Personal Financial Planning (PFP)

MBA Class of 2023

Equity (contd..)

Real Estate

Commodities (Gold / Silver)

Income Tax

Loans and Credit card

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 Equity (contd..)

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 Equity & Retail Investor
Successfully investing in equity requires specialised
knowledge, expertise and time commitment

Directly investing in equity without such knowledge,

expertise and time commitment =

Speculation and not investment

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 Mutual Funds
Investing through mutual funds is the most
recommended method of investing in equity (and in
debt instruments)

The topic of mutual funds is dealt with in detail in

a .pdf FAQ document that will be given to the
students. They are requested to read the document
carefully. One class will be allotted to answering
questions on this topic.

FAQ document is part of the class material /

syllabus
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 Real Estate

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 Real Estate

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 Commodities: Gold & Silver

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 Gold / Silver

Gold and silver are safe

haven assets
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 Gold Jewellery
• Gold jewellery is NOT an investment

• On sale, ~ 10% lost due to melting charges

• Making charges are never recovered on sale

• Fashions change making the jewellery obsolete,

even for your own family

• Incurs additional storage charges

• Exposed to loss by theft

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 Gold Bar / Bullion (0.999 Purity)
• Eliminates most of the negatives listed under jewellery

• Has additional storage charges

• Exposed to loss by theft

• During 2001-15, ROI was 13.66% p.a., against the

sensex return of 13.97% (without dividend) and 15.97%
(with dividend)

• Between 1964 (Rs. 63.25 per 10 grams) and 2016 (Rs.

28,623 per 10 grams), gold appreciated by 12.20% p.a.
over a 52 years’ period

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 Gold: Conclusions
• Buy jewellery as jewellery and not as an
investment

• If at all gold should be in your portfolio, invest

through Gold Exchange Traded Funds (ETF)
whereby you can protect the grams needed for a
future purpose

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 Income Tax

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 Impact of Income Tax on ROI
Income tax impacts the post-tax ROI

Eg. Tax-free bonds @ 8% - Post-tax ROI = 8%

Taxable bonds @ 10% with 30% income tax - Post-

tax ROI = 7%

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 Tax Benefit on Investments
It has beneficial impact on ROI as the investment amount net
of taxes is lower but ROI is available on the gross investment
value

Eg. Assume 1.50 Lakhs is invested in PPF in a year by an

individual in 30% tax bracket. He made no other investment

Under Section 80C, this 1.50 Lakhs is reduced from taxable

income. So tax saved = 1.50 x 30% = 45,000.

Net effective investment in PPF = 1.50 - 0.45 = 1.05

Interest @ 7.10% on PPF is earned in 1.50 = 10,650

Net effective ROI = 10,650 / 105,000 x 100 = 10.14%

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 How to Deal with Tax Benefits
Tax benefit will be one of the factors on investment decision
making

It cannot be the only factor

The investment chosen must be suitable for the financial goal

Never invest only on the basis of tax benefit available

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 Section 80 C
Most important tax benefit provisions for individuals. Attempt
should be made to make maximum use of this benefit (subject
to the investments being suitable for the financial goals)

Investments made under various instruments are deducted

from the total income subject to a maximum of 150,000 per
p.a.

Includes EPF, PPF, life insurance premium etc., as well as

repayment of principal amount of home loan

Link to know about the qualifying instruments:

https://groww.in/p/section-80c/

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 EEE Investment
EEE = Exempt, Exempt, Exempt

Exempt 1 = At the time of investment, the invested amount is

reduced from the total taxable income (subject to limits)

Exempt 2 = The income / interest on the investment is free for

all time to come in future

Exempt 3 = At the time of maturity, the principal investment

and interest / ROI is paid back to the investor on which there is
no tax

Most common example: EPF* / PPF / life insurance policy

premium (insurance-cum-investment policies - not term
insurance
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 EPF, VPF, PPF
Elements EPF VPF PPF
Eligibility Salaried individual Salaried individual Any individual

Depends upon Depends upon

Maturity 15 years
employment period employment period
Premature / partial Subject to specific Subject to specific Subject to specific
withdrawal needs needs period
Safety Govt. Guaranteed Govt. Guaranteed Govt. Guaranteed
Interest rate p.a. as
of Jan 2022 (annually 8.5% (set annually) 8.5% (set annually) 7.1% (set quarterly)
compounded)

Tax treatment EEE* EEE* EEE

Maximum
12% of basic salary 88% of basic salary Rs 1.50 L
investment p.a.

Interest on employee’s contribution exceeding Rs 2.50 L p.a. is taxable

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 When to Invest for Tax Benefit?
Invest throughout the year

Do not wait for Feb / March to invest

If an employed individual, disclose your planned investment to

the employer at the beginning of the year itself so that monthly
tax deduction is lower. Tax year is April - March

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 Loans and Credit Card

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 Reasons to Borrow
Acquire an appreciating asset

Acquire a depreciating asset

Emergencies

Higher education

Spending

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 Reasons to Borrow -Examples
Acquire an appreciating asset - Home

Acquire a depreciating asset - Car

Emergencies - Medical

Higher education - MBA

Spending - Overseas vacation

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 Credit Card
Credit card is a wonderful product if used as a
convenience card
Credit card could become the beginning of
financial downfall if used as a credit line i.e
spending the future income now
Rolling over the balance attracts high interest
~ 24% p.a. When the total statement value is
not paid on or before due date - interest charged
from the date of transaction on the transaction
value, and, interest given on the payment value
from date of payment
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