Retirement Planning
Content
RETIREMENT PLANNING
Prof: Vinod Agarwal IBS,MUMBAI
Retirement Planning Planning is a µFinancial Planning¶ after the retirement. Financial planning is the process of successfully meeting financial needs of life through the proper management of finances. It is your roadmap to Financial Health, & Sustainable Wealth creation.
Retirement
Why you need Financial Planning?
Life
without Financial planning is like Unplanned Vacation.
If
you wish to achieve your financial goals successfully & peacefully you must plan your financial life.
Problems of Random investment
Wrong selection Wrong timing Short
± flavor of the month.
± mostly near top.
term investment. investment.
Inadequate
Who needs Financial Planning?
Whatever
may be level of your income or assets , you need financial planning. is myth that only rich people need financial planning.
It
How to do Financial Planning?
By
scientific Asset Allocation.
What is Asset Allocation?
Investing
predefined percentage of your savings in different Asset classes.
Why Asset Allocation so important?
Diversification. Thumb rule No.
1 Never put all your eggs in one basket.
Different
asset classes give better return for specific time duration. of portfolio return will depend on Asset allocation only.
94%
Financial Planning and Asset Allocation
Significance of Asset Allocation
Significance Relative to Return
Brinson, Hood
and
Beebower : Determinants of Portfolio Performance, 1986, 1991: ³Asset Allocation helps explain over 93% of a portfolio¶s performance´.
Financial Planning and Asset Allocation
Asset Classes to Invest
Gold
Art
Financial Planning Insurance
Debt Mutual Funds
Equity
Commodities
Real Estate
How to do Asset Allocation
Determine
the Current financial
situation.
What
you wish to achieve? Your Financial Goals. much risk you wish to take? Your Risk Profile.
How
Step 1 ± Current Status
Find
out Net saving available for Investment. accumulated till today.
Wealth
Step 2 ± Goal Setting
What
is your intention of investment?
Simply
put, How much money you need? & When you need the money? (Time horizon) financial goals are vital to financial planning.
Specific
Financial Goals - Examples
Mandatory Goals:-
(1) (2) (3) (4) (5)
Children education Children marriage Retirement Planning. Pension. Purchase of residential premises. Purchase of vehicle.
Optional Goals:Goals:(1) (2) (3) (4) (5) (6) (7) (8)
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.
Goal setting
Specify amount required & approximate time period when money required.
(1) (2) (3) (4)
Types of goals.
Short term Goals 1-2 years. Medium term goals 3-5 years. Long term goals 5-10 years. Distant goals > 15-20 years.
Risk Profile
(1) (2)
Two types of Risk in any investment. Risk of Purchasing power loss. Risk of Capital loss.
Strong correlation between risk & reward. Aim of financial planning is to get maximum return with minimum risk.
Risk Profile
Financial Capacity
(1) (2) (3) (4)
Income status, more important Net Saving status. Age:- Younger the age higher is risk taking capacity. Dependents in family. Liabilities, Loans taken.
Risk Profile
Mental capacity ± Temperament. How will you react to temporary fall in value of your investment?
(1) (2) (3)
Risk averse , Conservative. Moderate risk taking personality. Aggressive investor.
Risk Profile
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.
Do & Don'ts
Don¶t
buy on tips, impulse or under influence of µleft behind¶ feeling. Don¶t chase last year topper Stick to your asset allocation.
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 and Asset Allocation
FINANCIAL PLANNING FOR THE FUTURE««... FUTURE««...
Phase I Phase II Dependant Phase Accumulation phase
Child s Marriage Child s Education Housing
Phase III Distribution Phase
Children Marriage 25 yrs 35 yrs Over 25 - 30 yrs
Birth & Education
22 yrs
Earning Years
60 yrs Age
Retirement Age
Type of Assets
Assets ± Cash, Savings a\c, Floating rate mutual fund. Ideal for short term goals. (2) Income generating Assets ± Bank F.D.,PPF, NSC, Bonds. Ideal for medium term goal. (3) Capital appreciation Assets ± Equity- Shares, Real Estate, Gold, Art. Ideal for long term goal.
(1) Liquid
Financial Planning and Asset Allocation
FEW EXAMPLES OF ASSET ALLOCATIONS
Financial Planning and Asset Allocation
INVESTOR PROFILE
Mona, Joydeep ( Age 28 years ) Financial Goals Investment Strategy Planning to purchase a house Aggressive Growth Portfolio in the next 5 - 8 years Short-term Bonds 10% 15% Planning for family in 2 years time. Creating long-term wealth for retirement
Stocks 75%
Financial Planning and Asset Allocation
INVESTOR PROFILE
Sheela, Shekhar ( Age 37 years ) and two kids
Financial Goals Has a housing loan Providing for children education (7-10 years) Planning for child¶s wedding (15 - 20 years) Take care of old parents Planning for retirement
Investment Strategy
Balanced Portfolio Stocks 60% Short-term 15%
Bonds 25%
Financial Planning and Asset Allocation
INVESTOR PROFILE
Maura & Akash Chaudary Financial Goals Retired Regular Income Medical Costs Investment Strategy
Conservative Portfolio Stocks 15% Bank Deposits 40%
Bonds 45%
Tips for asset allocation
Thumb rule 2
100-Age in years = Maximum % allocation to Equity.
Equity will give highest return in long run but Equity is very risky product for < 2 years horizon. Risk of capital loss in Equity investment almost zero if invested for > 5 years but as high as 30% in 3 months.
Emergency Kit
Before
planning new investment, it is very important to prepare emergency kit to Protect your Current financial status. is first & vital step in any financial planning.
Insurance
Insurance
Aim
± Financial Compensation for any unexpected loss. Cover the Risk.
Personal
Risks. Loss of income. Property Risks. Damage to property. Liability Risks. Losses due to damage to others.
Life Insurance - Basic
Aim
± Financial protection to your dependents in case of your premature death. Life of earning member of family, ONLY, should be insured.
Insurance
should be taken for financial risk protection only NOT for Investment or Tax planning. Insurance is very bad investment product .
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 (1) Accident Insurance.
Pays sum assured on accidental death + pays income loss due to Partial or permanent disability due to accident. (2) Mediclaim Insurance. ICICI Lombard has family Mediclaim policy. (3) Critical illness Insurance Available as rider with life insurance.
General Insurance cont.
Property
risk insurance. (1) Business assets. Damage may be due to Natural calamities, fire, theft. (2) Vehicles Comprehensive cover. (3) Personal assets ± Householder Policy. Insurance against damage to Residential Property.
Liability Insurance
Professional Third Term
Indemnity insurance.
party insurance for Vehicle.
insurance equal to loan amount.
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
(1)
Investment in Income generating assets. Investment in Expense generating assets ( ? Liabilities).
(2)
Income Generating Assets
Regular
Income in form of Interest , Dividend , or Rent . Gain from investment .
Capital 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.
Expense generating Investment
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. your professional income decreases you will be in trouble.
When
Financial definition of asset, liability.
The
investment which brings cash inside your pocket is Asset. investment which takes out cash from your pocket is Liability. investment in both classes.
The
Balance
Cash Management
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.
early stages of life allocate higher portion to Assets. Ideally your Alternate income should fund your Luxury, Liabilities.
During Delay
expenses, DO NOT delay Investments.
Investment
Step Step Step Step
1 Asset Allocation 2 Provision for Insurance 3 Cash flow planning 4 Actual investment.
Investment Options
Capital protection + Income generation.
(1) Govt. Assured return schemes. (2) Bank Deposits. (3) Bonds. (4) Company deposit, debentures. (5) Mutual fund Debt schemes
Income generating investments
o
o
o
Pros. (1) Safe ± Capital protected. (2) Tax rebate on investment. PPF, NSC. (3) Tax free return. PPF, Mutual fund. Cons. (1) Low return ± difficult to beat Inflation. (2) Lock in period. Tips PPF is best investment for long term investment. Floating rate funds best for short term investment. Senior citizen scheme best for retirement planning. Always calculate post tax, inflation adjusted return.
Income generating Investment.
Thumb
rule 4.
When interest rates are rising invest in Floating rate schemes & take Fixed rate loans. When interest rate is falling invest in Long term Income or Gilt funds & take floating rate Loans.
Income Schemes
P.P.F. Return % Tax-free Rebate on Investment Liquidity 8% Yes Yes 50% withdr awal after 5 years N.S.C. 8% NO Yes 6 year lock in K.V.P. 8% NO NO BANK F.D. 6-8% NO Yes if >5 year Floating rate Funds 5-6% Yes No
7.5 Lock in No lock in years as per lock in term of F.D.
Income Generation + Capital Appreciation
MIP
& Balance schemes of mutual
fund Equity shares with high dividend yield Rented real estate Suitable for moderate risk profile & investors near retirement age.
Capital Appreciation
shares - Direct, IPO, Mutual fund, PMS. Real estate Gold Art ± paintings
Equity Equity
& Real Estate are best long term Wealth creator & Equity is most tax efficient investment.
Speculative investment
Trading
in equity shares. Derivative trading Commodity trading Very risky product. No speculator has become Billionaire. Only brokers make money. Never trade with borrowed money.
Mutual Fund
What is Mutual fund? (1) Fund collected from different investors for common purpose, managed by Professional manager & Income distributed to investors in proportion to their investment. Investors allotted Units for investment. Initial price is always Rs. 10 per unit.
(2)
(3) Market price of unit is called NAV. Market value of investment / Units allotted = NAV
Mutual fund Advantages
Diversification Professional Income
management
tax benefits.
Liquidity. Systematic
regular investment of small amount possible.
Mutual Fund Types
(1) Debt Schemes.
(a) Floating rate scheme. (b) Income or bond schemes. (c) Gilt schemes. (d) MIP ± 5 to 30% investment in equity. Debt schemes ideal for regular income, capital protection & short term goals.
Mutual fund Types cont.
(2) Balance Schemes
(a) Debt oriented. 40% investment in equity. (b) Equity oriented. 65% or more investment in equity. Best for medium term financial goals 2-4 years. Best for beginner in equity market investment.
Mutual fund Types cont.
(3) Equity schemes
(a) Diversified Equity schemes. Flexi cap diversified equity scheme is best investment for Wealth creation. ( b) ELSS - Equity linked saving scheme. Best for tax planning. (c) Sector ± Thematic funds. (d) Index fund. (e) Exchange traded funds.
Mutual fund Types cont.
(4)
Specialty funds.
(a) Exchange traded Gold fund. (b) Real estate fund. (c) Art fund.
Plans ± Options
Dividend
plan
Options (1) Dividend Payout. (2) Dividend Reinvestment.
Growth
plan. best plan for wealth creation.
Mutual Fund Types
Close Open
Ended Ended
How to invest?
Lump S.I.P.
sum investment. Systematic Investment Plan Systematic Transfer plan
S.T.P. If
you invest directly at fund office or online there is no entry load.
Fund Selection
Say
NO to NFO New fund offer
Existing
Diversified mutual Fund schemes having consistent performance during last 5 years. Beware of Agents/ Brokers advise:(a) NFO ± At par offer, Low NAV. (b) Dividend declared. (c) Churning ± Profit booking.
Not > 10 schemes 4-5 Diversified Equity funds. 1 ELSS scheme 1 Balanced scheme 1 MIP 1 Floating rate scheme 1-2 Sectoral or Midcap scheme.
Ideal portfolio Type of Fund
Best for Time Horizon Expected return Risk of capital loss
Floati ng Rate fund <1 year 5±6 % Zero
MIP, Fixed matur ity funds 1-2 years
Bala Equity nced schemes sche mes > 5 years
2-4 year s 7 ± 8 10 ± % 12 % Almo 5 ± st 10 zero % up to 2 year s.
> 15 %
20 ± 30 % in first 3 years.
4-5 star funds
Diversified Mutual fund. (1) HDFC Equity, (2) Reliance Vision, (3) Reliance growth, (4) SBI Magnum Contra. (5) DSP ML Equity. ELSS (1) Magnum tax gain (2) HDFC Tax Saver. Sectoral & Midcap (1) DSP ML TIGER, (2) Reliance Diversified power sector, (3) SBI Magnum global (4) Sunderam Select Midcap fund. Exchange traded. Nifty BeES, Banking BeES.
4-5 star funds - Continue
Balanced (1) HDFC Prudence (2) Magnum Balanced. MIP (1) HDFC Long Term MIP, (2) ICICI Prudential Income Multiplier.
Model Portfolio
Equity Equity Balanc MIP, Diversif Midcap ed Bond ied Sector Fund Fund Age 20-30 Dependent 35-40% 35-40% 20% 1-2 Age 30-40 302030% Children in school 35% 25% Age 40-50 Children in college Age 50-60 Children marriage Higher Education > 60 years Retirement planning Profile Floating rate Fund 10%
10% 1020% 10% 20%
3035% 2530% 1020%
1015%
20- 10% 30%
5-10% 20% 20% 30% 3040%
Income Tax Planning - Tips
Tax
planning is legal. Purchasing power of Unaccounted money will slowly go down. No cash transaction possible in Mutual fund.PAN card copy required. Make maximum use of tax free income limit Create multiple heads of income tax payer. ELSS investment can be used for income tax planning & wealth creation.
Income Tax calculation
Tax
free income limit:Male Individual & HUF. 1,10,000. Female individual 1,45,000. Senior citizen (>65 years age) 1,95,000.
Only
10% tax on income between Tax free limit & 1,50,000. to 1 lac rebate for 80C investment.
Up
Income Tax calculation
If male tax payer or HUF has income of 2.5 lac & 1 lac invested under sec. 80C then tax payable is only Rs. 4000. For female tax payer only 500 & For senior citizen nil up to 2.95 lac income.
If Husband, Wife, HUF & Parent or Major child has income of 2.5 lac each, & they invest Rs. 1 lac each under sec. 80 C, total tax payable will be only 8,500 on total 10 lac taxable income. 4 lac will be compulsory invested each year.
Capital Gain Tax
Long term capital gain. Equity scheme / shares. > 1year. Tax free. Real Estate, Gold. > 3 years. 20% with indexation or 10%. Debt scheme of mutual fund > 1 year. 10%. Short term capital gain. Equity scheme / shares. 10%. Real Estate, Gold < 3years & Debt scheme of mutual fund < 1 year ± will be added to business income.
Income Tax Planning Tips
Multiple heads of Tax payer in family. Gift to parents & major children is tax free, clubbing free, without any limit. Give loan to spouse at low interest rate, instead of gift to avoid clubbing of income. Take maximum advantage of Tax free income. (1) Long term capital gain on shares & equity mutual fund. (2) Dividend from mutual funds & shares. (3) P.P.F. interest. Tax free bond interest. (4) Agriculture income.
Income Tax Planning Tips
Home loan.- Principle payment eligible for 80C rebate, Interest deducted from income up to 1.5 lac per year per head. Real estate ± buy cheap , sell at highest possible price after 3 years. Capital gain tax can be saved by investing in Capital gain bonds up to 50 lac. Up to 1 k.g. gold per married women & 500 gram gold per unmarried women in family , will be allowed during income tax search.
Retirement Planning
Retirement doesn't mean stoppage of work, it means freedom from compulsion to work for money ± Financial freedom. Why? To maintain same life style even after retirement Life expectancy is increasing. 80+ age not unusual. Female spouse will live 5 years more then male. Inflation will make difficult to maintain same level of living standard. You & your spouse may not like to remain dependent on children. We don¶t have govt. social security scheme.
Financial Planning and Asset Allocation
Why retirement planning
Increasing life expectancy Protect PostRetirement Lifestyle
Protection for Spouse /Dependents
Retirement Plan An essential need
Increasing Cost of Health
Falling Interest Rate Scenario
Breakdown of traditional support systems
Financial Planning and Asset Allocation
FINANCIAL PLANNING FOR THE FUTURE««... FUTURE««...
Phase I Phase II
Child s Marriage Child s Education Housing
Phase III
Children Marriage 25 yrs 35 yrs Over 25 - 30 yrs
Birth & Education
22 yrs
Earning Years
60 yrs Age
Retirement Age
Financial Planning and Asset Allocation
Why retirement planning
If Inflation is 5%, then the amount required to meet expenses«« Amount in Rs. Monthly expenses Medial costs Marriaage Today 30000 500000 1000000 In 10 years 49000 800000 1600000 In 15 years 62000 1000000 2100000 In 20 years 80000 1300000 2700000
Particulars Monthly expenses Rate of return Investment corpus required
20 years 15 years 80000 62000 7% 7% 1.40 crore 1.06 crore
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.)
How?
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.
Start
Asset allocation
Maximum equity allocation in % = 100-age in years. 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 (1) Unaccounted money. (2) Lump sum investment of large amount. (3) Title problems. (4) 10-12 year cycle, so poor Liquidity. Invest only if ready to stay invested for 10 years. (5) Maintenance charges. (6) Entry load- Reg. fees & Exit load ± capital gain tax Advantages. (1) One good investment can change your financial life. (2) 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.
Mutual fund returns
Fund name Start date Reliance growth Oct-95 Reliance Vision Oct-95 SBI Magnum Contra- July 99 HDFC Equity Dec.94 DSP ML Equity April 97 HDFC Prudence Jan 94 1 year return 5 year return annualized % 72.6 Since inception return % 37 Worst 3 months return -45 76.9
56.6
60.7
31.6
-39.6
66.3
72.1
38.3
-42.7
53.6
57.8
26.9
-34.7
70.3
62.9
32
-46
43.2
46.7
24.8
-18
Magic of Compounding
Compounding is called eighth wonder of world. Rule of 72 72/ Interest rate = No. of years required to double money. 72/ No. of years required to double money = % interest return.
If you earn 24% compounded return your money double in 3 years, multiplies 10 times in 10 years, 100 times in 20 years & 1000 times in 30 years. Average return of diversified mutual fund is >24% in last 14 years.
Financial Planning and Asset Allocation
THE EIGHT WONDER OF THE WORLD...
The Power of Compounding
2,533,529 2,099,636 Savings Returns * 1,572,834
350,000
330,000
300,000
Assuming an annual savings of Rs. 10,000 in an instrument providing return of 9.5% p.a.
Saves from age 25 to 60
Saves from age 27 to 60
Saves from age 30 to 60
Financial Planning and Asset Allocation
Amount required to be saved monthly:-
Rs. 100 lakhs :-
Financial Planning and Asset Allocation
Start Early
Your Twin Age : 25 years Age : 25 years Start : Today Start : at age 30 Invest : 5 years Invest : 30 years Amount : Rs 10,000 p.a. Amount : Rs 10,000 p.a. Redemption on Redemption on retirement (age 60) retirement (age 60) Value at 60 - 51 lakhs. Value at 60 ± 50 lakhs.
You
Financial Planning and Asset Allocation
INFLATION ROBS YOUR PURCHASING POWER
543,113 40 YRS.
(Assuming inflation @ 8% p.a.)
251,568 30 YRS.
Rs. 25,000 today 116,525 20 YRS.
53,973 10 YRS.
10 yrs
20 yrs
30 yrs
40 yrs
Financial Planning and Asset Allocation
Estimating Future Needs
Rs. 20 lakhs today:today:-
Wealth creating ideas
Be fearful when others are greedy, be greedy when others are fearful. Invest when discount sale is on. Price is what you pay, value is what you get. Purchase share of business not share certificate. Look at P/E ratio not absolute level of index. Wealth creation is art of purchasing 1 rupee for 40 paisa.
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.
Self help
Self help is best help. Devote some time for your financial planning. Magazines:(1) Mutual fund insight from Valueresearch Co. (2) Outlook Money from Outlook Express group. Websites:(1) moneycontrol.com Personal finance section & Mutual fund section. Portfolio can be created & maintained. (2) valueresearchonline.com best analysis of mutual funds, rating, & mutual fund portfolio analysis.
Thank You
Prof: Vinod Agarwal IBS,MUMBAI
Retirement Planning Planning is a µFinancial Planning¶ after the retirement. Financial planning is the process of successfully meeting financial needs of life through the proper management of finances. It is your roadmap to Financial Health, & Sustainable Wealth creation.
Retirement
Why you need Financial Planning?
Life
without Financial planning is like Unplanned Vacation.
If
you wish to achieve your financial goals successfully & peacefully you must plan your financial life.
Problems of Random investment
Wrong selection Wrong timing Short
± flavor of the month.
± mostly near top.
term investment. investment.
Inadequate
Who needs Financial Planning?
Whatever
may be level of your income or assets , you need financial planning. is myth that only rich people need financial planning.
It
How to do Financial Planning?
By
scientific Asset Allocation.
What is Asset Allocation?
Investing
predefined percentage of your savings in different Asset classes.
Why Asset Allocation so important?
Diversification. Thumb rule No.
1 Never put all your eggs in one basket.
Different
asset classes give better return for specific time duration. of portfolio return will depend on Asset allocation only.
94%
Financial Planning and Asset Allocation
Significance of Asset Allocation
Significance Relative to Return
Brinson, Hood
and
Beebower : Determinants of Portfolio Performance, 1986, 1991: ³Asset Allocation helps explain over 93% of a portfolio¶s performance´.
Financial Planning and Asset Allocation
Asset Classes to Invest
Gold
Art
Financial Planning Insurance
Debt Mutual Funds
Equity
Commodities
Real Estate
How to do Asset Allocation
Determine
the Current financial
situation.
What
you wish to achieve? Your Financial Goals. much risk you wish to take? Your Risk Profile.
How
Step 1 ± Current Status
Find
out Net saving available for Investment. accumulated till today.
Wealth
Step 2 ± Goal Setting
What
is your intention of investment?
Simply
put, How much money you need? & When you need the money? (Time horizon) financial goals are vital to financial planning.
Specific
Financial Goals - Examples
Mandatory Goals:-
(1) (2) (3) (4) (5)
Children education Children marriage Retirement Planning. Pension. Purchase of residential premises. Purchase of vehicle.
Optional Goals:Goals:(1) (2) (3) (4) (5) (6) (7) (8)
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.
Goal setting
Specify amount required & approximate time period when money required.
(1) (2) (3) (4)
Types of goals.
Short term Goals 1-2 years. Medium term goals 3-5 years. Long term goals 5-10 years. Distant goals > 15-20 years.
Risk Profile
(1) (2)
Two types of Risk in any investment. Risk of Purchasing power loss. Risk of Capital loss.
Strong correlation between risk & reward. Aim of financial planning is to get maximum return with minimum risk.
Risk Profile
Financial Capacity
(1) (2) (3) (4)
Income status, more important Net Saving status. Age:- Younger the age higher is risk taking capacity. Dependents in family. Liabilities, Loans taken.
Risk Profile
Mental capacity ± Temperament. How will you react to temporary fall in value of your investment?
(1) (2) (3)
Risk averse , Conservative. Moderate risk taking personality. Aggressive investor.
Risk Profile
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.
Do & Don'ts
Don¶t
buy on tips, impulse or under influence of µleft behind¶ feeling. Don¶t chase last year topper Stick to your asset allocation.
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 and Asset Allocation
FINANCIAL PLANNING FOR THE FUTURE««... FUTURE««...
Phase I Phase II Dependant Phase Accumulation phase
Child s Marriage Child s Education Housing
Phase III Distribution Phase
Children Marriage 25 yrs 35 yrs Over 25 - 30 yrs
Birth & Education
22 yrs
Earning Years
60 yrs Age
Retirement Age
Type of Assets
Assets ± Cash, Savings a\c, Floating rate mutual fund. Ideal for short term goals. (2) Income generating Assets ± Bank F.D.,PPF, NSC, Bonds. Ideal for medium term goal. (3) Capital appreciation Assets ± Equity- Shares, Real Estate, Gold, Art. Ideal for long term goal.
(1) Liquid
Financial Planning and Asset Allocation
FEW EXAMPLES OF ASSET ALLOCATIONS
Financial Planning and Asset Allocation
INVESTOR PROFILE
Mona, Joydeep ( Age 28 years ) Financial Goals Investment Strategy Planning to purchase a house Aggressive Growth Portfolio in the next 5 - 8 years Short-term Bonds 10% 15% Planning for family in 2 years time. Creating long-term wealth for retirement
Stocks 75%
Financial Planning and Asset Allocation
INVESTOR PROFILE
Sheela, Shekhar ( Age 37 years ) and two kids
Financial Goals Has a housing loan Providing for children education (7-10 years) Planning for child¶s wedding (15 - 20 years) Take care of old parents Planning for retirement
Investment Strategy
Balanced Portfolio Stocks 60% Short-term 15%
Bonds 25%
Financial Planning and Asset Allocation
INVESTOR PROFILE
Maura & Akash Chaudary Financial Goals Retired Regular Income Medical Costs Investment Strategy
Conservative Portfolio Stocks 15% Bank Deposits 40%
Bonds 45%
Tips for asset allocation
Thumb rule 2
100-Age in years = Maximum % allocation to Equity.
Equity will give highest return in long run but Equity is very risky product for < 2 years horizon. Risk of capital loss in Equity investment almost zero if invested for > 5 years but as high as 30% in 3 months.
Emergency Kit
Before
planning new investment, it is very important to prepare emergency kit to Protect your Current financial status. is first & vital step in any financial planning.
Insurance
Insurance
Aim
± Financial Compensation for any unexpected loss. Cover the Risk.
Personal
Risks. Loss of income. Property Risks. Damage to property. Liability Risks. Losses due to damage to others.
Life Insurance - Basic
Aim
± Financial protection to your dependents in case of your premature death. Life of earning member of family, ONLY, should be insured.
Insurance
should be taken for financial risk protection only NOT for Investment or Tax planning. Insurance is very bad investment product .
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 (1) Accident Insurance.
Pays sum assured on accidental death + pays income loss due to Partial or permanent disability due to accident. (2) Mediclaim Insurance. ICICI Lombard has family Mediclaim policy. (3) Critical illness Insurance Available as rider with life insurance.
General Insurance cont.
Property
risk insurance. (1) Business assets. Damage may be due to Natural calamities, fire, theft. (2) Vehicles Comprehensive cover. (3) Personal assets ± Householder Policy. Insurance against damage to Residential Property.
Liability Insurance
Professional Third Term
Indemnity insurance.
party insurance for Vehicle.
insurance equal to loan amount.
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
(1)
Investment in Income generating assets. Investment in Expense generating assets ( ? Liabilities).
(2)
Income Generating Assets
Regular
Income in form of Interest , Dividend , or Rent . Gain from investment .
Capital 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.
Expense generating Investment
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. your professional income decreases you will be in trouble.
When
Financial definition of asset, liability.
The
investment which brings cash inside your pocket is Asset. investment which takes out cash from your pocket is Liability. investment in both classes.
The
Balance
Cash Management
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.
early stages of life allocate higher portion to Assets. Ideally your Alternate income should fund your Luxury, Liabilities.
During Delay
expenses, DO NOT delay Investments.
Investment
Step Step Step Step
1 Asset Allocation 2 Provision for Insurance 3 Cash flow planning 4 Actual investment.
Investment Options
Capital protection + Income generation.
(1) Govt. Assured return schemes. (2) Bank Deposits. (3) Bonds. (4) Company deposit, debentures. (5) Mutual fund Debt schemes
Income generating investments
o
o
o
Pros. (1) Safe ± Capital protected. (2) Tax rebate on investment. PPF, NSC. (3) Tax free return. PPF, Mutual fund. Cons. (1) Low return ± difficult to beat Inflation. (2) Lock in period. Tips PPF is best investment for long term investment. Floating rate funds best for short term investment. Senior citizen scheme best for retirement planning. Always calculate post tax, inflation adjusted return.
Income generating Investment.
Thumb
rule 4.
When interest rates are rising invest in Floating rate schemes & take Fixed rate loans. When interest rate is falling invest in Long term Income or Gilt funds & take floating rate Loans.
Income Schemes
P.P.F. Return % Tax-free Rebate on Investment Liquidity 8% Yes Yes 50% withdr awal after 5 years N.S.C. 8% NO Yes 6 year lock in K.V.P. 8% NO NO BANK F.D. 6-8% NO Yes if >5 year Floating rate Funds 5-6% Yes No
7.5 Lock in No lock in years as per lock in term of F.D.
Income Generation + Capital Appreciation
MIP
& Balance schemes of mutual
fund Equity shares with high dividend yield Rented real estate Suitable for moderate risk profile & investors near retirement age.
Capital Appreciation
shares - Direct, IPO, Mutual fund, PMS. Real estate Gold Art ± paintings
Equity Equity
& Real Estate are best long term Wealth creator & Equity is most tax efficient investment.
Speculative investment
Trading
in equity shares. Derivative trading Commodity trading Very risky product. No speculator has become Billionaire. Only brokers make money. Never trade with borrowed money.
Mutual Fund
What is Mutual fund? (1) Fund collected from different investors for common purpose, managed by Professional manager & Income distributed to investors in proportion to their investment. Investors allotted Units for investment. Initial price is always Rs. 10 per unit.
(2)
(3) Market price of unit is called NAV. Market value of investment / Units allotted = NAV
Mutual fund Advantages
Diversification Professional Income
management
tax benefits.
Liquidity. Systematic
regular investment of small amount possible.
Mutual Fund Types
(1) Debt Schemes.
(a) Floating rate scheme. (b) Income or bond schemes. (c) Gilt schemes. (d) MIP ± 5 to 30% investment in equity. Debt schemes ideal for regular income, capital protection & short term goals.
Mutual fund Types cont.
(2) Balance Schemes
(a) Debt oriented. 40% investment in equity. (b) Equity oriented. 65% or more investment in equity. Best for medium term financial goals 2-4 years. Best for beginner in equity market investment.
Mutual fund Types cont.
(3) Equity schemes
(a) Diversified Equity schemes. Flexi cap diversified equity scheme is best investment for Wealth creation. ( b) ELSS - Equity linked saving scheme. Best for tax planning. (c) Sector ± Thematic funds. (d) Index fund. (e) Exchange traded funds.
Mutual fund Types cont.
(4)
Specialty funds.
(a) Exchange traded Gold fund. (b) Real estate fund. (c) Art fund.
Plans ± Options
Dividend
plan
Options (1) Dividend Payout. (2) Dividend Reinvestment.
Growth
plan. best plan for wealth creation.
Mutual Fund Types
Close Open
Ended Ended
How to invest?
Lump S.I.P.
sum investment. Systematic Investment Plan Systematic Transfer plan
S.T.P. If
you invest directly at fund office or online there is no entry load.
Fund Selection
Say
NO to NFO New fund offer
Existing
Diversified mutual Fund schemes having consistent performance during last 5 years. Beware of Agents/ Brokers advise:(a) NFO ± At par offer, Low NAV. (b) Dividend declared. (c) Churning ± Profit booking.
Not > 10 schemes 4-5 Diversified Equity funds. 1 ELSS scheme 1 Balanced scheme 1 MIP 1 Floating rate scheme 1-2 Sectoral or Midcap scheme.
Ideal portfolio Type of Fund
Best for Time Horizon Expected return Risk of capital loss
Floati ng Rate fund <1 year 5±6 % Zero
MIP, Fixed matur ity funds 1-2 years
Bala Equity nced schemes sche mes > 5 years
2-4 year s 7 ± 8 10 ± % 12 % Almo 5 ± st 10 zero % up to 2 year s.
> 15 %
20 ± 30 % in first 3 years.
4-5 star funds
Diversified Mutual fund. (1) HDFC Equity, (2) Reliance Vision, (3) Reliance growth, (4) SBI Magnum Contra. (5) DSP ML Equity. ELSS (1) Magnum tax gain (2) HDFC Tax Saver. Sectoral & Midcap (1) DSP ML TIGER, (2) Reliance Diversified power sector, (3) SBI Magnum global (4) Sunderam Select Midcap fund. Exchange traded. Nifty BeES, Banking BeES.
4-5 star funds - Continue
Balanced (1) HDFC Prudence (2) Magnum Balanced. MIP (1) HDFC Long Term MIP, (2) ICICI Prudential Income Multiplier.
Model Portfolio
Equity Equity Balanc MIP, Diversif Midcap ed Bond ied Sector Fund Fund Age 20-30 Dependent 35-40% 35-40% 20% 1-2 Age 30-40 302030% Children in school 35% 25% Age 40-50 Children in college Age 50-60 Children marriage Higher Education > 60 years Retirement planning Profile Floating rate Fund 10%
10% 1020% 10% 20%
3035% 2530% 1020%
1015%
20- 10% 30%
5-10% 20% 20% 30% 3040%
Income Tax Planning - Tips
Tax
planning is legal. Purchasing power of Unaccounted money will slowly go down. No cash transaction possible in Mutual fund.PAN card copy required. Make maximum use of tax free income limit Create multiple heads of income tax payer. ELSS investment can be used for income tax planning & wealth creation.
Income Tax calculation
Tax
free income limit:Male Individual & HUF. 1,10,000. Female individual 1,45,000. Senior citizen (>65 years age) 1,95,000.
Only
10% tax on income between Tax free limit & 1,50,000. to 1 lac rebate for 80C investment.
Up
Income Tax calculation
If male tax payer or HUF has income of 2.5 lac & 1 lac invested under sec. 80C then tax payable is only Rs. 4000. For female tax payer only 500 & For senior citizen nil up to 2.95 lac income.
If Husband, Wife, HUF & Parent or Major child has income of 2.5 lac each, & they invest Rs. 1 lac each under sec. 80 C, total tax payable will be only 8,500 on total 10 lac taxable income. 4 lac will be compulsory invested each year.
Capital Gain Tax
Long term capital gain. Equity scheme / shares. > 1year. Tax free. Real Estate, Gold. > 3 years. 20% with indexation or 10%. Debt scheme of mutual fund > 1 year. 10%. Short term capital gain. Equity scheme / shares. 10%. Real Estate, Gold < 3years & Debt scheme of mutual fund < 1 year ± will be added to business income.
Income Tax Planning Tips
Multiple heads of Tax payer in family. Gift to parents & major children is tax free, clubbing free, without any limit. Give loan to spouse at low interest rate, instead of gift to avoid clubbing of income. Take maximum advantage of Tax free income. (1) Long term capital gain on shares & equity mutual fund. (2) Dividend from mutual funds & shares. (3) P.P.F. interest. Tax free bond interest. (4) Agriculture income.
Income Tax Planning Tips
Home loan.- Principle payment eligible for 80C rebate, Interest deducted from income up to 1.5 lac per year per head. Real estate ± buy cheap , sell at highest possible price after 3 years. Capital gain tax can be saved by investing in Capital gain bonds up to 50 lac. Up to 1 k.g. gold per married women & 500 gram gold per unmarried women in family , will be allowed during income tax search.
Retirement Planning
Retirement doesn't mean stoppage of work, it means freedom from compulsion to work for money ± Financial freedom. Why? To maintain same life style even after retirement Life expectancy is increasing. 80+ age not unusual. Female spouse will live 5 years more then male. Inflation will make difficult to maintain same level of living standard. You & your spouse may not like to remain dependent on children. We don¶t have govt. social security scheme.
Financial Planning and Asset Allocation
Why retirement planning
Increasing life expectancy Protect PostRetirement Lifestyle
Protection for Spouse /Dependents
Retirement Plan An essential need
Increasing Cost of Health
Falling Interest Rate Scenario
Breakdown of traditional support systems
Financial Planning and Asset Allocation
FINANCIAL PLANNING FOR THE FUTURE««... FUTURE««...
Phase I Phase II
Child s Marriage Child s Education Housing
Phase III
Children Marriage 25 yrs 35 yrs Over 25 - 30 yrs
Birth & Education
22 yrs
Earning Years
60 yrs Age
Retirement Age
Financial Planning and Asset Allocation
Why retirement planning
If Inflation is 5%, then the amount required to meet expenses«« Amount in Rs. Monthly expenses Medial costs Marriaage Today 30000 500000 1000000 In 10 years 49000 800000 1600000 In 15 years 62000 1000000 2100000 In 20 years 80000 1300000 2700000
Particulars Monthly expenses Rate of return Investment corpus required
20 years 15 years 80000 62000 7% 7% 1.40 crore 1.06 crore
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.)
How?
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.
Start
Asset allocation
Maximum equity allocation in % = 100-age in years. 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 (1) Unaccounted money. (2) Lump sum investment of large amount. (3) Title problems. (4) 10-12 year cycle, so poor Liquidity. Invest only if ready to stay invested for 10 years. (5) Maintenance charges. (6) Entry load- Reg. fees & Exit load ± capital gain tax Advantages. (1) One good investment can change your financial life. (2) 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.
Mutual fund returns
Fund name Start date Reliance growth Oct-95 Reliance Vision Oct-95 SBI Magnum Contra- July 99 HDFC Equity Dec.94 DSP ML Equity April 97 HDFC Prudence Jan 94 1 year return 5 year return annualized % 72.6 Since inception return % 37 Worst 3 months return -45 76.9
56.6
60.7
31.6
-39.6
66.3
72.1
38.3
-42.7
53.6
57.8
26.9
-34.7
70.3
62.9
32
-46
43.2
46.7
24.8
-18
Magic of Compounding
Compounding is called eighth wonder of world. Rule of 72 72/ Interest rate = No. of years required to double money. 72/ No. of years required to double money = % interest return.
If you earn 24% compounded return your money double in 3 years, multiplies 10 times in 10 years, 100 times in 20 years & 1000 times in 30 years. Average return of diversified mutual fund is >24% in last 14 years.
Financial Planning and Asset Allocation
THE EIGHT WONDER OF THE WORLD...
The Power of Compounding
2,533,529 2,099,636 Savings Returns * 1,572,834
350,000
330,000
300,000
Assuming an annual savings of Rs. 10,000 in an instrument providing return of 9.5% p.a.
Saves from age 25 to 60
Saves from age 27 to 60
Saves from age 30 to 60
Financial Planning and Asset Allocation
Amount required to be saved monthly:-
Rs. 100 lakhs :-
Financial Planning and Asset Allocation
Start Early
Your Twin Age : 25 years Age : 25 years Start : Today Start : at age 30 Invest : 5 years Invest : 30 years Amount : Rs 10,000 p.a. Amount : Rs 10,000 p.a. Redemption on Redemption on retirement (age 60) retirement (age 60) Value at 60 - 51 lakhs. Value at 60 ± 50 lakhs.
You
Financial Planning and Asset Allocation
INFLATION ROBS YOUR PURCHASING POWER
543,113 40 YRS.
(Assuming inflation @ 8% p.a.)
251,568 30 YRS.
Rs. 25,000 today 116,525 20 YRS.
53,973 10 YRS.
10 yrs
20 yrs
30 yrs
40 yrs
Financial Planning and Asset Allocation
Estimating Future Needs
Rs. 20 lakhs today:today:-
Wealth creating ideas
Be fearful when others are greedy, be greedy when others are fearful. Invest when discount sale is on. Price is what you pay, value is what you get. Purchase share of business not share certificate. Look at P/E ratio not absolute level of index. Wealth creation is art of purchasing 1 rupee for 40 paisa.
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.
Self help
Self help is best help. Devote some time for your financial planning. Magazines:(1) Mutual fund insight from Valueresearch Co. (2) Outlook Money from Outlook Express group. Websites:(1) moneycontrol.com Personal finance section & Mutual fund section. Portfolio can be created & maintained. (2) valueresearchonline.com best analysis of mutual funds, rating, & mutual fund portfolio analysis.
Thank You
