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Personal Financial Planning

Personal Financial Planning

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Personal Financial Planning

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  1. Personal Financial Planning Kamlesh H Bhatt Insurance Magician

  2. Personal Financial PlanningWHAT? • Systematic approach for Attainment of Financial Goals of an individual • Not only for rich • Not only for old & retired • It is for all those who wish to create and protect Wealth.

  3. Personal Financial PlanningWHY? • Increased life expectancy • Increasing Cost of Services • medical expenses • Education • Declining job certainty • Absence of social security system • Disintegration of joint families • Multiplicity of financial products • Tax Structure • Inflation

  4. Personal Financial PlanningHOW? PRESENT FINANCIAL POSITION ( Income + Assets(F&NF)-Liabilities) GAP FUTURE FINANCIAL GOALS

  5. BRIDGE GAP With Areas of Financial Planning • Tax Planning How to minimize taxes in a legal way ( HUF/MWPA) • Investment Planning Understanding of Investment options • Liability Planning Understanding of borrowing options • Insurance Planning Life and General • Retirement Planning Preparing for retirement • Estate Planning After Life

  6. Personal Financial PlanningHOW? Financial Planning is not a onetime Process Define your financial Goals Evaluate financial health Develop a Plan of Action Implement Review, Reevaluate, Revise

  7. Financial Life Cycle

  8. Financial Life Cycle

  9. Financial Life Cycle Stage 1 – Wealth Accumulation Stage 2 Stage 3 The Retirement Years Approaching Retirement Tax Planning Estate Planning Saving & Investment Insurance Planning Liability Planning Assets Acquisition Initial Goal Setting 20 30 40 50 60 70 80


  11. Savings & Investments • Incorporate saving into your plans • Not as residual • Start Early- • advantage of compounding compounding-Annuity.xls • Treat money from different sources alike • Risk & Return go together • Make investment automatic • To enforce discipline • Take advantage of tax incentives • Post tax return

  12. Diversification • Diversification helps to reduce risk • When the returns are negatively correlated • Avoid over-diversification • Portfolio may become unmanageable • Certain risks can’t be diversified • Systematic risk • Risk Profile • Attitude towards risk • One can assume more risk as investment time horizon lengthens • Risk reduces over time • There are more opportunities to make adjustments

  13. Asset Allocation • 100 minus your age

  14. Equities • Why Equities • Better Return • Diversification • Liquidity • Basic Requirements • Time • Training • Temperament

  15. Equities- Tax Aspects • Long Term Capital Gain on Securities covered by STT( 01.10.04) (Section 10(38)) • Equity • Transaction on a recognized Stock Exchange • Transaction is chargeable to STT • Short Terms Capital Gain on Equity Shares • Lower rate of tax (10% plus surcharge plus education cess) • Transactions on a recognized stock exchange • Subject to STT • Dividend on Equity Shares in tax free in the hands of Investors

  16. Mutual Fund

  17. Why Mutual Fund • Diversification • Reduction in risk with small investment • Professional Management • Training, Time, Temperament • Transaction Cost • Liquidity • Open ended or listed on the stock exchange • Varied Investment objectives • Risk-return profile of the investor • Convenience • Transparency • Tax benefits

  18. Classification of Mutual Fund Scheme • By Structure • By Objectives • By Other Schemes

  19. By Structure • 1.Open Ended Schemes: In this the scheme is open for subscription all through year • 2.Close Ended Scheme: In this the scheme is opened only during a specified period • 3.Interval Schemes: It combines the features of open and close ended funds.

  20. By Objectives • Growth Fund: It’s objective is to provide capital appreciation over the medium to long term. • Income Fund: It’s objective is to provide regular and steady income to investors. • Balanced Fund: It’s objective is to provide both growth and regular income to investors • Money Market Scheme: It’s objective is to provide easy liquidity, regular income to investor.

  21. By Other Schemes • Tax Saving Scheme: It’s objective is to offer tax rebates to investors under specific provisions of IT act. • Industry Specific Scheme: In this the money is invested only in industries specified in the offer document • Load schemes: In this commission is charged each time the investor buys or sells units • No Load Scheme: In this no commission is charged each time the investor buys or sells units

  22. Services • Investment Plans • Systematic Investment Plan (Automatic Investment) • Investment of a pre-determined amount every period by post dated cheques or direct debit to the designated account • Systematic Withdrawal Plan (SWP) • Investment made is withdrawn on pre-determined dates and denominations • Minimum investment/ encashment is mentioned in the scheme • Automatic Reinvestment Plan • Reinvestment of dividend instead or receiving in cash

  23. Income Tax Aspects • Deduction under Section 80C • ELSS/Infrastructure MF – Up to Rs.1,00,000 along with other qualifying investments • Dividend • Dividend is tax-exempt in the hands of the recipients • Dividend distribution tax – 12.5% plus surcharge plus education cess • No dividend distribution tax on equity oriented schemes

  24. Income Tax Aspects • Capital Gain = Sale Consideration – Cost of acquisition • Units held for more than 12 month are considered Long Term Assets • Lower tax rate • Indexation • Long Term Capital Gain • Equity oriented MF -50% invested in equity shares of domestic companies – Nil; Subject to STT • Others – 10% without indexation, 20% with indexation • Short Terms Capital Gain • Units of equity oriented mutual fund • 10% plus surcharge plus education cess; Subject to STT • Other at normal rate of tax

  25. Indexation • Indexed Cost of Acquisition and Indexed cost of improvement • Cost Inflation Index notified by the Central Government • Indexed Cost CII for the year of transfer CII for the year of acquisition/ Improvement Cost of acquisition/ Improvement X

  26. Capital Assets Financial Assets Non Financial Assets Period of Holding > 12 Months Period of Holding < 12 Months Period of Holding > 36 Months Period of Holding < 36 Months Short Term Capital Gain Long Term Capital Gain Short Term Capital Gain Long Term Capital Gain Equity/ Equity Oriented Mutual Funds Other Mutual Funds/ G Sec Equity/ Equity Oriented Mutual Funds Other Mutual Funds/ G Sec Exempt 20% with Indexation or 10% without indexation sec.112 10% sec. 111A Normal Rate of Tax 20% Normal Rate of Tax

  27. Tax Saving Schemes

  28. Tax Saving Schemes


  30. Managing Credit • Why Credit • Enjoy now pay later • To overcome large outlays that can not be postponed • Financial Emergencies • Convenience • Investment purposes • Improper Use of credit • Basic expenses • Impulse purchases • Delinquency • Understand the cost of credit

  31. Managing Credit • Don’t use revolving credit facility on the credit card • Personal loans are more expensive than vehicle loan/housing loan compounding-EMI.xls • Take tax benefits into account

  32. Tax Benefits • Housing Loan • Interest up to Rs.1,50,000 deductible from the Net Annual Value • Interest of pre-purchase/pre-construction period is deductible in five equal installments • Tax benefit under section 80 C – repayment of principal is eligible for rebate up to Rs.1,00,000 • Deduction under Section 80 E towards interest component in repayment of education loan • For his own higher education from approved institution • For a period of 8 years or till repaid whichever is earlier


  34. Life Insurance • Why Life Insurance • To protect your dependents from financial hardship in event of untimely death • As an Investment vehicle – protection of wealth • Who does not need life insurance • Single with no dependents • Children • Non-earning members of family • Retired with no dependents

  35. Calculating Insurance NeedHow much insurance you need? Two Approaches • Earnings Multiple Approach • Needs Approach • Earnings Multiple Approach • Life cover equivalent to a multiple of your gross annual income (5-15 times) • You want to replace a stream of annual income that is lost due to the death of the breadwinner • The longer you need to replace the income stream, greater the multiple • Higher the return you can earn on settlement the lower the multiple

  36. continued……… Needs Approach • Determine the need of the family after the death of the primary breadwinner • Assessing Needs • Immediate needs at the time of death • Debt elimination • Immediate Transitional funds • Family Expenses • Educational Expenses/ Marriage Expenses • Take stock of available resources • Needs minus resources

  37. Term Policies • Pure risk cover with no investment component • Risk cover for a fixed term • Premium paid goes towards risk cover • Sum assured payable only in case of death of the insured during the term • Nothing payable in case of survival • Premium paid is significantly lower compared to investment based policies • No loan against policies • Suitable for taking a huge cover at a low cost

  38. Term Policies • Renewable Clause • The policy can be renewed by the policy owner without medical examination • No need to prove continued insurability • Premium will be adjusted at each renewal • Restriction in terms of numbers of renewal or age • Convertible Clause • Option to convert a term policy into a whole life or endowment policy • Conversion takes place from the date of commencement of the original policy or from the attained age

  39. Whole Life Policies • A variation of term insurance where the term is equal to the life of the insured • Term insurance for the longest term • Sum assured is paid to the nominees on the policyholder’s death • Premium is higher than term policy as every policy eventually would have a claim • Variations • Pure Whole Life Insurance – Premium is payable throughout the life • Limited Payment Whole Life Insurance – Premium is payable for a limited period

  40. Endowment Policies Investment based policies • Dual benefit • Life cover for a specific tenure • Wealth accumulation • Insurance money is payable to the insured/nominee • In the event of the death of the insured during the endowment period • In the event of insured surviving till the end of the endowment term • A combination of Term Insurance and Pure endowment

  41. Endowment Policies • Money-back policies • A variation of endowment policy • A part of the sum assured is paid to the insured at regular intervals • Unit Linked Insurance Plans • A variation of endowment policy • Investment as per the choice of the insured e.g. • Equity • Balanced • Debt

  42. Health Insurance Plans • Covers medical expenses due to hospitalization from sudden illness or accident • Covers pre-hospitalization (30 days) and post-hospitalization (60 days) • Covers Domiciliary hospitalization • Age group of 5 to 80 years. Children can be covered from the age of 3 months provided at-least one of the parents is covered • Benefits • Reimbursement of medical expenses • Discount on family package • No claim bonus

  43. Health Insurance Plans • Cash Less Facility • Third Party Administrators • Maintain data-base of policyholders • Issue identity cards to policyholders • Handle claim settlements • Advise as to whether the ailment is covered by the policy • Exclusions • Hospitalization within 30 days • Certain diseases within the first year • Pregnancy/child-birth • Indicative premium for Rs.3,00,000 cover – Rs.3,500 • Premiums paid are eligible for deduction under section 80D of Income tax Act.

  44. Critical Illness Plan • Financial assistance in the event of insured contracting any of the covered critical illness. • The policy covers First Heart Attack, bypass surgery (Coronary artery), Stroke, Cancer, Kidney failure, Major organ transplantation, Multiple sclerosis, Aorta graft surgery, Primary pulmonary arterial hypertension, Paralysis. • Clams to be supported with a certificate from the specialist confirming occurrence of the critical illness • Premiums paid are eligible for deduction under section 80D of Income tax Act. • Exclusion • Illness contracted within 90 days • Death within 30 days after diagnosis

  45. Critical Illness Plan • Indicative premium for age 45 years Cover Premium 1,00,000 800 2,00,000 1600 5,00,000 4000

  46. Hospital Daily Allowance • Cash benefits in the event of insured persons being hospitalized due to sickness or accident. • Age group of 3 months to 60 years. • Daily allowance for every day of Hospitalization -Rs.500/-, Rs.1000/- or Rs.2000/- per day • Maximum of 30/60 days of hospitalization per policy period • Premium paid eligible for Tax benefit u/s 80 D of IT Act • ICU admission double the scheduled amount (maximum of 7 days) • Indicative Premium for 25-40 years old for Rs.2000 per day for 30/60 days - Rs.600/ Rs.1020 per annum


  48. Building Retirement Pool • Common Pitfalls • Start too late • Put away too little • Invest too conservatively • With drawing your retirement benefits every time you change your job • To get maximum advantage of compounding, avoid the above pitfalls

  49. Planning for Retirement • Age at Retirement • Retirement Goals • Quality of life • Hobbies • Any unfulfilled financial obligation • Place to live • Estimating Income Needs • Reduction in post retirement expenses • Inflation • Estimating retirement Income • Funding the shortfall • How much the retirement pool must be • How much to save every year

  50. Features of Annuity Plans • Retirement plans to provide pension from a chosen retirement date • Most of the plans are Deferred Annuity type • Accumulation phase • Annuity or Pay-out phase • Age at entry – 18 years to 65 years • Retirement Age/ Vesting date – optional 45 years to 70 years • Single premium or periodical payments with monthly, quarterly, half yearly, yearly options • Premium based upon the target amount and the vesting date