jcp content final
TRANSCRIPT
-
8/14/2019 JCP Content Final
1/194
ICICI Securities Page 1 of 194 JCP on Managing Personal Finances
JOINT CERTIFICATION PROGRAM (JCP) ON
MANAGING PERSONAL FINANCES
CURRICULUM
Session 1: Introduction and Steps of Financial Planning
Session 2: Insurance Planning
Session 3: Retirement Planning
Session 4: Investment Planning
Session 5: Tax Planning AND Estate Planning
Session 6: Asset Classes & Product Suitability AND Goal Planning
Session 7: Summary AND Important Calculations by Our Team
Session 8: Assessment Test
Session 9: Case Study Contest
.
-
8/14/2019 JCP Content Final
2/194
ICICI Securities Page 2 of 194 JCP on Managing Personal Finances
SESSION 1: INTRODUCTION AND STEPS OF FINANCIAL PLANNING
Planning doesnt come naturally to most of us. In a way it challenges optimism and
compels you to think about uncertainties. Implementing a plan doesnt always
guarantee, but it ensures that the odds of success increase manifold.
As we go through various life stages, we aspire to attain various goals. And to
achieve them it is imperative that we have a sound financial backing. This is where
the concept of financial planning comes in, which helps you achieve your goals.
What is financial planning?
Financial planning is the process of managing ones finances with the objective of
achieving life goals. These goals could vary from buying a house to going on a
dream vacation to more serious goals like retirement planning or child education
planning. A good financial plan requires analyzing the financial status, outlining the
goals and understanding the means for achieving these goals.
Setting realistic time horizons to achieve goals and achieving them with discipline
and planning is what a good financial plan helps in accomplishing. The ability to
mitigate risks when investing is another important facet that financial planning
addresses.
Why financial planning?
Financial Planning provides direction and meaning to your financial decisions. One
feels more secure and more adaptable to life changes, once they measure that they
are moving closer to realization to their goals. Implementing a financial plan offers an
unrivalled peace of mind. It removes components of fear and uncertainty from your
day-to-day life.
-
8/14/2019 JCP Content Final
3/194
ICICI Securities Page 3 of 194 JCP on Managing Personal Finances
It is better to co-relate with an example.Let's assume you go for an overnight 12-
hour train journey. What all things do you plan for? Reserving ticket in advance,
reaching station well on time, taking food, water, bed spreads, i-pod, books, lock and
key, etc. This has become a normal routine for most of us. For a 12-hour journey, we
plan so many things properly.
Life is a similar journey for approximately 75 to 80 years; and there are some
financial requirements in this journey too like buying a home, car, getting children
educated and married, etc. Hence, it is prudent to plan well ahead for all these
requirements like a train journey.
The importance of financial planning cannot be overstated. Among others, two
aspects matter a lot are - inflation and changing lifestyles.
Inflation is a situation wherein too much money chases a limited number of goods.
This leads to a fall in the purchasing power of money. For example, a product that
costs Rs. 100 today would cost Rs. 106 a year later, assuming inflation at 6 percent.
Over 30 years, assuming that inflation continues to rise at 6 percent, the same
product would cost you Rs. 574. Financial planning helps ensure that you are better
prepared to deal with the impact of inflation, especially in retirement when expensescontinue but sources of income dry up.
The second factor is changing lifestyles. With higher disposable incomes, it is
common for individuals to upgrade their standard of living. For example, cars were
considered luxuries not too long ago but are a necessity today. Financial planning
plays a key role in helping individuals and families, both upgrade and maintain their
lifestyle.
Moreover, there are contingencies like medical emergencies or unplanned
expenditures. Sound financial planning helps mitigate such circumstances, without
straining your finances.
-
8/14/2019 JCP Content Final
4/194
ICICI Securities Page 4 of 194 JCP on Managing Personal Finances
To put it in a nutshell, financial planning is all about investing for your goals and
maintaining a fair amount of liquidity to make use of any opportunity that may
present itself or meet any unforeseen emergencies.
Features of financial planning
A financial plan enables you to analyze your behavior and help optimize your
expenses and savings. Viewing each individual expense as a whole enables you to
understand the impact on your long-term financial plan. For example, investing in a
certain mutual fund might help increase your returns but might not work out too
favorably once its tax implications are considered.
A good financial plan helps in setting realistic time horizons to achieve goals and
assists in achieving them with discipline. The ability to mitigate risks when investing
is another important facet that financial planning addresses.
Understanding the risk-taking ability along with achieving long-term goals can often
be a fine balance in today's volatile markets and the ever changing global economic
factors. Traditional bank deposits do not yield enough returns to beat the soaring
inflation rates. Falling equity markets, resulting in erosion of wealth, have added to
the woes of investors. It is during such times that disciplined investing and focus on
the long-term ensures wealth creation.
Myths about financial planning
Myth 1: I need to have a substantial sum of money/assets before thinking about
financial planning
Fact: This myth primarily prevents people taking the first step towards financial
planning. Financial planning will in fact help build assets and investments. Investing
is only one part of financial planning. Financial plan will help you structure your
goals, chart out a road map and above all make you aware of what you need to do to
get to your final destination.
-
8/14/2019 JCP Content Final
5/194
ICICI Securities Page 5 of 194 JCP on Managing Personal Finances
Myth 2: I am already saving enough. Why do I need financial planning?
Fact: If you have saved enough you have already taken the first step towards
financial planning. However, saving is just one aspect. A good financial plan will help
you understand how much is enough... It will help channel your savings in the right
direction and make them work harder and better to achieve your goals. A financial
plan will tell you how much of your savings should form part of an emergency fund
and how much should be easily liquid-able. This helps in times of emergencies and
opportunities.
Myth 3: I cannot afford a financial planner or financial plan.
Fact: Like any professional service like doctor, lawyer etc financial planners also
charge for their services. Look at these charges as a proactive investment and not
some reactive expenses like doctors fees. A good financial plan will help you save
and earn far more money than you would have paid in fees or commissions. And
more importantly, beyond the monetary benefits, it will give you peace of mind, time
saving, and a better focus on your financial life.
Myth 4: I am too young to worry about financial planning.
Fact:Wouldnt you like to live longer, but not working longer? The earlier you start
the greater your chances of achieving your life goals. Hit the field running. With age
on your side the amount you need to invest will be low while the risk / return you can
take will be higher - thereby, making your money work hard. Just think about this
A 25 year old invests Rs 50,000 annually at 10% for 25 years end up with Rs 50 lakh.
A 30 year old does the same and ends with just 29 lakh.
Myth 5: I am nearing retirement. Isn't it too late for financial planning?
Fact:While running a marathon you need to start early and break out of the pack, but
you also need to conserve energy to finish. Financial Planning will help you keep
-
8/14/2019 JCP Content Final
6/194
ICICI Securities Page 6 of 194 JCP on Managing Personal Finances
pace with your finances through life. When nearing retirement it can tell you how
much energy you still have left and what strategy changes you need to finish the
race. A financial plan can help you understand where you stand and forecast how
your retirement years will pan out financially.
Myth 6: My children will take care of me post-retirement. I don't need to think
about planning for retirement.
Fact:In such scenarios, there may not be a need to save extensively for retirement.
But financial independence is always welcome. Moreover, financial planning can help
you with your estate planning. You may want to help your grandchildren get the best
education and it is important to plan for such goals and invest in instruments
accordingly.
Myth 7: I know enough about investing and have good knowledge of markets and
financial products.
Fact: It is good to know about the markets and financial products. However, a
financial plan is not just about financial products or the markets. A good financial
plan considers your risk profile and suggests an asset allocation strategy. It helps youdefine your goals and suggests an investment strategy based on your risk profile.
And importantly, a financial plan if followed will inculcate discipline in your
investments and will help you overcome drastic downturns in the markets by a
diversified asset allocation mix.
Just consider thisYour asset allocation dictates a 70% equity, 20% debt and 10%
cash allocation. If the market moves up your equity allocation goes up which you
need to rebalance to the original. The money you have made by booking profits
moves to a safer investment. If the market falls and presents an opportunity, you are
liquid to invest and not left with un-booked losses.
-
8/14/2019 JCP Content Final
7/194
ICICI Securities Page 7 of 194 JCP on Managing Personal Finances
Myth 8: Isn't tax planning the same as financial planning?
Fact: Categorizing financial planning as another term for tax planning is another
misconception. Both are distinct but tie-in as well. Tax planning is one component of
financial planning. Financial planning will not only cover the most tax-efficient
investments but will also help you chose the right instruments for tax planning based
on your risk profile. An investor with higher risk profile can look at greater
investments in equity-linked tax-saving instruments while risk-averse investors may
want more of a fixed income component in his tax planning. Financial planning can
help determine this allocation.
Steps of Financial Planning Process
Financial planning requires financial advisors to follow a process that enables
acquiring client data, and working with the client to arrive at appropriate financial
decisions and plans, within the context of the defined relationship between the
planner and the client.
The following is the six-step process that is used in the practice of financial
planning.
-
8/14/2019 JCP Content Final
8/194
ICICI Securities Page 8 of 194 JCP on Managing Personal Finances
Implement the plan:
Explain how therecommendations need to
be carried out
Establish
relationship:Discuss how we
will worktogether
Gather client data:
Discuss goals and financialinformation
Develop the plan:
Presenting financialplanningrecommendations
Monitor the plan: PeriodicReview and Revision
Analyze and evaluate
financial status:determine what needs tobe done to achieve goals
-
8/14/2019 JCP Content Final
9/194
ICICI Securities Page 9 of 194 JCP on Managing Personal Finances
1. Establish and define the client-planner relationship: The financial planning
process begins when the client engages a financial planner and describes the
scope of work to be done and the terms on which it would be done.
The terms of engagement between client and a partner are usually spelt out in alegal agreement that is signed by both parties.
The general scope of the work includes:
Explaining services provided, the process of planning, and the required
documentation
Describing how they will be compensated
Identifying the responsibilities of the planner and the client in the relationship
(discretionary vs. non-discretionary)
Deciding on the length of the engagement
Discussing any other matters needed to define or limit the engagement's scope
2. Gather client data, including goals:This step involves asking for information
about clients financial situation. Planner needs to help define clients personal
and financial goals, understand his time frame for results and discuss, if relevant,
how he feels about risk. This step is basically about gathering all the necessary
information before proceeding any further. It includes collection of:
Client's income status
Assets and liabilities status
The extent of risk a person is exposed to
The extent of insurance that a person has, etc.
3. Analyze and evaluate financial status: In this step, the planner evaluates
clients current financial status and analyzes potential scenarios and outcomes.
The planner analyzes the information provided by client to assess his current
situation and determines what he must do to meet his goals. This could include
analyzing his assets, liabilities and cash flow, current insurance coverage,
investments or tax strategies.
-
8/14/2019 JCP Content Final
10/194
ICICI Securities Page 10 of 194 JCP on Managing Personal Finances
Some examples include:
Identifying short-term goals like buying a house, buying a car, taking a vacation,
etc.
Identifying long-term goals like childrens education, childrens marriage,retirement, etc.
Attributing a financial value to each of these goals
Separating realistic and unrealistic goals
4. Develop and present financial planning recommendations:The planner makes
an assessment of what is already there, and what is needed in the future and
recommends a plan of action. This may include augmenting income, controlling
expenses, reallocating assets, managing liabilities and following a saving and
investment plan for the future. It involves:
Filling the savings gap
Restructuring existing assets into productive/growth assets
Making an investment plan, both lump-sum and regular
Building a defense mechanism into the plan through insurance
5. Implement the financial planning recommendations:This involves executing
the plan and completing the necessary procedure and paperwork for
implementing the decisions taken with the client.
Filling the savings gap by inducing the client to save more through systematic
investment plan (SIPs), endowments, etc.
Restructuring existing assets into productive/growth assets. Get the client into
equity products where goals are aggressive.
Making an investment plan, both lump-sum and regular. Match them to cash
flows. How much of monthly earnings can the client save? How much of his
lump-sum receipts can he set aside?
Building a defense mechanism into the client's plan through insurance. This is a
broader concept. He needs term insurance to cover the risk of dying early but
endowment for the risk of living too long the two facets of retirement planning.
-
8/14/2019 JCP Content Final
11/194
ICICI Securities Page 11 of 194 JCP on Managing Personal Finances
Liabilities and assets need to be insured through sufficient term insurance so
that they do not become a burden on the plan
Surrendering legacy insurance and consolidating them
Making the client's plan tax efficient
6. Monitor the financial planning recommendations:The financial situation of a
client can change over time and the performance of the chosen investments may
require review. A planner monitors the plan to ensure it remains aligned to the
goals and is working as planned and makes revisions as may be required.
Reviewing where insurance coverage has gone out of sync with the plan
Reviewing where portfolio mix has gone out of sync with the plan
Reviewing where the themes mix has gone out of sync with the plan
Reviewing where major macro changes have affected some of the client's plan
assumptions
-
8/14/2019 JCP Content Final
12/194
ICICI Securities Page 12 of 194 JCP on Managing Personal Finances
SESSION 2: INSURANCE PLANNING
An individual undergoes various life stages, each characterized with specific
goals. When you are single, usually up to 25 years of age, you start laying the
foundation for the financial security of your future. Once you get married andhave children, your priority is asset accumulation and wealth generation. And
then your pre-retirement and finally the retirement phase are characterized by
wealth utilization and distribution.
A proper financial planning at each stage of life leads to a secure financial future.
But, we have to consider the time value of money as well. The present value of
the money will not be the same in future. For example, your monthly expenses of
Rs. 30,000 today will be Rs. 38,288 after five years, assuming inflation at 5%.
All these show that life is constantly changing. Your life stages change and so do
goals and priorities. The financial position and the cost of living also changes with
time.
In order to have a secure financial future, you have to plan according to these
changing situations. But one factor that you are always exposed to at all times is
risk.
We live in an uncertain world. Risk is a possibility of any harm, injury, loss, danger
or destruction of an individual or their belongings.
There are accidents, mishaps, illnesses, natural disasters happening every day. A
person who is happy, healthy and alive today cannot be sure of what will happen
tomorrow, as he/she is always exposed to this uncertainty called risk.
From your current age to the age of your retirement, you have some specific
goals like buying a new house, getting married, child's education, retirement
planning, etc. You always plan your finances to turn your goals into reality. But
you are exposed to some possible uncertainties like death, accident, illness, loss
of job, etc.
-
8/14/2019 JCP Content Final
13/194
-
8/14/2019 JCP Content Final
14/194
ICICI Securities Page 14 of 194 JCP on Managing Personal Finances
insurance cover ensures that you achieve your goal, even in case of an
eventuality. Your family and dependents will not be affected financially if you
have an insurance cover.
Now, let us see what an insurance company does.
An insurance company brings together people who share the same risk. The risk
can be to their life, or their belongings like house, vehicle, etc.
It collects the contribution called the premium from the group of people and pays
a compensation or claim to the one who suffers a loss.
Thus by forming a fund pool it spreads the risk of one among a group.
What are the types of insurance?
Insurance is mainly of two types - life insurance and general insurance. General
insurance covers a wide range of products like vehicles, fire insurance, house,
travel, health, marine, etc.
Now let us see life insurance in detail.
Life insurance
Life insurance is a contract in which the insurer agrees to pay the assured sum of
money to the insured in case of his/her death. Life insurance covers the risk
associated with the life of an individual.
The assured sum which the insurer pays is in consideration of a certain amount
called the premium. The premium is either paid in lump sum or as periodical
payments.
Need for life insurance
Every earning individual needs to support his/her dependents financially for
spending their daily expenses, repaying liabilities and achieving all the goals,
during his/her lifetime. The regular income earned by the individual is the source
-
8/14/2019 JCP Content Final
15/194
ICICI Securities Page 15 of 194 JCP on Managing Personal Finances
for achieving all these. Hence, it's very important to protect the family against the
loss of the income due to the death of the breadwinner, so that the family's quality
of life does not undergo any drastic change.
Individuals have two ways of protecting loss of income due to one's death one,by accumulating sufficient assets, another by taking life insurance, or by a mix of
both. Most of the individuals in their early stages of working life might not have
accumulated enough assets and hence, it's prudent to have sufficient life cover in
place.
How much life insurance should one buy?
Life insurance is meant to provide with the enough money to your dependents to
replace your income in case you die. Ideally, your life cover must take care of the
following things:
a) Family expenses till lifetime;
b) Liabilities outstanding and
c) Family and children goals.
This worksheet will help you determine how much coverage you will need:
1. Providing for family expenses till lifetime
Annual expenses required for dependents Rs.2,40,000
Number of years for which you wish to provide above
expenses
25 years
A: Corpus required for funding family expenses Rs.60,00,000
2. Liabilities Outstanding
Home loan Rs.15,00,000
B: Corpus required for repaying liabilities Rs.15,00,000
3. Family Goals
Child education (todays cost) Rs.8,00,000
Child marriage (todays cost) Rs.10,00,000
C: Corpus required for fulfilling goals Rs.18,00,000
A + B + C = The estimated amount of life insurance you
will need
Rs.93,00,000
(From this estimated cover, you can deduct existing life cover, if any, and assets that you have
accumulated - excluding the ones for your familys use)
-
8/14/2019 JCP Content Final
16/194
ICICI Securities Page 16 of 194 JCP on Managing Personal Finances
If you are unable to cover all the above three, then cover can be taken at least for
some of them, based on the below order of priority:
a) Unsecured liabilities;
b) Family expenses till lifetime;
c) Secured liabilities;d) Children goals; and
e) Family goals.
Thumb rule to calculate life cover
As a thumb rule, every earning individual has to have a life cover of 10 to 20 times
of annual income depending on their age. For people aged from 25 to 40, a life
cover equal to 20 times of annual income and for people above the age of 40, a
life cover equal to 10 times of annual income would be the thumb rule.
Insurance coverage given by life insurance companies
The life insurance companies provide life cover to individuals based on two main
factors Age and Income. Since life cover replaces an individual's income for the
family, income is the main factor. As age increases, the risk of natural death
increases and hence, age too plays a role in determining how much of life cover
can be provided to an individual. Apart from these two factors, there are a lot of
other factors like personal health, family's medical history, usage of tobacco, etc.
The below is an indicative table which provides the maximum life cover which
can be offered based on age. The slabs might vary from one company to another.
Age group Maximum life cover offered
18 35 20 times of annual gross income
36 45 15 times of annual gross income
46 55 10 times of annual gross income
56 60 5 times of annual gross income
Consequences of not having sufficient life cover
Let us see this with an example.
Anil, aged 32, is working in an IT firm and has a family of 3 people Soni, aged
30, house wife; and 2 children Kunal, aged 4 years and Kapil, aged 1 year.
Annual income Rs.7 lakh
Family's annual expenses Rs.5 lakh
-
8/14/2019 JCP Content Final
17/194
ICICI Securities Page 17 of 194 JCP on Managing Personal Finances
Home loan outstanding taken by Anil Rs.25 lakh
Existing life insurance cover for Anil Rs.10 lakh
On sudden death of Anil due to an accident, the family gets Rs.10 lakh (sum
assured) from the life insurance company, which is not sufficient to meet thefamily's annual expenses and repay the home loan outstanding. The home has to
be sold to repay the home loan outstanding amount. Rs.10 lakh will be put in a
fixed deposit which will yield around Rs.1 lakh p.a. as interest for meeting daily
expenses. The family's lifestyle drastically changes with less amount available for
regular expenses. Therefore, it is important to have sufficient life cover.
Which Life Cover to choose?
There are several variants of life insurance, ranging from pure protection plans to
savings and investment-linked plans. Lets take a look:
Term plans
Term insurance is a pure risk cover. It has no element of savings or investment. In
the event of death or total and permanent disability, the insureds family gets the
sum assured. If the insured survives the policy term, he or she gets nothing.
Term plan, as the name indicates, is for a specific term, and offers the greatest
amount of coverage at the lowest premium. This is because the insurer does not
provide anything if insured outlives the policy term, i.e. there is no maturity value.
Lets understand this with an example: Suppose Kumar takes a term plan when
he is 35 years old for a sum assured of Rs. 50 lakh and a term of 10 years. His
annual premium is, say, Rs. 7,000. If he dies within the 10-year term, his family
will receive Rs. 50 lakh. If he survives the policy term, he would get nothing.
One can select the length of the term for which he or she wants the coverage,
right from 5 years up to 30 years. Some companies also offer 40-year term plans.
-
8/14/2019 JCP Content Final
18/194
ICICI Securities Page 18 of 194 JCP on Managing Personal Finances
Term plans come in different variants. Heres a quick sheet to understand them.
RETURN OF
PREMIUM
INCREASING
PLAN
DECREASING
PLAN
SINGLE
PREMIUM
CONVERTIBLE
TERM PLAN
- You get the
return ofpremium at
the end of the
term, but if
you die mid-
way, your
family gets
the sum
assured.
- Slightly
more
expensive
than a pure
term plan as
they promise
return of
premium.
- The sum
assured(cover) in this
plan increases
every year as
a person
advances in
age, while the
premium
remains
constant.
- The core
objective of
this plan is to
beat the rising
inflation
- The
premium is
generally high
for this plan
- The cover
decreases at apredetermined
rate over the
period while the
premium
remains
constant.
- The main idea
of this plan is
that a person's
needs for high
life cover
decreases with
age as his
liabilities (like
home or car
loan) decrease
or no longer
exist.
- The premium
is normally low
for this plan
- Ideal for
those whohave a large
amount to
spare at the
time but are
unsure of
cash flows in
the future.
- This plan
lowers the
risk of lapse
of policy as
a result of
missed
premiums.
- Here you can
switch from aninitial basic
term plan to
insurance-
cum-
investment
plan, at a later
date.
- Premium
may change at
the time of
conversion.
Endowment plans
Endowment plans are a combination of a risk-cover with financial savings. On
death or disability during policy term, sum assured plus bonus or guaranteed
additions is paid to the beneficiaries. Sum assured is paid even if policyholder
survives the policy term. Premiums are generally high for these plans.
Endowment plans are quite popular for their survival benefits.
-
8/14/2019 JCP Content Final
19/194
ICICI Securities Page 19 of 194 JCP on Managing Personal Finances
Money-back or cash-back plans
Under this plan, certain per cent of the sum assured is returned to the insured
person periodically as survival benefit. On the expiry of the term, the balance
amount is paid as maturity value. The life risk may be covered for the full sumassured during the term of the policy irrespective of the survival benefits paid.
Whole-life plans
Whole-life plans provide life insurance cover for the entire life of the insured
person or up to a specified age. Premium paid is fixed through the entire period.
This plan pays out a death benefit so you can be assured that your family is
protected against financial loss that can happen after your death. It is also an ideal
way of creating an estate for your heirs as an inheritance.
Unit Linked Insurance Plans (ULIP)
ULIP is basically a combination of insurance cover and mutual funds. In ULIPs, a
certain part of the premium is invested in various equity and debt instruments
and the balance is used to provide cover for life.
ULIPs allow policyholders to earn market-linked returns by investing a portion of
the premium money in various options. The returns on ULIPs are linked to the
performances of the markets and underlying asset classes.
Typically, ULIPs provide with a choice of funds in which you may invest. One also
has the flexibility to switch between different funds during the life of the policy.
In the event of death or permanent disability, the sum assured (to the extent one
is covered) is given to the policyholder to assure that his family is protected from
sudden financial loss. A ULIP has varying degrees of risk and rewards. There are
various charges applicable for ULIPs and the balance amount out of the premium
is only invested.
Pension Plans
Pension plans are basically retirement plans to which individuals make
contributions till retirement or for a specified period with an aim to get regular
-
8/14/2019 JCP Content Final
20/194
ICICI Securities Page 20 of 194 JCP on Managing Personal Finances
income post-retirement. One-third of the corpus accumulated can be withdrawn
as a lump-sum and the remaining can be used to buy annuity that will make
monthly payments to the holder. An annuity is a contract with an insurance
company under which one receives fixed payment on an investment for a lifetime
or for a specified number of years.
Annuity Types
Annuities can be divided into two types deferred and immediate.
In deferred annuity, you save in a systematic manner to build up sufficient funds
for retirement. The withdrawals commence after the retirement of the investor.
In the immediate annuity plan, you invest a lump sum amount as the premium
and the insurance company starts paying back annuity immediately. These are
suitable for investors who have retired or are nearing retirement, and need steady
income from the accumulated retirement corpus.
Annuity Payout Options
There are various annuity payment options that you can opt for. You should
select the options that suit your specific needs the best. Some of the popular
options are:
Life annuity: This option pays you for life. The payment stops when you die.
Hence, this option is suitable for someone who does not have any financial
dependents.
Life annuity with return of purchase price:This option pays you annuity for life
and on death, the initial purchase price (premium paid in the beginning) is
returned back to the nominee.
Life annuity for fixed-period guarantees: This option pays an annuity for a
guaranteed period of 5, 10 or 15 years (as chosen by you) and thereafter as long
as you are alive. This option is ideal for someone who needs money for a fixed
period after which dependency on pension money will come down.
-
8/14/2019 JCP Content Final
21/194
ICICI Securities Page 21 of 194 JCP on Managing Personal Finances
Joint life and last survivor annuity:This option pays annuity throughout your life
and on death, continues the annuity during the lifetime of the named spouse. It
thus takes care of expenses of both the partners.
Life annuity increasing at a fixed rate: In this option, the annuity amount
increases every year at a simple rate, starting at 3 per cent p.a. This options works
well for those who have not factored in inflation and need an increasing annuity
with each passing year. This option needs a bigger corpus to sustain over the
long term.
Riders
Riders are additional benefits attached to the basic life insurance policy. They
allow you to enhance your insurance cover and help customize your policy to suit
your specific needs.
The most common types of riders available are:
Critical illness:This rider provides additional cover to you in the event of a critical
illness. Cancer, coronary artery bypass, heart attack, kidney failure, major organ
transplant and paralytic strokes are the generally covered illnesses.
Accidental death benefit: It provides an additional sum assured if the policy
holder dies due to an accident.
Partial and permanent disability rider: In this rider, a portion of sum assured is
paid, in case you are disabled permanently or temporarily, due to an accident.
Most policies pay a certain percentage of sum-assured periodically for next 5-10
years.
Waiver of premium rider:This rider waives off future premiums in case you are
not able to pay the premiums due to disability or income loss. Put simply, it
exempts you from paying premiums until you are ready to work again. This helps
protect your policy from getting expired.
-
8/14/2019 JCP Content Final
22/194
ICICI Securities Page 22 of 194 JCP on Managing Personal Finances
Dos and Donts for buying Life insurance
Dos
When you buy a life insurance policy you should: Think through why you are buying insurance and what core requirements and
expectations
Seek and receive advice and options patiently
Be open-minded but cautious about the advice and information you gather. Ask
lots of questions about the policy options to see what fits your needs. Find out
policy details like: Whether it is a Single Premium or Regular Premium policy.
Which is the best premium payment frequency that suits you e.g.: Annual,
quarterly etc. Whether there is an ECS (Electronic Clearing Service) payment
option to make your premium payment safe and easy.
Fill the proposal form very carefully and personally
Fill it completely and truthfully, remember you are responsible for its contents.
Make sure that the information you give cannot be disputed during a claim.
Ensure you fill Nomination details. If the form is in one language and you are
answering the questions in a different language, ensure the questions are
explained correctly to you and that you have understood them completely.
Remember you have to give a declaration to this effect in the proposal form.
Keep a copy of the completed proposal form you sign and any declarations and
terms agreed upon mutually for your records.
If you are buying Unit Linked Insurance Policies (ULIPs) ask specific questions
about: Various charges, Fund options, Switching of funds; Benefits if you
discontinue the policy, Surrender the policy or Make a partial withdrawal of funds.
Don'ts:
Do not leave any column blank in the proposal form
Do not let anyone else fill it up
Do not conceal or misstate any facts as this could lead to disputes at the time of
a claim
Do not miss or delay your premium payment
(Source: www.policyholder.gov.in)
-
8/14/2019 JCP Content Final
23/194
ICICI Securities Page 23 of 194 JCP on Managing Personal Finances
Non-Life / General Insurance
We saw life insurance that takes care of the insureds near and dear ones in case
of his/her demise. Insurance, other than life insurance, falls under the category of
general insurance. General insurance products include policies for health, motor,home and travel among others. Lets take a closer look at some of these areas.
Health insurance
Every human being is exposed to various health hazards. Medical emergency can
strike anyone without pre-warning. Lifestyle and critical diseases are catching up
with people at an early age. Health insurance helps to protect against a future
outlay that may be considerably high and unbudgeted for. Hence, the need for an
effective health insurance plans. Healthcare today is an expensive affair, making it
extremely important to invest in health insurance to protect ones family and
finances from the huge dent that a medical emergency can cause. The need for
health insurance is gaining prominence among individuals who consider it as a
means of obviating health risks that can make inroads into their savings. Even
people who strictly follow return on investment policy for their investments are
eying health insurance as a hedge against financial shocks due to medical
emergencies.
There is a myth associated with health insurance that goes this way: If you are
young and looking healthy you dont require health insurance. This is far from the
truth. This is the myth that has gripped majority of people. What happens if one
suddenly meets with an accident? People feel that if they are young and healthy,
they do not require any health insurance. One should always be prepared to deal
with such untoward incidents and availing a health insurance policy is the best
way.
There are two kinds of health insurance policies available in India:
1. Indemnity: This covers hospitalization expenses incurred on re-imbursement
or cashless basis.
2. Benefit:This includes critical illness policies which include the payment of a
lump sum amount on the diagnosis of any of the named critical illnesses.
-
8/14/2019 JCP Content Final
24/194
ICICI Securities Page 24 of 194 JCP on Managing Personal Finances
Benefits of health insurance
A good health plan ensures that medical expenses incurred on hospitalization for
more than 24 hours are covered by the insurance company. This may include
room charges as well as the money spent towards the surgeon, nursing,medicines and other tests.
One can also avail the benefit of a cashless claim, where the hospitalization
expenses are directly settled between the hospital and the insurance company.
A health insurance policy also takes care of pre-hospitalization and post-
hospitalization expenses. Daily cash allowance and payments for treatment
received prior to hospitalization and during the recovery period is extremely
beneficial as the insured might not have an alternate source of income during
those trying times.
An advantageous policy offers floater plans where the entire family is covered
under one policy and allows the coverage of the medical insurance policy to be
shared among the family members.
Health insurance offers undeniable benefits which extend beyond conventional
hospitalization. Health insurance policies offer a number of benefits such as
income tax deduction, long-term discounts, family discounts and no claims
bonus. Health insurance premiums offer a tax benefit under Section 80D and
there are now products available that are optimized for tax saving. This means
that while the insured is safeguarded from medical contingencies, he or she is
also reducing tax outgo and saving money on a portion of income.
Types of health insurance policies
Insurance companies offer a wide range of health insurance products with
varying coverage and cost. There are options available between a conventional
hospitalization policy and a benefit policy which pays lump sum amount in case
of a pre-specified event or illness. One can also opt for a health insurance policy
that offers cashless claims settlement. Such features help cut down out-of-pocket
medical expenditures, thus reducing the need for cash during hospitalisation or
-
8/14/2019 JCP Content Final
25/194
ICICI Securities Page 25 of 194 JCP on Managing Personal Finances
medical emergencies. An individual can select the policy that suits his /her health
and budget.
Buying health insurance
It is always better to enroll in a health insurance cover as early as possible. Health
insurance premium tends to increase with age more the age, higher the
premium. A health insurance policy provides a continuous and adequate lifelong
cover against any eventuality, and the premium payable is also very competitive.
Any adult above 18 years of age and up to 60 years can buy a health insurance
policy, which stands renewable up to 70 years of age. An individual can avail a
policy for self along with dependent parents, spouse and kids.
Approaches to buying
Sole bread winner of a household should explore options of taking a personalaccident or critical illness cover. Such covers ensure lump sum payment in
case of a life threatening disease or accident.
3 months and above- Infants above three months till 18 years of age can beenrolled in a Floater Cover under their parents policy.
Married person with kids:A family comprising of children and elderly shouldopt for a cover that offers more than just a normal mediclaim. A cover that
takes care of Outpatient Department expenses like vaccination for kids,
maternity expenses to regular check ups of elderly members of the family.
An individual keen to cover himself and the family against maximum riskexposure should go for a top-up mediclaim cover, which provides higher
hospitalization cover sum insured.
Health insurance plans available today are quite user-friendly. You can buy a
policy online, renew it online and get details of your claim status. You can also
find the list of cashless hospitals pan-India. Also, there is a cashless facility
available under the health policy which eases the requirement of cash when you
are hospitalized.
-
8/14/2019 JCP Content Final
26/194
ICICI Securities Page 26 of 194 JCP on Managing Personal Finances
Dos and Donts for buying Health insurance
Dos
When you buy a health insurance policy you should:
Know that there are restrictions on coverage
Pay special attention to terms and conditions in the policy like:The clause excluding pre-existing diseases
Waiting period before certain diseases can be covered
Restrictions or limits on various expenses relating to hospitalization
Co-payment, which means you have to share a part of the claim
Pre-conditions for renewal
Upper limits for age at entry and for renewal
Disclose details of all pre-existing health problems including:
Major ailments
Conditions like high blood pressure or diabetes
The company may want medical test reports depending on age at entry; you
should comply with all procedures and documentation requirements
Check where and how the medical tests will be carried out
Check who should bear the cost for the tests
Pay the premium only after the insurer accepts your proposal
Renew the policy meticulously for the rest of your life
Donts
Conceal facts or you could face a dispute at the time of a claim
Allow a gap of even one day in your policy renewal or your cover may be
insufficient or useless
Overseas Health Policy: Dos and Donts
Dos
Insure well ahead of your travel dates ensuring you have time for medical tests
if required by the company
Ensure you cover your entire period of stay abroad and all the countries you
will be visiting
Be aware of what your policy covers and does not cover. These policies cover
not only hospitalization but could also cover travel related risks like:
Loss of passport
Loss of cash
Loss of baggage and
-
8/14/2019 JCP Content Final
27/194
ICICI Securities Page 27 of 194 JCP on Managing Personal Finances
Repatriation expenses
Disclose details of all pre-existing health problems including
Major ailments
Conditions like high blood pressure or diabetes
Comply with all procedures and documentation requirements the company maywant including medical test reports depending on age at entry.
Check where and how the medical tests will be carried out
Check who should bear the cost for the tests
Pay the premium only after the insurer accepts your proposal
Donts
Conceal facts or you could face a dispute at the time of a claim
(Source: www.policyholder.gov.in)
Motor insurance
Motor insurance is the fastest growing general insurance segment in India and
worldwide. Motor vehicles are divided into three classes for the purpose of
insurance: Private cars, Motor cycles, and Commercial vehicles.
Motor insurance policies are normally taken for a period of one year. However,
according to the requirements of the vehicle owner, a policy for a shorter term
can be issued. Situations do arise when a person plans to sell off his vehicle
within a couple of months and does not intend to renew his policy for another
year. In such circumstances, he may go for a shorter period of cover. Short
period insurance attracts short period scale for calculating premium and
obviously works out costlier than the pro-rata for the said period.
Third party insurance and comprehensive insurance policy are the two types of
motor insurance policies available.
Third party insurance: This covers the insured's liability to third parties for
death and bodily injury caused by an accident involving the motor vehicle. This
refers to the minimum risks that are to be covered under the Motor Vehicles Act.
Comprehensive insurance policy:This insurance cover is wider in scope and
covers not only accidental damage to the insured's own vehicle but also the loss
or damage to the vehicle itself by way of accident, theft and other specified perils.
-
8/14/2019 JCP Content Final
28/194
ICICI Securities Page 28 of 194 JCP on Managing Personal Finances
Dos and Donts for buying Motor insurance
Dos
When you buy a motor insurance policy you should:
Know that you can buy this policy through anyone and there is no compulsionto buy it through your vehicle dealer
Fill the proposal form yourself even if the vehicle dealer is arranging for the
insurance
Fill the proposal form carefully and factually and thoroughly
Keep a copy of the completed proposal for your records
Read the policy brochure/ prospectus carefully to know what is covered and
what is not
Ask for information about add-on covers that may be available and choose what
suits you
Give documents such as RC Book, Permit and Driving Licence to the insurance
company for verification
Ensure that you keep these documents updated from the authorities concerned
Donts
Dont let anyone else fill your proposal form
Dont leave any column blank
Dont forget to renew your policy without any break
Dont forget to ask for the correct procedure when you buy a used car that
already has insurance.
Dont make false declarations about the actual use of the vehicle you are
insuring
(Source: www.policyholder.gov.in)
Home / property insurance
A home is usually the largest asset an average person owns during his lifetime.
Therefore, it is imperative to secure your home from natural and man-made
catastrophe. A home insurance plan ensures you peace of mind by protecting the
structure and the contents of your home. Banks generally offer home insurance
at the time of taking a home loan. You can purchase a policy from an insurance
agent or it can be purchased online. You can also purchase it through
-
8/14/2019 JCP Content Final
29/194
-
8/14/2019 JCP Content Final
30/194
ICICI Securities Page 30 of 194 JCP on Managing Personal Finances
Travel insurance
In the present scenario domestic as well as overseas travel could pose a risk and
the need for insurance is being realized.
For students who wish to pursue studies abroad, taking a travel insurance policyis a necessity. It is better to buy the policy from India as it is more cost effective. It
helps the student to seek a waiver from the compulsory university insurance,
which in turn will certainly help the student save substantially. Student medical
insurance in India costs one-third the amount they have to pay in the US. The
waiver form can be downloaded from the university website and sent to the
appropriate person indicated.
Dos and Don'ts for buying Travel Insurance
Dos
Plan for your Travel Insurance ahead of time just as you plan for your visa and
so on.
Take care to fill in the proposal form completely and truthfully after getting the
necessary medical tests done and obtaining the medical report as required
Plan for the travel period ahead of time and ensure that your insurance covers
the entire period
If you have to extend the period of cover, plan for it before the cover expires and
provide the required documents to the insurer
Make sure you have gone through the policy document completely and make a
note of the contact details of the agency servicing the claims so that it is handy in
the event of an emergency
If you are cutting short your travel period, check your policy to see if you are
entitled for a refund
Donts
Dont postpone taking your travel insurance till the last minute
Dont get pushed into taking a cover only as recommended by your travel agent
Get as much information as possible and exercise your choice
Dont get tempted to opt for the cheapest cover as it might not meet your needs
(Source: www.policyholder.gov.in)
For Further Reading on Insurance, you may refer:
http://www.policyholder.gov.in/
http://www.irda.gov.in/
-
8/14/2019 JCP Content Final
31/194
ICICI Securities Page 31 of 194 JCP on Managing Personal Finances
SESSION 3: RETIREMENT PLANNING
As one grows older, retirement is an inevitable stage of life. Therefore, it is
essential to create a plan that will fulfil ones needs right through ripe old age.
Planning for retirement is about ensuring that one has adequate income to meetthe expenses post retirement. It is about anticipating ones future requirements
and taking the correct steps to enjoy current lifestyle well beyond ones working
years.
There are three stages in our life learning, earning and accumulation. In the
learning phase we go through our education and complete it. In the next stage i.e.
the earning phase, we earn our livelihood, say, from the age of 25 up to 60. So
this is a very important phase to accumulate the earned money. In the
accumulation phase, we start using up the accrued money, which we have been
amassed during the earning stage. Hence, it becomes necessary for us to plan for
retirement even while we are in our second stage i.e. the earning phase.
Everybody desires to retire peacefully and lead a fairy tale retired life. But in
actuality, the happily ever after or to retire peacefully is a very vague term. Most
importantly, you should decide when you want to retire. One may want to retire
at the age of 55 or even earlier, or one may want to continue working till 65. It is
vital to think about the expenses or needs after retirement. You should know how
much amount you will require annually after retirement.
Generally everybody wants to continue the same lifestyle even after retirement.
To continue with the same lifestyle a person needs to plan well for retirement.
Factors that necessitate planning for retirement
In the past, larger job opportunities with the government (therefore assured
pension) and dependence on joint family ensured that planning for retirement
was not the top priority. Today, the changing socio-economic landscape,
including the rising rate of inflation and longer life expectancy necessitate
planning well for retirement.
-
8/14/2019 JCP Content Final
32/194
ICICI Securities Page 32 of 194 JCP on Managing Personal Finances
Retirement planning is the key challenge for all of us. It is the key challenge even
for developed nations. The population is aging around the world. Employers are
encouraging people to work longer - by increasing the retirement age and
curtailing the benefits, such as pensions. In the United States (US), for example,
retirement age is gradually increasing to 67 from historic 65. Further, only 15 percent of the private sector jobs today provide pensions, in 1979 that figure was 38
per cent.
Following are a few key reasons that call for prudent retirement planning:
1. Social changes:The social structure is continuously changing wherein a large
number of young working professionals are moving out of their traditional joint
families to lead a nuclear family structure. Hence this creates a situation wherein
the older members in the family will have to fend for themselves after retirement.
2. Increasing life expectancy: The average life expectancy of an individual has
gone up due to advancements in medical sciences and technology. By 2050, life
expectancy is projected to reach to 74 years from the current 65 years. This
increases the number of years that an individual lives post-retirement. Increased
longevity would mean planning for 15 to 20 years of retired life may be, even
more.
3. No benefits from employers: Earlier, there were guaranteed pension and
medical benefits available from employers. These days, more and more
corporates and even governments are moving towards defined contribution
system from defined benefit systems. This means, our retirement could be very
different from those earlier days or from what our parents experienced. We would
need to manage on our own to take care of our needs post retirement.
4. Rising medical expenses:In old age, the need for medical expenses rises. Even
simple tests and procedures now cost hundreds of rupees. In the years to come,
it would cost even more. Medical inflation is a matter of great concern. The
healthcare costs in India are rising steadily at the rate of 18 to 20% every year.
This is higher than the overall inflation rate of 6 to 7% as seen in the past few
years. This needs to be, and can be managed with the help of retirement
planning.
-
8/14/2019 JCP Content Final
33/194
ICICI Securities Page 33 of 194 JCP on Managing Personal Finances
5. Increased standard of living:There has been a rise in the standard of living of
people in the country. Let us look at examples of increased standard of living:
1. Till a few years ago, cars were considered luxury, but today it is a necessity.
2. Eating out and going to a movie were experiences that people did not enjoy
much a few years ago. Now it has become common, and easily cost hundreds of
rupees in a day. To maintain this standard of living, it is essential to plan for
retirement.
6. Rising inflation:Generalinflation is another great concern that necessitates the
need for retirement planning. For the uninitiated, inflation is the fall in purchasing
power of money. Simply put, an increase in the general price level for a
considerable period of time is called as inflation. Even a 2 per cent inflation rate
will reduce the purchasing power of your money over time.
Let us understand this with an example:About 60 years ago, an average middle
class person earned Rs. 600 and was able to support his family comfortably. Now
compare the salary with that of a typical middle class family earning today, about
Rs. 30,000. So what was Rs. 600 six decades ago is equivalent to Rs. 30,000 now,
a 50 times increase. This is inflation. It is essentially a real-life value of money
which keeps on reducing.
This kind of price rise will have a deep impact on our finances over a period of
time. For example, what will be the cost of 1 litre of milk, which costs Rs. 30 a litre
today, after 30 years? Well, assuming inflation to be 5 per cent the price will be
Rs. 129.66. Like wise, there will be a continuous price rise over a long period. If
you plan to maintain your current lifestyle even after you retire, you will need to
build in inflation protection. That may mean saving more for investment purposes
or adjusting your current investment strategy to generate a higher return over the
long term.
-
8/14/2019 JCP Content Final
34/194
ICICI Securities Page 34 of 194 JCP on Managing Personal Finances
If your monthly expenses today is Rs. 30,000
Years Toretirement
Actual amount
required
consideringinflation (Rs.)
Corpus required
at retirement(Rs.)
Monthly savings (Rs.) required at
8% 10% 12%
10 53,725 10,749,791 59,298 53,360 47,982
15 71,897 14,385,646 42,338 35,819 30,226
20 96,214 19,251,239 33,617 26,591 20,929
25 128,756 25,762,500 28,161 20,723 15,135
30 172,305 34,476,037 24,320 16,581 11,190
35 230,583 46,136,714 21,396 13,467 8,372
(Note: Inflation taken at 6 percent and post-retirement return at 8 percent)
To offset the effects of inflation, it is necessary to create regular income channels
that will provide ample funds to maintain your life style even after retirement. To
create such channels, planning your finances in a systematic manner takes
precedence. This brings us to the objective of retirement planning.
There may be other reasons as well that may cause some financial hitch during
life after retirement. Thus to overcome those hindrances, it is necessary that one
makes regular savings and investments.
Where to start? Steps to retirement planning
Before you start planning for retirement there are some aspects that you should
be mindful of. Analyzing your current situation and creating a plan accordingly
will have great positives. Identifying your current life stage is the first step
towards creating your retirement plan. Every life stage has its priorities and so
you should examine them. Life stages are mainly segregated as: Single, Married,
Married and with kids, and Post-retirement. Each life stage brings with it the
challenges and to overcome them proper planning is needed. Especially in the
early years of your life, in addition to meeting your current financial needs, you
have to plan for your future as well.
-
8/14/2019 JCP Content Final
35/194
ICICI Securities Page 35 of 194 JCP on Managing Personal Finances
Step 1. Identify your life stage
Single: If you are single then your life stage priority must be to lay the foundation
for financial security. This is generally the time when you are just entering theworkforce and getting adjusted into a professional life. At this stage, chances are
that your liabilities will be minimal. This gives you an impetus to save more.
Starting to save early on in life helps you build up a sizeable retirement corpus
because of the power of compounding that comes into play.
Married and have kids: When you are married and in the subsequent life stage
when kids are born, your priority may be to accumulate assets and generate
wealth for the future life goals like buying a new house, children's education,
children's marriage, among others. Generating wealth is in part related to saving
up for your retirement. This process needs to be conducted in a systematic
manner such that your life goals are not compromised and at the same time your
retirement kitty grows.
Post-retirement: And if you are retired, and no longer working, then you must be
utilizing the wealth that you accumulated during your pre-retirement phase. With
the advancement in medical care, the average life expectancy is trending higher.
To make the wealth that you saved sustainable for your long life, you should look
for channels that will keep your resources flush.
After identifying your life stage, the next step is to find out how much you will
need to fund your retired life.
Step 2. Estimate the cost of retirement / estimate the required retirement
corpus
One size does not fit all and it is very difficult to find out actually the amount you
will need to save up to be used after retirement. Retirement Planning helps in
determining how much money you need to live a comfortable life even after your
earning years have stopped, besides ensuring a corpus for that phase of life.
-
8/14/2019 JCP Content Final
36/194
ICICI Securities Page 36 of 194 JCP on Managing Personal Finances
There are few simple steps that you can follow to compute an approximate figure
that you will need:
Arrive at the age at which you wish to retire. (Eg: Current age 30;
Retirement age 55)
Calculate your current monthly expenses. Eg: Rs. 30,000 p.m. Factor in the inflation rate (Eg: 6% p.a.) and then calculate the monthly
expenses that you will need after retirement. (Eg: 128,756 p.m.)
Assume a rate of return to be generated from your retirement corpus, i.e.
annuity rate. (Eg: 8% p.a.)
Now, arrive at the real rate of return from your retirement corpus post-
retirement, after negating the effect of inflation. (Eg: [(1+8%)/(1+6%)] 1 =
1.89%)
Divide the annual expenses required post-retirement by the real rate of
return to arrive at your retirement corpus. (Eg: 128,756 / [1.89%/12] = Rs. 8.17
crore.)
This will be the total corpus required. You also need to factor in the
investments including provident fund, which you have already made, to arrive at
the net corpus required.
Retirement planning worksheet
-
8/14/2019 JCP Content Final
37/194
ICICI Securities Page 37 of 194 JCP on Managing Personal Finances
EXPENSES TYPE
Household Expenses
Home Loan Annual EMI
Personal Loan EMI's (Annual)Vehicle Loan EMI's (Annual)
Education Expenses
Entertainment Expenses
Medical Expenses
Vehicle Maintenance Expenses
Holidays Expenses
Insurance Premiums
Traveling Expenses
Systematic Investment Plan (Annual)
Other Expenses
Total Expenses
Planned Retirement Age
No of years retirement corpus to be used
Existing PF / PPF / Other investments made towards retirement
CurrentAnnualExpenses
Post-RetirementAnnualExpense (intoday's cost)
Step 3. Assess how you are prepared for it
Once you have an idea of the required retirement corpus, the next step is to asses
how prepared you are currently to meet the retirement needs. Put simply, what
sources of retirement income are currently available to you? These could be your
Employee Provident Fund (EPF), Public Provident Fund (PPF), gratuity, or pension
schemes offered by insurance companies. The amount of income you receive
from these sources will depend on the amount you invest, the rate of investment
return, and other factors. Finally, if you plan to work during retirement, your job
earnings will be another source of income.
Step 4. Calculate the gap
Once you have taken the stock of your current pool of assets, the step is to
calculate the gap. Gap/shortfall is calculated as: The required retirement corpus
(step 2) minus The available investments (step 3).
-
8/14/2019 JCP Content Final
38/194
ICICI Securities Page 38 of 194 JCP on Managing Personal Finances
If there is a short fall, you will need to bridge that up from additional personal
retirement savings.
Step 5. Build your retirement fund
When you know roughly how much money youll need, your next goal is to save
that amount and build your retirement fund. First, youll have to map out an
investment plan that works for you.
Investing should take into consideration your risk profile and the life stage. If you
have a long time for your retirement, then it is suggested that you invest a major
portion of your portfolio into equity or equity-related products. It has been
observed that equity products have given superior returns in comparison to most
other investments. Hence, by investing in equity products you will be able to
generate a greater corpus till your retirement. However, if you are close to your
retirement, it is advisable to invest in debt products because of the certainty of
the maturity value.
Illustration: Suppose, a person needs a corpus of 1 crore in his retirement kitty at
the age of 60. If he plans at the age of 25, considering returns of 8 percent, he has
to save Rs 58,033 per year. If he starts planning at the age of 35 he has to save Rs
1,36,788 every year. And if he starts planning late at the age of 45 he has to save
Rs 3,68,295 to reach his goal of Rs 1 crore.
Age/Returns Amount to be invested every year to accumulate Rs 1 crore
8% 10% 12%
25 58,033 36,897 23,166
35 1,36,788 1,01,681 75,000
45 3,68,295 3,14,738 2,68,242
A person in the age group of 25 to 35 can take maximum exposure to equity so as
to get better than 8 percent returns. In this age group a person can save more as
there are fewer liabilities. A person in the age group 35 to 45 has to take moderate
exposure or say 50 percent in equity. And a person above 45 has to take
minimum exposure to equity and when he reaches 55 he has to cut down the
-
8/14/2019 JCP Content Final
39/194
ICICI Securities Page 39 of 194 JCP on Managing Personal Finances
equity exposure gradually. But suppose, if one has started planning for retirement
at a late age then to satisfy his goal he has to take equity exposure accordingly,
irrespective of his age.
A. Some of the investment options are:
1. Employee provident fund (EPF)
Most companies have EPF for the benefit of employees. An employee can
contribute 12 per cent of the salary towards EPF. The employer also contributes
12 per cent of salary. The current rate of interest on EPF is 8.5 per cent. This is a
good tool to build a retirement corpus.
2. Public provident fund (PPF)
PPF is another tool to build the retirement corpus. The minimum contribution is
Rs. 500 and the maximum is restricted to Rs. 1 lakh per annum. The current rate
of interest is 8.7 per cent. The contributions as well as the interest earned are tax
free. Its tenure is 15 years and can be renewed by 5 years each time. Moreover,
withdrawal facility is also available after 6 years. This is a good tool to fund your
retirement if you are not covered by EPF. Even those covered under EPF can also
contribute to PPF, for a larger retirement corpus.
3. Pension products from insurance companies
One of the most common investment options for retirement is through pension
plans, which come in the form of either endowment plans or ULIPs. In
endowment plans, the premiums are being invested into primarily debt
instruments only. ULIPs are a combination of mutual funds and insurance cover.
4. New Pension System (NPS)
The New Pension System (NPS) is a new voluntary contributory pension scheme
introduced by the Central Government. Under NPS, individuals can open a
personal retirement account and can accumulate a pension corpus during their
-
8/14/2019 JCP Content Final
40/194
-
8/14/2019 JCP Content Final
41/194
ICICI Securities Page 41 of 194 JCP on Managing Personal Finances
a. Deferred annuities: In this type of annuity, the investor saves in a systematic
manner to build up sufficient funds for retirement. The withdrawals commence
after the retirement of the investor. They are best suitable for a long period and
not suitable for short term wealth generation.
b. Immediate annuities: The holder of immediate annuity makes one-time lump
sum payment, and begins receiving payments immediately. Immediate annuities
provide guaranteed flow of income for the rest of life and for a period defined by
the investor. It is wise to invest in immediate annuities if you are close to
retirement.
On the basis of nature of the investment, annuities can be fixed or variable.
a. Fixed annuities:As the name suggests, holders of fixed annuities receive an
assured rate of interest for a certain period. In this case, both interest and
principal are guaranteed and the payout amount remains constant throughout the
term.
b. Variable annuities:Holders of variable annuities receive varying payouts. This
is to take into account the inflation.
Both deferred and immediate annuities can be fixed or variable.
There are various payment options that annuity holders can opt for. You should
selection the options that suit your specific needs the best.
Annuity payout options
USP Pros Cons
Life annuity Income for life You dont risk
outliving your
corpus
Payment stops on
death, even if early
Life annuity with
return of corpus
Income for life and
principal given to
nominee after
Nominee gets the
money after
investors death
Low payout
because only
income is given out
-
8/14/2019 JCP Content Final
42/194
ICICI Securities Page 42 of 194 JCP on Managing Personal Finances
death
Fixed term annuity Guaranteed income
for a fixed period
Provides income
for fixed period as
specified by
investor
Investor is at risk of
outliving the
chosen term
Joint annuity for
life
After investor dies,
partner gets
income for life
Takes care of
expenses of both
partners
Low payout
because term is
longer
Joint annuity for
life with return of
corpus
After investor dies,
partner gets
income for life
Nominee gets the
money after
investors death
Very low payout
Increasing annuity Increased payouts
every year
Takes inflation into
account
Needs a bigger
corpus to sustainover long term
2. Fixed deposits (FD)
FDs as the name suggests provide a fixed return. This is a low risk instrument by
banks and so the returns are also low (7-9 percent). The stability of the returns is
what makes this instrument a very attractive one for conservative investors,
including retired persons. Besides banks, FDs are now provided by Non-banking
Financial Institutions (NBFCs). In comparison, FDs from NBFCs offer higher
interest rates. While investing in these FDs it is essential to look at their credit
rating. The FDs with a high credit rating will offer you stable and higher returns
whereas a low credit score can be slightly risky.
3. Post Office Monthly Income Scheme (PO MIS)
PO MIS currently provides an interest rate of 8.4% percent per annum which is
paid monthly. The minimum amount to be invested is Rs. 1,500 and the
maximum is Rs. 4.5 lakh. PO MIS has a maturity period of 5 years.
-
8/14/2019 JCP Content Final
43/194
ICICI Securities Page 43 of 194 JCP on Managing Personal Finances
4. Senior Citizens Savings Scheme
As the name indicates, this scheme is available for senior citizens. The scheme is
available to - 1. Who has attained age of 60 years or above on the date of opening
of the account. 2. Who has attained the age 55 years or more but less than 60
years and has retired under a Voluntary Retirement Scheme or a SpecialVoluntary Retirement Scheme on the date of opening of the account within three
months from the date of retirement. 3. No age limit for the retired personnel of
Defence services provided they fulfill other specified conditions. Investments can
be made in any post-office by opening an account. Only one deposit can be made
in each account; the deposit amount shall be a multiple of Rs.1,000 and should
not exceed Rs. 15 lakh. The scheme has tenure of 5 years. The account can be
extended for a 3 year period by making an application. The current interest rate is
9.20% per annum. Premature closure of account is permitted 1. After one year
but before 2 years on deduction of one and a half per cent of the deposit. 2. After
2 years but before date of maturity on deduction of 1 per cent of the deposit.
Premature closure is allowed after three years. In case of death of the depositor
before maturity, the account is closed and deposit is refunded without any
deduction along with interest.
5. Monthly Income Plan (MIP)
MIP of mutual fund is a debt-oriented scheme that aims to provide reasonable
returns on a monthly basis through investment in debt (75-80 percent of its
corpus) as well as a small portion in equities. MIPs aim to provide investors with
regular pay-outs (through dividends). They invest predominantly in interest
yielding debt instruments (commercial paper, certificate of deposits, government
securities and treasury bills). The debt investments ensure stability and
consistency while the equity instruments in the portfolio boost the returns.
Beside the regular investment avenues, there may be other resources that can be
tapped to generate income after retirement. This will mainly be an outcome of the
investments that you make along your way to fulfil your financial goals. Some of
the income sources are:
6. House rentals
-
8/14/2019 JCP Content Final
44/194
ICICI Securities Page 44 of 194 JCP on Managing Personal Finances
This can be useful to generate steady returns against your earlier property
investment. If you have a second house and if it is rented out, then it is a good
source of income during your retired life.
7. Reverse mortgage
A reverse mortgage provides income that people can tap into for their retirement.
It is a type of mortgage in which a homeowner can borrow money against the
value of his or her home. No repayment of the mortgage (principal or interest) is
required until the borrower dies or the home is sold. The transaction is structured
so that the loan amount will not exceed the value of the home over the life of the
loan. A senior citizen who holds a house or property, but lacks a regular source of
income can mortgage his property with a bank or housing finance company (HFC)
and the bank or HFC pays the person a regular payment. The advantage is that
the person who has mortgaged his property in this manner can continue staying
in the house for his life and at the same time receiving the much needed regular
payments. So, effectively the property now pays for the owner.
Quick Look Retirement Planning Products
Product
Return
indicative
Capital
risk Tenor
Investment
horizon
Minimum
investment
Taxation/
Tax
benefits
Direct
equity 12 15% High No lock-in
> 5 years
(with active
monitoring
>3years) -
No tax on
long-term
gains;
Short-term
gains is
15%
Mutual
funds -
Equity 12 15% High
No lock-in;
can be
redeemed
any time 5 years
Can be
started at
Rs. 500 SIP
No tax on
long-term
gains;
Short-term
gains is
15%
-
8/14/2019 JCP Content Final
45/194
ICICI Securities Page 45 of 194 JCP on Managing Personal Finances
PMS 12 15% High No lock-in > 3 years Rs. 25 lakh
No tax on
long-term
gains;
Short-term
gains is15%
ULPP /
ULIP 6 10% Medium 5 years > 5 years
> Rs.
10,000 per
annum
Investments
under
Section 80C
are tax
exempt
ELSS 8 15% Medium 5 years > 3 years
Rs. 5,000
lump sum
Tax
benefits
available
under
Section 80C
Structured
Products 8 15% Medium 3-5 years > 3 years > Rs.5 lakh
Mutual
funds -
Debt 7 10% Low No lock-in 1-5 years Rs. 500 SIP
Short term -
as per slab;
Long term
with
indexation -
20% /
without
indexation -
10%
Deposits/
NCD/
Bonds 7 - 9% Low
15 days -
10 years 1-5 years Rs.1,000 As per slab
NPS 8 - 9% Low
Till the
individual
is 60 years
old > 15 years
Rs. 500 per
month or
Rs.6,000
annually
Tax
benefits
available
under
-
8/14/2019 JCP Content Final
46/194
ICICI Securities Page 46 of 194 JCP on Managing Personal Finances
Myths about Retirement
Myths are faulty beliefs with no scientific back up. Given below is the list of
common myths about retirement and how you can tackle them:
Section
80C;
Maturity
benefits are
taxable
Senior
Citizen
Saving
Scheme 9.20% Nil
5 years
(extendable
for
additional 3
years) 5 years Rs.1,000
No; Interest
is fully
taxable
EPF 8.50% Nil
Up to an
individual's
retirement > 15 years
12% of the
basic
salary
Yes; up to
Rs.1 lakh
PPF 8.70% Nil 15 years > 15 years Rs. 500
Yes; up to
Rs.1 lakh
under
Section 80C
PO MIS 8.40% Nil 5 years 5 years Rs. 1,500
No tax
benefit
under
Section 80C
5-year
NSC 8.50% Nil 5 years 5 years Rs. 100
Yes; up to
Rs.1 lakh
under
Section 80C
10-year
NSC 8.80% Nil 10 years 10 years Rs. 100
Yes; up to
Rs. 1 lakh
under
Section 80C
-
8/14/2019 JCP Content Final
47/194
-
8/14/2019 JCP Content Final
48/194
ICICI Securities Page 48 of 194 JCP on Managing Personal Finances
Fact: Our traditional joint family system is breaking down to nuclear family
system due to changing life styles and due to mobility and relocation for better
career prospects. In fact, it will be considered as unfair for the children if you are
dependant on them during the times of high cost of living.
Everybody will be more happy to be financially secure and independent rather
than depend on your children. Adequate savings will preserve your financial
freedom. If children take care of you consider it as a bonus.
Myth 5: I don't earn enough to save for retirement
Fact: Just as every drop of water makes a mighty ocean, small amounts if
invested regularly, will help you build your retirement nest. If a person aged 35
invests Rs 1000p.m., he will retire with a corpus of Rs 10,00,000 at age 60,
assuming returns at the rate of 10% p.a.
Myth 6: I will plan for retirement once I have paid off my auto loan
Fact:One may assume that he will have more money at his disposal, once he has
paid off the loans. However, in reality your expenses always outpace your
income.
Once you have paid off your one loan, you will probably want to take another
loan for some other thing, and the cycle goes on. And, thus retirement planning
will get further pushed off, as it does not seem as an immediate need.
Myth 7: I have saved enough money for retirement
Fact:While planning for retirement expenses, one must account for inflation as it
will reduce the purchasing power of money over a period of time. For e.g. If a
person aged 35 requires Rs 25,000 p.m. to meet his household expenses, he will
require Rs 95,000 p.m. to meet the same expenses when he retires at the age of
-
8/14/2019 JCP Content Final
49/194
ICICI Securities Page 49 of 194 JCP on Managing Personal Finances
58 and will require Rs 1,92,000 p.m. to maintain the same standard of living by the
time he reaches age 70. This is assuming an inflation rate of 6%.
Thus while planning for retirement one should not only aim for an income which
will take care of his immediate expenses, but also aim for an income which willkeep in pace with inflation.
Case Study of a Pre-Retiree
T.K. Pai, 59, is approaching retirement. After having worked for almost 30 years in
a public sector, he is about to retire in next 6 months. He is happy, but worried
too. Though he would be getting pension and other lump sum retirement
accumulations as provident fund and gratuity, he is not sure whether the pension
would be sufficient. He is also unsure as in how to best utilize his retirement
benefits.
Fortunately, he met a financial planner, who has provided him a clear picture of
his finances and ways to lead a peaceful retired life.
Pais key financial assets:
Public provident fund (PPF): Rs 12 lakh
Bank deposits: Rs 10 lakh
Equity: Rs 5 lakh
On retirement:
Employer provident fund (EPF): Rs 20 lakh
Gratuity: Rs 10 lakh
Cash: Rs 1 lakh
Pension p.a: Rs 2.4 lakh
Pais key financial liabilities include earmarking approximately Rs 10 lakh for
daughters marriage in next 2 years and to upgrade his existing 1-BHK apartment
to 2-BHK apartment, which would entail an additional lump sum amount of Rs 20
lakh. His wife is dependent on him and he needs to support his daughter for at
least next 5 years.
-
8/14/2019 JCP Content Final
50/194
ICICI Securities Page 50 of 194 JCP on Managing Personal Finances
Pais financial position (excluding cash) on retirement would be:
PPF: Rs 12 lakh
Bank FD: Rs 10 lakh
EPF: Rs 20 lakhGratuity: Rs 10 lakh
Equity Rs 5 lakh
Total: Rs 57 lakh
Considering the life facts that he is on the verge of retirement and has still two
goals left to achieve, viz; funding his daughters marriage and upgrading the
apartment, it would be better to play conservative than being aggressive on
investments.
Contingency fund: It is suggested increasing the cash holding by Rs 2 lakh to
bring it up to Rs 3 lakh to ensure that the contingent expenditures are met. The
cash holding has to be periodically reviewed and it is suggested that it should be
increased gradually to cushion the unforeseen expenditures on account of
medical expenditures, etc.
Daughters marriage and apartment up-gradation: Pai needs to earmark an
amount equal to Rs 30 lakh for his daughters marriage and apartment up-
gradation; to be parked in debt instruments either in bank fixed deposits (FDs) or
debt mutual funds with floating interest rates to keep the value of the investments
intact.
Total expenditure on retirement:
Cash holding: Rs 2 lakh
Daughter's marriage: Rs 10 lakh
Apartment up-gradation: Rs 20 lakh
With this, the financial allocation on retirement would appear as:
Expenditure: Rs 32 lakh
Retirement investments: Rs 25 lakh
-
8/14/2019 JCP Content Final
51/194
ICICI Securities Page 51 of 194 JCP on Managing Personal Finances
The suggested debt-to-equity ratio at this age is: 4:1 i.e. 80% of invest-able
amount in debt and balance in equity, which he should further re-balance to more
conservative ratio of 9:1 i.e. 90% in debt and balance in equity. The re-balancing
to move funds in debt is required for capital protection, which, post retirement is
more important than wealth creation.
Accordingly, as suggested, asset allocation on retirement will be:
Equity: Rs 5 lakh
Debt: Rs 20 lakh
Total : Rs 25 lakh
Pai is advised to invest Rs 5 lakh in diversified equity mutual funds with good
track record. For debt investments, his investment strategy needs to take care of
capital protection, regular periodic income and liquidity.
SESSION 4: INVESTMENT PLANNING
We all work for money. It is equally important to ensure that money works for us.
There are two main ways to make money. 1. We make money by working. 2.
Money makes money that is, by way of investments. Investment refers to a
commitment of funds to one or more assets as per the goals and risk profile of an
individual.
In order to achieve our goals, it is important that we have a sound investment
plan in place. Investment plan is nothing but the process of making investments
based on our needs.
Why invest?
-
8/14/2019 JCP Content Final
52/194
ICICI Securities Page 52 of 194 JCP on Managing Personal Finances
Investi