BASIS OF FINANCIAL PLANNING

SUBMITTED TO: Mr. Himal Parikh

Submitted by : Prashant Maharshi

FINANCIAL PLANNING

Financial planning is the long-term process of wisely managing one’s finances so one can achieve his financial goals.

It is your roadmap to Financial Health, & Sustainable Wealth creation.

WHY FINANCIAL PLANNING IS NEEDED?Life without Financial planning is like Unplanned Vacation.

Manage one’s finances for the achievement of goals.

Emergency cash requirement.

Determining capital structure.

To maximize Return on Investment at minimum level of risk.

To minimize and defer income taxes and other government levies.

WHAT ARE COMMON EXCUSES FOR NOT PLANNING FINANCES?

Lack of money.

No need of life insurance.

Too young to think about retirement planning.

Child’s education is more important then retirement planning.

Only rich person can make will.

WHAT IS THE PROCEDURE OF FINANCIALPLANNING?

Measure financial health

Financial goal setting

Risk Profile

Decide Investment areas

HOW TO MEASURE FINANCIAL HEALTH?Before person start financial planning he/she has to determine their

financial health. Three simple personal finance rule with which a person can start with:

a) Calculate debt to income ratio.

Debt to Income Ratio= Total monthly outgoing on liabilities(EMIs)

Total monthly income from fixed resources

Debt to Income ratio should not be higher then 30%.

Cont…b) Calculate Savings to Income Ratio

Savings to Income Ratio= Total monthly savings

Total monthly income

One should save atleast 20% of their monthly income.

Cont…

3) Contingency Reserve

One should set aside 6 to 24 months of living expenses Contingency fund to be used only at the time of emergencies.

FINANCIAL GOAL SETTINGMandatory Goals

Purchase of home

Child’s Education

Purchase of car

Retirement

Child’s Marriage

FINANCIAL GOAL SETTING CONT…Optional Goals

Up gradation of Residence.

Luxury Car.

Purchase of Luxury items at Home.

Vacation Abroad.

Wealth creation

Charity

Inheritance – Estate planning.

Early Retirement

Table showing some of the financial goals according to their priority

GOAL PRIORITY TIME TILL GOAL OCCURS

Child’s College Education

High 9 Years

Child’s Marriage Medium 12 Years

Retirement High 15 Years

Foreign Vacation Low 16 Years

RISK PROFILE

Primary long-term riskInflation risk Loss of purchasing power

Primary short-term risk Volatility risk Instability of investment

Other risks

Business risk

Market risk

Liquidity risk

Interest rate risk

Currency risk

Inherent risks of a particular business

Likelihood that the market as a whole will fall

Risk of not being able to access money when needed

Loss of principal on fixed-rate investments due to rising interest rates

Investment’s value will be affected by changes in exchange rates

HOW ARE THESE RISKS MANAGED?

Primary long-term risk

Inflation risk Invest in stocks

Primary short-term risk

Volatility risk Hold investments for the long-term

Other risks

Business riskMarket riskLiquidity risk

Interest rate riskCurrency risk

Diversify within an asset classDiversify among asset classesDiversify among asset classesHave an emergency fund“Ladder” portfoliosDiversify among countries or hedge

ASSET CLASSES TO INVEST

Financial Planning

Equity

Debt

Real EstateGold

Insurance

EQUITY

Equity Mutual Fund

Equity Shares

Investment in equity is risky person should invest in equity depending upon their Risk appetite and risk tolerance.

DEBTPublic Provident Fund (PPF)

Gives 8% tax free return. Minimum investment of Rs.500. Lock in period 15 years. No risk involved.

Recurring Deposit High in safety. Not allowed to withdraw before certain period. They are taxable. Expected return between 6-7% depending on term.

DEBT

Post Office SchemesOffer 8% of savingsReturns are taxable and most schemes have a lock in.

Debt-Based Mutual Fund Investment through Systematic Investment PlanningDividends are tax free.Capital gain tax applies at the time of selling of units.

REAL ESTATE

Real estate is profitable option to invest one’s money in but it is not risk free.

Risk involved in real estate investment are

Getting bad tenant.

Market decline.

GOLD

Physical gold

Gold ETFs

Gold FUND OF FUND (FOF)

E-Gold

GOLD

Gold is risky as gold price can fluctuate sharply.

Therefore only 10-15% of the portfolio should be allocated in gold.

Physical gold is more risky then gold ETFs, E-Gold and Gold FOF.

Unlike other type of gold investment physical gold is not price transparent.

Buy back of physical gold is not on market prices but after deducting high making charges.

INSURANCE

Aim of insurance is to cover the risk and provide financial compensation for any unexpected losses. Such as:

Personal Risks-Loss of income.

Property Risks- Damage to property.

Liability Risks- Losses due to damage to others.

INCOME SCHEMESP.P.F. N.S.C. BANK

F.D.Floating rate

Funds

Return % 8% 8% 6-8% 5-6%

Tax-free Yes NO NO Yes

Rebate on Investment

Yes Yes Yes if >5 year No

Liquidity 50% withdrawal after 5 years

6 year lock in Lock in as per term of F.D.

No lock in

WHAT ARE HURDLES IN FINANCIAL PLANNING?

Lack of funds.

Lack of knowledge regarding financial assets.

Misguiding Schemes.

Difficulty in finding appropriate financial planner.

5 DO’s OF FINANCIAL PLANNING

Emergency Cash

Medical Insurance & Life Insurance

Child Education Fund

Retirement Fund

Make a Will

HOW TO RAISE EMERGENCY CASH?

Credit Card

Loan Against Securities

Selling Assets

Personal Loan

Advance Against Salary

Borrowed From Friends & Relatives

8 DON’T’s OF FINANCIAL PLANNING Don’t think credit

Don’t delay investment

Don’t ignore inflation

Don’t be careless in the market

Don’t dip into that retirement fund

Don’t cash your Employees Provident Fund

Don’t ignore tax saving tools

Don’t economize on insurance

HOW TO CHOOSE FINANCIALPLANNER?

Understands Your Planner’s Personality

A Planner helps you to make planned investment

Understand the Expertise of your planner

Is your planner proactive?

Is he well-versed with tax laws?

CONCLUSION

Keep investment simple.

Start investing early.

Invest regularly.

Monitor investment every 3-6 months.

Stay invested for long time.

Take experts help.

Thank You…