wealth mgt 03

8/3/2019 Wealth Mgt 03

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Economic cycles in WM

The level of economic activity changes

constantly giving rise to various economic

cycles also known as business cycles. An

economic cycle goes through following stages:

A) expansion

B) Recession economic activity slow down

C) Depression activity comes to stand still

D) recovery


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Role of Financial statements

Financial goals can be achieved only afterthoroughly understanding one`s currentfinancial condition and developing financial

plans accordingly. Balance sheet

P & L account

Budgets/Forecast Lets prepare a Financial P&L and B/s for an

individual


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Balance sheet

Liquid Assets cash, savings account, FDs, MF.

Investments Real estate, bonds, stocks

Real property SOP, LOP

Personal property- Vehicles, Jewelery, Artwork,etc.

Current liabilities utilities, rent, medical bills,

bank credit, credit card balance Long term liabilities Mortgage, Loans,

educations loans, etc.


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Analyze the following:

Asset 2011 2010 2009 Liabilities 2011 2010 2009

Cash 30000 30000 50000 Utilities 60000 50000 45000

savings a/c 40000 50000 50000 Rent 85000 80000 75000

FDs 100000 Medical 25000 18000 15000

Real estate 200000 300000 300000 bank credit 50000

MF 20000 5000 edu loans 120000 150000 180000

Mortgage 50000 70000 90000

Stocks 110000 5000 Net worth 210000 122000 95000

Jewellery 50000 50000 50000

Vehicles 50000 50000 50000

Total 600000 490000 500000 600000 490000 500000


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Income and expenditure

Particulars 2011 2010 2009Salary 250000 225000 200000

Bonus 20000

commission

Pension and annuity

Investment income 10000 5000

Total income 280000 230000 200000

ExpenseHousing 90000 80000 75000

Utilities 60000 50000 45000

Food 30000 25000 20000

Transportation 6000 4000 2000

Medical 4000 3000 1000

Clothing 6000 3000 2000

Insurance 8000 8000 8000

Taxes 3000 2500 2500

Recreation 5000 4000 1000

Personal care 5000 4500 3000

Edu loans 30000 30000 0

TOTAL EXPENSES 247000 214000 159500

Cash surplus 33000 16000 40500


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How to collect personal financial data

for WM

Types of records:

Bank accounts

Credit card statements Taxes

Property documents

Insurance documents

Investment and retirement accounts

Trusts and wills


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Managing taxes

While doing FP/WM we need to know the updated taxlaws.

Income tax

Wealth tax More importantly the tax benefits available:

LTCG tax free, Dividend tax free, Investments undersec 80C of I-tax act.

Benefits on transfer of house property, etc.

& Clubbing provisions

Gift tax provisions

Also, TAX planning as an HUF


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Managing cash and savings

Role of CM: cash mgt deals with day to day

managing ones cash and near cash resources

in order to achieve ones long term objectives

and goals.

Establishing a proper savings program is

another aspect of cash management and

personal financial planning.


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Financial services information

Financial Institutions in India:

RBI

Commercial Banks

Scheduled banks Non-scheduled banks NBFCs

Credit rating agencies CRISIL,ICRA,CARE

Merchant banks equity issues, loan syndica.

Mutual Funds

Insurance companies LIC and General


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Savings program

FP dictates that a certain portion of the assets should be kept liquid

However, idle cash should also not exist

We look at INTERERT RATES

Simple interest 2000 * 8 /100 *1 year = 160

Effective rate of interest is the annual rate of return earned in the timeperiod when the funds are held

ERR = Amount of interest / Amount of money invested

160 / 2000 = 8%

Compounding = Cal. FV

FV = PV(1+r)^n.

3000 @ 6% for 5 years = 4014 3000 * (1.06)^5 = 4014

3000 * 1.338 = 4014

Where 1.338 is the FV interest factor for 5 years and 6%


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Channels of savings

T-bill:

14 day t-bill

91 day t-bill

Etc. Yield on t-bill = {F/P 1 } x 365/D where

F = face value, P = price of t-bill, D = number of days tomaturity

Example: the face value of a 364 day bill is Rs. 100, Ifthe purchase price is Rs. 88.24 calculate the yield.

=> 100/88 -1 x 365/364 = 13.36%


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CoDeposit

The next lowest risk asset is CoD, after T-bill issued by banks andfinancial institutions.

The secondary market of CoDs does not have a depth buy theinstrument is highly secured

CoDs are available to individuals, compnaies, trusts, etc. FV =500,000 minimum.

Return on CoD (disc rate) = F/ {1+[I*N]/365*100}

F = face value, I = discount rate, N = days to maturity

Example: if the face value is 100,000 and effective interestrate is 6%. The issuance period is 90 days. Calculate the rateof return for the CoD.

100000/ {1+ [0.06*90/365]} = 98522.17

Therefore, yield = 100000-98522.17 / 100000 = 1.47%


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Automobile purchase planning

Possessing an automobile has become a necessity for today'sgeneration.

Before buying a car, it is essential to know what one can afford.Whether purchase is outright or is it going to be financed by loan

What would be the regular cash outflow

Operating costs of automobile installment, insurance, license fee,fuel and oil and repairs and maintenance costs.

Whether brand new or second hand

Features of car

Reliability and warranties

Purchase of car

Price negotiation

Financing schemes


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EMI plan of buying a Car

Types of Finance schemes

Margin money outflow

Advance EMI

EMI

Residual value

Step up scheme Refinancing


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Apartments

Are generally the most common form of

housing facility available today

Apartments are available for ownership andalso for renting

Motives for buying a house

Tax shelter Inflation hedge

Retirement home


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Apartment

Cost of ownership

Down payment

Mortgage fees

Closing costs

Mortgage payments

Property and Taxes and insurance Maintenance and operating costs


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Home affordability analysis

Amount of annual income

Monthly income

Lenders affordability ratio

Maximum loan payment

Average Interest Rate

Funds available for making a down payment

Maximum purchase price

Repayment charges if any

Home buying process:

http://www.loanscalculator.org/


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House buying decision

Eligibility criteria

Comparative analysis of different LOANS.

Compare EMI

Compare Interest rate fixed/floating/teaserloan

Prepayment charges

Quality of service

Loan processing duration


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Rental contract

House taken on rental basis

Cost of rent brokerage, etc.

Initial deposit

Rent outflow per month

Closing costs if any damages, etc.

Renewal costs if any


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Documentation

KYC norms

Salary slip

Form 16

IT returns past years

PAN card

Residential proof ,etc.

wealth mgt 03

Documents