Financial Planning for Young Investors

An initiative of SEBI & NISM

Need for financial education
 Deterioration of personal finances
 Proliferation of new and complex
financial products
Agenda
 Introduction
 Financial planning
 SMART goals
 How to achieve your goals
 Risk v/s return
 The power of compounding
 Inflation effects on
investments
 Savings v/s investments
 Loans v/s investments
 Savings and investment
related products
 Protection related products
 Borrowing related products
 Investment strategies
 How not to lose money
 How to begin investing
 Advantages of financial
education
 Investor protection and
grievances
WHAT IS FINANCIAL
PLANNING?
 The financial planning process
Gather financial data

Identify goals and risk appetite

Identify gaps

Prepare a plan to bridge the gaps

Implement the plan

Review periodically
Gathering financial data
 What is the source of income and what
is its nature
◦ Monthly Salary
◦ Business Income
 How much are your monthly expenses
Exercise
Identify Goals

Your goals

Short Medium
Long term
term term
Identify gaps or issues
 Are there any expenses which have to
be met on a priority, due to which plan
may have to be changed
 Are there any liabilities which are
already existing or worse still, may crop
up suddenly?
Prepare the financial plan

Financial
goals

Risk
taking
ability
 Expenditure Assets

Income Liabilities
Risk
taking
ability
SMART GOALS
Objectives Incorrect approach Correct approach

Specific I need money to pay I will save Rs. 50,000 to pay my

my college fees college fees in a year’s time
Measurable I will pay off my debts In the next six months, I will
return Rs. 3,000 I owe to my
friends
Attainable I will save money I will save Rs. 2000 every month
by cutting down on eating out and
partying
Realistic If I save money, I will If I save regularly, need not borrow
be rich more money, I can pay off my
debts by next year and will have
enough savings till I begin to earn

Time-bound I will save money for I will save Rs. 10000 a year for the
my vehicle next 2 years for my vehicle
How to achieve goals
 Arrange goals in order of their time to
reach (short term, followed by medium
term and lastly long term)
 Plan investments for each goal.
Implementing the plan, the real challenge
RISK AND RETURN
Risk and Return
 Risk and investing go hand in hand
 Risk increases as the expected potential
return increases
 No-risk, what’s that?
 Manage the risks
 Risk v/s returns
Risk category Instruments

Low risk Cash, bank FD

Medium risk Debentures, bonds, fixed

income mutual funds
High risk Equity shares, equity mutual
funds
The power of compounding
 The eighth wonder - compounding
 Rs.1 lac invested @ 10%
Year Simple interest Compound interest
@ 10% p.a. @ 10% p.a.
1 1,10,000.00 1,10,000.00
2 1,20,000.00 1,21,000.00
3 1,30,000.00 1,33,100.00
4 1,40,000.00 1,46,410.00
5 1,50,000.00 1,61,051.00
20 3,00,000.00 6,72,749.99
25 3,50,000.00 10,83,470.59
30 4,00,000.00 17,44,940.23
THE RULE OF 72
WHAT IS INFLATION?
 Effects of Inflation
Item Price in Price in
2001-02 2009-10
Sugar (1 kg) Rs. 16 Rs. 40
Cooking oil (5 liters) Rs. 290 Rs. 500
Rice (1 kg) Rs. 14 Rs. 35
Petrol ( 1 liter) Rs. 33.46 Rs. 48.83
Basics of Savings and Investment
 Savings  Investing
◦ Short term ◦ Long term
◦ Value remains stable ◦ Value moves up and
◦ Lower returns over down in short term
long 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
CHOOSING THE RIGHT
INVESTMENT OPTIONS
 Safety

Liquidity Returns
Loans v/s Investments
 Before you borrow:
◦ Financial strength
◦ Credit card debt and personal loans
◦ Low interest rates
◦ Tax benefits
◦ Loan for investments
THE PRODUCTS
Savings & investment related products
 Bank deposits
 Small savings 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
◦ Health insurance
 Comprehensive health insurance
 Hospitalisation policy
 Critical illness plan
 Specific condition coverage
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
◦ Don’t give into temptation
◦ Automatically have money go towards your
bills
How not to lose money
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. It’s a Ponzi!
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)
◦ Insurance Regulatory & Development
Authority (IRDA)
◦ Ministry of Corporate Affairs (MCA)
◦ Ministry of Finance (MoF)
THANK YOU!