Financial PLANNING

CS

T. Anil Kumar
FCS

Agenda

Introduction

Financial Planning

SMART Goals

Risk vs Returns

Power of Compounding

Inflation

Investment Vehicles

Investment Strategies

Importance of learning about

money & planning!
Enables us to take informed
decisions about money

Introduction
Planning of finances is essential for everyone.
One must restrain from overspending
Planning helps us to plan, save and achieve
our financial goals
If people start planning from student days,
they have longer time to plan.
Power of compounding helps the most over
longer periods of time

Your monthly budget

A : Income

Pocket Money
Part time assignment
Prize
Stipend
Cash gifts, if any

B : Expenses

College Fees
Party
Gift
EMI if any
Lunch
Travelling expenses
Others

C: Balance (A-B) - Savings

(20% of Income)

WHAT IS FINANCIAL PLANNING &

The financial planning process.

Gather
financial
Data
1
Review
Periodically
6
Implement
the plan
5

Identify
goals &
risk
Appetite
2
Identify
Gaps
3
Prepare a
plan to bridge
the gaps
4

Where we
want to be

Where
we are

Gathering financial data

Net worth & Planning

What is the source of income and what is its nature

Monthly Salary
Business Income
How much are your monthly expenses
Knowing salary & expenses act as first step for planning
Even basic needs cannot be met, even if is a handsome salary but
lack of planning.

Identify Goals

Define investment objective or financial goals

Goals can be
- short term (upto 3 years),
- medium term (3 to 5 years) or
- long term (upwards of 5 years)

Each goal must have a target amount and a target date

Goals without amounts and dates are likely to be missed!
GOALS must be SMART Goals

Identify gaps or issues

Are there any expenses which have to be met on a priority, due
which plan may have to be changed
Are there any liabilities which are already existing or worse still,
may crop up suddenly?

to

Prepare the plan

Understand the risk taking ability
Income & Expenditure and Assets & Liabilities play a very
important role in an individuals risk taking ability
High income does not necessarily mean high risk appetite if the
person also has large amount of liabilities
Low income used judiciously to build assets, can increase risk
appetite
Wealth = net worth
Net worth = assets liabilities

Implement the plan

Preparing plan is relatively simple, implementing it regularly is

the real challenge

Where is the money invested in which asset class
determines the potential returns the investor can expect
Avoiding risky investments may lead to compromising of
goals

To Sum Up

How to Achieve Goals

Arrange goals in order of their time to reach (short term, followed by
medium
term and lastly long term)

Plan investments for each goal.

Short term goals cannot be achieved by investing in risky avenues

which by definition are long term in nature
Long term goals cannot be funded by investing in short term
avenues as they may not generate enough returns

Steps for Budget Planning

Determine
your
bill for
essentials

Total
debts

Calculate your
income
Determine
your bill for
non-essentials

Calculate
your
savings

RISK AND RETURN

- Risk and investing go hand in hand
- Risk increases as the expected potential return
increases.
-Even no-risk products such as savings accounts
and government bonds carry the risk of earning less
than the inflation rate
Low risk - Cash, bank, FDs, Gold (Returns 3.5 - 8%)
Medium Risk GOI Bonds, Companies bonds (8-10%)
Aggressive Investments Equity & Mutual Funds
(Returns >12%)
It is crucial to manage your risk

Time value of Money & Inflation

Inflation erodes purchasing power
of money

Inflation

2021
Rs. 392/=
tomorrow

Inflation
10 %
2011
Rs 1,000/=
today

What Rs. 1/= you can buy today might

not be enough for purchasing the same
after 1 year.
Means purchasing power of Rupee has
gone down.

Power of Compounding
- What happens to Rs. 100 invested @ 10% for 5
years in bank FD?
Year

Amount
Floating
(@10%fixed rate rate
of interest

Amount (Based
on floating rate)

110.00

10%

110.00

121.00

9%

119.90

133.10

12%

133.50

146.41

10%

146.85

161.05

9%

160.06

Compounding
Formula for calculating annual compound interest is

Where,
A = final amount
P = principal amount (initial investment)
r = annual nominal interest rate (as a decimal)
(it should not be in percentage)
n = time

Choosing the right investment

option
Any investor should look for:
Safety
Liquidity
Returns

Asset Allocation
- Investors need to have varying percentages of
investments.
LOW
MEDIUM
HIGH

Diversification

in Rs.

Funds

10,000

Investments

Stocks

3,500 (35%)

Bonds

3,500 (35%)

Bullion

3,000 (30%)
10,000

Investment options
Short term Savings bank account
Money market funds / liquid funds
Long term Equity shares
PPF
Bonds and debentures

Savings & investment related products

Savings may be
- Financial Assets
- Non Financial Assets

Financial Assets
Cash Instruments
Debt Instruments
Equity Instruments
Non
Financial Assets
CommodityEx Traded Funds

Real Estate

Bullions-Gold,
Silver, Diamond

Savings & investment related products

Cash Instruments
Cash in hand
Cash in Bank
Useful for emergencies
Looses value because of inflation
3-6 months of average monthly expenses
to be kept in cash instruments.

Asset Allocation Strategy

Assets have different
risk return characteristics
investments allocated based on risk-return characteristics
are known as Asset allocation
Asset allocation strategy SHOULD CONSIDER
Your time frame
Your risk tolerance
Your personal circumstances

Savings & investment related products

Debt Instruments
- Small Savings Schemes
- Public Provident Funds
- National Saving Certificates
- Post Office Monthly Income
Schemes
- Senior Citizen Savings Schemes
- Post Office term deposit
- Post Office Savings accounts
- Post Office Recurring Deposits
- Kisan Vikas Patra
Bonds & Debentures
- Tax Saving Bonds-Infrastructure
Bonds, 54EC
- Debentures & Company Fixed Deposits

Savings & investment related products

Equity Funds
- Investing in the Equity capital of the Company
- Public Offer
- Purchasing through secondary market.
Dividend or capital appreciation.

Third richest man in the world after Carlos Slim & Bill Gates
having a networth 50$ Billion $ is Warren Buffet.
He bought his first share at the age of 11 & he regretted
that he started too late.
He bought a small farm at the age of 14 with savings from
delivering newspapers.
He drives his own car & never travels in a private jet.
He owns 65 Companies writes one letter to the CEOs & does
not hold meetings.

Savings & investment related products

Mutual Funds
- The money pooled in by the investors
in mutual fund is managed by Asset
Management Companies & invested
in money markets, equity, debts etc.
The returns earned are distributed as
as dividend or added to the capital.

Savings & investment related

products..
Insurance
- Spreads risk
- Spreads the losses
To be discussed openly and no sentiments to be attached.
New Pension System, 2009
Available to all Indians between 18 and 55years
On maturity, either Withdraw the money, or
Buy immediate annuity, or both
Minimum 40% for buying annuity and maximum 60% withdrawn

Loans or Investments
Loans & Credit cards have a very high
cost.
Loans taken are deductible under
Income Tax Housing Loan & Principal.
Students Loans are also deductible.

Credit cards
Credit cards allows extra float on their money.
Non Payment of dues within 45 days leads to
interest @ 3% per month.
Warren Buffet
Stay away from credit cards (bank loans) and invest in yourself
& remember;
a) money does not create man but it is the man who
created money.
b) live your life as simple as you are.
c) Dont do what others say, just listen to them but do
what you feel good.

Tax Planning
Section 80 C Rebate upto Rs. 1,00,000
Investments like insurance
premia, housing loan, PPF etc
Long term capital gain on equities are not taxable
80 CCF Infrastructure Bonds are also exempt.

Regulators
Securities & Exchange Board of India
Reserve Bank of India
Insurance regulatory Development Authority
Competition Commission of India

Any questions I would be glad to answer

THANK YOU!

r your valuable time & patient hearing