Introduction to
Financial Planning
Harsha Prakash N


25 March 2013
Disclaimer: This document is a presentation prepared based on knowledge assimilated from various sources. The author does not claim intellectual property rights on any methodologies or pictures, however the presentation, as a document is the intellectual property of the author

Agenda

Introduction to Financial Planning

Understanding Financial Products in India

Agenda – What to expect ?
Finance is common sense. So my presentation is not going to teach you rocket science. Its anything but earth shattering. So sit back relax and enjoy!
Introduction to various financial products in India: how do they work? Some myths & pitfalls!
Basics of Financial Planning: Introduction to the concept with an illustration

Agenda

Introduction to Financial Planning

Understanding Financial Products in India

Needs in life change with Time and so does their cost!
Dude, Mr. X
Mr and Would be Mrs X
Mr, Mrs & Jr X
Mr. Old X
Books
Bikes
Babes
Booze
Gifts
Vacations
Wedding etc.
House & Car
Education & Weddings
Healthcare
Monthly Pension
Healthcare
Lump sum savings
If you do not create wealth, you would not be able to afford your future needs!

Life spices up your pursuit of needs & wants with some nasty uncertainties
Uncertainties in Life
Personal Health (Critical Illness, Death, Disability)
Professional
(Job losses etc.)
Economic
(inflation, price rises)
PLANNING for future expenditures & COVERING risks is the answer for a happy tomorrow!
How does one ensure financial security for the future for self and dependants in light of these uncertainties?

Financial Planning is a roadmap to one’s future financial needs & goals
Financial Planning

Financial Planning is a systematic 5 stage process
I. Assess Current Status
II. Set Financial Goals
III. Create Financial Plan
IV. Execute Financial Plan
V. Monitor & Reassess
Let’s understand these steps in detail…

I. Understand your current net worth in detail
Net Worth

Identify the Risks & gaps. For example: In case your liabilities exceed assets, create goals to improve assets. If you are not adequately insured, increase your cover
Illustrative

II. Identify your immediate, medium and long term goals
Illustrative

III. Create a Financial Plan
Note: 12% return has been assumed on equity investments and 8.5% on debt investments. Inflation has been assumed to be 6%.
Illustrative

III. Compute your Monthly Investible Surplus! But use the new mantra!
Monthly Income = 75,000
10,000
Monthly Expenses
30,000
35,000
EMI or Fun Expenses
Investible Surplus
Monthly Outflow
Monthly Income = 75,000
8,000
Monthly Expenses
(28,000)
39,000
EMI or Fun Expenses
Required Investments
Monthly Outflow
Old Mantra I – E = I*
New Mantra I – I* = E
I – Income, E = Expenditure, I* = Investments
Source: Funds India
Illustrative

Fixed Deposits (Banks & Corporate)
Liquid & Debt Funds
Fixed Income Funds
GOI Bonds
PPF
Non ULIP Insurance
IV. Execute the plan by identifying the appropriate investment avenues that suit your risk appetite and goals! OR get a Financial Planner to do it for you!

Equity Stocks
Mutual Funds
ETFs
Gold (not quite)
ULIPs




Anything under the Sun if you want to buy! Land, Apartments, Houses, Farms etc.
Equity
Debt/
Liquid
Real Estate
Medium to High
Low
High
High
Low
High
Risk
Returns

Be careful in choosing a financial planner!
Hire a fee-based financial planner, not one who charges a percentage of your portfolio
Choose a financial planner who has NO vested interest in selling select products to you (There are few noted financial planning firms in India that act as distributors for ULIPs, endowment plans, mutual funds etc.)
Always do your own research before you commit into any investments
Despite these cautions, investing in a good financial planner is worth it and can help you avoid attending such boring presentations!

Split up of your investments between debt and equity depends on your risk apetitie
Investments in equity should decrease with age of the investor. As you approach a retirement age or close to the goal post, move from equity to debt
Note: This a generic recommendation or Norm. The actual investment split will differ by each investor on basis of his goals, existing assets, risk appetite etc.

Agenda

Introduction to Financial Planning

Understanding Financial Products in India

Protection

Investments

Key components of financial planning
Covered in the later half of the presentation
Let’s understand this Financial Protection in more detail

Contingency Fund should ideally support your living for at least 6 months, in case of emergencies
1st Level Contingency Fund
Funds that are 100% liquid and available for immediate consumption.
Advised Norm is to have 3 months expenses in Savings Account as Emergency Fund
2nd Level Contingency Fund
Funds that are available for consumption within a day
Advised norm is 3 months of expenses in FDs or liquid funds
3rd Level Contingency Fund
Extra level of safety. Funds worth 6 months of expenses placed in FDs or liquid funds
It is a good practice not to tinker with this emergency fund. Emergency fund should not be placed in equity instruments as principal can be eroded

Protection – Life Insurance protects your family in your absence; Health insurances covers for medical expenses!
It is better to replace endowments with Term Plan + PPF Combo and ULIPs with MF and Term Plan Combo

Agenda

Introduction to Financial Planning

Understanding Financial Products in India

Protection

Investments – Low Risk Investments

Comparison of Low Risk Investment Options

Agenda

Introduction to Financial Planning

Understanding Financial Products in India

Protection

Investments – High Risk Investments

High Risk Investment Options

Direct Equities
Direct investment in stocks, F & O etc.
Day Trading and Portfolio Building
High risk & volatility; needs good understanding of markets (Technical & fundamental analysis) to make good returns
It’s exciting. No limit for returns; also no limits for losses; proceeds not taxable
Demat & Trading account needed
My $ 0.02 for a beginner: Follow investment advice from reputed sources; do your own research; pick blue chip stocks at market lows and build a portfolio. Make money on dividends and big market swings

Mutual Funds? Do we understand how they work? Not many do!
Interviewer: What do you know about Mutual Funds?
Interviewee: Mutual Funds are subject to market risk. Please read the offer document carefully before investing!
A real life interview. Answer was a shocker!

Mutual Funds? Do we understand how they work? Not many do!
Interviewer: What do you know about Mutual Funds?
Interviewee: Mutual Funds are subject to market risk. Please read the offer document carefully before investing!
A real life interview. Answer was a shocker!

Invests in equity (stocks) ~90% equity
High risk, high returns
Entry Modes: ELSS, Direct Purchase, SIP
Top Funds: HDFC Equity, HDFC Top 200, Franklin India Blue-chip, DSP Blackrock equity etc.
There are more than 1000 MF schemes in India? Which MF should you go for?
Invests in GoI and other bonds
Low risk low returns
Highly liquid funds
Entry Modes: Direct Purchase, SIP
Top Funds: Performance in these funds does not drastically change across houses
Balanced investment between equity and debt (60%- 40%)
Medium Risk, Medium Returns
Entry Modes: Direct Purchase, SIP
Top Funds: HDFC balance, HDFC Prudence etc.
Invests in particular sector or follows a unique investment approach
Generally High Risk
Entry Modes: Direct Purchase, SIP etc.
Top Funds: ICICI FMCG Fund, Advisory series funds, UTI Infrastructure fund etc.
Invests in equity (stocks)
High risk, high returns
Entry Modes: ELSS, Direct Purchase, SIP etc.
Top Funds: HDFC Equity, HDFC Top 200, Franklin India Blue-chip, DSP Blackrock equity etc.

Direct Option or Dividend Option? Direct Purchase vs. Distributor Mode?
Direct Option:
The profits made by the mutual funds are retained in the fund and NAV growth reflects profits. Investors make profit by selling MFs at higher NAV
Investor would need to wait for high NAVs. Lack of liquidity. Fund value can drop before investor decides to cash out

Dividend Option:
Fund houses distribute profits to investors by declaring dividends
NAV falls to the extent of declared dividend! Shocked ya!
Provides liquidity. Dividends are taxable (12.5%) and no guarantee of dividend being declared every year
Its your units being reduced in value & given to you as cash!

Direct Purchase:
Purchase directly from mutual fund. No entry loads. 1st investment will involve paper work. IPIN provided with 1st investment will give online access for future transactions

Distributor Mode:
For new investor distributors change Rs 150 as fee
You further communications will be with mutual fund house
Distributors are supposed to be advisors and charge fee for same! But value add is minimal, majority of their agents basically distribute applications and have minimal understanding of products
Growth Option vs. Dividend Option
Direct Purchase vs. Distributor Mode

Let’s break some Mutual Fund Myths & get some free advice!

Myths
A fund with a net asset value (NAV) of Rs 10 is cheaper and so, more attractive than a fund whose NAV is Rs 50. ( You mean, NFOs are the best way to enter MFs?)
Dividend from my MF is an additional income. Hence funds that regularly declare dividends are good buys.
250% dividend on my investment, wow! The fund house is generous!
Recent performances are the benchmarks!
SIPs score over lump sum investing
Investing in n number of funds reduces risk!
No entry load & no exit load! Yeppieyayay! MFs are free investments!

Free Advice but not necessarily the best advice:
If you are making a direct purchase instead of SIP, enter when markets are bearish
Timing does not matter for SIPs, have at least 3 -5 year time frame for SIPs. The longer the duration, the better it is
Factors to keep in mind while choosing a fund: Past performance (only an indicator), Fund age, Fund Manager, Expense Ratio, Portfolio Turnover, Fund Strategy, Benchmark performance, competitor funds etc.)
I am not a fan of balanced funds, FDs are better. For MFs = equity based funds
Again, invest time in some research, understand the fund strategy. Trust me, you will love the nuances!

Corporate FDs are capital generation schemes for private companies; Higher risk and reward combo for investors
FDs offered by corporates. Higher interest rates than banks? Why? Due to higher risks. No guarantee on principal. Only few of them declare credit ratings (risk). Good diversification if you have excess cash (at your risk)

Do we understand ULIP? Not Tulips - they are beautiful, but ULIPs…..!
Premium Paid
A ULIP is a product that offers both insurance and investment!
Awesome? No! Look where your money is going!!
5-10%
10 - 12% Charges
80%
What are these charges? ULIP strips almost 10-12% of your investment as charges
Premium Allocation Charge
Fund Management Charge
Administration Charge
Mortality Charge

To ULIP or Not to ULIP?
Pure term Insurance. No adulteration with investments. Higher sum assured at lower premiums.
SIP or MF investments where fund managers does not have interest in squeezing charges as high as 10%
Issued in public interest by akosha.com

Some Golden Rules for Financial Management and Investing for Young Professionals
Start Early. Make use of the compounding effect
As a young professional, Emergency Fund, Term Insurance and Health Insurance are must haves
Be Regular and Disciplined in savings and investments
Returns from an investment should exceed inflation. If you have doubts, read the statement again & again!
Every financial product has a downside or risk. Try your best to understand it. We are MBAs after all 
Don’t Invest in Products you don’t understand (especially ULIPs) , even if it’s a babe selling it! Better use your charm and invest on a dinner ;)
Start Tax planning in April. Yes you heard me right, not march but April!

Good References

For Regular Investing Gyan:
Manish Chauhan: www.jagoinvestor.com
Deepak Shenoy: www.capitalmind.in
Safal Niveshak: www.safalniveshak.com

Portfolio Management Software
Perfios – Good and Cheap. Excellent Features
Birla Sun Life My Universe

For Fund Research
Funds India
Value Research Online
AMFI India
Mutual Fund Accounts
Funds India (A little cumbersome, but free account)
HDFC Bank offers MF a/c but charges Rs. 400 per year
5. Equity Platforms
ICICI Direct – Little costly, but user friendly for new investors
Sharekhan & IIFL – Low cost, but service is a little poor

Danke Schoene!