Financial Planning Godrej

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Financial Planning- For Godrej

Prof. Smita Kumar


Program Objectives

To understand what is financial planningWhy is it importantWhat is inflationWhat is the process of financial planningWhat is risk appetiteWhat are the different avenues of investmentWhat is asset allocationhow to go about retirement planning, estate planning and tax planningMore than anything, how to go about making your and your family’s financial future secure


Course contentWhat is financial planningThe need for financial planningFinancial planning process - How to get startedWhat is your risk appetiteBasic elements of financial planning –

Time value of moneyDisciplined and regular investingImpact of inflationBuild your wealth with savings and wise investing

Planning for life eventsChildren’s education and marriageRetirement


Course contentWhat is asset allocationImportance of asset allocationDifferent avenues for investment

InsuranceMutual fundsEquityFixed depositsGoldReal estate

Tax planningCash flow managementRetirement planningHow much real estate should you own?Use your credit card smartlyHow to spend wisely


Lessons of life“Life is full of uncertainties. Future investment earnings and interest and inflation rates are not known to anybody. However, I can guarantee you one thing... those who put an investment program in place will have a lot more money when they come to retire than those who never get around to it.”

Noel Whittaker


What is financial planning?Financial Planning is a process whereby you will have a roadmap of your personal and financial life, which will help you to meet all your life’s expenses –both the expected… (household expenses, discretionary expenses, children’s school and college fees, putting money together to buy a home, EMI payments, saving and investing for your retirement and so on)…and the unexpected…(medical contingency, creating a safety fund to compensate for loss of a job, and so on). It is easy to say that as long as you are earning, your monthly salary will cover your expenses, and whatever you save you will invest, and on your retirement, hopefully, you will have enough set aside to live the rest of your life maintaining a good lifestyle.


Financial Planning ?Financial Planning is not some esoteric concept. It is for everybody who has financial goals to achieve or financial challenges to meetPersonal Financial Planning is the process of determining whether and how an individual can meet life goals through proper management of financial resources.Financial Planning goes beyond advice on

investments. It is the development and implementation of an integrated, co-ordinated plan for achieving overall financial objectives


Financial Planning ?Therefore, Financial Planning is a process aimed at identifying all needs of an individual namelyBuying a homeSaving for their children’s education/marriageProtecting their family through insuranceInvesting their hard earned moneyManaging debtPlanning for retirement


Importance of financial planningAccording to an expert, people who have WRITTEN Financial Plans and follow the plan diligently over their lifetime end up making 3 times more money than an investor who doesn’t have a financial plan.Financial Planning is probably the most important aspect of investments. It helps you understand and appreciate the importance of

starting early, managing your risk and having a structured approach rather than make ad-hoc investments


Why is Personal Financial Planning Important

To manage income and expenses.To create an awareness of your current and future financial status.To plan for the future by developing goals and devising ways to achieve those goals.To be constantly aware of economic and external environmentTo provide a system of evaluation and revision for your financial progress.


Why Should You Develop a Personal Financial Plan?

To help you understand and achieve your financial goals.To help you achieve financial independence.To help you understand where all your money is spent.To help you support those that have supported you.


Financial Planning

InflationFuture cost of important

goals would be much higher than present

Why Financial Planning?

Lack of planningis the biggest cause of

financial stress

Traditional investmentnot as attractive

Changing Life Stage & Life Style Needs

Vacation, Gizmos, Car, House, Children…


Comprehensive financial planning


Financial Planning Process


Financial Planning ProcessStep 1: Define Your Financial GoalsStep 2: Evaluate Your Current Financial Status and risk apetiteStep 3: Develop a Plan of Action

Consider Your GoalsStep 4: Implement Your PlanStep 5: Review Your Progress, Reevaluate, and Revise Your Plan as the external economic environment or your Financial Status Changes


Step 1: Define Your Financial GoalsSpecifically define and write down your financial goals to reflect your financial and life situation.Attach a cost to each goal.Set a date for when the money is needed to accomplish the goal.What are the time horizons for financial goals?

Short-term goals can be accomplished within a 1-year period Intermediate-term goals take 1-10 years to accomplish.Long-term goals take more than 10 years to achieve.


Why are goals the cornerstone of a financial plan?

Goals keep the future in mind by reminding you of the rewards.Goals provide measurable targetsGoals entice you to keep the plan in effect.Goals provide tangibility for the question, “Why?”


Where do you stand Today?The first step in doing anything of importance is to first assess where you stand today and where it is that you want to reach. To do this, you need to first measure your financial health, and then determine how your money moves.Measuring your Financial Health When dealing with your personal finances, it is therefore important to start by knowing how financially healthy you are today


3 simple personal finance rules

Debt to Income Ratio

Ideally, your debt to income ratio should not be higher than 30% as this means you are straining your income. This means you should not be spending more than 30% of your income on paying loans / interest on loans.


Savings to Income Ratio

Ideally, you should be saving at least 20% of your monthly income to save and invest.


Contingency Reserve

You should set aside 6 to 24 months of living expenses as a contingency fund to be used only in times of emergencies. This should include any EMIs that you may have. Once you implement these simple rules, you will find that your finances are more in your control and manageable.


Determining How Your Money Moves What are the financial habits, or lack of them, that have brought you to your current level of financial health? When you sit down to assess yourself, it is all really about only 2 things: 1. Are you living “within” your means or “below” your means?

By this we mean, is your level of saving the level that you require, or do you save that little bit extra and –invest it?

2. What do you spend on and how much do you invest? This means, is your expenditure primarily on luxuries or necessities?


And accordingly, are you investing as much as you can or are you spending the cash that could have been invested instead? These 2 all important factors will determine whether you will be able to send your child to that excellent school or retire those few years earlier, after achieving your financial goals.

Determining How Your Money Moves


Financial quadrantsThe four important financial quadrants are incomes (existing & future), expenses, assets and liabilities. Money tends to flow between the above quadrants – your income will fund your expenses and will take care of the full or part purchase of any assets you may buy.Part purchase of assets can be supported by taking on liabilities. Your liability payments are in turn again funded by your income.Thus, the most important way to generate wealth is to live within or preferably below your means by keeping an eye on your existing and future money flow. For this, you need to first be aware of what your means are and what you are spending your money on.

The use of a personal budget is the simplest and quickest way of analyzing whether you are a spender, or a saver.


Step 2: Evaluate Your Current Financial StatusStep A Your income: Be aware of your Net Monthly Income (post tax). This can be more than just your pay packet. You can be receiving income from rent, from interest, from dividends and so on

Step B Your expenses:Expenses are your costs of living.There are two types of expenses:

Fixed expenses such as rent, car payments, etc. are expenses that don’t change in amount and are usually controlled by a contract.Variable (flexible) expenses, like your phone bill or the amount you spend on entertainment, are expenses over which you have control.


Main Expense items The main Expense items that show up in everybody’s budgets are:Grocery billSpending on children’s school / college tuition feesShopping and entertainment, including eating outElectricity billTravelling / fuel expenseTelephone and cell phone billsMedical expenseMiscellaneous expenses such as society charges if you own a home and others


LiabilitiesStep C - Liabilities

Keep track of your Liabilities The main Liabilities that people can have are:Home Loan (the biggest and longest EMIs you will ever have to pay)Education LoanCar LoanPersonal LoanCredit Card Payments


Step D –Net free cashInvest your Net Free Cash to build your wealth The free cash you have left after your expenses are taken care of is your net free cash. This is the money that will go towards building wealth for your financial goals and accumulating assets. It is these ‘leftover’ funds, also known as your investible surplus that will build your wealth. The only way to increase net free cash is to cut back on unnecessary expenditures i.e. expenditure that is not a necessity.

Remember – it is better to first invest, and then spend out of what is left, rather than to first spend, and then invest out of what is left.


Savings rate

Savings rate = Savings/Income

Bare minimum :10%Good :10 - 25 %Very Good :25 - 50%Excellent :above 50%

Exercise: How much are YOU saving ?

Money was invented so we could know

exactly how much we owe. - Cullen

Hightower


Liquidity or Contingency cash

Liquidity ratio = Cash in savings ac/Monthly expenses

Ideal :3-6Inadequate :less than 3Excess cash :more than 6

Exercise: What is your liquidity?


Step 1 Determine Your Financial Goals

Common financial goals can include: Purchase of home Purchase of Car Child’s Education Supporting your parents Child’s Marriage Retirement Vacation Buying Holiday Home Wealth Accumulation Creating Trusts Charity / philanthropy


Step 2Classify financial goals based on their priority and proximity Short term (less than 3 years) Medium term (3 to 5 years) Long term (more than 5 years )


Step 3 – Quantify your goalsIf a goal is not quantified, it becomes very difficult to select a path to achieve it. Again this can be divided into two parts, minimum and maximum.For example, you may have a goal of funding your child’s higher education. For this you can consider two scenarios. The first scenario, of your child being educated in India, may be the minimum that you need to achieve.For this, the fees may be Rs.10 lakhs. Maximum amount for the goal would be sending your child abroad for further studies. For this, the fees may be Rs.25 lakhs. Now you know that the minimum you need to achieve is Rs.10 lakhs in today’s terms. You can start investing accordingly.


Step 4 Plan and Invest towards Your GoalsRemember, your goals should be

SMART = Specific, Measurable, Attainable, Relevant and Time BoundResolve conflicting goals if anyYou must also evaluate your investment progress regularly. If the progress towards the goal is not satisfactory then one or more of the following options can be exercised: Review your investments and alter specific investment amounts / investment instruments Push the goal further back, where possible. For example, if you are planning to retire at 50, consider retiring at 55 instead, giving yourself more earning years. Reduce the goal corpus that is required. If you wanted to buy a house for Rs.75 lakhs, consider a house for Rs.60 lakhs.


Basic elements in planningTime Value of MoneyThe time value of money is the value of money figuring in a given amount of interest earned over a given amount of time.For example, 100 Rs. of today's money invested for one year and earning 5 percent interest will be worth 105 Rs. after one year.Therefore, 100 Rs. paid now or 105 Rs. paid exactly one year from now both have the same value to the recipient who assumes 5 percent interest; using time value of money terminology, 100 Rs. invested for one year at 5 percent interest has a future value of 105 Rs.Thus time value of money is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.


Some standard calculations Some standard calculations based on the time value of money are:Present value

The current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows.

Present value of an annuity An annuity is a series of equal payments or receipts that occur at evenly spaced intervals. Leases and rental payments are examples. The payments or receipts occur at the end of each period for an ordinary annuity while they occur at the beginning of each period for an annuity due.


Standard calculations Present value of a perpetuity is an infinite and constant stream of identical cash flows.Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. Future value of an annuity (FVA) is the future value of a stream of payments (annuity), assuming the payments are invested at a given rate of interest.


Time Value of Money (TVM).FV = PV x (1+R)N

FV: Future Value PV: Present Value R: rate of return N: Number of time periods for which the money is investedSo, for example, if you had Rs.50 lakh available today, and you invested it into a 1 year Bank Fixed Deposit offering 7.50%, then in 1 year your money would be worth Rs.53.75 lakhs. In your day to day life, the money you can save and invest is the Present Value in your equation. R is the available market rate of interestN investing time horizon


Power of compounding


Power of compoundingYou know now that the higher R you can earn and the longer N youcan invest for, the larger will be your Future Value of money.Let’s see an example with different rate of return (R) and different investment horizons (N). Assuming your Present Value i.e. the sum you can invest is Rs.1,000:

The above table indicates that for the longer N, equity is a better investment than a fixed income instrument. It is not prudent to let your wealth lie in a low return instrument when your investment horizon is long. Also while over small time periods, the difference due to higher rates of return is not very huge, it is over longer time periods that the impact is very significant



How inflation can affect your PlanPurchasing power is the number of goods or services that one unit of currency can purchase. It is literally, the power to purchase.For example, one rupee can purchase much less today than it could purchase say twenty years ago. If money income stays the same, but the prices of goods or services increases, then the purchasing power of income is reduced.This increase in the price level is called Inflation. Real income refers to income adjusted for inflation. Thus inflation is the increase in prices that erodes the purchasing power of money. And this is by far the most important thing to account for when building a financial plan.


Scenario 1Mr. Gupta has a 6 year old daughter. He plans to send his daughter to college for graduation at age 18 and post graduation at age 21, for which he will spend Rs.10 lakhs and Rs.25 lakhs respectively. What corpus does Mr. Gupta need to accumulate for his daughter’s education goals? Assuming that inflation in college fees is approximately 10% p.a: If Mr. Gupta’s daughter goes to college at age 18 i.e. in 12 years, college fees at that time will be approximately Rs.31.40 lakhs. This is the amount Mr. Gupta has to accumulate in 12 years to send his daughter for the same standard of college education available today at Rs.10 lakhs. Similarly, for his daughter’s post graduation, in 15 years Mr. Gupta needs to accumulate approximately Rs.1.04 crore to give the samelevel of post graduate education available for Rs.25 lakhs today. This is the effect inflation has had on college education fees.


Scenario 2Mrs. Kapoor is currently 30 years old and wants to retire early – by the age of 50. On retirement, she wants to maintain her current lifestyle. She is currently spending approximately Rs.20,000 a month on household expenses, and approximately Rs.3 lakhs per annum on travel, medical and discretionary expenditure. What corpus does she need to live her life post retirement? In order to maintain her current lifestyle, and assuming her post retirement life expectancy is another 35 years, Mrs. Kapoor will need Rs.13 crores to sustain her current lifestyle.


She can invest this Rs.13 crore corpus into safe debt instruments and earn a 5.50% post tax interest on the amount. Both principal and interest will go towards sustaining her lifestyle for 35 years post retirement. At her 85th year (assuming 85 years life expectancy) there will be no money left at all. This is assuming a simple 7% rate of inflation on household expenditure, and a 10% rate of inflation on other expenditure.

This is the effect that inflation can, and will, have on your financial life.


Impact of inflation


Effect of inflationLet’s take a figure of Rs.10,000. Assume an inflation rate of 10% and take a time period of 20 years. In 20 years, you will need a figure of Rs.67,275 to have the same purchasing power as your Rs.10,000 today. You have 3 choices of where to invest your Rs.10,000 today –

the bank savings account, a debt mutual fund, and an equity mutual fund.

Let’s see how each one fares against an inflation rate of 10%.


Effect of inflation contd.The amount you require to simply keep the purchasing power of your money constant is Rs.67,275. Inflation at 10% has eaten into the value of your money so much that over 20 years, even investing in a debt product at 7.50% p.a. is not enough. You need to earn at least 10% every year to just match inflation and keep the purchasing power of your money intact. In the table above, it is only equity earning 15% p.a. that matches and beats inflation. You can also match and beat inflation by investing into a mix of equity and debt instruments i.e. diversifying your investments across different asset classes. This brings us to asset allocation.


Impact of inflation


Points to be noted about inflationPractical inflation is likely to be higher than what the statistical measures reveal Future inflation may likely be higher than the historical levels if India continues to grow the way it is generally expected to. India’s high growth path in the foreseeable future would result in higher income levels and lower resistance to rising prices. Higher incomes and rising prices form a vicious cycle with one feeding the other. Too much money chases limited goods or services.While drawing up your financial plan, you should keep in mind and account for the above factors in estimating inflation so that you are not left high and dry at critical junctures.


Building Wealth with Wise Investing Wise Investing is not about timing markets or investing in debt when interest rates are at all-time high. It is about being disciplined about investments. Wise investing is all about having a peaceful sleep at night after investing. It is about knowing that you are steadily working towards building the level of wealth you require to achieve all your financial goals.


Points to be kept in mind before investingRealistically assess what your investible surplus is – the amount of money you have left after you have set aside enough to run your house and maintain a contingency fund. You will need to take a good look at your finances and the disposable income you have available.Assess your risk appetite and your risk tolerance. It is possible that you are the kind of risk taker that would risk a 50% loss, if the upside means a 50% gain. But can your finances tolerate this level of risk? Or would it be financially easier to handle a smaller gain that comes from risking less?


Points to be kept in mind before investing contd.Speak to an unbiased advisor before investing. This is the best way to get a professional view of the investment you are considering. Better yet, ask your advisor what would be a good investment for you to make, considering the various financial goals you want to achieve.Make sure you don’t put all your money in one place. Diversification of your portfolio across different asset classes such as equity, debt property and gold is a good way to reduce exposure to the risks of any one asset class.And lastly, to build your wealth, invest your money first and spend what you have left. This is a much better approach than doing things the other way around.


Why is investment important when you are youngInvestment is important when you are young as it provides for your future needsThe need to invest stems from two major factors

InflationLifestyle

Typically a wide range of investment avenues are available to investorsThe investors risk appetite should determine which investment avenue is chosen


Why is investment important when you are young contd.

Equities have the potential to deliver better than other avenues over longer time framesYoung investors have time on their side and should consider investing a significant portion of their portfolio on equities, while older people may look at fixed income securitiesMutual funds offer a better option as they have a variety which are suitable for different risk appetites.


Planning for life eventsRetirement planningPlanning for child’s/ children’s education / marriageTax planning


Retirement planningTo plan your retirement, you need~ TimeStart early. Use the power of compounding that can make even a small amount add up to a substantial one. Start channeling a small amount of your investments to a suitable pension option.~ CommitmentThis needs discipline. No matter what your expenses, there should be a regular outflow towards your goal till you retire. This is often easier said than done because your immediate needs may seem stronger than a future requirement.

~


AdjustmentPrices will rise by the time you retire and continue rising post your retirement. Account for inflation because it will affect you as long as live. Your standard of living might change. In fact, it would haveconstituted a major increase in your expenditure pattern rather than inflation, over the last few years.

~ DetailingWhen accounting for base expenses for your retirement, don't forget to include all expenses currently being reimbursed by your company. Medical or travelling expenses may not pinch you right now, but they will at a later stage, since you will bear them yourself post retirement


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 retirementLife 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.


Why retirement planning ? Retirement planning is An essential need due to

Increasing life expectancy Protect Post- Retirement LifestyleIncreasing Cost of Health Protection for

Spouse /DependentsFalling Interest Rate ScenarioBreakdown of traditional support systems


How Much? If retirement <10 years away 250*Existing monthly expenseIf 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?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.


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.


Factors to be taken into account for calculating retirement corpus

1.Current Age2. Retirement Age3. Life expectancy4. your current living expenses5. Increase in your living standard over the period6. Impact of inflation over the years on ur living expenses7. Current rate of return on your saving to build corpus8. Post retirement, rate of return on corpus9. & finally The impact of income tax on your income generation from corpus in post retirement life


Retirement Planning – Case studyLet’s assume the case of Mr. Roy. Mr. Roy is aged 45 and currently is working with ABC Ltd. as a software developer. He is earning Rs.60,000 p.m. He wishes to retire at age 55. His current house hold expenditure is Rs.25,000 per month. Over and above this he requires Rs.75,000 a year for an annual vacation with his family and Rs.25,000 a year for medical expenses. He wishes to maintain the same level of life-style post his retirement.


He has assumed his life expectancy as 85 years. His children are already educated and he has no other goals. He is adequately insured and has created a contingency corpus of 12 months of living expenses and is maintaining this corpus in liquid funds and partly as cash in the bank. As he is nearing retirement, Mr. Roy is worried about how much corpus he is going to need and whether or not he will be able to build this corpus in his remaining 10 working years.



So now Mr. Roy knows he needs to achieve a corpus of Rs.4.58 crore to maintain his lifestyle in his post retirement period. The next question in Mr. Roy’s mind is to how to achieve this corpus. He is expecting to get gratuity of Rs.25 lakhs and expects his EPF maturity to be Rs.48 lakhs. Over and above this, keeping retirement in mind he has invested Rs.12 lakhs in mutual funds (current value) so far and has allotted his ancestral property of Rs.50 lakhs (current value) to his retirement goal. He also has Rs.35,000 surplus savings per month that can be invested towards his retirement. How much will his total achievable corpus be at retirement?



6 steps to retirement planningHow much is your Current Yearly ExpensesHow much will be average Inflation figure in coming yearsHow much would you need at your Retirement –

Retirement yearly Expenses = Current Yearly Expenses * (1 + inflation)^(number of years left)

Finally coming up with the corpus you would need at the retirement.

Corpus needed = (Monthly Expenses)/(interest expected )

Calculating how much you should save per month. (based on CAGR)You figure out how much you can saveThen you find out how much return you need to generate .Then you decide where to invest to generate that return

Understanding Where to invest it .


A simple and practical approachRough and ready method of calculationEstimate monthly expenses ex Rs. 25,000Estimate additional expenses like

Health careEmergenciesholidays etc ex Rs. 1,00,000Total Rs. 4,00,000Add Rs 2,00,000 for inflation

Corpus required at 10 % = 6,00,000 * 100/10 = Rs. 60,00,000


Planning for child’s marriageMr. Anup John is 33 years old and has a daughter aged 2. He wishes to create a marriage corpus that should be ready for his daughter within 22 years. Currently Mr. John imagines that he would spend Rs.15 lakhs on her marriage if it were happening today. How much does he need to save every month or every year for his daughter’s marriage, assuming a 10% inflation rate on marriage expenses?


Solution


Planning for Child’s Education Mr. Jack’s son is going to graduate after 12 years. Mr. Jack wants his son to do engineering for which he requires Rs.5 lakhs currently. After his engineering, Mr. Jack also wants him to go abroad for post-graduation which costs Rs.25 lakhs currently. How much is Mr. Jack going to need to send his son to engineering college in 12 years?


Solution


An investment of Rs.5,700 approximately (every month) or Rs.73,500 (every year) will help Mr. Jack achieve his son’s graduation corpus. An investment of Rs.25,000 approximately (every month) or Rs.3.20 lakhs every year will help Mr. Jack achieve his son’s post graduation corpus. When investing for both goals, Mr. Jack has to keep in mind thathe must invest into the right investment products for his personal risk profile. When planning for any goal, it is important to invest based on your risk appetite and goal time horizon. It is essential to understand the risks associated with equity investing.

When a goal is drawing nearer, the goal corpus can be de-risked to protect it from equity volatility and invested into debt to provide fixed returns and capital safety.


CalculatorsThis site gives various widgets which can be downloaded on to your computers and can be used for various calculators like SIPInsuranceRetirement corpus etc.

http://www.investmentyogi.com/retirement-calculator.aspx


Importance of tax planningTax planning is making investments or contributions in line with prescribed guidelines that lead to reduction in tax liabilityTax saving is investing in tax saving instruments / productsUnder tax planning one takes into consideration one’s larger financial plan after accounting for

agefinancial goalsability to take risksinvestment horizon etc.

Thus by adopting tax planning one ensures not only tax saving but also long term wealth creation and protection of capital


Mistakes made while trying to save taxesLast minute tax planningBuying ULIPs – premium paid, and cover offered is far less than term plansIgnoring power of compounding through tax saving mutual fundsNot optimizing all options of tax saving – only considering 80C other sections under section 80 also to be considered for overall increase in tax saving


Steps to tax planningStep 1Compute gross total income (GTI)Sources of income

Income from salary Income from house property Profits and gains from business & profession Capital gains (short term and long term) and Income from other sources.


Step 2 Compute net taxable income (NTI)

Various deductions allowed under the Income Tax Act, should subtracted from your GTI They are

Investing in tax saving instruments covered under Section 80C, along with the recently introduced Section 80CCF) Donations Expenditure on handicapped dependent Premium payment for your medical insurance Interest paid on loan taken for higher education Rent paid for residential accommodation Expenditure incurred on a specified diseases suffered by you


Step 3 Calculate tax payable


For ex. if NTI after availing all deductions is Rs. 10,000, your tax liability will be computed as under


Parameters for prudent tax planningAgeif you are young, you should allocate more towards market-linked tax saving instruments such asEquity Linked Saving Schemes (ELSS), Unit Linked Insurance Plans (ULIPs) and National Pension Scheme (NPS), as at a young the willingness to take risk is high. One may also consider taking a home loan when you are young as; number of years of repayment are more along with your willingness to take risk being high. Also a noteworthy point is the earlier you start with your investments, the greater is the tenure you get while investing in an investment avenue, which enables one to make more aggressive investments and create wealth over the long-term to meet your financial goals.


Illustration


Example


Other factorsFinancial goalsThe financial goals which one sets in life, also influences the tax planning exercise. So, say for example your goal is retiring from work 5 years from now, then your tax saving investment portfolio will be also less skewed towards market-linked tax saving instruments, as you are quite near to your goal and your regular income will stop. Likewise if you are many years away from the financial goal, you should ideally allocate maximum allocation to market linked tax saving instruments and less towards those instruments (tax saving) which provide you assured returns.


Risk appetite

Your willingness to take risk which is a function ofyour age,income, expenses, nearness to goal, will be an important determinant while doing your tax planning exercise.

So, if your willingness to take risk is high (aggressive), you can skew your tax saving investment portfolio more towards the market-linked instruments.Similarly, if your willingness to take risk is relatively low (conservative), your tax saving investment portfolio can be skewed towards instruments which offer you assured returns, and if you are a moderate risk taker you can take a mix of 60:40 into market-linked tax saving instruments and assured return tax saving instruments respectively.


Optimal tax planning with section 80C


Thinking beyond 80 C


Importance of life insuranceInsurance means safeguarding against a specific risk which one is exposed to.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.


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.


HUMAN LIFE VALUE (HLV)

Human Life Value evaluates the need for insurance cover in termsof money required to sustain the same standard of living by the family in case something happens to the bread earner of the family. Human Life Value has two approaches to it:

HLV on the basis of INCOME:In order to calculate Human Life Value on the basis of income, we have to take the annual income of a person and deduct all his personal expenses and also assume the age at which he wants to retire. Personal Expenses includes all those expenses which he does on himself, day to day expenses, insurance premium on his own policy etc., personal expenses can be defined as those expenses which will not be needed in case the person is not there tomorrow.Net annual income of all the personal expenses is assumed to bespent for the welfare of the family.


ExampleMr. A aged 35 years earns Rs. 12 Lakhs p.a. spends Rs. 2 Lakhs p.a. for his personal consumption. Therefore, he saves Rs. 10 Lakhs p.a. for the family welfare, net of his personal expenses, which can be used by his wife and children for household expenses, savings and host of other things they want to do. Now assuming he will retire at the age of 60 years and earn a return of 6% p.a. on the amount invested, so to have Rs. 10 Lakhs p.a. as income for next 25 years (60�35) at the rate of 6%, the total insurance requirement as on today comes out to be Rs. 1.35 crores.


HLV on the basis of EXPENSE:Factors which are needed to be taken into account arelife expectancy of spouse,

number of children and their dependency period on him,monthly household expense of the family excluding his personal expense, cost of inflation and outstanding loans.


ExampleMr. A aged 35 years earns Rs. 12 Lakhs p.a. and he spends Rs. 2 Lakhs p.a. for his personal consumption.The age of the spouse is 30 years and her life expectancy is 80 years. Yearly expense of the family is Rs. 6 Lakhs, so the net family expense excluding his personal expense comes out to Rs. 4 Lakhs p.a.Assuming an interest of 6% p.a. on the amount

invested and the inflation at 5% p.a., Rs. 1.60 crores of insurance cover is required in order to meet the expense requirement of his spouse for the next 50 years i.e. till her life expectancy.


How do you judge which insurance plan suits you?Buy insurance only when you know that there is a need for the samePoints to be kept in mind before buying insurance policy

1.Are you buying insurance for protection purpose?2.Are you buying insurance for investment purpose?3.Are you buying insurance just for saving TAX?

Different policies available in the market cater to different needs. Therefore, don’t buy insurance for sake of buying it; buy insurance because you need it.


LIFE INSURANCEThe types of life insurance policies are as follows:

1. Term Insurance (Pure Insurance)2. Endowment Policy (Savings based)3. Money Back Policy (Savings based)4. Unit Linked Insurance Plan (ULIP) (Savings

based, market linked)



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.


A thumb ruleIn the opinion of Insurance Companies, (and correctly so), the higher age, the higher the probability of death and higher the cost of insurance. Take a simple case of a person who is 20 years old and another who is 40 years old. The 20 year old pays a annual premium of Rs. 5450 for a 30 year policy for Rs. 25 lacs, whereas the 40 year old pays an annual premium of Rs. 16925 for a similar policy. Both the calculations are for a product called Amulya Jeevan offered by the LIC of India


A simple method to calculate amount of insurance required

Divide number 240 by your age. If your age is 20, the division is 12. If your age is 30, it is 8, for 40 it is 6 and so on. Now this division multiplied by your annual gross income is the cover required by you! Suppose you are 30 and your annual income is Rs. 6 lacs, then you need a cover of around Rs. 48 lacs. (The division of 240 by your age is 8 and 8 multiplied by your annual income is 48).


A simple method to calculate amount of insurance required contd.

You need to make finer adjustments such as adding your loan liabilities to the needed cover and subtracting therefrom the value of your liquid assets. Thus if this 30 year old had a housing loan of Rs. 25 lacs (unpaid portion) and if his financial assets were say Rs. 8 lacs (deposits, shares, mutual funds etc.), the corrected cover amount is 48 plus 25 minus 8 i.e. Rs. 65 lacs.

Any specific fund needs and other financial assets need is to be used for correction in similar way. Insurance is ideally done the day after you land up your first job. But then the annual income needs a correction.


General Insurance policies :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.


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 –Liability Insurance –Professional Indemnity insurance. Third party insurance for Vehicle. Term 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 forinvestment)

Cash Management, Options :Cash Management, Options (1) Investment in Income generating assets. (2) Investment in Expense generating assets ( ? Liabilities).


Basics of investing in StocksOver the long term, stocks have historically outperformed all other investmentsOver the short term, stocks can be hazardous to your financial health.The biggest single determiner of stock prices is earnings.Stocks are your best shot for getting a return over and above the pace of inflation.Individual stocks are not the market.You can't tell how expensive a stock is by looking only at its price.Investors compare stock prices to other factors like revenue, earnings, cash flow, and other fundamental criteria to assess value.It's smarter to buy and hold good stocks than to engage in rapid-fire trading.


How much should you pay?Price/earnings (P/E) ratiois merely a gauge to tell you whether a stock is overvalued or undervalued The P/E based on the past four quarters provides the most accurate reflection of the current valuation, because those earnings have already been booked.To quickly compare P/Es and growth rates, use the PEG ratio -- the P/E (based on estimates for the current year) divided by the long-term growth rate. A company with a P/E of 36 and a growth rate of 20% has a PEG of 1.8.In general, you want a stock with a PEG that's close to 1.0 (or lower), which means it is trading in line with its growth rate. But for a quality company, you can pay more.


Stock picking strategy that gives highest returns

Buy stocks with low price in relation to earnings –stocks with P/E multiples o less than 5 times or even those with multiples between 5 and 10 times, have generated biggest returnsBuy stocks with low price in relation to book value –stocks trading at P/BV o less than 1 or 1 to 1.5 times have outperformed those that traded at higher valuationsBuy stocks with low price in relation to liquidating value – Stocks trading at premium less than 5 times their net current asset value have produced higher returns than those trading at more than 5 times


Stock buying strategy contd.Buy stocks using a magic multiple of P/E and its P/BV. Stocks where the output of this ratio was lower than 22.5 have generated more returns than those whose output was greater than 22.5Find out which stocks are trading cheapest relative to their peers and stick with them for a few years. The will attain market beating returns for a sufficiently long period of timeAnalyze a company’s past performance record, its management credibility and future prospects before making final decisions


Investing in bondsBonds are fancy IOUs Bonds can provide a worry-free stream of incomehowever they include a wide array of instruments with varying degrees of risk and reward. So, You can lose money in bonds. Bond prices move in the opposite direction of interest rates. A bond and a bond mutual fund are totally different animals. Don't invest all your retirement money in bonds. Pay attention to total return, not just yield. If you want capital gains, go long. If you want steady income, stick with short to medium terms.


How to select a brokerStep 1: Determine Your NeedsStep 2: Ask for ReferralsStep 3: Do Your HomeworkAfter developing a list of potential brokers, you need to do some research.Check to ensure that a broker is licensed to do business in the state you'll be trading in, has several years of experience, andworks for a brokerage firm with a good reputation.You want to look for a firm that uses an independent custodian for the securities you are buying.You'll also want to compare fees charged with the range of services offered.If you are selecting a full-service broker, it's important to interview him or her.During the interview, look for a good listener who can demonstrate that they understand your investment goals.


What is a mutual fundA mutual fund is a legal vehicle that enables a collective group of individuals to: Pool their surplus funds and collectively invest in instruments / assets for a common investment objective. Optimize the knowledge and experience of a fund manager, a capacity that individually they may not have Benefit from the economies of scale which size enables and is not available on an individual basis.



Some definitionsNet Asset Value (NAV)

NAV is the sum total of all the assets of the mutual fund (at market price) less the liabilities (fund manager fees, audit fees, registration fees among others); divide this by the number of units and you arrive at the NAV per unit of the mutual fund. Simply put, this is the price at which you can buy / sell units in a mutual fund.


Some definitionsCompounded Annual Growth Rate (CAGR)

It means the year-over-year growth rate of an investment over a specified period of time. Mathematically it is calculated as under:


Some definitionsAbsolute Returns

These are the simple returns, i.e. the returns that an asset achieves, from the day of its purchase to the day of its sale, regardless of how much time has elapsed in between. This measure looks at the appreciation or depreciation that an asset - usually a stock or a mutual fund - achieves over the given period of time. Mathematically it is calculated as under:


Why should we invest in mutual funds? Diversification Professional managementLower entry level Economies of scale Innovative plans/services for investors Liquidity



4 good reasons for investing regularly through SIPs Light on the wallet – as low as Rs. 250 per month

Makes market timing irrelevant

Power of compounding


4 good reasons for investing regularly contd.Lowers the average cost


How to choose Mutual Funds?There are several MFs which have consistently beaten the bench mark indexRefer www.moneycontrol.comRefer www.valueresearchonline.comShortlist those which are in existence for more than 5 yrsArrange them in decreasing order of returnsOut of such shortlisted funds, ignore those which are too small (look at asset base), and choose those which are in 5 star or at least 4 star category


Choosing Mutual Funds - continuedAvoid Sectoral or thematic funds, since you will be taking risk on a sector or a themeSpread SIPs over 3 to 5 funds, to further diversify riskMake SIPS to coincide different dates in a month, say 7th, 14th, 21st and 28th (for 4 funds) or 10th, 20th and 30th (for 3 funds): this will further diversify the riskNever discontinue SIP on market crash, look at it as an opportunity!


Choosing Mutual Funds - continuedUse web tools to track valuationAt least once in 3 to 4 months, review SIPs and the statementsRemember ‘loads’Remain invested for at least 365+1 days, to optimise tax outgoConsult a Certified Financial Planner or at least a qualified MF advisor before investing


What are the recommendations then?Start with 3 to 5 MFs (Either diversified equity or tax saving Start with SIPs in these funds, for 12/13 monthsTrack the funds’ NAV and valuation of your portfolio at least once in 3 monthsUse web tools for easy trackingPrepare a comprehensive plan after due diligence and then stick to the same, come what may.


Gold What is unique to gold?Most countries hold gold reserves as a store of valueAnnual supply remains relatively fixed. According to a report from the World Gold Council mine supply has averaged 2,497 tonnes peryear over the last several years. Given that above ground stocks at the end of 2009 totalled 165,600 tonnes, the annual mine supply is 1.5% of the total stock Relatively low industrial use, Gold carries no default risk unlike other financial assets.

All these factors together make gold an attractive investment as a store of long-term value, particularly during uncertain economic environment and a way to protect wealth during high inflation.


Factors that impact pricesGlobal uncertainty

InflationFestive season


What should you do about goldRisks: Gold is a long-term store of value, but not a long-term return generator. Over the last 40 years, gold’s compounded annual growth rate (CAGR) has been 9.5%. In the 10 years between 2001 and 2010, gold prices have witnessed a definite rally with a CAGR of 17.95%. As on 8 August, the year-to-date rise in gold price has been around 19.31%. The rise in CAGR in the last 10 years is a result of a decade-long rally, typical to asset price cycles.

Remember that there are no income-oriented payouts such as dividends or interest, hence the investor is totally dependent on price rise for returns


Portfolio allocation:Do not have a very large portion of overall portfolio allocated to goldGold is primarily a hedge, hence maintain a 5-

10% allocation and that too via gold exchange-traded funds.Since Indians have been traditionally been investing in gold, most families would have some amount of gold jewellery and other physical gold. Check the value of your physical gold and add on only if required.


Investment avenues“Zero risk” Investments

Fixed Deposits in Post Offices

Monthly Income scheme of Post Offices

National Savings Certificates

Kisan Vikas Patra

PPF Account in Post Offices

RBI Bonds

Any Government Guaranteed Instruments

Various LIC policies


Low risk” InvestmentsSaving Bank deposits in Nationalised BanksRecurring Deposits in Nationalised BanksTime Deposits in Nationalised BanksPPF Accounts in Nationalised Banks‘Liquid Plus’ Mutual FundsInsurance Policies of Private Insurance Companies

What is DICGC Guarantee? (Deposits up to one lac Rupees only for specified banks) – check the DICGC website to confirm coverage


“Medium Risk” InvestmentsBalanced Mutual Fund (Debt and Equity oriented)Company deposits (May tend to become high risk e.g. Garware Nylons, IAEC etc. (Key is rating - AA at least. (What is rating?) Gold (If held for a long term)


Risky investments“High Risk” Investments

Investments in Equity Oriented Mutual FundsInvestments in Properties

“Very High Risk” InvestmentsContribution to Property Mutual Funds Contribution to Private Equity Funds for unlisted companiesShare Market – Direct Investments or derivative products like Futures and OptionsCommodity Futures


The Risk Return Profile Avenue Pretax returns Post tax returns Saving bank 3.50% 2.50% 1 to 3 year bank deposit 7.50 to 10.0% 5.25% to 7% Recurring / Time deposits 6.50 to 8.50% 4.55 to 6.00% Liquid Funds 7.45% 7.45% Insurance policies Cannot say Cannot say Post office schemes 8.00 to 8.50% 5.60 to 6.00





Index performance NSE


Index performance BSE




Stock market returnsSince 1990 till date, Indian stock market has returned about 17% to investors on an average in terms of increase in share prices or capital appreciation annually. Besides that on average stocks have paid 1.5% dividend annually. Dividend is a percentage of the face value of a share that a company returns to its shareholders from its annual profits. Compared to most other forms of investments, investing in equity shares offers the highest rate of return, if invested over a longer duration.


Mutual Fund Performance Equity Diversified


Mutual Fund Performance Equity Tax saving


Mutual Fund performance - Balanced


Asset Allocation ?



Importance of asset allocationAsset allocation may sound like a complicated concept, but it is really very simple. It means allocating your investments across various investment avenues or assets so that the poor performance of any one asset does not affect the overall performance of the entire portfolio.Different asset classes are differently correlated with one another. For example, when equity does well, debt or gold may not do well, and vice versa. It is this different correlation that makes asset allocation such a critical component of financial planning. Asset Allocation depends upon the following factors:

Your risk profile (appetite and tolerance)Your financial goal time horizon


Rewards of Asset Allocation and RebalancingESTABLISHING AN ASSET ALLOCATION STRATEGY and rebalancing regularly to preserve that strategy will introduce more discipline into an investment plan.Asset allocation and rebalancing play important roles in achieving & maintaining diversified and disciplined investment portfoliosA diversified portfolio can experience reduced investment risk because the growth opportunity is not limited to the performance of a security, but is open to opportunities presented by a collection of securities.Investing in a selection of securities spread across different asset classes builds a portfolio that may help reduce volatilityin turbulent times as well as give opportunities for growthEffective tactical asset allocation process adds value in the longer-term


Guidelines for asset allocationIf your goal is more than 10 years away, you can invest up to 70 – 75% of your investible funds into equity, depending on your risk profile. The remainder of your investment can be put into debt (15 to 20%) and gold ETFs (around 10%).As your goal comes closer, for example when your goal is 6 years away, you can maintain an asset allocation of 60% in equity, 30% in debt and 10% in gold ETFs.When your goal is less than 3 years away, it would be wise to not expose the corpus to equity market volatility. Maintain a 100% exposure to low risk/risk free fixed income instruments.


What’s Your Risk Appetite? What’s Your Risk Tolerance?

Risk profile is made up of two components –your risk appetite and your risk tolerance.

Risk appetite simply refers to how much risk one is willing to accept. Risk ‘tolerance’ on the other hand indicates how much risk your finances can handle. The two might be very different.


How to become a crorepati


Sample asset allocation


Asset Allocation




Expert opinion"Asset allocation is key. Have around 10-15 per cent of your portfolio invested in gold, as it is an effective hedge during uncertain times Don't buy physical gold - use exchange traded funds (ETFs). Allocate another 15 per cent to relatively safe debt funds. Cash can command 10 per cent. The balance is to be invested in equity, not in a lump sum but in a staggered manner through SIPs. Through the mechanism of SIPs, which essentially immunizes you against market turbulence, discretion goes out and discipline walks in.


How much real estate must you own?Normally 50% of one’s money should be invested in property. However in places like Mumbai, initially this may work to 80%. Slowly increase other investment to bring investment in property to 50%Do not opt for property as prices are high and you feel that it is easy to make gains on propertyOwning an asset including property in unduly high proportions can be self defeating especially when prices fallInvestment in property and other assets must be in line with pre determined asset allocation


All assets have a cycle and trying to enter and exit based on its cycle is time consuming and often volatileOne property must be held primarily for one’s residence. Other properties can be held for investmentConsider taking a loan to buy property in case funds are not sufficientRemember principal and interest on home loan are eligible or tax deduction.

Interest is deductible from income up to Rs. 1,50,000 under section 24(b)Principal amount upto 1,00,000 is deductible under 80C


National Pension schemeThe National Pension System is a retirement planning option thathas been made available to the citizens of India in the year 2009. The NPS is a new voluntary contributory pension scheme introduced by the Central Government through Pension Fund Regulatory and Development Authority (PFRDA) to promote old age income security.The aim of the NPS is to provide a sumptuous retirement corpus for the working class of India (Something like Social Security in USA) when they retire. Though it is not a compulsory contribution option like Social Security, this scheme is purely voluntary. The scheme is available to all citizens of India who are not Government Employees.


Under the NPS, individuals can open a personal retirement account with the government through the PFRDA and can set aside and save a pension corpus during their work life to meet financial needs post retirement. There are various investment options available for the investors who wish to subscribe to the National Pension System. The amount invested in the scheme earns returns depending on theinvestment options selected by the investor.At the time of withdrawal (When the investor retires) the subscribers have to invest 40%of their accumulated pension money under the Scheme to purchase a life annuity from an IRDA regulated life insurance company and the balance may be withdrawn in full. The amount the investor can withdraw and the timeframe after which it can be withdrawn are subject to certain conditions.


HighlightsAny Indian citizen will be able to start a New Pension Scheme account and can start investing any amount up for a pension.Open to all citizens aged between 18-60 yearsExit age for new pension scheme will be 60 years.Attractive investment schemes to choose fromProfessional record-keeping and fund managementTechnology driven, Transparent fee based systemWithdrawal facility as and when you wish, under Tier IINo entry and exit loadsMultiple fund managersMultiple investment optionsMinimum Contribution per installment: Rs 500Minimum Contribution per year: Rs 6000Minimum Contributions per year : 1


Who are the people involved in the National Pension System?

There are many people or rather the correct technical term wouldbe intermediaries involved in the NPS. They are:1. The Pension Fund Regulatory and Development Authority (PFRDA) of India

PFRDA is the regulator for the NPS. PFRDA is responsible for registration of various intermediaries in the system such as Central Record Keeping Agency (CRA), Pension Funds, Custodians, NPS Trustee Bank, etc. The PFRDA also monitors the performance of the various intermediaries and ensure that all stakeholders comply with the guidelines/regulations issued by PFRDA from time to time.The most important responsibility of the PFRDA is to ensure that the interest of the Citizens who invest in the scheme are protected which essentially means they are there to look after our best interest.


2. The Central Record Keeping Agency (CRA)The record-keeping, administration and customer service functions for all subscribers of the New Pension System will be centralized and performed by the CRA. The CRA will, on the basis of instructions received from subscribers, transmit such instructions to the appointed Pension Funds on a regular basis. The CRA will also provide periodic, consolidated PRAN statements to each subscriber.The National Securities Depository Limited (NSDL) has been appointed as the CRA for the NPS.NPS allows you to choose from any one of the following six entities as PF to manage your pension fund:1. ICICI Prudential Pension Funds Management Company Limited2. IDFC Pension Fund Management Company Limited3. Kotak Mahindra Pension Fund Limited4. Reliance Capital Pension Fund Limited5. SBI Pension Funds Private Limited6. UTI Retirement Solution Limited7. Annuity Service Provider (ASP)


3. Pension Fund ManagersThe money deposited by investors is invested into a pension fundwhich is managed by designated fund managers. There are a few leading professional firms that have been appointed to act as the Pension Fund Managers. They invest the subscriber’s money into various schemes like equities or bonds etc for further investment.The Pension Funds are required to invest strictly in accordance with the guidelines issued by the government and PFRDA. The NAV of each and every scheme in the Pension Funds would be communicated to the CRA and the investors regularly.


4. Annuity Service ProvidersThe Annuity Service Providers are responsible for delivering a regular monthly pension to the investor after they attain their retirement age of 60 yrs. The PFRDA is in process of appointing the Annuity Service Provider(s) for the NPS accounts. Upon appointment of the same, you will be able to select any Annuity Service Provider for your account as per your choice at the time of withdrawal of contribution from your NPS account or on attaining 60 years of age.


Trust & Trustee Bank (TB)

The Trust established under the NPS, is responsible for taking care of the funds under the NPS and is the registered owner of all NPS assets. The trust holds an account with as the NPS Trustee Bank, i.e Bank of India. NPS Trustee Bank facilitates fund transfers across various entities of NPS system which include, PFM, Annuity Service Providers, subscriber, etc. The NPS Trust is being administered by the Board of Trustees, asdecided by the PFRDA.


Point of Presence (PoP)

PoP is the first point of interaction between the voluntary subscriber and the NPS architecture. The PoP is responsible for performing functions relating to registration of subscribers, undertaking Know Your Customer (KYC) verification, receiving contributions and instructions from subscribers and transmission of the same to designated NPS intermediaries.

How to invest in NPS?

The PoP is the entity through which an investor can invest into the National Pension Scheme. The Investor who wishes to subscribe tothe NPS can contact the PoP and become an investor in the Pension Scheme.


Types of NPS AccountsThe NPS currently has two types of Accounts available for the subscribers. They are:1. Tier 1 Account – This is a non-withdrawable account wherein you will not be able to take out your investments until you reach your retirement age of 60 years. If you want to withdraw the money from your Tier 1 account before you reach 60 years, you would be required to invest atleast 80% of the money in your account to purchase a life annuity from an Annuity Provider (Life InsuranceCompanies). You can only withdraw the remaining 20% of your balance.2. Tier II Account – To open a Tier 2 account, you need to have an active tier 1 account. You can withdraw your savings from this account whenever you want.The Tier II account makes it easy for you to withdraw your money before retirement because there is no limit on the withdrawals you can make from the Tier II account.You need to maintain a minimum balance of Rs. 2,000, and you cantransfer money from the Tier II account to Tier I account, but not the other way around.


Asset Allocation and Categories in the NPSThere is an Active Choice option, and an Auto Choice option. If you select Auto Choice then your money is invested in a certain percentage in the various classes based on your age.Here are the three investment classes:

In the Active Choice you can select how much of your money will be invested in the different classes with a cap of 50% in Class E.Now, there are pension funds that will manage your money, and in either of these options you have to select the fund manager who will manage your fund. So even if you select the Auto Choice, you still have to tell them which fund manager you want to manage your money.


Fees and Costs related to the NPS


What is the minimum amount of investment in the NPS?

For a Tier I NPS account you need to contribute a minimum of Rs.6,000 per year, and make at least 4 contributions in a year. Theminimum amount per contribution can be Rs. 500.Minimum amount for opening Tier II account is Rs. 1,000, minimumbalance at the end of a year is Rs. 2,000, and you need to make at least 4 contributions in a year.

What are the tax implications of NPS?The revised Direct Tax Code proposes to make the NPS tax exempt at the time of withdrawal. Initially NPS was going to be taxed at the time of withdrawal, and that had put it at a disadvantage toother products like ULIPs and Mutual Funds. But the revised codeproposes it to be exempt from tax, and that really adds to its lure.


Points to be noted about NPSNPS doesn’t pay a pension directlyThe way NPS works is that you invest regularly in the scheme and the scheme invests that money on your behalf.At the age of 60 you will get the money and it will be up to you to invest it and generate an income for yourself. In this regard you can think of it more like a provident fund than a pension.Under NPS there is no fixed rate at which your money will growWhen you open the NPS account – you will be asked to select a fund manager and your money will be invested by this fund manager. You will also be asked whether you want to choose an Ultra Safe, Safe or Medium approach, and based on your selection the fund managers will spread your money between debt and equity instruments. The rate of growth will depend on the performance of the fund managers and the choices you make, so to that extent it’s not like a bank fixed deposit where they tell you that you will get 8 or 9% interest regardless of anything else.


How to calculate pension amount from NPS?Example

I am 28 years old – how much pension will I get if I invest Rs. 2,000 every month?

Contribution Amount: 2000Periodicity: MonthlyRate of Interest: 9.5% (Assumed)Number of Years: 32 (60 – 28)value of corpus Rs. 50,05,164.Now, this is the amount that you will get at the end of 60 years, and

you will have to invest it in order to get a pension. You could create a bank fixed deposit with it or buy an annuity.NPS requires you to buy an annuity from 40% of your money in the Tier

1 account compulsorily, but there is no such restriction on the Tier 2 account


Benefits of Investing in NPSThere are a lot of benefits of investing in the NPS. They are:1. You can choose the amount you want to set aside and save every year2. All you have to do is to open an account with any one of the POP and get an Account3. You can choose your own investment option and Pension fund and see your money grow4. You can operate your account from anywhere in the country , even if you change your city, job or pension fund manager5. NPS is regulated by PFRDA, with transparent investment norms and regular monitoring and performance review of fund managers by NPS trust


Use credit cards smartlyRead up on the terms and conditions before you use the card and not afterCheck how much annual fees are to be paid. Whether they will be waived in the subsequent years or notDouble check whether your card is ‘lifetime free card’ or notPay credit cards before due date. Interest charged is prohibitive and could be in excess of 30% p.a.Use card only to make purchasesDo not use EMI option as interest charged is very highBorrowing cash on your credit card is a very expensive affairIgnore insurance benefit as in most cases claiming it becomes very difficult.


How to spend wiselySpend in line with budgetTrack expensesDon’t succumb to impulse spendingBeware of credit cards- use them wisely


In Cricket and Financial Planning - Play to WIN!

Get a strong head start!Have a balanced team!Have a Safety Plan in case of a bad over!Pace yourself!Know Where You Stand!Have a good coach!


Get a strong head startA strong head start is the best offense. If you’re chasing a huge score, you need to take strong initial steps to get those runs on the board.

Similarly, if you need an ‘x’ sum of money within ‘n’ years, get cracking with the right investments into the right products!

Remember, an investment of Rs. 10,000 per month started at age 30, going on every month until age 60, will yield almost the exact same future value as an investment of Rs. 45,000 per month started at age 40!

By starting just 10 years later, you have to invest 4.5 times the amount, to get the same end corpus.


Have a balanced team!While 11 Sachins might seem like a dream, it wouldn’t work.Our team needs to balance itself with strong performers in batting (equity), bowling and fielding (debt and gold).

Think of our batsmen like your portfolio’s equity component.

It is Dhoni (our cool and calm opportunities fund), Sachin (our beloved bluechip performer) and Sehwag (the ever aggressive midcap) that we pin our hopes on to get that run rate up.Your equity in your portfolio is what will help you beat inflation and really grow your wealth.


Balanced teamBut when equity is sitting it out, where would we be without Yuvraj, Bhajji and Zaheer to take those wickets.

It’s the debt and gold in your portfolio that will perform when market conditions cause equity to wait its turn.

Depending on your age, time horizon to your goals and your risk appetite, you should arrive at the right mix of equity, debt andgold that will balance your portfolio.


Have a Safety Plan in case of a bad over!We’ve all seen how one bad over can turn the tide.

In case a wicket falls in your own financial life (an unforeseen financial emergency like loss of a job, health trouble etc), you need to have a backup plan.

Build a contingency reserve (at least 6 months worth of expenses) to land on until you get back on your feet.

You should also have enough life insurance to take care of your loved ones in case of any unfortunate event.


Pace yourself!At the beginning of the match, we need to be aggressive. After all, we have wickets in hand.

Similarly, if you’ve got more than 10 earning years left until your goal, then the investments for that goal can go more into equity(up to 75%), and less into debt and gold (25%).

But when we’re almost out of wickets (earning years, the ability to take risks), we need to be

cautious, play carefully,don’t try anything too wild.

Go for a higher exposure to debt and gold, Minimize the risk to the portfolio by minimizing the equity component.


Have a good coachYour investments might consist of good individual performers, but its your financial planner who will build your overall investment schedule, keep an eye on it, identify strengths and weaknesses of individual investments and manage them correctly, so that from being good individually, they become excellent together.

Just like our team did well under Gary Kirsten, benefiting from his experience and coaching prowess, your wealth will benefit from the knowledge and technical know-how of your Financial Planner


Remember, it’s not just a game, it’s a sport.

Just like achieving your life dreams is not just a question of investing, it’s a question of having the right Plan.You need to know

your goals, your team (your investment options), the pitch and playing conditions (the market scenario),pace yourself (consider how many years till your goals arrive), and above all, let your Coach help you to do the very best you can do.

And don’t forget, in cricket, as in financial planning, we’re playing to win!


Guidelines for investing

Know the Asset Class, not just the name of the productHave a Purpose – don’t just invest because you have the money to spareKnow the Costs of the Product AND the Remuneration to Your Adviser!


Financial planning DosChoose your financial advisor with due diligenceRead the investment documents carefullyRead the features and benefits of the investment products, to assess whether they suit your risk profile and investment objectives / financial goalsCarry out at least some basic researchAsk questions to your agent / distributor / relationship managerwhich are relevant in context of your investment objective / financial goals Monitor your investments regularly to where tour investments stand and see whether they are meeting your objectives / financial goalsTake sufficient time while doing your investment / financial planning


Financial planning Don’ts Don’t have blind faith in your agent / distributor / relationship managersDo not always go with big brandsDo not sign blank cheques / formsGet lured by "returns" (%)Look for ways of making shortcut moneyInvest money if others / relatives / friends have invested in such a scheme


Sacred mantras of investingSo, what are the overall Sacred Mantras for investment?Early in life (earlier than 45 years of age), open a PPF account, deposit only Rs.60000 in 6 years, earn tax rebate of Rs.157000, a maturity value of Rs.160000, and an overall return of 20.8% (tax free), in 15 years!Do not revolve credit card dues (Interest at 42%)Do not let money languish in savings, opt for Auto / Reverse SweepDo not buy anything on instalments (except house)Save to the extent it pinches the pocket (but only slightly)


Sacred mantras of investing contd.Buy insurance that you may need, before you are 30!Do not buy insurance as a means of saving or tax planning – tax saving mutual funds offer a much better choiceNever buy endowment or money-back policiesInstead, buy term policies before 30 and invest balance in Tax saving MF or PPFInvest some money in Pension Plans to augment your post retirement income, particularly if you have no pension


Sacred mantras of investing contd.Up to the age of 53 to 55 (depending on your age of retirement, i.e. till 5 years before retirement, continue investing in diversified MFs via Systematic Investment Plan (SIP) or Systematic Transfer Plan)Take full advantage of Chapter VI A deductions (likely to be Rs.300000 now)If you do not need money out of MF dividends, opt for growth option, for faster growth.Never, I repeat, never buy units of New Fund Offers


Sacred mantras of investing contd.However nice and trust-worthy they may be today, never transfer your assets to children. After that you are going to be ‘worthless’ or at least ‘less’ ‘worth’ to be looked afterWell before retirement buy adequate medical insurance and create a ‘no claim’ record, so that you do not have problem in getting cover later in life, when you may need it most


Value of timeTime is a valuable asset and you should make the most of it.You should still follow the process of Financial Planning when building wealth for your family’s and your life goals.

If you have a goal that is less than 3 years away, for example buying a house or a car, or sending your child for higher studies, then the corpus should be invested in safe instruments and should not be exposed to market risks i.e. no equity exposure.

For a goal that is 3 to 5 years away (medium term), your exposure to risky assets (equity) should be low, and your primary exposure should be to debt (think more MIPs, fewer balanced funds).


For goals that are 5 to 10 years away, your equity exposure can be higher, with lower exposure to debt, as the time horizon willenable you to weather any market volatility that comes your way.

For goals that are 10 years away or more, you can be primarily invested into equity, with some exposure to debt.

At all times, remember to have your contingency fund stashed in a safe place (liquid plus funds, a sweep in flexi deposit with your bank) in case of an emergency. Your contingency fund should be 6 to 12 months of your family’s and your monthly living expenses.


How to select a professional financial plannerCheck the capability of the individual or the organization that you wish to hire as your financial planner by asking a few simple questions such as:

A) What is the business model of the company? How does it earn its revenues?B) What is the process that they would follow in building the financial plan? Have a look at a sample plan.C) What is the team size? Their experience and qualifications?D) Are their recommendations based on solid research or driven by commissions?E) How long has the individual or the organization been in business? How many clients have they made financial plans for?F) Can they give references of existing clients with whom you can speak to?


ConclusionConclusion 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.


DisclaimerWhile I thank you for your attention, I need to stress that I am not a qualified ‘CFP’ or ‘Mutual Fund Distributor’. The views expressed are borne out of my personal experience, and my readingsPlease consult your advisor before investing


Financial Planning Godrej

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