Financial Planning

What is Financial Planning?

Financial Planning is an exercise aimed at identifying all the financial needs of an individual and translating these needs into monetarily measurable goals at different times in the future. Financial Planning ensures that right amount of money is available in the right hands at the right time in the future to achieve an individual’s financial goals

Objectives Of Financial Planning

• Identifying the requirement for money for different purposes and prioritising them

• Converting these requirements into specific needs, in terms of money, and the time when it is required

• Taking stock of the investors’ current financial position to ascertain their net worth and net income / expenses

• Planning savings and investments in a manner that would enable the investors to achieve their pre-determined goals

• Optimising returns through adequate diversification in sync with the investors’ risk – return frame work

Why do we need Financial Planning?

To fund our future needs through right mix of investments

To protect our future from unforeseen contingencies

To maintain the same standard of living even after retirement

To enable risk management through diversification

To choose assets commensurate with the investors’ life and wealth stages

To beat the ravages of inflation

Inflation erodes the value of your money

5 10 15 20 25

55,839

41,727

31,18023,300

74,726

0

10000

20000

30000

40000

50000

60000

70000

80000

No of Years

Futu

re V

alue

The slide illustrates the value of Rs 1 Lakh at different stages assuming an average inflation rate of 6%

Can you do your own Financial Planning?

• Will your family be financially secure in the event of your unfortunate illness / demise?

• Will the stream of cash flows arising from your asset holdings be sufficient to match the expected liability structure?

• Are your finances inherently tax efficient?

• Have you made adequate provisions for your children’s education and marriage?

• Are you confident enough to enjoy your post-retirement life?

If your answer is NO to any one or all of the above questions, you need a specialist to handle your finances...

Asset Allocation Strategies

Conservative

50%

30%20% Equities

Bonds

Cash/MoneyMarket

Moderate10%

45%

45% Equities

Bonds

Cash/MoneyMarket

Aggressive

75%

10%15%

Equities

Bonds

Cash/MoneyMarket

Comparison Of Investment Options

HighModerateHighModerate to HighMutual Funds

LowHighModerateLow to HighReal Estate

ModerateModerateHighModerateGold

LowLow HighLow to ModerateLife Insurance

ModerateLowHighModeratePPF

HighLowHighLow to HighBank Deposits

ModerateModerateHighModerate to HighBonds

Low to highHighLowModerate to HighEquity

LiquidityVolatilitySafetyReturn

AgeAge

Inco

me

Inco

me

Savings / InvestingSavings / Investing

Kid 2Kid 2

Kid 2’s Kid 2’s CollegeCollege

Kid 2’s Kid 2’s MarriageMarriage

CarCar

HouseHouse

MarriageMarriage

Kid 1Kid 1

Kid 1’s Kid 1’s CollegeCollege

Kid 1’s Kid 1’s MarriageMarriage

Emergencies????Emergencies????

Birth and Birth and EducationEducation

0 2560Working LifeWorking Life 75 +Retired LifeRetired Life

????????

RetirementRetirement

Investment Life Cycle

Asset Allocation

In simple words, it means determining the percentage of the total investments to be made in equities, bonds and money market / cash instruments.

Empirical studies indicate that over 94% of the returns on a managed portfolio can be attributed to the right mix of asset allocation

Here we seek to address the basic questions of how, where and when to invest taking in to consideration the market conditions and the investors’ risk-return frame work

Wealth Creation Stage

Financial Goals

Planning to purchase a house in the next ten years

Creating long-term wealth for retirement / house

Aggressive Growth Portfolio

Cash10% Bonds

15%

Equity75%

Age – Up to 30 Years

Wealth Management Stage Financial GoalsFinancial Goals

Providing for children’s education (5 - 8 years)

Planning for children’s marriage (15 - 20 years)

Planning for retirement

Balanced PortfolioCash20%

Bonds30%

Equity50%

Age – 30 to 55 Years

Wealth Preservation Stage

Financial GoalsFinancial Goals

Making provisions for higher life expectancy, medical emergencies and financial independence

Age – 55 Years & Above

Conservative Portfolio

Bank Deposits

40%Equity20%

Bonds40%

Concept of Mutual Funds

Mutual Fund is an instrument where a number of investors contribute to form a common pool of money. This pool of money is invested in accordance with a pre-determined objective. The ownership of the fund is thus joint or “Mutual” and the fund belongs to all the investors in the same proportion as the amount of contribution made by each one of them

Why Mutual Funds? • Mutual Funds provide the services of experienced and skilled

professionals backed by a dedicated research team

• They enable efficient risk management by diversifying across a wide variety of sectors and companies

• They are less expensive vis-à-vis direct investment in equities as they seek to reap the benefits of economies of scale

• Performance and other investment details of individual schemes are disclosed on a regular basis

• Mutual funds facilitate investment of small amounts in a number of schemes to suit the investors’ risk - return framework

How Do Mutual Funds Work?

MF

Step 1 : Make investments

Step 5: Returns provided to investors

Investor community

Earnings to the Fund House/ Distributor

Step 4: Expenses deducted

from the returnsStep3: Assets provide returns

Step 2: Money is invested

Various Assets

Risk-Return-Time Horizon Scale

DEBT

BALANCED

EQUITY

SECTOR

Time

RETURN

RISK

Systematic Investment Plan (SIP)

The Smart Investors’ Preference

Why SIP?

The Formula For Creating Wealth

Start Early Invest Regularly Create Wealth

+

Myth : Timing is essential to generate high returns

Reality: It is the time and not the timing that matters

Is it worth the risk or the tension? Who can time the market to

perfection? Not even the experts can !!

It is the small drops that make an ocean!!

We earn regularly; We spend regularly

Shouldn’t we also invest regularly?

What Is Systematic Investing?

• It simply means investing ‘Fixed Amount’ every It simply means investing ‘Fixed Amount’ every monthmonth

• A method of investing regularly to benefit from the A method of investing regularly to benefit from the stock market volatilitystock market volatility

• The first step that may take you a long way towards The first step that may take you a long way towards achieving your financial goals and objectives…achieving your financial goals and objectives…

Why Should One Invest Systematically?

• To imbibe financial disciplineTo imbibe financial discipline

• To eliminate the need to time the marketsTo eliminate the need to time the markets

• To successfully achieve the financial goals To successfully achieve the financial goals and objectivesand objectives

• To harness the power of compounding by To harness the power of compounding by investing with a long term perspective investing with a long term perspective

Why Systematic Investment Plan?

4772.50500

205100

1010100

812.50100

520100

425100

Units boughtPurchase Price

Systematic Investing

5065500

520100

1010100

205100

1010100

520100

Units bought

Purchase Price

Systematic Investing

4480500

425100

520100

520100

1010100

205100

Units bought

Purchase Price

Systematic Investing

Rupee Cost Averaging Works

Fluctuating Markets Declining Markets Rising Markets

Avg NAV : Rs 13.00 (65/5)Avg. Unit Cost : Rs 10.00

(Rs 500/50)

Avg. NAV : Rs 14.50 (72.50/5)Avg. Unit Cost : Rs 10.64

(Rs 500/47)

Avg. NAV : Rs 16.00 (80/5)Avg. Unit Cost : Rs 11.36

(Rs 500/44)

Power Of Compounding

“ The most powerful force in the universe is the power of compounding “

-Albert Einstein

If you invest Rs 1000 for 50 years at 10% returns p.a., you would receive Rs 100 every year for 50 years. So WITHOUT any compounding you would have Rs 6000 (initial investment Rs 1000 + interest for 50 years Rs 5000) at the end of 50 years. However WITH compounding, the same Rs 1000 at 10% returns p.a. would mount up to Rs 1,17,391 at the end of 50 years

Power Of Compounding

33,42,53413,76,0854,42,8732,25,57815%

24,97,90111,50,1934,08,3482,15,38412%

20,72,35210,24,2253,87,1852,08,90910%

Value at the end of 15 yrs

Value at the end of 10 yrs

Value at the end of 5 yrs

Value at the end of 3 yrs

Rate of Return

Rs 5000 invested per month

Equity Markets & SIP

• Equity markets are synonymous with uncertainty and Equity markets are synonymous with uncertainty and volatility volatility

• The average investor invariably suffers from suchThe average investor invariably suffers from such market gyrationsmarket gyrations

• SIP - A strategy of not only preserving capital but SIP - A strategy of not only preserving capital but also translating into substantial creation of wealth also translating into substantial creation of wealth in long runin long run

“If you want to stay calm and sail smoothly in turbulent times GO FOR SIP”

Financial Planning Through Insurance “Insurance is not for the one who passes away, it is for those

who survive”

- Anonymous

Why do we need Insurance?

• To ensure adequate coverage and protection against the risks and uncertainties of life

• To ensure a decent standard of living to the dependants in the event of unexpected demise of the bread winner

• To provide a feeling of security and financial support during critical hours and periods of crisis in life

• Reduced mortality rates, increased life expectancy and rising medical and hospitalisation expenses

• Emergence of nuclear family system – reduced dependency on other family members

Life Insurance

Term Insurance

Endowment Plans

Unit Linked Insurance Plans

(ULIPs)

Insurance = Investment + Assurance

Term Insurance• Sum assured is payable only at the death of the policy holder

• Provides only risk cover with no savings elements

• Low Premium & High Coverage

Endowment Policy• In this policy the insured amount is payable at the end of specified

period or upon the death of the insured person whichever is earlier.

• Moderate Premium

• High Bonus

• High Liquidity

• Savings Oriented

Unit Linked Insurance Plans A policy, which provides for life insurance where the policy value at any time

varies according to the value of the underlying assets at the time. Investors can also take a SIP route of investment. ULIP distinguishes itself through the multiple benefits that it provides to the consumer. The plan is a one-stop solution providing:

• Investment and Savings• Life protection• Flexibility• Adjustable Life Cover• Tax benefit (as per Section 80C of Income Tax Act)• Transparency

• Options to take additional cover against - Death due to accident - Disability - Critical Illness - Surgeries

General Insurance

Health Insurance

Vehicle Insurance

Property Insurance

Insurance – Buy a policy, buy peace of mind

Need for Health Insurance• Reduced human mortality rates and increasing life spans due to

advancements in medical science

• Rising hospitalisation and medication expenses

• Compensates the loss of income to the family due to accident/disability to the earning member

Vehicle & Property Insurance • Covers the risk of loss/damage to your movable and immovable

assets

• Also provides adequate coverage to any financial liability arising from the risk of loss/damage to the life and property of third parties

Tax Planning With Mutual Funds

• The Equity Linked Savings Schemes (ELSS) are equity-oriented schemes that offer the twin benefits of tax savings and the potential to earn higher returns

• The traditional products such as post-office schemes and bonds do not offer high returns and are not tax efficient

• ELSS power packs both these benefits with a minimal lock-in period of three years

• Under section 80C of Income Tax Act, investment made in ELSS up to Rs 1lakh qualifies for deduction

• An investor can either make a lump sum investment or choose to take the SIP route to counter market volatility

SIP with Sundaram BNP

Tax Saver Period Total Inv.(Rs) Value*(Rs) % Return**

Last 1 Year 12,000 14,996 49.70

Last 2 Years 24,000 26,103 8.30

Last 3 Years 36,000 41,827 10.00

Last 5 Years 60,000 97,424 19.50

Since Inception*** 1,15,000 4,71,390 28.30

Illustration assuming Rs 1000 per month SIP

* As on 30/06/2009

** For growth option on a compounded annual basis *** Launched – November 1999

Personal Income Tax

Structure 2009-10 Total Income(Rs) Tax Rates

Upto 1,60,000 Nil

1,60,001 to 3,00,000 10%3,00,001 to 5,00,000 20%5,00,001 and Above 30%

Note :

• In case of resident women below age of 65 years, the basic exemption limit is Rs 1,90,000/-

• In the case of resident individual of the age of 65 years and above, the basic exemption limit is Rs 2,40,000/-

• The Finance Bill 2009 has abolished surcharge

• Education cess is applicable at 3% on income tax

Tax Slab 2009 - 10 Equity Oriented Schemes

Short Term Capital Gains Tax

Long Term Capital Gains Tax

Dividend Income

Dividend Distribution Tax

Resident Individual/HUF 15% Nil Tax Free Nil

Resident Partnership Firm /AOP/BOI 15% Nil Tax Free Nil

Domestic Companies 15% Nil Tax Free Nil

NRIs 15% Nil Tax Free Nil

Other Schemes

Short Term Capital Gains Tax

Long Term Capital

Gains Tax*Dividend Income

Dividend Distribution Tax - Other than

Liquid/Money market Schemes

Dividend Distribution Tax - Liquid/Money market Schemes

Resident Individual/HUF As per slab 10% Tax Free 14.16% 28.33%Resident Partnership Firm /AOP/BOI 30% 10% Tax Free 22.66% 28.33%

Domestic Companies 30% 10% Tax Free 22.66% 28.33%

NRIs As per slab 10% Tax Free 14.16% 28.33%

* The Finance Bill 2009 has abolished surcharge in case of Resident Individuals, HUF, Partnership Firms, AOP, BOI on the amount of income tax. For others including corporate bodies, 10% surcharge on tax payable

Secondary and Higher Education Cess: To be levied at the rate of 3% calculated on tax payable plus applicable surcharge

Bank FDs vs. Debt Funds

Investors in higher tax brackets are better off investing in debt funds as against bank FDs as debt funds are inherently more tax efficient

For example consider an investor in the highest tax bracket. Interest from his investment in bank FDs would attract the maximum marginal tax rate (inclusive of cess – 30.90%) applicable to him. If a one year bank FD fetches around 10%(pre-tax), his post-tax returns would be a meager 6.91%

As opposed to this, if he had invested in a short term debt fund (dividend option) which also delivers close to 10% average annualized returns (over 1 year period) and distributes it among the unit-holders in the form of dividends. The dividend income will be tax-free in his hands but the mutual fund will be paying a dividend distribution tax of 14.16% (which is indirectly borne by the investor). So he will be getting a net effective return of 8.58% p.a. which is much higher as compared to the post tax returns on FDs

However, if the investor invests in a debt fund with growth option, then the tax treatment becomes slightly different. For example, let’s assume he invests in an Bond Fund for two years. Appreciation in the NAV of a debt fund is treated as capital gains. Now, at the time of redemption, returns from debt funds are taxed as Long Term Capital Gains (LTCG) if invested for more than a year. Now, based on the option he chooses, LTCG is either taxed @ 11.33% without indexation or 22.66% with indexation. Both the options are certainly better than the tax treatment of FDs where he pays tax at the rate applicable to his marginal income

Moreover, just by investing for a little over 12 months in debt funds at the end of the financial year, one can reap double

indexation benefits thereby further reducing his/her tax liability Put simply, for similar pre-tax returns, debt funds provide better

post tax returns as compared to FDs. Moreover, no TDS is deducted by mutual funds in case of resident individuals

Golden Rules Of Investing

• Invest early, regularly and systematically for a longer period

• Ensure adequate liquidity for contingencies of life

• Ensure adequate diversification by investing across asset classes and time horizons

• Do not attempt to time the market. Patience is the key

• Be realistic in expectations of returns

• Balance investments in accordance with your risk-return framework

InflationRising Life Expectancy

Protection againstUncertainty

Balanced Asset Allocation

FinancialPlanning

Factors necessitating Financial Planning

Who are we?

SPRISM Investment Services Pvt Ltd

Mumbai

• Established in the year 2000. One of the leading distributors in South India

• Based in Bangalore with presence in Mumbai, Chennai, Hyderabad & Coimbatore

• Current Assets Under Management – Rs.5000 Cr

• Our range of products includes Mutual Funds, PMS, Insurance, Bonds, IPO and Fixed Deposits which will meet the needs of the investor at every step in life

Special Attributes • Clearly defined advisory models with a holistic approach

• Dedicated sales team for client servicing

• Seasoned professionals with rich experience in the financial service industry

• Offers portfolio tracking, customized reports, information alerts & event triggers

• A wide array of products to suit the customers’ risk – return framework

Value Added Services

SMS Alerts

Sprismatic – Tabloid & Newsletter

Weekly Portfolio Update

Monthly Portfolio Review

Client - Fund Manager Interface

Daily & Weekly Market reports

Monthly Market Report

Reports on Credit Risk Analysis

Standard Reports on Equity Schemes

Weekly Inflation Report

Adhoc Reports on request

Corporate Office: # 7/2, 1st Floor, Brunton Road, Bangalore-560025, Tel:080-25550129/30/31, 41503210/11/12/13.

Bangalore Sales Office: #21,Raja Glitz, 1st Floor, K.H.Road, Bangalore-560027, PCS – Tel: 080-66653100-125, Retail – Tel: 080-66653126-149.

Mumbai: #4, Khaitan Chambers, 2nd Floor, 143-145, Mody Street, Fort, Mumbai-400001, Tel: 022-40991111/12

Chennai: 5th Floor, Crown Court, #128, Cathedral Road, Chennai-600086, Tel: 044-28112861/62

Coimbatore: #42/19, Ahuja Towers, 3rd Floor, T.V. Swamy Road (west), R.S.Puram, Coimbatore-641002, Tel: 0422-4364440/41.

Hyderabad: #1-11-222/2, Street No-4, Gurumurthy Lane, Behind Levis Dockers Showroom, Begumpet, Hyderabad-500016, Tel: 040-40056555

SPRISM Network

Thank You..

www.sprisminvest.com