PowerPoint Presentation

Unit 1Financial Planning

What is Financial Planning?Financial Planning is the process of meeting ones life goals through the proper management of personal finances.It means making a decision about money in hand as well as future generation of income as to how it can be utilized to the best advantage.Financial GoalsI want to retire rich.I want to start a business.I want to be the Prime Minister of the country.I want to buy a house.Are they Financial Goals?NO. They are not.

Financial goals should be measurable and have a time frame.I want to buy a house valued at Rs.75lacs, 10 years from now.Financial goalsFinancial goals must be measureableS SpecificM- MeasurableA AchievableR RealisticT Time frame

Egs???Need for financial planningChildrens future including education and marriageBuying a housePurchasing a carTravellingStarting own businessComfortable Retirement5GoalsMajor Goals in LifeChildrens EducationChildrens MarriageBuying a HouseIndependent RetirementMinor Goals in LifeHome RenovationInternational VacationsCar PurchaseHoliday HomeCorpus for Start-upFamily GiftingOther Big PurchasesOther Financial GoalsReducing Tax Outgo by Tax PlanningProtection of Assets & LifeBeing Debt-freeCharity work

Importance of financial planningIncome Financial Planning helps to efficiently manage and utilize the income earned. Proper management of income is important to ensure a comfortable presence and a secure futureCash flow plays an important role in tracking income as well as expenditure. Financial Planning will help to create adequate cash flows to meet regular expenses , unforeseen expenses and save for futureCapital Financial Planning helps to build a long term capital and shape ones financial futureImportance of financial planningInvestment Financial Planning helps to identify various investment opportunities appropriate to ones financial situationFamily security helps to provide financial security for the familyStandard of living helps to improve the standard of living. Savings and assets helps to build savings and assetsNeed for financial planningLonger life span and lack of social securityFew generations ago, someone would start earning by the time one reached the age of 20 years, work till the age of 58 years and live till around 65 years.In recent times, one starts working at 25 years of age after completing post graduation studies. Consider a retirement age of 60 years and life span of 80 years.In most jobs no pension is the norm.Need for Financial PlanningProliferation of numerous productsNew players have caught up considerably with their product innovation, aggressive marketing and new distribution channels.Need for Financial PlanningComplexity of products & servicesInnovation has made the products increasingly complexInvestors need informed guidance on making a finance sense out of what is being offered to them as investment or insuranceNeed for Financial PlanningIncreasing income and savings levelsIncreasing level of borrowingsHigher aspirations and goalsInflationNuclear familiesPlethora of InformationObjectives of financial planningProtecting oneself and familySecuring family in case of any inevitable happening to ones lifeProtecting the assetsMeeting the unexpected situationPlanning for kidsPlanning for retirementThe Personal Financial Planning ProcessStep 1: Define Your Financial GoalsStep 2: Evaluate Your Current Financial StatusStep 3: Develop a Plan of ActionStep 4: Implement Your PlanStep 5: Review Your Progress, Re-evaluate, and Revise Your Plan as Your Financial Status ChangesLife Cycle stagesYoung and unmarriedYoung and married, with no childrenMarried and having young childrenMarried and having older childrenRetirement

Life Cycle StagesStageFinancial NeedsInvestment PreferencesChildhood

No needs. Focus on education. Pocket moneyValues imbibed during this stage set the foundation for future.Young UnmarriedMarriage, Buying a car and a house.Term plans. Higher risk appetite. Equity preferred. Liquid fundsYoung marriedBoth working, life comfortable.Only one working, contingency/Life InsuranceLiquid / Money Market Mutual Funds Risk appetite ok. Equity mustMarried with young childrenLife/General insurance very high.Investments in equity, gold and real estate.Married with older childrenEducation needs, cost of housing and marriage of children.Investments in equity, gold and real estatePre retirementAll loans extinguished. Plan for retirement.Debt funds, less in equityRetirementLiving expenses out of corpusPost office MIS and Bank deposits17Wealth cycle of an investor

Wealth Cycle StagesStageFinancial NeedsInvestment PreferencesAccumulation Stage(Phases of Life Cycle Stage: Young Unmarried to Pre-Retirement.)Investing for long term identified financial goalsGrowth options & long term products. High risk appetiteTransition StageNear Term needs for funds as pre- specified needs draw closer Short & Medium term investments. Lower risk appetiteReaping Stage/ Distribution Stage Equivalent to Retirement Phase of Life Cycle StageHigher liquidity requirements / Goal has reached.Liquid / Money Market Mutual Funds Lower risk appetite.Inter- Generational transferLong term investment of inheritanceLow liquidity needs. Ability to take risk & invest for long term.Sudden Wealth Surge (Lottery, Sale of Shares/Business, Inheritance, Contest etc.)Medium to long termWealth Preservation. Initially invested in Liquid Funds then FP charts a plan.Financial Planning Delivery ProcessEstablishing Client-Advisor RelationshipUnderstanding Clients Situations & GoalsAnalyzing clients Financial Advisory needsDeveloping Recommendations and StrategyOffering the Right Products and ServicesMonitoring the Performance Client Data AnalysisPosition of client on the life cycle Position of client on the wealth cycle Calculate the net worth of the clientRisk orientation How much risk can the client take?Whether Client & family members have sufficient risk cover for life, health and other aspects?Whether present cash flows and investment patterns sufficient to achieve the future goals?If not sufficient, what are the deviations required to achieve the goals?

Risk ProfilingExtremely Risk AverseModerately Risk AverseRisk NeutralModerately Risk AppetiteExtremely Risk Appetite

Functions of a financial advisorOne who helps the client understand how to meet his lifes financial goals. The planner takes a clear view of the clients financial situation and makes financial planning recommendations that are suitable for himA financial planner is one who advises the client the ways of achieving the financial goals set by the client. He is a client oriented professional who works in the best interest of the client.Functions of a financial advisorThe financial advisor discusses and suggests a very well organised, well planned system of adopting strategies for using the clients resources to attain both long term and short term financial goals.He monitors the clients financial position at frequent intervals and suggests changes in the strategies of the clients for achieving the financial goals.Scope of Financial Advisory ServicesContingency PlanningInsurance PlanningInvestment PlanningTax planningEstate PlanningRetirement PlanningContingency PlanningA contingency funding plan aims at keeping aside funds for emergencies like loss in business, loss of job or hospitalization.Normally, 6 months expenses should be kept in savings account or liquid funds . The idea is that 6 months is sufficient to look for an alternate job or start a new business.

Insurance PlanningInsurance Planning is determining the adequacy of insurance cover required by the client to cover the risk associated with ones life, medical emergencies and assets.Insurance PlanningHow much of health insurance is required to protect a client and his dependents to meet with a medical emergency like an accident or disease?Which type of accident policy and critical illness policy will suit the client?Is there a need to have insurance of household goods?Determine whether the client has adequate life insurance . The thumb rule is one should have Life cover which is at least 10 times his annual income.What are the risks to the clients (or familys) income earning capacity in case of his death or disability?What are the risks of loss with respect to the assets owned by the family?Investment PlanningInvestment Planning determines the optimum investment and asset allocation strategies based on the time horizon, risk profile and financial goals of the client.A Financial Planner offering Investment Planning services should understand and analyse various asset classes as well as the products available under each asset class before recommending an investment strategy to the client for achieving financial goals. Investment PlanningWhat are the life goals? How can these be translated into financial goals?What is the clients risk profile?What is the time horizon available for investments?What should be the ideal Asset Allocation?Which asset allocation strategy should be followed?How to achieve diversification of investments?What is the investment objective income, growth or just capital protection?How much to invest either in a lump-sum or regularly (SIP) to achieve the given goal?

Tax Planning & Estate PlanningTax Planning includes planning of income, expenses and investments in a tax efficient manner to gain maximum benefit of prevailing tax laws. Is the client making maximum use of all available tax exemptions/deductions? How to lower the tax liability? How to increase tax-adjusted returns on investments?What are the changes in tax laws that may affect cash flows, investments and savings?How to avoid just the year-end tax saving and do strategic tax planning?Which investment option to choose amongst the various options available u/s 80C of the IT Act, 1961?Retirement PlanningRetirement Planning is determining how much of corpus is required to fund the expenses during the retirement years and ways to build that corpus in the pre-retirement period. It deals with the utilisation of the corpus accumulated during the retirement years.What is the retirement corpus required to lead the same lifestyle after retirement?How will inflation affect the sustainability of retirement corpus in post retirement years?Is there scope for early retirement, or retirement is postponed due to inadequate corpus?