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Financial PlanningS.B. Mainak
Faculty MemberNational Insurance Academy
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INSTRUMENTS OF FINANCIAL PRODUCTS
RBI BONDS GOVERNMENT AGENCIES BONDS
SMALL SAVINGS INSTRUMENTS.
PUBLIC SECTOR BONDS.
BANK DEPOSITS.
BONDS/DEBENTURES OF CORPORATE ENTITIES ANDFINANCIAL INSTITUTIONS.
MUTUAL FUNDSDEBT/EQUITY/HYBRID.
EQUITY.
LIFE INSURANCE.
UNIT LINKED INSURANCE GOLD.
REAL ESTATE
POSTAL SAVINGS SCHEMES
ANNUITIES
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RISKRETURN PROFILERBI bonds Low risk medium return
Government agencies bonds Low risk medium return
Small savings instruments Low risk average return
Public sector bonds Relatively low risk avg.returns
Bank deposits Low risk low returns
Bonds/debentures of corporate entities and financialinstitutions
Medium risk high returns
Mutual funds debt/equity/hybrid Low to higher risk low to higher
Equity Highest risk highest return
Life insurance Lowest risk lower to high returns
Unit linked insurance Low to high risk- average to high returns
Gold Medium risk average returns
Real estate Medium risk- average returns
Postal savings schemes Low risk average return
Annuities Low risk & Average return
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FINANCIAL PLANNING
TRADE OF BETWEEN RISK AND RETURNS.
FINANCIAL POSITION OF THE INDIVIDUAL
AND THE MILESTONES PLANNED
FOR/OBLIGATIONS.
FUNDS MANAGEMENT
TAX PLANNING
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Income from Salary
Salary includes a fixed payment made periodically
by the employer to the employees.
The salary income is taxable in the hands ofemployees.
Salary includes salary received and salary in
arrears and advanced salary.
Salary includes perquisites as per section 17.
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Perquisites
Perquisites are taxable in case of specific
employees (Director).
Salary of Director any benefits given to theDirector
Perquisites are taxable in case of all the
employees
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Perquisites which are not taxable
Cost of medical treatment in a hospital orreimbursement of medical treatment
Reimbursement of medical expenses upto Rs.15,000/- per year on medical treatment of self andhis family.
Health insurance premium / mediclaim
Self promotion including publicity, gift,scholarship, club facility, use of health club andsimilar facilities, use of telephone, maintenance ofaccommodation in nature of guest house,
conference expenses
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Calculation of Gratuity under
payment of Gratuity Acta)Gratuity received
b) Maximum limit Rs. 3, 50,000/-
c) Formula = last salary drawn x 15/26 x
no. of completed years
Salary includes basic + D.A. Gratuity = (a)(c) subject to maximum
limit of Rs. 3, 50,000/-
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Income from House Property
Reasonable Lettable Value (RLV)
a) Fair rent
b) Municipal value
c) Higher of a) and b)
d) Standard rent
e) Lower of c) and d) = RLV\Reasonable Lettable Value (RLV) is called as
Annual Value
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Net Annual Value
Reasonable Lettable Value (RLV) (-)
Municipal taxes = Net Annual Value
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Calculation of House Property
Income Annual value (-) municipal tax = Net
Annual Value (-) 30% of NAV as standard
deduction under Sec. 24(a) (-) Interest onloan for property under sec. 24 (b)
All equal to Net income from house
Property
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Self Occupied Property
Annual value Nil (-) Interests on property
loan subject to maximum limit of Rs.
1,50,000/-
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Capital Gain Tax
Formula for long term capital gain =
Sale proceed (-) Indexed cost of acquisition
= Cost of acquisition x Cost Inflation Index
(CII) of the year of transfer / sale (/) CII of
the year of purchase
Long Term Capital Gain
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ULIP SCHEMES
Gilt Fund Schemes
Bond Fund Schemes
Balance Fund Schemes
Risk fund or Growth Fund Scheme
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Types of Investment
Money Market Instruments
Bond Market Investment
Equity Market Investment
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CONVENTIONAL VERSUS ULIP PRIMARILY LIFE INSURANCE.
LOWEST RISK -LOW TO HIGHRETURN.
RISK OF INVESTMENTMANAGED BY INSURER.
PREDICTABLE AND STABLERETURNS.
LESS TRANSPARENT.
INVESTMENT PATTERNSTATUTORILY PRESCRIBEDAND HENCE LESS FLEXIBLE.
LOWER FLEXIBILITY TOCUSTOMER FORWITHDRAWALS DURING THETERM.
IT IS BOTH LIFE INSURANCEPLUS INVESTMENT.
LOW TO HIGH RISK- AVERAGE
TO HIGH RETURNS. RISK OF INVESTMENT BORNE
BY CUSTOMER.
DEPENDING ON THE CHOICE OFFUND PREDICTABLE TO
UNPREDICTABLE RETURNS. MORE TRANSPARENT.
FLEXIBLE INVESTMENTPATTERN.
HIGHLY FLEXIBLE FOR THECUSTOMER TO WITHDRAWDURING THE TERM- PARTIAL
SURRENDER, SWITCHING.
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MUTUAL FUND VERSUS ULIP
ONLY INVESTMENT.
LOW TO HIGHER RISK
LOW TO HIGHERRETURNS.
VIEWED GENERALLYFROM SHORT TERM TOMEDIUM TERM
PERSPECTIVES. ONLY ELSSINVESTMENTQUALIFIES FOR TAXBENEFIT.
SHORT TERM (HELDFOR LESS THAN 12MONTHS) CAPITALGAINS IS TAXABLE.
INVESTMENT PLUSINSURANCE.
LOW TO HIGH RISK-AVERAGE TO HIGHRETURNS.
VIEWED FROM MEDIUMTO LONG TERMPERSPECTIVES
ALL ULIPS QUALIFYFOR TAX INCENTIVE.
AMOUNT RECEVED ONDEATH IS NOT TAXABLEIRRESPECTIVE OF THEPERIOD OF HOLDING.
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MUTUAL FUND VERSUS ULIP
AMOUNT RECEIVED ON
MATURITY UNDER LINKED
LIFE PRODUCTS AND
COMMUTED VALUE
RECEIVED UNDER PENSION
PRODUCT IS ALSO NOT
TAXABLE.
UNDER THE LINKED
PENSION PRODUCT ANNUITY
RECEIVED ONACCUMULATED AMOUNT ON
VESTING IS HOWEVER
TAXABLE.
LONG TERM CAPITAL
GAINS UNDER EQUITYSCHEME IS NOTTAXABLE.
LONG TERM CAPITALGAINS UNDER DEBTSCHEME IS TAXABLE AT
LOWER RATE.INDEXATION BENEFIT ISAVAILABLE.
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What are the Fees charged from ULIP Premium.
1. Administration Fees
2. Risk and Accident Benefit Premium.
3. Recoveries of Direct Expenses, Commission, ServiceTax.
4. Fund Management Fees
5. Switching Fees
6. Surrender Fees
List is illustrative Not Exhaustive.
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Various Money Market Instruments Call Money / Notice Call Money
Collatarised borrowing and Lending (CBLO) REPO
Term Money
Treasury Bills Commercial papers
Certificate of Deposits
Bills Rediscounting
Inter bank participation certificates
MIBOR linked investments
Money market mutual fund schemes
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BRIEF DESCRIPTION OF MONEY
MARKET INSTRUMENTS
CALL MONEY/ NOTICE MONEY:
It is the amount borrowed or lent on
demand for a very short period.
Normally one day. If the period is more than one day up to
30 days it is called as Notice money.
It is an unsecured form of lending.
It helps the banks to even out their day to
days deficit/ surpluses of money.
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CALL MONEY MARKET
Players in the market:
1. All commercial banks , Co-op banks and
Primary dealers are allowed to borrow andlent in the market.
2. Specified All India FI, Mutual funds,
Insurance Companies and certain specifiedentities are allowed only to lend.
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Repo Market
Agreement to repurchase the same securityafter a certain period at a predeterminedprice which is higher than sale price
Salient Features
PeriodNot exceeding 14 days
Collateral securitiesTreasury Bills,Institutional Bonds and G. secs.
SGL A/c and current A/c with RBI
Repo reported in NSE WDM segment
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COMMERCIAL PAPER
CP is a short term unsecured promissorynote with fixed maturity issued by wellrated Corporates to fund their working
Capital requirement. It is a discounted instrument.
Maturity period of 15 days to 1 year.
Interest on CP is determined by marketforces.
Certain guidelines of RBI needs to be
fulfilled for issuance of CP.
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MONEY MARKET MUTUAL
FUNDS These mutual fund invest the money in
liquid instruments as specified in the offer
document. The investor can withdraw money at any
time on notice.
Yield is attractive and better than Callmoney.
NAV market determined.
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COMPONENTS OF DEBT
MARKETS
Debt Market
Bonds issued by
Govt. Agencies
Electricity boards
Municipalities
Irrigation Authorities
State Road Transport
Corporation
National HighwayAuthority
Issued by
Corporates
Issued by Financial
Institution
Issued by PSU
Bond &
Debentures
Central Govt.Securities
Govt. Securities
State Govt.
Securities
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GOVT. SECURITIES
Features:
Fixed or Floating coupon payable semi
annually.
Zero coupon also issued
Bullet Repayment
Risk free investment- no default risk
Subject to interest risk/ price risk.
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GOVT. SECURITIES
Primary Market- Issuance Techniques:
---Auction: Price/ Yield Based
---- Private Placement with RBI
--- On tap issue
--- Conversion of Adhoc T- Bills/SpecialSecurities into Dated securities
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GOVT. SECURITIES
Secondary Market:
Trading by Participants
Open Market Operation By RBI
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Some Statistics on Debt Market
Outstanding Govt. Debt
Rs. In Crore
Central Govt. Deb. 1306201
State Govt. Debt 270726
Total 1576927
* Corporate Bonds Market 3,50,000
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BONDS & DEBENTURES
Issued By:
Govt. Agencies
PSU(Taxable & Non Taxable)
Public Financial Institutions
Private Corporate Sector
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EQUITY INVESTMENTS
Equity Investment would provide superiorreturns in the longer term.
Equity is high risk high return investment.
Equity Research allows the fund manager totake informed decisions.
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EQUITY MARKET
Total 5600 listed companies
Market Capitalisation of Rs. 6000000cr (approx.)
Sensex touched all time high of 21235 & low of7,660 during the year 2008.FII investment about 80000 CR till 31st December
2007 and Rs. (-) 65000 cr till 31.12.2008 and Rs.72000 cr during 2009
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OUTLOOK FOR EQUITY
MARKETS
Factors Affecting the Equity Markets:
Positive impact
Improved corporate earnings
Consistent Growth in GDP Stable Government
Negative impact
Global slowdown in growth Tightening in credit and equity market
following subprime crises in US
Moved towards deflation
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ECONOMY AT A GLANCE
FY06 FY07FY08
FY 09
REAL GDP (% CHG) 9.0 9.3 9.0 5.8
AGRICULTURE(% CHG) -3.6 6 4.5 2.6
INDUSTRIAL PRODUCTION
(%CHG) 8.4 8.2 9.0 5.0
SERVICE SECTOR(%CHG) 10 11 11.5 10.5
GDP Sectoral Trends
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GDP-Sectoral TrendsQ1 Q2 Q3 Q4
Agriculture & allied activities 3.2 2.8 -0.4 2.6
Agriculture 3 2.7 -0.8 2.7
Mining 4.6 3.7 4.9 1.6
Industry 6.1 6.3 2.1 1.4
Manufacture 5.5 5.1 0.9 -1.4Electricity, Gas & Water Supply 2.7 3.8 3.5 3.6
Construction 8.4 9.6 4.2 6.8
Services 10.2 9.8 10.2 8.6
Trade, hotels, transport & comm 13 12.1 5.9 6.3
Finance, insurance, realty 6.9 6.4 8.3 9.5
Community, social & persnl.serv. 8.2 9 22.5 12.5
GDP at factor cost 7.8 7.7 5.8 5.8
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ECONOMY AT A GLANCE(Contd)
FY06 FY07 FY08
INFLATION (%) 6.4 5.4 7.4
EXPORTS (%CHG) 30.7 23 25
IMPORTS (%CHG) 26.1 23.5 26
FDI INFLOWS ($BLN) 5.9 4.7 12
FII INFLOWS ($BLN) 9.3 12.5 75
FOREIGN EXCHANGERESERVE($BLN) 135.5 145.2 282
GDP GROWTH (% CHANGE)
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GDP GROWTH (% CHANGE)
Country Latest 2009
(E)
2010
(F)
USA - 2.6 - 2.9 1.4
Japan - 9.7 - 6.4 0.6
Britain - 4.1 - 3.7 0.3EuroArea - 4.6 - 3.7 0.3
Germany - 6.9 - 5.2 0.3
Brazil 1.3 - 1.5 2.7China 6.1 6.5 7.3
India 5.3 6.0 7.4
Source : The Economist , World Bank , BIS
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INDIAS EXPORTS
Year Value ($bn.) Growth (%)2001-02 43.82 - 1.66
2002-03 52.71 20.28
2003-04 63.84 21.11
2004-05 83.53 30.84
2005-06 103.09 23.30
2006-07 126.26 22.47
2007-08 163.12 28.35
2008-09 168.70 3.4
Source : RBI and Commerce Ministry
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FISCAL INDICATORS
2003-04 2008-9=09
Budget
Estimate
Revenue
Estimate
Budget
Estimate
Revenue
Estimate
Revenue Deficit* 4.10% 3.60 1.00 4.40
Fiscal Deficit* 5.60% 4.80 2.50 6.00
Primary Deficit* 1.10% 0.30 - 1.10 2.50
Subsidies** 44,907 44,323 71,431 1,29,243
Revenue
Expenditure**
3,66,227 3,62,074 6,58,119 8,03,446
*% to GDP **Rs. Crore
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STOCK EXCHANGE
1. Bombay Stock Exchange (BSE)
a) Daily average turn over of Rs 10000 cr
b) Sensex stocks contribute around 30% of marketcapitalisation
c) Sensex consisting of 30 stocks from 17 sectors
d) The index is calculated online at every 15seconds
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STOCK EXCHANGE
2. National Stock Exchange (NSE)
a) Daily average turn over Rs 20000 cr
b) Nifty stocks contribute around 40% of marketcapitalisation
c) Nifty consisting of 50 stocks from 22 sectors
d)The index is calculated online at every 15seconds
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Trading strategyLong term purchase
Short term purchase
Intraday trading
International trading
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Category of StocksSENSEX
NIFTY
A Group(BSE 200)
B1 stocks
B2 stocks
T stocksTrade to trade stock
S stocks
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Contd.,BSE-500
CNX500
Sectoral indices
Mid cap
Small cap
Illiquid stocks
Unlisted stocks
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Market Operation
Regular trading in cash market
Regular trading in derivative market
Futures
Options (Call and put)
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Inflow of Money
Bill discounting and rediscounting
Participatory Notes (P notes)
Stock mortgage
Stock lending
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Positively Performing Stock
Stocks 01/01/09 31/03/09 % change 30/9/2009Maruti 525 766 46% 1642
Sterlite 278 374 42% 740
M&M 279 385 38% 864Hero Honda 800 1085 36% 1675
SAIL 78 103 32% 168
GRASIM 1223 1607 31% 2775RIL 1240 1548 25% 2166
NALCO 190 239 25% 347
ACC 480 580 21% 814
Positively Performing Stock
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Positively Performing StockStocks 01/01/09 31/03/09 % change 30/09/09
CIPLA 183 219 20% 280
Tata Motr 158 189 20% 590
ONGC 675 808 20% 1186
Infosys 1125 1346 20% 2287
TCS 485 575 18% 613
GAIL 208 240 18% 361
Powergrid 83 95 15% 110
BHEL 1372 1551 13% 2272
CAIRN 175 194 11% 261
Sensex 9720 10048 3.50% 16852
Nift 2963 3108 4.90% 5006
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Negatively Performing Stock
Stocks 01/01/09 31/03/09 % change 30/09/09DLF 284 182 (-)36.00 426
Ranbaxy 253 164 (-)35.18 417
Rel Capitl 545 371 (-)31.80 906Suzlon 63 45 (-)28.00 96
Zee 140 106 (-)24.30 -
Rel Comm 228 183 (-)19.40 299PNB 534 441 (-)17.65 782
ICICI Bnk 455 385 (-)15.40 858
SBI 1294 1125 (-)13.08 2090
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Negatively Performing Stock
Stocks 01/01/09 31/03/09 % change 30/09/09HCL Tech 117 105 (-)11.00 322
L&T 777 680 (-)12.50 1647
Siemens 290 250 (-)13.80 551Unitech 41 36 (-)12.12 107
Bharti
Airtel
720 622 (-)13.62 419
Neutral Stock
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Neutral StockStocks 01/01/09 31/03/09 % change 30/09/09
Rel Petro 88 96 8.60 -
ITC 172 186 8.20 234
Wipro 236 253 7.20 582
HDFC 1495 1590 6.28 2764
Hindalco 5.2 55 5.76 126
Tata power 751 781 4.10 1307
Tata steel 218 223 2.33 504
Ambuja C 7050 71.50 1.42 99
Sun pharm 1070 1080 0.93 1390
NTPC 182 182 - 212
Idea 52.75 52.45 - 76
Neutral Stock
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Neutral Stock
Stocks 01/01/09 31/03/09 % change 30/09/09
HDFC Bnk 1007 996 -1.00 1609Rel Infra 585 567 -3.08 1204
HLL 251 240 -4.44 262
BPCL 377 365 -3.45 567ABB 456 420 -8.00 776
Rel Power 120 110 -8.35 167
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