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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…