financial

planning
Batch: EMFM 10

By Amar Mehta & Sushama Patil

A unique approach to financial planning

ITM Institute of Financial Market (Vashi)

financial planning

ITM Institute of Financial Market (Vashi)

Introduction
What is Financial Planning ?
Phase I Phase II Dependant Phase Accumulation phase Childs Marriage Phase III Distribution Phase

Why you need Financial Planning?

Income

Childs Education

Who needs Financial Planning?

Housing

Children Marriage 25 yrs Birth & Education 22 yrs Age 35 yrs Earning Years 60 yrs Over 25 - 30 yrs Retirement Age

financial planning

ITM Institute of Financial Market (Vashi)

Steps
Step 1 Current Status
Find out Net saving available for Investment. Wealth accumulated till today.

Risk Profile
Two types of Risk in any investment. Risk of Purchasing power loss. Risk of Capital loss.

Step 2 Goal Setting

Financial Goals Examples Children education Children marriage Retirement Planning. Pension. Purchase of residential premises. Purchase of vehicle. Optional Goals Up gradation of Residence. Luxury Car. Purchase of Luxury items at Home. Vacation Abroad. Wealth creation Crorepati, Billionaire. Charity Religious or Social. Inheritance Estate planning. Early Retirement - Financial freedom.

Financial Capacity Income status, more important Net Saving status. Age:- Younger the age higher is risk taking capacity. Dependents in family. Liabilities, Loans taken.
How will you react to temporary fall in value of your investment? Risk averse , Conservative. Moderate risk taking personality. Aggressive investor. Technical Knowledge. Even if financial & mental capacity strong, technical knowledge required to invest in Shares, Art Painting, Real Estate. Either take professional help or take Mutual Fund route.

Basic aim of Financial planning is to get sufficient fund at specific time for defined financial goal, not to get Super high return

financial planning

ITM Institute of Financial Market (Vashi)

Cash Flow Management

Income Business Expense = Take home cash. Take Home Cash Home expense Taxation - Interest & Installment payments on loan taken = Saving ( cash available for investment) Cash Management Options

Investment in Income generating assets Regular Income in form of Interest , Dividend , or Rent . Capital Gain from investment . This additional or Alternate income will supplement your business income, increase cash available for investment & when it crosses your professional income you will achieve financial freedom.

Investment in Expense generating assets ( ? Liabilities) Residential home, Vehicles, Ornaments, Over insurance. If your all saving is diverted to these investments you will have lesser & lesser cash available for actual investment. When your professional income decreases you will be in trouble.

Thumb rule No.3: 15-20% of your take home cash should go to income generating investments. Your EMI should not exceed 30% of your take home cash. During early stages of life allocate higher portion to Assets. Ideally your Alternate income should fund your Luxury, Liabilities. Delay expenses, DO NOT delay Investments.

financial planning

ITM Institute of Financial Market (Vashi)

Insurance (Emergency Kit)

Life Insurance
Which type of Policy? Term Insurance: It is purest form of insurance & so best. Most of us need only this insurance. Whole life policy. Pension Schemes. Do not buy Endowment, Money back, Capital protection plan, Children plan or Unit Linked Plans ULIP. Best option is Term Insurance + PPF / ELSS scheme of mutual fund. How much? Income based calculation: 10 times your annual gross income. Need based calculation: 200*Monthly home expense + Loan taken + Pending Financial goals - Current value of your financial assets (excluding your residential premises). You must take Term insurance = Loan taken.

General Insurance policies

Personal Risk protection
Accident Insurance.: Pays sum assured on accidental death + pays income loss due to Partial or permanent disability due to accident. Mediclaim Insurance: ICICI Lombard has family Mediclaim policy. Critical illness Insurance: Available as rider with life insurance Business assets: Damage may be due to Natural calamities, fire, theft. Vehicles: Comprehensive cover. Personal assets Householder Policy. Insurance against damage to Residential Property.

Liability Insurance
Professional Indemnity insurance. Third party insurance for Vehicle. Term insurance equal to loan amount.

Property risk insurance.

financial planning

ITM Institute of Financial Market (Vashi)

How to do Financial Planning?

Asset Classes to Invest

What is Asset Allocation?

Investing predefined percentage of your savings in different Asset classes.

Gold

Why Asset Allocation so important?

Debt
Diversification. Thumb rule No. 1 Never put all your eggs in one basket. Different asset classes give better return for specific time duration. 94% of portfolio return will depend on Asset allocation only.

Art

Mutual Funds

Financial Planning
Insurance

How to do Asset Allocation

Equity
Determine the Current financial situation. What you wish to achieve? Your Financial Goals. How much risk you wish to take? Your Risk Profile.

Commodities

Real Estate

financial planning

ITM Institute of Financial Market (Vashi)

Ways for financial planning

Asset allocation
As your retirement time comes near shift to debt schemes. 10-20% in floating rate scheme for emergency expenses.(2-3 months expenses). Up to 15 lac in senior citizen scheme for 9% assured regular income. P.P.F. 20% for 8% tax free return. MIP 20% & Balanced scheme 20% for regular income + capital appreciation. 10-30% in Equity scheme for wealth creation.

Wealth creation
Equity & Real estate are best asset classes for wealth creation. Real Estate - Problems Unaccounted money. Lump sum investment of large amount. Title problems. 10-12 year cycle, so poor Liquidity. Invest only if ready to stay invested for 10 years. Maintenance charges. Entry load- Reg. fees & Exit load capital gain tax Advantages One good investment can change your financial life. Shortly mutual funds will be available.

Equity
In long run equity gives best tax free return. Sensex multiplied 180 times in last 29 years, that is >18% compounded return. Mutual funds have done still better. Value of Reliance Growth scheme multiplied 48 times in 12 years. (>35% compounded return). Time in market is important not timing the market. Risk of capital loss zero if invested > 5 years. 20000 monthly SIP in Reliance Growth scheme created wealth of 3 crore in 12 years. >5 mutual fund schemes created wealth of >2 crore. Even small amount can be invested.

financial planning

ITM Institute of Financial Market (Vashi)

Retirement planning
If Inflation is 5%, then the amount required to meet expenses
Amount in Rs. Monthly expenses Today 30000 In 10 years 49000 In 15 years 62000 In 20 years 80000

How Much?
If retirement <10 years away 250*Existing monthly expense If retirement between 10 20 years form today 350*existing monthly expense If retirement > 20 years from today 500*existing monthly expense + Add provision for pending financial goals (children education, marriage etc.)

Medical costs
Marriage

500000
1000000

800000
1600000

1000000
2100000

1300000
2700000

Particulars Monthly expenses Rate of return Investment corpus required

20 years 80000 7% 1.40c crore

15 years 62000 7% 1.06 crore

How?
Start early: Retirement planning starts the day you get your first income. Invest regularly: Small amount invested regularly. Stay invested: Power of compounding. Best options are P.P.F., Pension schemes of insurance co., Equity mutual fund & Real estate.

financial planning

ITM Institute of Financial Market (Vashi)

Quotes & conclusions

Stock market quotes
In short term market is like Voting machine, in long run it is like weighing machine. Bull will climb staircase but bear will always jump through window. Tops & bottoms are for fools & liars. Most important organ for investment is stomach.

Conclusion
Investing is not Rocket Science. Keep it simple. Start investing early in life. Save & invest regularly, systematically. Stay invested for long term till your goal achieved. Stick to asset allocation. Monitor 3-6 monthly. If necessary take expert help. You have worked hard to earn money, now make the money work hard for you.

financial planning

ITM Institute of Financial Market (Vashi)

Self help
Self help is best help. Devote some time for your financial planning. Magazines Mutual fund insight from Valueresearch Co. Outlook Money from Outlook Express group.

Websites moneycontrol.com Personal finance section & Mutual fund section. Portfolio can be created & maintained. valueresearchonline.com best analysis of mutual funds, rating, & mutual fund portfolio analysis.

financial planning

ITM Institute of Financial Market (Vashi)