Slide 1

Introduction to FINANCIAL PLANNING

Presented by: Vinod Krishna M. U. R15PMS15

As part of Ph.D Course Work 3 Financial Planning & Financial Services Marketing

At REVA University, Bengaluru

1

What is Financial Planning?

Financial Planning is the PROCESS of meeting ones life goals through the proper management of his finances with the help of a Financial Planner.

2

Birth and Education

0

25

60

Working Life

75 +

Retired Life

Marriage

Kid 1

Kid 1s College

Kid 1s Marriage

Kid 2

Kid 2s College

Kid 2s Marriage

Retirement

Age

Income

????

Emergencies????

Car

House

Savings / Investing

Why Financial Planning ?

3

How to do Financial Planning

4

Areas of Financial Planning

Risk Management & Insurance Planning

Investment Planning

Retirement Planning

Tax Planning

Estate Planning

Some future needs

6

Investment Planning

7

Equation of Life

Income Expenditure = Savings

Income Savings = Expenditure

INVESTMENTS

INVEST TO MAKE YOUR MONEY WORK FOR YOU

8

FV = PV (1 + r)n

Equation to become RICH

Albert Einstein (1879 - 1955) called it the 8th Wonder - It can work for you, or against you. When you invest it works for you. When you borrow it works against you!

He is quoted as saying, "The most powerful force in the universe is compound interest."

You can become financially secure by winning the lottery. The surer way is to save money, invest it and ... Let it compound!

9

FV = PV (1 + r)n

The more you SAVE, makes a difference

The more you EARN, makes a difference

The SOONER you start, makes a difference

FV Future Value of your investments

PV Present Value of your investments

r Rate of Return

n Period of Investment

Enhancing Future Value

10

Asset Allocation

Asset allocation is an investment portfolio technique that aims to balance risk and create diversification by dividing assets among major categories such as Gold, Real Estate, Bonds, Stocks, and Cash.

11

Asset Allocation

Security Selection

Investment Decisions

Time Spent

10%

60-70%

20-30%

Impact on Returns*

92%

< 5%

< 2%

KEY !!

Market Timing

What drives Portfolio performance?

* Study by Brinson, Singer & Beebower, 1986

12

Diversification

Dont put all Eggs in One basket

13

Where to Invest?

14

Direct Equity Investments

IPOs (Primary Market)

Buying/Selling Shares/Derivatives/Commodities (Secondary Market)

Portfolio Management Services

Mutual Funds

Lump sum Investment (NFOs & On-going)

Regular Investment Systematic Investment Plan (SIP)

Unit Linked Insurance Plans

Provides Risk Cover along with Wealth Creation

Options for investing in Equity

15

Insurance Planning

16

Why Insurance?

Insurance is a Risk Management Tool.

Insurance only compensates economic losses suffered by the dependents in case of eventuality.

Concept of Insurance is to protect the economic value of Assets.

Insurance does not protect the asset. It does not prevent its loss. It tries to reduce the impact of the risk on the owner of the asset and those who depend on that asset.

We all are faced with three types of risks.

Risk to Life

Risk to Health

Risk to Assets

17

Birth and Education

0

25

60

Working Life

75 +

Retired Life

Marriage

Kid 1

Kid 1s College

Kid 1s Marriage

Kid 2

Kid 2s College

Kid 2s Marriage

Retirement

Age

Income

????

Emergencies????

Car

House

Risk Management

Dying Too Soon - DTS

Living Too Long - LTL

18

Life Insurance

19

Imagine what happens to your familys future needs in your absence because of Uncertainties of Life

Childs Higher Education

Childs Marriage

Family compromising on the current Life Style

What about Liabilities like Housing Loan, Vehicle Loan, Personal Loan, Credit Card Balance etc

20

21

Human Life Value method is used to calculate the amount that is needed by dependents in the case of unfortunate demise of the breadwinner of the family.

HLV = Present Value of a persons future earnings

Steps to Calculate HLV

Estimate individuals average lifetime earnings

Deduct the self maintenance expenses, taxes, insurance premium

Determine the balance span of earning life

Determine the present value of balance earning for the family

Human Life Value

22

Simpler Method

Use a simple underwriting guideline, frequently used by life insurance companies to suggest proper amounts of coverage.

Age Multiple of

Annual Income

25 25

35 20

45 15

55 10

23

Life Insurance Plans

Term Insurance: Pure Risk Cover insurance

Mortgage Protection Policy: To Cover Long term liabilities like Housing Loan

Endowment: Risk Cover + Savings

Money Back Policies: Risk Cover + Saving + Liquidity at regular interval

Unit Linked Plans: Risk Cover + Returns based on your preferences + Liquidity

Child Plans Secure future needs of your child, for higher education, marriage etc.

Pension / Annuities: Post Retirement Expenses Cover

24

Health Insurance

25

8.Ambulance Charges

7.Waiver for pre-existing diseases

4.Pre & Post Hospitalization

6.Health Check up

2.Family discounts

1. Cashless Facility

3.Cumulative Bonus

5.Income tax benefit

Health Insurance

26

Asset Insurance Householders Policy

27

RETIREMENT PLANNING

Risk of Living Too Long

28

Living Standard After Retirement

Imagine a life without car

Regular Health Check-ups

Routine House Hold Expenses

Dream Home

29

When do you spend more money While at work or at Vacation??

So what do you think is Retirement for you?

Shouldnt you have enough provisions to take care of the increasing costs during your LONG VACATION - Retirement ??

Average Life Expectancy would increase from 75 years to 85 years in the next two decades.

Living costs will increase dramatically over the next 20 years

Plan for your Long Vacation from TODAY

30

Different Investment & Protection Plans

Tax Saving Mutual Fund (ELSS) for 3 Yrs + goals.

Life Insurance

Term Insurance to cover Liabilities.

Unit Linked Insurance Plans for various needs like

Childrens Higher Education and Marriage

Retirement Benefits

Asset Creation over long term

Health Insurance

House Holders policy to take care of your hard earned assets.

31