Finance 12-14

Financial Planning
For persons who have just joined an organization

Ankur Verma Rahul Kashyap Nikhil Kumar Rudra Sayak Sardar

Introduction
What is Financial Planning? A comprehensive evaluation of an investors current and future financial state by currently known variables to predict future cash flows, asset values and withdrawal plans. A good financial plan can alert an investor to changes that must be made to ensure a smooth transition through lifes financial phases, such as decreasing spending or changing asset allocation. Financial plans also are fluid, with occasional updates when financial changes occur. Financial planning may mean different things to different people. It can be undertaken by anyone with a clear assessment of ones inflow of funds and the goals that needs to be achieved from time to time. Financial Planning is a process consisting of the following activities Assessing present assets and resources to understand the current situation Setting objectives-Both in terms of returns and risks Determining constraints and financial planning areas like Taxes, Legalities, time horizon, liquidity, unique circumstances Determining appropriate plan and strategy to achieve financial goals. Evaluating the plan in a timely manner. Adjusting and modifying the plan with changing times.

Why Financial Planning For a person who has just joined an organization or has just received a job offer from an organization, the first thing on their mind is to buy a car, or bike or a fancy gadget. Savings or tax planning is not in their mind. For them retirement is a distant object and it is something which can be postponed for a later date. A simple example would suffice to get them out of their dream. If your monthly expense is Rs 30,000, and you retire 30 years from now, you will need Rs 1.80 lakh every month, assuming that the annual inflation rate is 6%. Even if you can manage with 80% of your present expenses, that is, Rs 24,000, you will need Rs 1.44 lakh every month. There's more. If you live till 85-with rising living standards and progress in medical science, this is a conservative estimate-that is, for 25 years after after retirement (assuming you retire at the age of 60 years), the value of the nest egg you need to build is a staggering Rs 4.5-5 crore. This if we assume 6% annual inflation and 12% return on investment before retirement. If we assume 8% inflation, the corpus required is a mammoth Rs 12 crore.

Now if we calculate for someone who starts at the age of 25 his per month contribution is Rs 9700. Whereas someone who has starts at 30 will have to pay Rs 19000 per month, if they wish to achieve Rs 4.5 crore. Now retirement is not the only expenditure in horizon ,marriage education for children ,Medical policy and life insurance are few of them. If someone wishes to acquire a car or house there is no money left. So the planning needs to be such that a person can avail all benefits at old age without compromising on present time.

The Financial Planning process:

1. Establish and define the client-planner relationship 2. Gather client data, including goals 3. Analyse and evaluate your financial status 4. Develop and present financial planning recommendations and alternatives 5. Implement the financial planning recommendations 6. Monitor the financial planning recommendation

1. Establish and define the client-planner relationship The financial planner should clearly explain and document the services that he or she will provide to you and define both his/her and your responsibilities during the financial planning engagement. The financial planner should explain fully how he or she will be paid and by whom. You and the planner should agree on how long the professional relationship should last and how long the professional relationship should last and how decisions will be made. 2. Gather client data, including goals. The financial planner should ask for information about your financial situation. You and the planner mutually define your personal and financial goals, understand your time frame for results and discuss, if relevant how you feel about risk. The financial planner should gather all the necessary documents before giving you the advice you need. 3. Analyse and evaluate your financial status. The financial planner should analyse your information to assess your current situation and determine what you must do to meet your goals. Depending on what services you have asked for, this could include analysing your assets, liabilities and cash flow, current insurance coverage, investments or tax strategies.

4. Develop and present financial planning recommendations and/or alternatives. The financial planner should offer financial planning recommendations that address your goals, based on the information you provide. The planner should go over the recommendations with you to help you understand them so that you can make informed decisions. The planner should also listen to your concerns and revise the recommendations as appropriate. 5. Implement the financial planning recommendations You and the financial planner should agree on how the recommendations will be carried out. The planner may carry out the recommendations or serve as your coach, coordinating the process with you and other professionals such as attorneys, accountants or stockbrokers. 6. Monitor the financial planning recommendations You and the financial planner should agree on who will monitor your progress towards your goals. If the planner is in charge of the process, he or she should report to you periodically to review your situation and adjust the recommendations, if needed, as your life changes.

Analysis
Now if we look at the spending pattern of the subjects interviewed we get to see that person who is below the age 27 has erratic spending pattern and mainly uses credit cards. This increases more of liability. So financial planning for each age group is different. Where as a person who is in the age group of 24 to 27 has fewer dependents on them, so has better scope of saving.
No of Dependents RAHUL KASHYAP ashish singh Jugantu kalita Anup sarkar Debandu seal Nikhil kumar ankur verma depak poddar praveen kumar Tariq Alam 3 3 2 1 1 1 2 3 2 0 Savings 20-25 20-25 <20% <20% 20-25 20-25 20-25 30 20-25 20-25 Type of Savings save every month save every month No Savings No Savings Planned Savings Save after Expenses Planned Savings save every month save every month Save after Expenses

Spending Pattern

Expenses
Other Expenses 10% Household 15% Medical 5%

Savings 20%

Entertainment 20% Loans/EMI 30%

From the above chart we can get an idea of the expenditure pattern of the subjects whom we have surveyed. Now if we concentrate on the saving pattern from the above diagram we get the chart which is depicted below. Type of Savings

Investment Pattern
3.5 3 2.5 2 1.5 1 0.5 0 Mutual Fund 27-30 24-27 21-24 3 1 1 Fixed Deposits 1 0 0 Equity 0 1 0 Others 1 1 1

Investment Priority
6 5 4 3 2 1 0 27-30 Ensuring Comfortable life Buy a House Achieve growth in investments Reduce Income-tax 5 1 4 3 24-27 2 3 3 3 21-24 0 2 1 2

Persons in age group of 24-30 of the persons surveyed have shown concern about retirement. Whereas none of them under the age of 24 are concerned. Similarly who are in the age group of 27-30 have already has houses so purchasing a property is least in their mind. 24-27 have immediate priority of purchasing a property. From the above tables we are able to draw a picture of how the surveyed individuals manage their cash.

Expenditure Pattern
Fixed Expenditure Surplus Variable Expenditure

35% 45%

20%

Financial Planning
So keeping the analysis in mind things to be kept in mind for the planning are 1> 2> 3> 4> 5> Retirement Plan Life Insurance Achieve Investments Reduce Taxes Provision for housing and Car loan.

As most of them are yet to properly invest in a proper scheme, we will go with one plan each 1> Retirement plans :The plans available are compared in the table below

Policy
Guaranteed Money Back Plan SL ProGrowth Super II New Endowment Plan New Jeevan Anand

Premium yearly On Maturity Life Cover

25k 6.4l 4L

25k 11.7l 2.5L

24.4 8.1l 8.1L 6.7l 6.7L

23.2 24k 8.4l 6L

From the above table we can see most retirement plans are providing a life cover as well. Depending on the needs a person can further go for more sum assured in the life cover but it will increase the premium rates. 2> Investment Purposes For investment purposes there are options where he/she can invest in equity M.F or F.D. Looking at M.F we have options like.

Edelweiss Tokio

Reliance life Insurance

HDFC Life pro Growth Plus

HDFC Life Super Income

India First smart Save Plan

LIC new Endowment Plan

LIC new jeevan Anand Plan

Premium in thousands per year Sum Assured

25.5 4.4lakhs 4.5lakhs

25

25 5.9lakhs

25 7.9lakhs Regular interval from 15yr to 25 yr 2.5lakhs

25 4.4lakhs

24.5 5.3lakhs

24.2 5.1lakhs

Pay back

Lump sum In 15 y

Regular interval from 11yr to 15 yr 4.4lakhs

Lump sum In 15 y

Lump sum In 15 y

Lump sum In 15 y

Lump sum In 15 y

Life Cover

4.4lakhs

2.5lakhs

3.5lakhs

5.1lakhs

3.5lakhs

Now comparing the Fixed deposit schemes and performance of stock markets we can safely assume that an investor should select fixed deposits or mutual funds as per their risk preferences. Stock markets since last 5 years have given an average return of 6% per annum where as M.F are supposed to grow at an average of 8% per annum. Fixed deposits are the safest options as they provide as they provide a steady interest of 9% P.A. But fixed deposits mean that the funds are locked in for a long period of time. Mutual funds are a better options for a person who has just started his professional career. A> As there is a fixed sum to be paid annually and through a longer period of time. B> Plus a person who has just started working would not have the lump sum amount so that they can go for a fixed deposits. C> Mutual Funds provide Life cover as well D> Tax saving is covered by M.F under the sections of 80c &80CC.

Recommendations
1> Interviewed population has got high component of variable expenditure to the extent of 45% of their annual expenditure. If some part of this could be curtailed, savings would increase. 2> As there is no particular set of goals (in terms of higher education or marriage) is stated no plan of action has been suggested. But it is strongly recommended that some amount should be invested in short term deposits. 3> As all the plans suggested are for a term of 11 years to 15 years with only one exception of 27 years. It is strongly suggested that the matured amount should be reinvested. 4> Medical expenditure is total of 5% of the annual expenditure. Most of the companies give a medical cover to their employees. So it is recommended to increase the coverage to cover dependents 5> Maintain a contingency fund in terms of savings account. Where one month salary should be there at all time. This would go a long way in solving liquidity problem in case of exigency.

QUESTIONNAIRE NAMEGENDERADDRESSQ1. WHAT IS YOUR AGE GROUP? 20-23 24-27 27-30 30 & above Q2. WHAT IS YOUR ANNUAL SALARY PACK? 250000-350000 350000-450000 450000-550000 550000-650000 650000 Above _____________(Please Specify) Q3. HAVE YOU TAKEN ANY EDUCATION LOAN? YES (-------------------PLEASE STATE THE AMOUNT) NO Q4. NUMBER OF DEPENDENT. 1 2 3 4 More Specify Q5. PROFILE OF DEPENDENTS. RELATIONSHIP AGE FATHER MOTHER BROTHER SISTER

a. b. c. d.

a. b. c. d. e.

Q6. ANY FINANACIAL ASSET OWNED? a. FIXED DEPOSIT b. BOND c. EQUITY

d. MUTUAL FUND e. OTHERS Q7. WHAT ARE MY FINANCIAL OBJECTIVE IN NEXT 20 YEARS PLEASE INDICATE PRIORITY FROM 1 TO 5, 1 BEING LOWEST, 5 BEING HIGHEST Ensure a comfortable Retirement Provide for childs/childrens Education costs Buy a House Provide Marriage Buy a Car for child/rens 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5

Achieve growth in investments Protect income in the event of death/disability Reduce Housing/Other Loans Reduce Credit Card liability and other Personal Expenses Ensure Assets are passed on smoothly to dependents Reduce Income-tax

a. b. c. d. e.

Q8. WHO DO YOU CONSULT WHILE TAKING FINANCIAL DECESION? ON MY OWN MY PARENTS/ FAMILY MY FRIENDS MY RELATIVE OTHERS( PLEASE SPECIFY-------------------------) Q9. WHAT PERCENTAGE OF MONTHLY SALARY DO YOU SAVE? LESS THAN 20% 20% TO 25% 26% TO 30% 31% TO 35% ABOVE 35%

a. b. c. d. e.

Q10. How do you save from your regular income?

a) Save as per planned schedule b) Save something every month c) Save whatever is left after meeting expenses d) Do not save regularly as expenses generally exceed income

Q11. How do you spend?

a) I have a definite spending pattern for regular monthly expenses b) I carefully plan my big purchases in advance c) I do not spend in a planned manner

Q12. My mode of spending is:

a) Always in cash b) Cash as well as credit card c) Mostly on credit card

Q13. I like to invest in instruments which _____________.

a) offer fixed guaranteed return b) offer slightly higher returns and largely protect capital c) offer substantially higher returns while there is risk of capital erosion

Q14. What percentage of your monthly salary is used to repay loans?

a) Nil b) Less than 20% c) Between 20% - 35% d) Between 35% - 50% e) Over 50% Q15. While taking Life Insurance policy, my objective is to ____________.

a) get at least the premium amount back if I survive the Plan period b) get some return on the premium if I survive the Plan period c) get market linked return on the amount of premium and some life cover or pension d) cover pure risk without any consideration of return (even of premium paid)

Q16. Up to what age would you like to work?

a) Upto 45 b) Upto 50 c) Upto 55 d) Upto 60 e) Upto 65 Q17. How do you approach Tax Planning during the year?

a) Estimate all income during the year, plan investments availing maximum tax benefits

b) Plan tax saving towards the end of the Financial Year c) Do not actively plan and meet most of my tax liability from the last few months salary d) Take the help of an expert like Chartered Accountant (CA)

Q18. Do you fully utilize Income Tax benefits, e.g. deductions from salary/income, rebates, etc.?

a) Yes b) No

Q19. When making various investments, which of the following parameters you focus on? a) Gross returns b) After tax returns c) After tax returns minus inflation for the period Q20.I am aware of the following (please select as many as applicable in your case):

a) Interest on my Savings Bank A/c. and Fixed Deposit A/c. are added to my total income and taxed accordingly b) Dividends on my equity shares are tax free in my hand c) Income in the form of dividends received from Mutual Fund units is tax free in my hand d) Short term Capital Gains on income funds, bonds, Gold ETFs (less than a year from investment) are are added to my total income and taxed accordingly e) Short term Capital Gains on equity and equity mutual fund schemes are payable at a lower rate of 15%

Q NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Ensure a comfortable Retirement Provide for childs/children s Education costs Buy a House Provide for child/rens Marriage Buy a Car Achieve growth in investments Protect income in the event of death/disability Reduce Housing/Other Loans Reduce Credit Card liability and other Personal Expenses Ensure Assets are passed on smoothly to dependents

RAHUL KASHYAP ashish singh Jugantu kalita anup sarkar debandu seal nikhil kumar ankur verma depak poddar M m M m m m m m RESPONSE RESPONSE RESPONSE RESPONSE RESPONSE RESPONSE RESPONSE RESPONSE 27-30 27-30 24-27 27-30 27-30 27-30 20-23 27-30 450000-550000 650000 Above 450000-550000 350000-450000 350000-450000 650000 Above 450000-550000 650000 Above YES no no no yes no no no 4 3 3 4 3 2 3 2 55,47, 22,27 58,54 no no 55 49 49 no no Others MUTUAL FUND Others Others Fixed Deposits MUTUAL FUND MUTUAL FUND MUTUAL FUND d 20-25 b b a b c c c a a c a b 20-25 c a c b b c c c a a a c <20% a c b b a b b c a b a c <20% b c a b a c d c a a c a 20-25 d a b a a b d c a a a a 20-25 a a a b a b c b a a b a 20-25 a b b b a b d a a c b a 30 b b b a a b c c a a c

praveen kumar Tariq Alam m m RESPONSE RESPONSE 24-27 24-27 350000-450000 350000-450000 no no 1 3 56 48 Fixed Deposits MUTUAL FUND d 20-25 b c c c a b d b a b e d 20-25 a a b c a b b c a b a

5 5

4 4

5 5

4 3

3 4

4 4

4 4

4 5

4 3

5 4

3 5

3 5

4 4

3 4

5 Reduce Income-tax Protect Income/Assets from Inflation 5

5 4

4 4

5 4

4 4

4 4

4 3

4 4

4 5

4 4