal Accident InsuranceThis insurance policy provides compensation for loss of life or injury(partial or permanent) caused by an accident. This includesreimbursement of cost of treatment and the use of hospital facility for the

treatment.

Travel InsuranceThe policy covers the insured against various eventualities while

traveling abroad. It covers the insured against personal accident, medicalexpenses and repatriation, loss of checked baggage, passport etc.

Liability InsuranceThis policy identifies the Directors of officers or other professionals

against loss arising from claims made against them by reason of anywrongful act in their official capacity.

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Motor InsuranceMotor vehicles act states that every motor vehicle plying on the road hasto be insured, with at least liability only policy. There are two types ofpolicy one covering the act of liability, while other covers insurers allliability and damage caused to ones vehicles.

Since a single policy cannot meet all the insurance objectives, oneshould have a portfolio of policies covering all the needs.

5.4 RETIREMENT PLANNING

I dont want to work for money, I want money to work for me. This shouldbe the motto.

For most of us Retirement is a 10 letter word that conjures images of sitting in thegarden of a house with partner for life, playing with the grand children, or hearingthe sounds of their laughter as one read the morning news paper. No more troublesin the world, no more effort to overcome the many obstacles that come ineveryones life, just the joy of knowing that have arrived into this heavenly state ofpeaceful bliss of Financial Nirvana.

The big question : How to start with it? If one is in the late twenties/early thirties,retirement may be the last thing on mind. Rightly so. But if he/she thinks he/shehas a log way to go for to plan for requirement, he/she should think again. The factof matter is that it is never too early to prepare for retirement, especially if he/shewants to maintain the same standard of living that one would have got accustomedto by then.

Let us take a hypothetical example. Consider an individual is of 35 years age andearning Rs. 3 lakhs per annum. His/her salary grows at 5 % per annum and he/sheplan to retire after 25 years. Under these circumstances, assuming the post

retirement would be 60 %

sip project mera money

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