Investment Planning for Executives

An initiative of SEBI & NISM

Need for financial education

Deterioration

of personal finances Proliferation of new and complex financial products

Agenda
Introduction to financial planning Basics of savings and investments Choosing the right investment options Asset allocation strategy Self portrait Savings and investment related products Protection related products Borrowing related products

Retirement planning Planning finances to become an entrepreneur Understanding Ponzi schemes Tax saving options Purchasing financial products Advantages of financial education Investor protection and grievances redressal mechanism

Financial planning

Basics of Savings and Investment

Savings
Short term Value remains stable Lower returns over long term

Investing
Long term Value moves up and down in short term Potentially higher returns over long term

Price of procrastination
Twin

brothers: Anil and Sunil Anil saved from the age 25 years till 35 years. He did not withdraw till 60 Sunil started saving at 35 years, but continued till 60 years Both saved Rs. 50,000 per year and earned 10% p.a. on their investments

Price of procrastination
Twin

brothers: Anil and Sunil Amount accumulated at 60 years

Rs. 86 lacs

Rs. 49 lacs

Ask yourself
Can

you reduce your spending by

10%
Put

that money to work to fund your future financial goals

BUDGETING

 Benefits

of budgeting

Checks or balances to prevent overspending Unexpected need for funds Discipline Helps maintain standard of living

 Steps

for budget planning

Calculate your income Determine your bill for essentials Note down your total debts Determine your bill for non-essentials Calculate your savings

WHAT IS INFLATION?

Effects of Inflation
Item
Sugar (1 kg) Cooking oil (5 liters) Rice (1 kg) Petrol ( 1 liter)

Price in 2001-02 Rs. 16 Rs. 290 Rs. 14 Rs. 33.46

Price in 2009-10 Rs. 40 Rs. 500 Rs. 35 Rs. 48.83

Inflation Effects on Investments

Initial investment Interest on investment Value after a year Inflation Your expenses after a year Investment Rs. 1,000 5% p.a. Rs. 1,050 6% p.a. Rs. 1,060

RISK AND RETURN

Risk and Return

Risk

and investing go hand in hand Risk increases as the expected potential return increases No-risk, whats that? Manage the risks

Time Value of Money

The value of the money today is not the same as it will be in the future

 Year
1 2 3

The eighth wonder compounding

Simple interest @ 10% p.a. 1,10,000.00 1,20,000.00 1,30,000.00

Rs.1 lac invested @ 10%

Compound interest @ 10% p.a. 1,10,000.00 1,21,000.00 1,33,100.00

4
5 20 25

1,40,000.00
1,50,000.00 3,00,000.00 3,50,000.00

1,46,410.00
1,61,051.00 6,72,749.99 10,83,470.59

30

4,00,000.00

17,44,940.23

THE RULE OF 72

CHOOSING THE RIGHT INVESTMENT OPTIONS

Safety

Liquidity

Returns

ASSET ALLOCATION STRATEGY

Risk tolerance

Time frame

Personal circumstances

Asset allocation

Self portrait
Financial goals

Liabilities

Assets

Asset allocation

Estimated future income

Estimated future expenses

THE PRODUCTS

Savings & investment related products

Bank deposits Government schemes Bonds / debentures Company fixed deposits Mutual funds Equity shares

Depository system

Protection Related Products

Insurance
Life insurance
Term life insurance Endowment policies Annuities / Pension plans ULIPs Comprehensive health insurance Hospitalisation policy Critical illness plan Specific condition coverage

Health insurance

Borrowing Related Products

Personal

loans Home loans Reverse mortgage Loan against securities Credit card debt

Steps to avoid excess debt

Set debt limits Shop carefully for debts Dont give into temptation Automatically have money go towards your bills

Retirement Planning
Start

early and retire peacefully Plan wisely Track and review your plan Dont dip into your retirement savings

Investment needed to create retirement fund

Finances for entrepreneurs

Understand

financial needs of self and business Save money in job before jumping in self employment Borrow from close relatives/ friends on strict business terms, if required Start groundwork while still in job Apply for loans from organisations designed to fund SMEs

Understanding Ponzi schemes

Ponzi

schemes promise high returns and low risk Initial investors may get high promised returns Money from initial investors is given to new investors thus it is only rotation of funds, not investment of funds If its too good to be true its probably not true. Its a Ponzi!

Tax Saving Options

Section 80C gives rebate upto Rs. 1,00,000 for select investments like life insurance premiums, housing loan principal, PPF, ELSS, etc. Long Term Capital Gains are not taxable for equities 80D (medical insurance), 80G (donations) and 24D (Housing loan interest repayment) are other important sections

Investment philosophies

Evaluate risk of every investment Decide the investment based on needs Do not invest in any scheme that you do not understand Do not invest on trust. Have everything backed up by documents Take into account tax implication of every income Do not blindly follow market tips and rumours Anything that appears unnaturally high or low will have some catch disguised Do not follow schemes where you may protect the interest but lose the principal Invest with knowledge after understanding the product well

PURCHASING FINANCIAL PRODUCTS

Selection of intermediary

Registration with regulator or a body approved by regulator, e.g. AMFI or stock exchange

Steps to become securities market investor

Know Your Client (KYC) form and documents PAN Card Personal identification proof Address proof Demat accounts & trading accounts required for equity investing For investing in MF, demat is optional

Advantages of Financial Education Helps build a secure financial future

Prepared for financial emergencies Protection from marketing gimmicks Feeling a sense of accomplishment Disciplined approach to money Awareness of questionable practices

Setting a good example for your family

Benefit other aspects of your life

Regulators

Various regulators in Indian financal markets are:

Securities & Exchange Board of India (SEBI) Reserve Bank of India (RBI) Forward Markets Commission (FMC) Insurance Regulatory & Development Authority (IRDA) Ministry of Corporate Affairs (MCA) Ministry of Finance (MoF)

THANK YOU!