Financial Planning

S.B. Mainak Faculty Member National Insurance Academy

INSTRUMENTS OF FINANCIAL PRODUCTS

RBI BONDS GOVERNMENT AGENCIES BONDS SMALL SAVINGS INSTRUMENTS. PUBLIC SECTOR BONDS. BANK DEPOSITS. BONDS/DEBENTURES OF CORPORATE ENTITIES AND FINANCIAL INSTITUTIONS. MUTUAL FUNDS DEBT/EQUITY/HYBRID. EQUITY. LIFE INSURANCE. UNIT LINKED INSURANCE GOLD.

REAL ESTATE POSTAL SAVINGS SCHEMES ANNUITIES

RISK RETURN PROFILE

RBI bonds Government agencies bonds Small savings instruments Public sector bonds Bank deposits Bonds/debentures of corporate entities and financial institutions Mutual funds debt/equity/hybrid Equity Life insurance Low risk medium return Low risk medium return Low risk average return Relatively low risk avg.returns Low risk low returns Medium risk high returns Low to higher risk low to higher Highest risk highest return Lowest risk lower to high returns

Unit linked insurance Gold

Real estate Postal savings schemes Annuities

Low to high risk- average to high returns Medium risk average returns
Medium risk- average returns Low risk average return Low risk & Average return

FINANCIAL PLANNING
TRADE OF BETWEEN RISK AND RETURNS.

FINANCIAL POSITION OF THE INDIVIDUAL AND THE MILESTONES PLANNED FOR/OBLIGATIONS.

FUNDS MANAGEMENT

TAX PLANNING

Income from Salary

Salary includes a fixed payment made periodically by the employer to the employees. The salary income is taxable in the hands of employees. Salary includes salary received and salary in arrears and advanced salary. Salary includes perquisites as per section 17.

Perquisites
Perquisites are taxable in case of specific employees (Director). Salary of Director any benefits given to the Director Perquisites are taxable in case of all the employees

Perquisites which are not taxable

Cost of medical treatment in a hospital or reimbursement of medical treatment Reimbursement of medical expenses upto Rs. 15,000/- per year on medical treatment of self and his family. Health insurance premium / mediclaim Self promotion including publicity, gift, scholarship, club facility, use of health club and similar facilities, use of telephone, maintenance of accommodation in nature of guest house, conference expenses

Calculation of Gratuity under payment of Gratuity Act

a)Gratuity received b) Maximum limit Rs. 3, 50,000/c) Formula = last salary drawn x 15/26 x no. of completed years Salary includes basic + D.A. Gratuity = (a) (c) subject to maximum limit of Rs. 3, 50,000/-

Income from House Property

Reasonable Lettable Value (RLV)
a) Fair rent b) Municipal value c) Higher of a) and b) d) Standard rent e) Lower of c) and d) = RLV\ Reasonable Lettable Value (RLV) is called as Annual Value

Net Annual Value

Reasonable Lettable Value (RLV) (-) Municipal taxes = Net Annual Value

Calculation of House Property Income

Annual value (-) municipal tax = Net Annual Value (-) 30% of NAV as standard deduction under Sec. 24(a) (-) Interest on loan for property under sec. 24 (b) All equal to Net income from house Property

Self Occupied Property

Annual value Nil (-) Interests on property loan subject to maximum limit of Rs. 1,50,000/-

Capital Gain Tax

Formula for long term capital gain =
Sale proceed (-) Indexed cost of acquisition = Cost of acquisition x Cost Inflation Index (CII) of the year of transfer / sale (/) CII of the year of purchase Long Term Capital Gain

ULIP SCHEMES
Gilt Fund Schemes Bond Fund Schemes Balance Fund Schemes Risk fund or Growth Fund Scheme

Types of Investment
Money Market Instruments Bond Market Investment Equity Market Investment

CONVENTIONAL VERSUS ULIP

PRIMARILY LIFE INSURANCE.
LOWEST RISK -LOW TO HIGH RETURN. RISK OF INVESTMENT MANAGED BY INSURER. PREDICTABLE AND STABLE RETURNS.

LESS TRANSPARENT. INVESTMENT PATTERN STATUTORILY PRESCRIBED AND HENCE LESS FLEXIBLE.

IT IS BOTH LIFE INSURANCE PLUS INVESTMENT. LOW TO HIGH RISK- AVERAGE TO HIGH RETURNS. RISK OF INVESTMENT BORNE BY CUSTOMER. DEPENDING ON THE CHOICE OF FUND PREDICTABLE TO UNPREDICTABLE RETURNS. MORE TRANSPARENT. FLEXIBLE INVESTMENT PATTERN.

LOWER FLEXIBILITY TO HIGHLY FLEXIBLE FOR THE CUSTOMER TO WITHDRAW CUSTOMER FOR DURING THE TERM- PARTIAL WITHDRAWALS DURING THE SURRENDER, SWITCHING. TERM.

MUTUAL FUND VERSUS ULIP

ONLY INVESTMENT. LOW TO HIGHER RISK LOW TO HIGHER RETURNS. VIEWED GENERALLY FROM SHORT TERM TO MEDIUM TERM PERSPECTIVES. ONLY ELSS INVESTMENT QUALIFIES FOR TAX BENEFIT. SHORT TERM (HELD FOR LESS THAN 12 MONTHS) CAPITAL GAINS IS TAXABLE. INVESTMENT PLUS INSURANCE. LOW TO HIGH RISKAVERAGE TO HIGH RETURNS. VIEWED FROM MEDIUM TO LONG TERM PERSPECTIVES

ALL ULIPS QUALIFY FOR TAX INCENTIVE.

AMOUNT RECEVED ON DEATH IS NOT TAXABLE IRRESPECTIVE OF THE PERIOD OF HOLDING.

MUTUAL FUND VERSUS ULIP

LONG TERM CAPITAL GAINS UNDER EQUITY SCHEME IS NOT TAXABLE. AMOUNT RECEIVED ON MATURITY UNDER LINKED LIFE PRODUCTS AND COMMUTED VALUE RECEIVED UNDER PENSION PRODUCT IS ALSO NOT TAXABLE. UNDER THE LINKED PENSION PRODUCT ANNUITY RECEIVED ON ACCUMULATED AMOUNT ON VESTING IS HOWEVER TAXABLE.

LONG TERM CAPITAL GAINS UNDER DEBT SCHEME IS TAXABLE AT LOWER RATE. INDEXATION BENEFIT IS AVAILABLE.

What are the Fees charged from ULIP Premium. 1. Administration Fees 2. Risk and Accident Benefit Premium. 3. Recoveries of Direct Expenses, Commission, Service Tax. 4. Fund Management Fees 5. Switching Fees 6. Surrender Fees List is illustrative Not Exhaustive.

Various Money Market Instruments

Call Money / Notice Call Money Collatarised borrowing and Lending (CBLO) REPO Term Money Treasury Bills Commercial papers Certificate of Deposits Bills Rediscounting Inter bank participation certificates MIBOR linked investments Money market mutual fund schemes

BRIEF DESCRIPTION OF MONEY MARKET INSTRUMENTS

CALL MONEY/ NOTICE MONEY: It is the amount borrowed or lent on demand for a very short period. Normally one day. If the period is more than one day up to 30 days it is called as Notice money. It is an unsecured form of lending. It helps the banks to even out their day to days deficit/ surpluses of money.

CALL MONEY MARKET

Players in the market: 1. All commercial banks , Co-op banks and Primary dealers are allowed to borrow and lent in the market. 2. Specified All India FI, Mutual funds, Insurance Companies and certain specified entities are allowed only to lend.

Repo Market
Agreement to repurchase the same security after a certain period at a predetermined price which is higher than sale price Salient Features Period Not exceeding 14 days Collateral securities Treasury Bills, Institutional Bonds and G. secs. SGL A/c and current A/c with RBI Repo reported in NSE WDM segment

COMMERCIAL PAPER
CP is a short term unsecured promissory note with fixed maturity issued by well rated Corporates to fund their working Capital requirement. It is a discounted instrument. Maturity period of 15 days to 1 year. Interest on CP is determined by market forces. Certain guidelines of RBI needs to be fulfilled for issuance of CP.

MONEY MARKET MUTUAL FUNDS

These mutual fund invest the money in liquid instruments as specified in the offer document. The investor can withdraw money at any time on notice. Yield is attractive and better than Call money. NAV market determined.

COMPONENTS OF DEBT MARKETS

Debt Market Govt. Securities Central Govt. Securities State Govt. Securities

Bonds issued by Govt. Agencies

Electricity boards

Bond & Debentures

Issued by PSU
Issued by Financial Institution

Municipalities
Irrigation Authorities
State Road Transport Corporation National Highway Authority

Issued by Corporates

GOVT. SECURITIES
Features: Fixed or Floating coupon payable semi annually. Zero coupon also issued Bullet Repayment Risk free investment- no default risk Subject to interest risk/ price risk.

GOVT. SECURITIES

Primary Market- Issuance Techniques: ---Auction: Price/ Yield Based ---- Private Placement with RBI --- On tap issue --- Conversion of Adhoc T- Bills/Special Securities into Dated securities

GOVT. SECURITIES
Secondary Market:
Trading by Participants Open Market Operation By RBI

Some Statistics on Debt Market

Outstanding Govt. Debt
Rs. In Crore

Central Govt. Deb.

State Govt. Debt Total

1306201
270726 1576927

* Corporate Bonds Market 3,50,000

BONDS & DEBENTURES

Issued By: Govt. Agencies PSU(Taxable & Non Taxable) Public Financial Institutions Private Corporate Sector

EQUITY INVESTMENTS
Equity Investment would provide superior returns in the longer term. Equity is high risk high return investment. Equity Research allows the fund manager to take informed decisions.

EQUITY MARKET
Total 5600 listed companies Market Capitalisation of Rs. 6000000cr (approx.) Sensex touched all time high of 21235 & low of 7,660 during the year 2008. FII investment about 80000 CR till 31st December 2007 and Rs. (-) 65000 cr till 31.12.2008 and Rs. 72000 cr during 2009

OUTLOOK FOR EQUITY MARKETS

Factors Affecting the Equity Markets: Positive impact Improved corporate earnings Consistent Growth in GDP Stable Government Negative impact Global slowdown in growth Tightening in credit and equity market following subprime crises in US Moved towards deflation

ECONOMY AT A GLANCE
FY08

FY06 FY07
REAL GDP (% CHG) 9.0 9.3 9.0

FY 09
5.8

AGRICULTURE(% CHG)
INDUSTRIAL PRODUCTION (%CHG)

-3.6
8.4 10

6
8.2 11

4.5
9.0 11.5

2.6
5.0 10.5

SERVICE SECTOR (%CHG)

GDP-Sectoral Trends
Q1 Agriculture & allied activities Agriculture 3.2 3 Q2 2.8 2.7
Q3 Q4

-0.4 -0.8

2.6 2.7

Mining Industry Manufacture

Electricity, Gas & Water Supply Construction

4.6 6.1 5.5

2.7 8.4

3.7 6.3 5.1

3.8 9.6

4.9 2.1 0.9

3.5 4.2

1.6 1.4 -1.4

3.6 6.8

Services Trade, hotels, transport & comm Finance, insurance, realty Community, social & persnl.serv. GDP at factor cost

10.2 13 6.9 8.2 7.8

9.8 12.1 6.4 9 7.7

10.2 5.9 8.3 22.5 5.8

8.6 6.3 9.5 12.5 5.8

ECONOMY AT A GLANCE(Contd)
INFLATION (%) EXPORTS (%CHG) IMPORTS (%CHG) FDI INFLOWS ($BLN) FII INFLOWS ($BLN) FOREIGN EXCHANGE RESERVE($BLN) FY06 FY07 FY08 6.4 5.4 7.4 30.7 23 25 26.1 23.5 26 5.9 4.7 12 9.3 12.5 75 135.5 145.2 282

GDP GROWTH (% CHANGE)

Country
USA

Latest
- 2.6

2009 (E)
- 2.9

2010 (F)
1.4

Japan Britain
Euro Area Germany Brazil China India

- 9.7 - 4.1
- 4.6 - 6.9 1.3 6.1 5.3

- 6.4 - 3.7
- 3.7 - 5.2 - 1.5 6.5 6.0

0.6 0.3
0.3 0.3 2.7 7.3 7.4

Source : The Economist , World Bank , BIS

INDIAS EXPORTS
Year Value ($bn.) Growth (%) 2001-02 43.82 - 1.66 2002-03 52.71 20.28 2003-04 63.84 21.11 2004-05 83.53 30.84 2005-06 103.09 23.30 2006-07 126.26 22.47 2007-08 163.12 28.35 2008-09 168.70 3.4 Source : RBI and Commerce Ministry

FISCAL INDICATORS
2003-04 2008-9=09

Revenue Deficit* Fiscal Deficit*

Budget Revenue Budget Revenue Estimate Estimate Estimate Estimate 4.10% 3.60 1.00 4.40
5.60% 4.80 2.50 6.00

Primary Deficit*
Subsidies**

1.10%
44,907

0.30
44,323 3,62,074

- 1.10
71,431 6,58,119

2.50
1,29,243 8,03,446

Revenue 3,66,227 Expenditure** *% to GDP **Rs. Crore

STOCK EXCHANGE
1. Bombay Stock Exchange (BSE)
a) Daily average turn over of Rs 10000 cr b) Sensex stocks contribute around 30% of market capitalisation c) Sensex consisting of 30 stocks from 17 sectors d) The index is calculated online at every 15 seconds

STOCK EXCHANGE
2. National Stock Exchange (NSE)
a) Daily average turn over Rs 20000 cr b) Nifty stocks contribute around 40% of market capitalisation c) Nifty consisting of 50 stocks from 22 sectors d)The index is calculated online at every 15 seconds

Trading strategy
Long term purchase Short term purchase Intraday trading International trading

Category of Stocks
SENSEX NIFTY A Group(BSE 200) B1 stocks B2 stocks T stocks Trade to trade stock S stocks

Contd.,
BSE-500 CNX 500 Sectoral indices Mid cap Small cap Illiquid stocks Unlisted stocks

Market Operation
Regular trading in cash market Regular trading in derivative market
Futures Options (Call and put)

Inflow of Money
Bill discounting and rediscounting Participatory Notes (P notes) Stock mortgage Stock lending

Positively Performing Stock

Stocks Maruti Sterlite M&M
Hero Honda

SAIL GRASIM RIL NALCO ACC

01/01/09 525 278 279 800 78

1223 1240 190 480

31/03/09 766 374 385 1085 103

1607 1548 239 580

% change 30/9/2009 46% 1642 42% 740 38% 864 36% 1675 32% 168
31% 25% 25% 21% 2775 2166 347 814

Positively Performing Stock

Stocks CIPLA Tata Motr ONGC
Infosys

TCS GAIL Powergrid BHEL CAIRN Sensex Nifty

01/01/09 183 158 675 1125 485 208 83 1372 175 9720 2963

31/03/09 219 189 808 1346 575 240 95 1551 194 10048 3108

% change 20% 20% 20% 20% 18% 18% 15% 13% 11% 3.50% 4.90%

30/09/09 280 590 1186 2287 613 361 110 2272 261 16852 5006

Negatively Performing Stock

Stocks DLF Ranbaxy Rel Capitl
Suzlon

01/01/09 284 253 545

63 140 228 534 455 1294

31/03/09 182 164 371

45 106 183 441 385 1125

% change (-)36.00 (-)35.18 (-)31.80

(-)28.00 (-)24.30 (-)19.40 (-)17.65 (-)15.40 (-)13.08

30/09/09 426 417 906

96 299 782 858 2090

Zee Rel Comm PNB ICICI Bnk SBI

Negatively Performing Stock

Stocks HCL Tech L&T Siemens
Unitech

01/01/09 117 777 290

41 720

31/03/09 105 680 250

36 622

% change (-)11.00 (-)12.50 (-)13.80

(-)12.12 (-)13.62

30/09/09 322 1647 551

107 419

Bharti Airtel

Neutral Stock
Stocks Rel Petro ITC Wipro 01/01/09 88 172 236 HDFC 1495 Hindalco 5.2 Tata power 751 Tata steel 218 Ambuja C 7050 Sun pharm 1070 NTPC 182 Idea 52.75 31/03/09 96 186 253 1590 55 781 223 71.50 1080 182 52.45 % change 8.60 8.20 7.20 6.28 5.76 4.10 2.33 1.42 0.93 30/09/09 234 582 2764 126 1307 504 99 1390 212 76

Neutral Stock
Stocks
HDFC Bnk

Rel Infra HLL

BPCL

ABB
Rel Power

01/01/09 1007 585 251 377 456 120

31/03/09 996 567 240 365 420 110

% change -1.00 -3.08 -4.44 -3.45 -8.00 -8.35

30/09/09 1609 1204 262 567 776 167