ICICI Wealth Management & Financial Planning PDF

JOINT CERTIFICATION PROGRAM (JCP) ON
MANAGING PERSONAL FINANCES
CURRICULUM
Session 1: Introduction and Steps of Financial Planning
Session 2: Insurance Planning
Session 3: Retirement Planning
Session 4: Investment Planning
Session 5: Tax Planning AND Estate Planning
Session 6: Asset Classes & Product Suitability AND Goal Planning
Session 7: Summary AND Important Calculations by Our Team
Session 8: Assessment Test
Session 9: Case Study Contest
ICICI Securities Page 1 of 194 JCP on Managing Personal Finances

SESSION 1: INTRODUCTION AND STEPS OF FINANCIAL PLANNING
Planning doesn’t come naturally to most of us. In a way it challenges optimism and
compels you to think about uncertainties. Implementing a plan doesn’t always
guarantee, but it ensures that the odds of success increase manifold.
As we go through various life stages, we aspire to attain various goals. And to

achieve them it is imperative that we have a sound financial backing. This is where
the concept of financial planning comes in, which helps you achieve your goals.
What is financial planning?
Financial planning is the process of managing one’s finances with the objective of
achieving life goals. These goals could vary from buying a house to going on a
dream vacation to more serious goals like retirement planning or child education
planning. A good financial plan requires analyzing the financial status, outlining the
goals and understanding the means for achieving these goals.
Setting realistic time horizons to achieve goals and achieving them with discipline
and planning is what a good financial plan helps in accomplishing. The ability to
mitigate risks when investing is another important facet that financial planning
addresses.
Why financial planning?
Financial Planning provides direction and meaning to your financial decisions. One
feels more secure and more adaptable to life changes, once they measure that they
are moving closer to realization to their goals. Implementing a financial plan offers an
unrivalled peace of mind. It removes components of fear and uncertainty from your
day-to-day life.

It is better to co-relate with an example. Let's assume you go for an overnight 12-
hour train journey. What all things do you plan for? Reserving ticket in advance,
reaching station well on time, taking food, water, bed spreads, i-pod, books, lock and
key, etc. This has become a normal routine for most of us. For a 12-hour journey, we
plan so many things properly.
Life is a similar journey for approximately 75 to 80 years; and there are some
financial requirements in this journey too like buying a home, car, getting children
educated and married, etc. Hence, it is prudent to plan well ahead for all these
requirements like a train journey.
The importance of financial planning cannot be overstated. Among others, two

aspects matter a lot are - inflation and changing lifestyles.
Inflation is a situation wherein too much money chases a limited number of goods.
This leads to a fall in the purchasing power of money. For example, a product that
costs Rs. 100 today would cost Rs. 106 a year later, assuming inflation at 6 percent.
Over 30 years, assuming that inflation continues to rise at 6 percent, the same
product would cost you Rs. 574. Financial planning helps ensure that you are better
prepared to deal with the impact of inflation, especially in retirement when expenses
continue but sources of income dry up.
The second factor is changing lifestyles. With higher disposable incomes, it is

common for individuals to upgrade their standard of living. For example, cars were
considered luxuries not too long ago but are a necessity today. Financial planning
plays a key role in helping individuals and families, both upgrade and maintain their
lifestyle.
Moreover, there are contingencies like medical emergencies or unplanned

expenditures. Sound financial planning helps mitigate such circumstances, without
straining your finances.

To put it in a nutshell, financial planning is all about investing for your goals and
maintaining a fair amount of liquidity to make use of any opportunity that may
present itself or meet any unforeseen emergencies.
Features of financial planning
A financial plan enables you to analyze your behavior and help optimize your
expenses and savings. Viewing each individual expense as a whole enables you to
understand the impact on your long-term financial plan. For example, investing in a
certain mutual fund might help increase your returns but might not work out too
favorably once its tax implications are considered.
A good financial plan helps in setting realistic time horizons to achieve goals and
assists in achieving them with discipline. The ability to mitigate risks when investing
is another important facet that financial planning addresses.
Understanding the risk-taking ability along with achieving long-term goals can often
be a fine balance in today's volatile markets and the ever changing global economic
factors. Traditional bank deposits do not yield enough returns to beat the soaring
inflation rates. Falling equity markets, resulting in erosion of wealth, have added to
the woes of investors. It is during such times that disciplined investing and focus on
the long-term ensures wealth creation.
Myths about financial planning
Myth 1: I need to have a substantial sum of money/assets before thinking about

financial planning
Fact: This myth primarily prevents people taking the first step towards financial
planning. Financial planning will in fact help build assets and investments. Investing
is only one part of financial planning. Financial plan will help you structure your
goals, chart out a road map and above all make you aware of what you need to do to
get to your final destination.

Myth 2: I am already saving enough. Why do I need financial planning?
Fact: If you have saved enough you have already taken the first step towards
financial planning. However, saving is just one aspect. A good financial plan will help
you understand how much is ‘enough’... It will help channel your savings in the right
direction and make them work harder and better to achieve your goals. A financial
plan will tell you how much of your savings should form part of an emergency fund
and how much should be easily liquid-able. This helps in times of emergencies and
opportunities.
Myth 3: I cannot afford a financial planner or financial plan.
Fact: Like any professional service like doctor, lawyer etc financial planners also
charge for their services. Look at these charges as a proactive investment and not
some reactive expenses like doctors fees. A good financial plan will help you save
and earn far more money than you would have paid in fees or commissions. And
more importantly, beyond the monetary benefits, it will give you peace of mind, time
saving, and a better focus on your financial life.
Myth 4: I am too young to worry about financial planning.
Fact: Wouldn’t you like to live longer, but not working longer? The earlier you start
the greater your chances of achieving your life goals. Hit the field running. With age
on your side the amount you need to invest will be low while the risk / return you can
take will be higher - thereby, making your money work hard. Just think about this…
A 25 year old invests Rs 50,000 annually at 10% for 25 years end up with Rs 50 lakh.
A 30 year old does the same and ends with just 29 lakh.
Myth 5: I am nearing retirement. Isn't it too late for financial planning?
Fact: While running a marathon you need to start early and break out of the pack, but
you also need to conserve energy to finish. Financial Planning will help you keep

pace with your finances through life. When nearing retirement it can tell you how
much energy you still have left and what strategy changes you need to finish the
race. A financial plan can help you understand where you stand and forecast how
your retirement years will pan out financially.
Myth 6: My children will take care of me post-retirement. I don't need to think

about planning for retirement.
Fact: In such scenarios, there may not be a need to save extensively for retirement.
But financial independence is always welcome. Moreover, financial planning can help
you with your estate planning. You may want to help your grandchildren get the best
education and it is important to plan for such goals and invest in instruments
accordingly.
Myth 7: I know enough about investing and have good knowledge of markets and
financial products.
Fact: It is good to know about the markets and financial products. However, a
financial plan is not just about financial products or the markets. A good financial
plan considers your risk profile and suggests an asset allocation strategy. It helps you
define your goals and suggests an investment strategy based on your risk profile.
And importantly, a financial plan if followed will inculcate discipline in your
investments and will help you overcome drastic downturns in the markets by a
diversified asset allocation mix.
Just consider this…Your asset allocation dictates a 70% equity, 20% debt and 10%
cash allocation. If the market moves up your equity allocation goes up which you
need to rebalance to the original. The money you have made by booking profits
moves to a safer investment. If the market falls and presents an opportunity, you are
liquid to invest and not left with un-booked losses.

Myth 8: Isn't tax planning the same as financial planning?
Fact: Categorizing financial planning as another term for tax planning is another
misconception. Both are distinct but tie-in as well. Tax planning is one component of
financial planning. Financial planning will not only cover the most tax-efficient
investments but will also help you chose the right instruments for tax planning based
on your risk profile. An investor with higher risk profile can look at greater
investments in equity-linked tax-saving instruments while risk-averse investors may
want more of a fixed income component in his tax planning. Financial planning can
help determine this allocation.
Steps of Financial Planning Process
Financial planning requires financial advisors to follow a process that enables

acquiring client data, and working with the client to arrive at appropriate financial
decisions and plans, within the context of the defined relationship between the
planner and the client.
The following is the six-step process that is used in the practice of financial
planning.

Establish
relationship:
Discuss how we
will work
together
Gather client data:

Discuss goals and financial
information
Analyze and evaluate

financial status:
determine what needs to
be done to achieve goals
Develop the plan:

Presenting financial
planning
recommendations
Implement the plan:

Explain how the
recommendations need to
be carried out
Monitor the plan: Periodic

Review and Revision

1. Establish and define the client-planner relationship: The financial planning
process begins when the client engages a financial planner and describes the
scope of work to be done and the terms on which it would be done.
The terms of engagement between client and a partner are usually spelt out in a
legal agreement that is signed by both parties.
The general scope of the work includes:
• Explaining services provided, the process of planning, and the required

documentation
• Describing how they will be compensated
• Identifying the responsibilities of the planner and the client in the relationship
(discretionary vs. non-discretionary)
• Deciding on the length of the engagement
• Discussing any other matters needed to define or limit the engagement's scope
2. Gather client data, including goals: This step involves asking for information
about client’s financial situation. Planner needs to help define client’s personal
and financial goals, understand his time frame for results and discuss, if relevant,
how he feels about risk. This step is basically about gathering all the necessary
information before proceeding any further. It includes collection of:
• Client's income status

• Assets and liabilities status
•The extent of risk a person is exposed to
• The extent of insurance that a person has, etc.
3. Analyze and evaluate financial status: In this step, the planner evaluates
client’s current financial status and analyzes potential scenarios and outcomes.
The planner analyzes the information provided by client to assess his current
situation and determines what he must do to meet his goals. This could include
analyzing his assets, liabilities and cash flow, current insurance coverage,
investments or tax strategies.

Some examples include:
•Identifying short-term goals like buying a house, buying a car, taking a vacation,
etc.
• Identifying long-term goals like children’s education, children’s marriage,
retirement, etc.
• Attributing a financial value to each of these goals
• Separating realistic and unrealistic goals
4. Develop and present financial planning recommendations: The planner makes

an assessment of what is already there, and what is needed in the future and
recommends a plan of action. This may include augmenting income, controlling
expenses, reallocating assets, managing liabilities and following a saving and
investment plan for the future. It involves:
• Filling the savings gap

• Restructuring existing assets into productive/growth assets
• Making an investment plan, both lump-sum and regular
• Building a defense mechanism into the plan through insurance
5. Implement the financial planning recommendations: This involves executing

the plan and completing the necessary procedure and paperwork for
implementing the decisions taken with the client.
• Filling the savings gap by inducing the client to save more through systematic
investment plan (SIPs), endowments, etc.
• Restructuring existing assets into productive/growth assets. Get the client into
equity products where goals are aggressive.
• Making an investment plan, both lump-sum and regular. Match them to cash
flows. How much of monthly earnings can the client save? How much of his
lump-sum receipts can he set aside?
• Building a defense mechanism into the client's plan through insurance. This is a
broader concept. He needs term insurance to cover the risk of dying early but
endowment for the risk of living too long — the two facets of retirement planning.

• Liabilities and assets need to be insured through sufficient term insurance so
that they do not become a burden on the plan
• Surrendering legacy insurance and consolidating them
• Making the client's plan tax efficient
6. Monitor the financial planning recommendations: The financial situation of a

client can change over time and the performance of the chosen investments may
require review. A planner monitors the plan to ensure it remains aligned to the
goals and is working as planned and makes revisions as may be required.
• Reviewing where insurance coverage has gone out of sync with the plan
• Reviewing where portfolio mix has gone out of sync with the plan
• Reviewing where the themes mix has gone out of sync with the plan
• Reviewing where major macro changes have affected some of the client's plan
assumptions

SESSION 2: INSURANCE PLANNING
An individual undergoes various life stages, each characterized with specific

goals. When you are single, usually up to 25 years of age, you start laying the
foundation for the financial security of your future. Once you get married and
have children, your priority is asset accumulation and wealth generation. And
then your pre-retirement and finally the retirement phase are characterized by
wealth utilization and distribution.
A proper financial planning at each stage of life leads to a secure financial future.
But, we have to consider the time value of money as well. The present value of
the money will not be the same in future. For example, your monthly expenses of
Rs. 30,000 today will be Rs. 38,288 after five years, assuming inflation at 5%.
All these show that life is constantly changing. Your life stages change and so do
goals and priorities. The financial position and the cost of living also changes with
time.
In order to have a secure financial future, you have to plan according to these
changing situations. But one factor that you are always exposed to at all times is
risk.
We live in an uncertain world. Risk is a possibility of any harm, injury, loss, danger
or destruction of an individual or their belongings.
There are accidents, mishaps, illnesses, natural disasters happening every day. A
person who is happy, healthy and alive today cannot be sure of what will happen
tomorrow, as he/she is always exposed to this uncertainty called risk.
From your current age to the age of your retirement, you have some specific
goals like buying a new house, getting married, child's education, retirement
planning, etc. You always plan your finances to turn your goals into reality. But
you are exposed to some possible uncertainties like death, accident, illness, loss
of job, etc.

So the question is: what should you do to mitigate this risk?
The answer is risk transfer.
Transfer of risk from one individual to another who is willing to bear the risk is
called risk transfer. And insurance is the most widely used tool to transfer risk.
To understand the concept of insurance better, let us use an example.
There is a village with 400 houses. The value of each house in the village is Rs.
20,000. Now, every year 4 houses get burnt. Nobody knows which house will be
burnt. There is an equal probability of every house getting burnt. Hence the total
loss annually due to this fire is Rs 80,000 (Rs 20,000*4).
This is a tricky situation for the villagers as nobody knows whose house will be
burnt and the one facing the eventuality is exposed to a great financial mess of
Rs. 20,000.
A smart villager comes up with an idea. He asks each house in the village to
contribute Rs. 200 each towards a common funds pool. This contribution will
generate a corpus of Rs. 80,000 (Rs. 200*400 houses). This way the risk of 4
owners is spread over 400 houses. Thus with a small contribution of Rs 200 per
house, the village covers the huge loss of Rs 80,000 of the 4 families whose
houses get burnt.
Insurance works on the same concept of forming a pool of funds.
Insurance is a fixed sum of money contributed to form a pool. The money is

drawn from the pool to support the one who faces an eventuality. Thus insurance
distributes the risk of one individual among a group. This is called risk pooling.
What are the key benefits of insurance?
Insurance provides security and savings. We have seen how insurance secures
you by forming a fund pool. Insurance is also a good savings tool. Having an

insurance cover ensures that you achieve your goal, even in case of an
eventuality. Your family and dependents will not be affected financially if you
have an insurance cover.
Now, let us see what an insurance company does.
An insurance company brings together people who share the same risk. The risk
can be to their life, or their belongings like house, vehicle, etc.
It collects the contribution called the premium from the group of people and pays
a compensation or claim to the one who suffers a loss.
Thus by forming a fund pool it spreads the risk of one among a group.
What are the types of insurance?
Insurance is mainly of two types - life insurance and general insurance. General
insurance covers a wide range of products like vehicles, fire insurance, house,
travel, health, marine, etc.
Now let us see life insurance in detail.
Life insurance
Life insurance is a contract in which the insurer agrees to pay the assured sum of
money to the insured in case of his/her death. Life insurance covers the risk
associated with the life of an individual.
The assured sum which the insurer pays is in consideration of a certain amount
called the premium. The premium is either paid in lump sum or as periodical
payments.
Need for life insurance

Every earning individual needs to support his/her dependents financially for
spending their daily expenses, repaying liabilities and achieving all the goals,
during his/her lifetime. The regular income earned by the individual is the source

for achieving all these. Hence, it's very important to protect the family against the
loss of the income due to the death of the breadwinner, so that the family's quality
of life does not undergo any drastic change.
Individuals have two ways of protecting loss of income due to one's death – one,
by accumulating sufficient assets, another by taking life insurance, or by a mix of
both. Most of the individuals in their early stages of working life might not have
accumulated enough assets and hence, it's prudent to have sufficient life cover in
place.
How much life insurance should one buy?

Life insurance is meant to provide with the enough money to your dependents to
replace your income in case you die. Ideally, your life cover must take care of the
following things:
a) Family expenses till lifetime;
b) Liabilities outstanding and
c) Family and children goals.
This worksheet will help you determine how much coverage you will need:
1. Providing for family expenses till lifetime
Annual expenses required for dependents Rs.2,40,000
Number of years for which you wish to provide above 25 years
expenses
A: Corpus required for funding family expenses Rs.60,00,000
2. Liabilities Outstanding
Home loan Rs.15,00,000
B: Corpus required for repaying liabilities Rs.15,00,000
3. Family Goals
Child education (today’s cost) Rs.8,00,000
Child marriage (today’s cost) Rs.10,00,000
C: Corpus required for fulfilling goals Rs.18,00,000
A + B + C = The estimated amount of life insurance you Rs.93,00,000
will need
(From this estimated cover, you can deduct existing life cover, if any, and assets that you have
accumulated - excluding the ones for your family’s use)

If you are unable to cover all the above three, then cover can be taken at least for
some of them, based on the below order of priority:
a) Unsecured liabilities;
b) Family expenses till lifetime;
c) Secured liabilities;
d) Children goals; and
e) Family goals.
Thumb rule to calculate life cover

As a thumb rule, every earning individual has to have a life cover of 10 to 20 times
of annual income depending on their age. For people aged from 25 to 40, a life
cover equal to 20 times of annual income and for people above the age of 40, a
life cover equal to 10 times of annual income would be the thumb rule.
Insurance coverage given by life insurance companies

The life insurance companies provide life cover to individuals based on two main
factors – Age and Income. Since life cover replaces an individual's income for the
family, income is the main factor. As age increases, the risk of natural death
increases and hence, age too plays a role in determining how much of life cover
can be provided to an individual. Apart from these two factors, there are a lot of
other factors like personal health, family's medical history, usage of tobacco, etc.
The below is an indicative table which provides the maximum life cover which
can be offered based on age. The slabs might vary from one company to another.
Age group Maximum life cover offered
18 – 35 20 times of annual gross income
Consequences of not having sufficient life cover

Let us see this with an example.
Anil, aged 32, is working in an IT firm and has a family of 3 people – Soni, aged
30, house wife; and 2 children – Kunal, aged 4 years and Kapil, aged 1 year.
Annual income – Rs.7 lakh
Family's annual expenses – Rs.5 lakh

Home loan outstanding taken by Anil – Rs.25 lakh
Existing life insurance cover for Anil – Rs.10 lakh
On sudden death of Anil due to an accident, the family gets Rs.10 lakh (sum
assured) from the life insurance company, which is not sufficient to meet the
family's annual expenses and repay the home loan outstanding. The home has to
be sold to repay the home loan outstanding amount. Rs.10 lakh will be put in a
fixed deposit which will yield around Rs.1 lakh p.a. as interest for meeting daily
expenses. The family's lifestyle drastically changes with less amount available for
regular expenses. Therefore, it is important to have sufficient life cover.
Which Life Cover to choose?

There are several variants of life insurance, ranging from pure protection plans to
savings and investment-linked plans. Let’s take a look:
Term plans
Term insurance is a pure risk cover. It has no element of savings or investment. In
the event of death or total and permanent disability, the insured’s family gets the
sum assured. If the insured survives the policy term, he or she gets nothing.
Term plan, as the name indicates, is for a specific term, and offers the greatest
amount of coverage at the lowest premium. This is because the insurer does not
provide anything if insured outlives the policy term, i.e. there is no maturity value.
Let’s understand this with an example: Suppose Kumar takes a term plan when
he is 35 years old for a sum assured of Rs. 50 lakh and a term of 10 years. His
annual premium is, say, Rs. 7,000. If he dies within the 10-year term, his family
will receive Rs. 50 lakh. If he survives the policy term, he would get nothing.
One can select the length of the term for which he or she wants the coverage,
right from 5 years up to 30 years. Some companies also offer 40-year term plans.

Term plans come in different variants. Here’s a quick sheet to understand them.
RETURN OF INCREASING DECREASING SINGLE CONVERTIBLE
PREMIUM PLAN PLAN PREMIUM TERM PLAN
- You get the - The sum - The cover - Ideal for - Here you can
return of assured decreases at a those who switch from an
premium at (cover) in this predetermined have a large initial basic
the end of the plan increases rate over the amount to term plan to
term, but if every year as period while the spare at the insurance-
you die mid- a person premium time but are cum-
way, your advances in remains unsure of investment
family gets age, while the constant. cash flows in plan, at a later
the sum premium the future. date.
assured. remains - The main idea
constant. of this plan is - This plan - Premium
- Slightly that a person's lowers the may change at
more - The core needs for high risk of lapse the time of
expensive objective of life cover of policy as conversion.
than a pure this plan is to decreases with a result of
term plan as beat the rising age as his missed
they promise inflation liabilities (like premiums.
return of home or car
premium. - The loan) decrease
premium is or no longer
generally high exist.
for this plan - The premium
is normally low
for this plan
Endowment plans
Endowment plans are a combination of a risk-cover with financial savings. On
death or disability during policy term, sum assured plus bonus or guaranteed
additions is paid to the beneficiaries. Sum assured is paid even if policyholder
survives the policy term. Premiums are generally high for these plans.
Endowment plans are quite popular for their survival benefits.

Money-back or cash-back plans
Under this plan, certain per cent of the sum assured is returned to the insured
person periodically as survival benefit. On the expiry of the term, the balance
amount is paid as maturity value. The life risk may be covered for the full sum
assured during the term of the policy irrespective of the survival benefits paid.
Whole-life plans
Whole-life plans provide life insurance cover for the entire life of the insured
person or up to a specified age. Premium paid is fixed through the entire period.
This plan pays out a death benefit so you can be assured that your family is
protected against financial loss that can happen after your death. It is also an ideal
way of creating an estate for your heirs as an inheritance.
Unit Linked Insurance Plans (ULIP)

ULIP is basically a combination of insurance cover and mutual funds. In ULIPs, a
certain part of the premium is invested in various equity and debt instruments
and the balance is used to provide cover for life.
ULIPs allow policyholders to earn market-linked returns by investing a portion of

the premium money in various options. The returns on ULIPs are linked to the
performances of the markets and underlying asset classes.
Typically, ULIPs provide with a choice of funds in which you may invest. One also
has the flexibility to switch between different funds during the life of the policy.
In the event of death or permanent disability, the sum assured (to the extent one
is covered) is given to the policyholder to assure that his family is protected from
sudden financial loss. A ULIP has varying degrees of risk and rewards. There are
various charges applicable for ULIPs and the balance amount out of the premium
is only invested.
Pension Plans
Pension plans are basically retirement plans to which individuals make
contributions till retirement or for a specified period with an aim to get regular

income post-retirement. One-third of the corpus accumulated can be withdrawn
as a lump-sum and the remaining can be used to buy annuity that will make
monthly payments to the holder. An annuity is a contract with an insurance
company under which one receives fixed payment on an investment for a lifetime
or for a specified number of years.
Annuity Types
Annuities can be divided into two types — deferred and immediate.
In deferred annuity, you save in a systematic manner to build up sufficient funds

for retirement. The withdrawals commence after the retirement of the investor.
In the immediate annuity plan, you invest a lump sum amount as the premium
and the insurance company starts paying back annuity immediately. These are
suitable for investors who have retired or are nearing retirement, and need steady
income from the accumulated retirement corpus.
Annuity Payout Options

There are various annuity payment options that you can opt for. You should
select the options that suit your specific needs the best. Some of the popular
options are:
Life annuity: This option pays you for life. The payment stops when you die.
Hence, this option is suitable for someone who does not have any financial
dependents.
Life annuity with return of purchase price: This option pays you annuity for life
and on death, the initial purchase price (premium paid in the beginning) is
returned back to the nominee.
Life annuity for fixed-period guarantees: This option pays an annuity for a
guaranteed period of 5, 10 or 15 years (as chosen by you) and thereafter as long
as you are alive. This option is ideal for someone who needs money for a fixed
period after which dependency on pension money will come down.

Joint life and last survivor annuity: This option pays annuity throughout your life
and on death, continues the annuity during the lifetime of the named spouse. It
thus takes care of expenses of both the partners.
Life annuity increasing at a fixed rate: In this option, the annuity amount
increases every year at a simple rate, starting at 3 per cent p.a. This options works
well for those who have not factored in inflation and need an increasing annuity
with each passing year. This option needs a bigger corpus to sustain over the
long term.
Riders
Riders are additional benefits attached to the basic life insurance policy. They
allow you to enhance your insurance cover and help customize your policy to suit
your specific needs.
The most common types of riders available are:
Critical illness: This rider provides additional cover to you in the event of a critical
illness. Cancer, coronary artery bypass, heart attack, kidney failure, major organ
transplant and paralytic strokes are the generally covered illnesses.
Accidental death benefit: It provides an additional sum assured if the policy

holder dies due to an accident.
Partial and permanent disability rider: In this rider, a portion of sum assured is
paid, in case you are disabled permanently or temporarily, due to an accident.
Most policies pay a certain percentage of sum-assured periodically for next 5-10
years.
Waiver of premium rider: This rider waives off future premiums in case you are
not able to pay the premiums due to disability or income loss. Put simply, it
exempts you from paying premiums until you are ready to work again. This helps
protect your policy from getting expired.

Dos and Don’ts for buying Life insurance
Dos
When you buy a life insurance policy you should:
• Think through why you are buying insurance and what core requirements and
expectations
• Seek and receive advice and options patiently
Be open-minded but cautious about the advice and information you gather. Ask
lots of questions about the policy options to see what fits your needs. Find out
policy details like: Whether it is a Single Premium or Regular Premium policy.
Which is the best premium payment frequency that suits you e.g.: Annual,
quarterly etc. Whether there is an ECS (Electronic Clearing Service) payment
option to make your premium payment safe and easy.
• Fill the proposal form very carefully and personally
Fill it completely and truthfully, remember you are responsible for its contents.
Make sure that the information you give cannot be disputed during a claim.
Ensure you fill Nomination details. If the form is in one language and you are
answering the questions in a different language, ensure the questions are
explained correctly to you and that you have understood them completely.
Remember you have to give a declaration to this effect in the proposal form.
• Keep a copy of the completed proposal form you sign and any declarations and
terms agreed upon mutually for your records.
• If you are buying Unit Linked Insurance Policies (ULIPs) ask specific questions
about: Various charges, Fund options, Switching of funds; Benefits if you
discontinue the policy, Surrender the policy or Make a partial withdrawal of funds.
Don'ts:
• Do not leave any column blank in the proposal form
• Do not let anyone else fill it up
• Do not conceal or misstate any facts as this could lead to disputes at the time of
a claim
• Do not miss or delay your premium payment
(Source: www.policyholder.gov.in)

Non-Life / General Insurance
We saw life insurance that takes care of the insured’s near and dear ones in case
of his/her demise. Insurance, other than life insurance, falls under the category of
general insurance. General insurance products include policies for health, motor,
home and travel among others. Let’s take a closer look at some of these areas.
Health insurance
Every human being is exposed to various health hazards. Medical emergency can
strike anyone without pre-warning. Lifestyle and critical diseases are catching up
with people at an early age. Health insurance helps to protect against a future
outlay that may be considerably high and unbudgeted for. Hence, the need for an
effective health insurance plans. Healthcare today is an expensive affair, making it
extremely important to invest in health insurance to protect one’s family and
finances from the huge dent that a medical emergency can cause. The need for
health insurance is gaining prominence among individuals who consider it as a
means of obviating health risks that can make inroads into their savings. Even
people who strictly follow return on investment policy for their investments are
eying health insurance as a hedge against financial shocks due to medical
emergencies.
There is a myth associated with health insurance that goes this way: If you are
young and looking healthy you don’t require health insurance. This is far from the
truth. This is the myth that has gripped majority of people. What happens if one
suddenly meets with an accident? People feel that if they are young and healthy,
they do not require any health insurance. One should always be prepared to deal
with such untoward incidents and availing a health insurance policy is the best
way.
There are two kinds of health insurance policies available in India:

1. Indemnity: This covers hospitalization expenses incurred on re-imbursement
or cashless basis.
2. Benefit: This includes critical illness policies which include the payment of a
lump sum amount on the diagnosis of any of the named critical illnesses.

Benefits of health insurance
A good health plan ensures that medical expenses incurred on hospitalization for
more than 24 hours are covered by the insurance company. This may include
room charges as well as the money spent towards the surgeon, nursing,
medicines and other tests.
One can also avail the benefit of a cashless claim, where the hospitalization
expenses are directly settled between the hospital and the insurance company.
A health insurance policy also takes care of pre-hospitalization and post-

hospitalization expenses. Daily cash allowance and payments for treatment
received prior to hospitalization and during the recovery period is extremely
beneficial as the insured might not have an alternate source of income during
those trying times.
An advantageous policy offers floater plans where the entire family is covered
under one policy and allows the coverage of the medical insurance policy to be
shared among the family members.
Health insurance offers undeniable benefits which extend beyond conventional

hospitalization. Health insurance policies offer a number of benefits such as
income tax deduction, long-term discounts, family discounts and no claims
bonus. Health insurance premiums offer a tax benefit under Section 80D and
there are now products available that are optimized for tax saving. This means
that while the insured is safeguarded from medical contingencies, he or she is
also reducing tax outgo and saving money on a portion of income.
Types of health insurance policies

Insurance companies offer a wide range of health insurance products with
varying coverage and cost. There are options available between a conventional
hospitalization policy and a benefit policy which pays lump sum amount in case
of a pre-specified event or illness. One can also opt for a health insurance policy
that offers cashless claims settlement. Such features help cut down out-of-pocket
medical expenditures, thus reducing the need for cash during hospitalisation or

medical emergencies. An individual can select the policy that suits his /her health
and budget.
Buying health insurance
It is always better to enroll in a health insurance cover as early as possible. Health

insurance premium tends to increase with age — more the age, higher the
premium. A health insurance policy provides a continuous and adequate lifelong
cover against any eventuality, and the premium payable is also very competitive.
Any adult above 18 years of age and up to 60 years can buy a health insurance
policy, which stands renewable up to 70 years of age. An individual can avail a
policy for self along with dependent parents, spouse and kids.
Approaches to buying
• Sole bread winner of a household should explore options of taking a personal
accident or critical illness cover. Such covers ensure lump sum payment in
case of a life threatening disease or accident.
• 3 months and above- Infants above three months till 18 years of age can be
enrolled in a Floater Cover under their parents’ policy.
• Married person with kids: A family comprising of children and elderly should
opt for a cover that offers more than just a normal mediclaim. A cover that
takes care of Outpatient Department expenses like vaccination for kids,
maternity expenses to regular check ups of elderly members of the family.
• An individual keen to cover himself and the family against maximum risk
exposure should go for a top-up mediclaim cover, which provides higher
hospitalization cover sum insured.
Health insurance plans available today are quite user-friendly. You can buy a
policy online, renew it online and get details of your claim status. You can also
find the list of cashless hospitals pan-India. Also, there is a cashless facility
available under the health policy which eases the requirement of cash when you
are hospitalized.

Dos and Don’ts for buying Health insurance
Dos
When you buy a health insurance policy you should:
• Know that there are restrictions on coverage
• Pay special attention to terms and conditions in the policy like:
◦The clause excluding pre-existing diseases
◦Waiting period before certain diseases can be covered
◦Restrictions or limits on various expenses relating to hospitalization
◦Co-payment, which means you have to share a part of the claim
◦Pre-conditions for renewal
◦Upper limits for age at entry and for renewal
• Disclose details of all pre-existing health problems including:
◦Major ailments
◦Conditions like high blood pressure or diabetes
• The company may want medical test reports depending on age at entry; you
should comply with all procedures and documentation requirements
•Check where and how the medical tests will be carried out
• Check who should bear the cost for the tests…
• Pay the premium only after the insurer accepts your proposal
• Renew the policy meticulously for the rest of your life
Don’ts
• Conceal facts or you could face a dispute at the time of a claim
• Allow a gap of even one day in your policy renewal or your cover may be
insufficient or useless
Overseas Health Policy: Dos and Don’ts
Dos
• Insure well ahead of your travel dates ensuring you have time for medical tests
if required by the company
• Ensure you cover your entire period of stay abroad and all the countries you
will be visiting
•Be aware of what your policy covers and does not cover. These policies cover
not only hospitalization but could also cover travel related risks like:
◦Loss of passport
◦Loss of cash
◦Loss of baggage and

◦Repatriation expenses
• Disclose details of all pre-existing health problems including
◦Major ailments
◦Conditions like high blood pressure or diabetes
• Comply with all procedures and documentation requirements the company may
want including medical test reports depending on age at entry.
• Check where and how the medical tests will be carried out
• Check who should bear the cost for the tests…
• Pay the premium only after the insurer accepts your proposal
Don’ts
• Conceal facts or you could face a dispute at the time of a claim
Motor insurance
Motor insurance is the fastest growing general insurance segment in India and
worldwide. Motor vehicles are divided into three classes for the purpose of
insurance: Private cars, Motor cycles, and Commercial vehicles.
Motor insurance policies are normally taken for a period of one year. However,
according to the requirements of the vehicle owner, a policy for a shorter term
can be issued. Situations do arise when a person plans to sell off his vehicle
within a couple of months and does not intend to renew his policy for another
year. In such circumstances, he may go for a shorter period of cover. Short
period insurance attracts short period scale for calculating premium and
obviously works out costlier than the pro-rata for the said period.
Third party insurance and comprehensive insurance policy are the two types of
motor insurance policies available.
• Third party insurance: This covers the insured's liability to third parties for
death and bodily injury caused by an accident involving the motor vehicle. This
refers to the minimum risks that are to be covered under the Motor Vehicles Act.
• Comprehensive insurance policy: This insurance cover is wider in scope and
covers not only accidental damage to the insured's own vehicle but also the loss
or damage to the vehicle itself by way of accident, theft and other specified perils.

Dos and Don’ts for buying Motor insurance
Dos
When you buy a motor insurance policy you should:
• Know that you can buy this policy through anyone and there is no compulsion
to buy it through your vehicle dealer
• Fill the proposal form yourself even if the vehicle dealer is arranging for the
insurance
• Fill the proposal form carefully and factually and thoroughly
• Keep a copy of the completed proposal for your records
• Read the policy brochure/ prospectus carefully to know what is covered and
what is not
• Ask for information about add-on covers that may be available and choose what
suits you
• Give documents such as RC Book, Permit and Driving Licence to the insurance
company for verification
• Ensure that you keep these documents updated from the authorities concerned
Don’ts
• Don’t let anyone else fill your proposal form
• Don’t leave any column blank
• Don’t forget to renew your policy without any break
• Don’t forget to ask for the correct procedure when you buy a used car that
already has insurance.
• Don’t make false declarations about the actual use of the vehicle you are
insuring
Home / property insurance

A home is usually the largest asset an average person owns during his lifetime.
Therefore, it is imperative to secure your home from natural and man-made
catastrophe. A home insurance plan ensures you peace of mind by protecting the
structure and the contents of your home. Banks generally offer home insurance
at the time of taking a home loan. You can purchase a policy from an insurance
agent or it can be purchased online. You can also purchase it through

bancassurance facilities provided by various bank branches and through the tele-
sales department of general insurance companies.
The amount of home insurance cover needed is calculated keeping a number of

factors in mind. Area of house (in sq. ft.), location of property and approximate
rate of construction (in Rs. /sq. ft.) are generally considered by insurance
companies. Properties more than 50 years old are not insured. Another point
considered while insuring a home is that companies only consider
'pukka/permanent' construction. An individual has to pay the premium every
month/quarter/six months according to the sum insured.
Terrorism and additional expenses for rent for alternative accommodation are the
optional covers that are available under a home insurance policy.
Dos and Don’ts for buying Property insurance
Dos
When you buy a property insurance policy you should:
• Know you can insure only property you own
• Be sure you have the documents to prove ownership and value at the time of a
claim
• Give a complete and correct description, address and location of the property to
be covered
• Ask the intermediary or insurer to give information and explain the basis of
fixing the Sum Insured. It can be
◦Market Value basis where depreciation is taken into account or
◦Reinstatement Value basis where the cost of replacement of the property
is taken into account. This is the basis on which the claim is paid.
◦Information regarding add-ons; choose them as per your needs
Don’ts
• Don’t allow anyone else to fill your proposal form
• Don’t conceal or misstate any facts about the property and its fixtures
• Don’t mis-declare the value of your property and face disputes at the time of a
claim

Travel insurance
In the present scenario domestic as well as overseas travel could pose a risk and
the need for insurance is being realized.
For students who wish to pursue studies abroad, taking a travel insurance policy
is a necessity. It is better to buy the policy from India as it is more cost effective. It
helps the student to seek a waiver from the compulsory university insurance,
which in turn will certainly help the student save substantially. Student medical
insurance in India costs one-third the amount they have to pay in the US. The
waiver form can be downloaded from the university website and sent to the
appropriate person indicated.
Dos and Don'ts for buying Travel Insurance
Dos
•Plan for your Travel Insurance ahead of time just as you plan for your visa and
so on.
•Take care to fill in the proposal form completely and truthfully after getting the
necessary medical tests done and obtaining the medical report as required
•Plan for the travel period ahead of time and ensure that your insurance covers
the entire period
•If you have to extend the period of cover, plan for it before the cover expires and
provide the required documents to the insurer
•Make sure you have gone through the policy document completely and make a
note of the contact details of the agency servicing the claims so that it is handy in
the event of an emergency
•If you are cutting short your travel period, check your policy to see if you are
entitled for a refund
Don’ts
•Don’t postpone taking your travel insurance till the last minute
•Don’t get pushed into taking a cover only as recommended by your travel agent
Get as much information as possible and exercise your choice
•Don’t get tempted to opt for the cheapest cover as it might not meet your needs
For Further Reading on Insurance, you may refer:
http://www.policyholder.gov.in/
http://www.irda.gov.in/

SESSION 3: RETIREMENT PLANNING
As one grows older, retirement is an inevitable stage of life. Therefore, it is

essential to create a plan that will fulfil one’s needs right through ripe old age.
Planning for retirement is about ensuring that one has adequate income to meet
the expenses post retirement. It is about anticipating one’s future requirements
and taking the correct steps to enjoy current lifestyle well beyond one’s working
years.
There are three stages in our life — learning, earning and accumulation. In the
learning phase we go through our education and complete it. In the next stage i.e.
the earning phase, we earn our livelihood, say, from the age of 25 up to 60. So
this is a very important phase to accumulate the earned money. In the
accumulation phase, we start using up the accrued money, which we have been
amassed during the earning stage. Hence, it becomes necessary for us to plan for
retirement even while we are in our second stage i.e. the earning phase.
Everybody desires to retire peacefully and lead a fairy tale retired life. But in
actuality, ‘the happily ever after’ or to retire peacefully is a very vague term. Most
importantly, you should decide when you want to retire. One may want to retire
at the age of 55 or even earlier, or one may want to continue working till 65. It is
vital to think about the expenses or needs after retirement. You should know how
much amount you will require annually after retirement.
Generally everybody wants to continue the same lifestyle even after retirement.
To continue with the same lifestyle a person needs to plan well for retirement.
Factors that necessitate planning for retirement
In the past, larger job opportunities with the government (therefore assured
pension) and dependence on joint family ensured that planning for retirement
was not the top priority. Today, the changing socio-economic landscape,
including the rising rate of inflation and longer life expectancy necessitate
planning well for retirement.

Retirement planning is the key challenge for all of us. It is the key challenge even
for developed nations. The population is aging around the world. Employers are
encouraging people to work longer - by increasing the retirement age and
curtailing the benefits, such as pensions. In the United States (US), for example,
retirement age is gradually increasing to 67 from historic 65. Further, only 15 per
cent of the private sector jobs today provide pensions, in 1979 that figure was 38
per cent.
Following are a few key reasons that call for prudent retirement planning:
1. Social changes: The social structure is continuously changing wherein a large

number of young working professionals are moving out of their traditional joint
families to lead a nuclear family structure. Hence this creates a situation wherein
the older members in the family will have to fend for themselves after retirement.
2. Increasing life expectancy: The average life expectancy of an individual has

gone up due to advancements in medical sciences and technology. By 2050, life
expectancy is projected to reach to 74 years from the current 65 years. This
increases the number of years that an individual lives post-retirement. Increased
longevity would mean planning for 15 to 20 years of retired life ─ may be, even
more.
3. No benefits from employers: Earlier, there were guaranteed pension and

medical benefits available from employers. These days, more and more
corporates and even governments are moving towards defined contribution
system from defined benefit systems. This means, our retirement could be very
different from those earlier days or from what our parents experienced. We would
need to manage on our own to take care of our needs post retirement.
4. Rising medical expenses: In old age, the need for medical expenses rises. Even
simple tests and procedures now cost hundreds of rupees. In the years to come,
it would cost even more. Medical inflation is a matter of great concern. The
healthcare costs in India are rising steadily at the rate of 18 to 20% every year.
This is higher than the overall inflation rate of 6 to 7% as seen in the past few
years. This needs to be, and can be managed with the help of retirement
planning.

5. Increased standard of living: There has been a rise in the standard of living of
people in the country. Let us look at examples of increased standard of living:
1. Till a few years ago, cars were considered luxury, but today it is a necessity.
2. Eating out and going to a movie were experiences that people did not enjoy
much a few years ago. Now it has become common, and easily cost hundreds of
rupees in a day. To maintain this standard of living, it is essential to plan for
retirement.
6. Rising inflation: General inflation is another great concern that necessitates the
need for retirement planning. For the uninitiated, inflation is the fall in purchasing
power of money. Simply put, an increase in the general price level for a
considerable period of time is called as inflation. Even a 2 per cent inflation rate
will reduce the purchasing power of your money over time.
Let us understand this with an example: About 60 years ago, an average middle
class person earned Rs. 600 and was able to support his family comfortably. Now
compare the salary with that of a typical middle class family earning today, about
Rs. 30,000. So what was Rs. 600 six decades ago is equivalent to Rs. 30,000 now,
a 50 times increase. This is inflation. It is essentially a real-life value of money
which keeps on reducing.
This kind of price rise will have a deep impact on our finances over a period of
time. For example, what will be the cost of 1 litre of milk, which costs Rs. 30 a litre
today, after 30 years? Well, assuming inflation to be 5 per cent the price will be
Rs. 129.66. Like wise, there will be a continuous price rise over a long period. If
you plan to maintain your current lifestyle even after you retire, you will need to
build in inflation protection. That may mean saving more for investment purposes
or adjusting your current investment strategy to generate a higher return over the
long term.

If your monthly expenses today is Rs. 30,000
Actual amount Monthly savings (Rs.) required at
required Corpus required
Years To considering at retirement
retirement inflation (Rs.) (Rs.) 8% 10% 12%
10 53,725 10,749,791 59,298 53,360 47,982
15 71,897 14,385,646 42,338 35,819 30,226
20 96,214 19,251,239 33,617 26,591 20,929
25 128,756 25,762,500 28,161 20,723 15,135
30 172,305 34,476,037 24,320 16,581 11,190
35 230,583 46,136,714 21,396 13,467 8,372
(Note: Inflation taken at 6 percent and post-retirement return at 8 percent)
To offset the effects of inflation, it is necessary to create regular income channels

that will provide ample funds to maintain your life style even after retirement. To
create such channels, planning your finances in a systematic manner takes
precedence. This brings us to the objective of retirement planning.
There may be other reasons as well that may cause some financial hitch during
life after retirement. Thus to overcome those hindrances, it is necessary that one
makes regular savings and investments.
Where to start? Steps to retirement planning
Before you start planning for retirement there are some aspects that you should
be mindful of. Analyzing your current situation and creating a plan accordingly
will have great positives. Identifying your current life stage is the first step
towards creating your retirement plan. Every life stage has its priorities and so
you should examine them. Life stages are mainly segregated as: Single, Married,
Married and with kids, and Post-retirement. Each life stage brings with it the
challenges and to overcome them proper planning is needed. Especially in the
early years of your life, in addition to meeting your current financial needs, you
have to plan for your future as well.

Step 1. Identify your life stage
Single: If you are single then your life stage priority must be to lay the foundation
for financial security. This is generally the time when you are just entering the
workforce and getting adjusted into a professional life. At this stage, chances are
that your liabilities will be minimal. This gives you an impetus to save more.
Starting to save early on in life helps you build up a sizeable retirement corpus
because of the power of compounding that comes into play.
Married and have kids: When you are married and in the subsequent life stage
when kids are born, your priority may be to accumulate assets and generate
wealth for the future life goals like buying a new house, children's education,
children's marriage, among others. Generating wealth is in part related to saving
up for your retirement. This process needs to be conducted in a systematic
manner such that your life goals are not compromised and at the same time your
retirement kitty grows.
Post-retirement: And if you are retired, and no longer working, then you must be
utilizing the wealth that you accumulated during your pre-retirement phase. With
the advancement in medical care, the average life expectancy is trending higher.
To make the wealth that you saved sustainable for your long life, you should look
for channels that will keep your resources flush.
After identifying your life stage, the next step is to find out how much you will
need to fund your retired life.
Step 2. Estimate the cost of retirement / estimate the required retirement

corpus
One size does not fit all and it is very difficult to find out actually the amount you
will need to save up to be used after retirement. Retirement Planning helps in
determining how much money you need to live a comfortable life even after your
earning years have stopped, besides ensuring a corpus for that phase of life.

There are few simple steps that you can follow to compute an approximate figure
that you will need:
• Arrive at the age at which you wish to retire. (Eg: Current age – 30;
Retirement age – 55)
• Calculate your current monthly expenses. Eg: Rs. 30,000 p.m.
• Factor in the inflation rate (Eg: 6% p.a.) and then calculate the monthly
expenses that you will need after retirement. (Eg: 128,756 p.m.)
• Assume a rate of return to be generated from your retirement corpus, i.e.
annuity rate. (Eg: 8% p.a.)
• Now, arrive at the real rate of return from your retirement corpus post-
retirement, after negating the effect of inflation. (Eg: [(1+8%)/(1+6%)] – 1 =
1.89%)
• Divide the annual expenses required post-retirement by the real rate of
return to arrive at your retirement corpus. (Eg: 128,756 / [1.89%/12] = Rs. 8.17
crore.)
• This will be the total corpus required. You also need to factor in the
investments including provident fund, which you have already made, to arrive at
the net corpus required.
Retirement planning worksheet

Post-
Retirement
EXPENSES TYPE Current Annual
Annual Expense (in
Expenses t oday's cost )
Household Expenses
Home Loan – Annual EMI
Personal Loan EMI's (Annual)
Vehicle Loan EMI's (Annual)
Education Expenses
Entertainment Expenses
Medical Expenses
Vehicle Maintenance Expenses
Holidays Expenses
Insurance Premiums
Traveling Expenses
Systematic Investment Plan (Annual)
Other Expenses
Total Expenses
Planned Retirement Age

No of years retirement corpus to be used
Existing PF / PPF / Other investments made towards retirement
Step 3. Assess how you are prepared for it
Once you have an idea of the required retirement corpus, the next step is to asses
how prepared you are currently to meet the retirement needs. Put simply, what
sources of retirement income are currently available to you? These could be your
Employee Provident Fund (EPF), Public Provident Fund (PPF), gratuity, or pension
schemes offered by insurance companies. The amount of income you receive
from these sources will depend on the amount you invest, the rate of investment
return, and other factors. Finally, if you plan to work during retirement, your job
earnings will be another source of income.
Step 4. Calculate the gap
Once you have taken the stock of your current pool of assets, the step is to
calculate the gap. Gap/shortfall is calculated as: The required retirement corpus
(step 2) minus The available investments (step 3).

If there is a short fall, you will need to bridge that up from additional personal
retirement savings.
Step 5. Build your retirement fund
When you know roughly how much money you’ll need, your next goal is to save
that amount and build your retirement fund. First, you’ll have to map out an
investment plan that works for you.
Investing should take into consideration your risk profile and the life stage. If you
have a long time for your retirement, then it is suggested that you invest a major
portion of your portfolio into equity or equity-related products. It has been
observed that equity products have given superior returns in comparison to most
other investments. Hence, by investing in equity products you will be able to
generate a greater corpus till your retirement. However, if you are close to your
retirement, it is advisable to invest in debt products because of the certainty of
the maturity value.
Illustration: Suppose, a person needs a corpus of 1 crore in his retirement kitty at

the age of 60. If he plans at the age of 25, considering returns of 8 percent, he has
to save Rs 58,033 per year. If he starts planning at the age of 35 he has to save Rs
1,36,788 every year. And if he starts planning late at the age of 45 he has to save
Rs 3,68,295 to reach his goal of Rs 1 crore.
Age/Returns Amount to be invested every year to accumulate Rs 1 crore

8% 10% 12%
25 58,033 36,897 23,166
35 1,36,788 1,01,681 75,000
45 3,68,295 3,14,738 2,68,242
A person in the age group of 25 to 35 can take maximum exposure to equity so as

to get better than 8 percent returns. In this age group a person can save more as
there are fewer liabilities. A person in the age group 35 to 45 has to take moderate
exposure or say 50 percent in equity. And a person above 45 has to take
minimum exposure to equity and when he reaches 55 he has to cut down the

equity exposure gradually. But suppose, if one has started planning for retirement
at a late age then to satisfy his goal he has to take equity exposure accordingly,
irrespective of his age.
A. Some of the investment options are:
1. Employee provident fund (EPF)
Most companies have EPF for the benefit of employees. An employee can
contribute 12 per cent of the salary towards EPF. The employer also contributes
12 per cent of salary. The current rate of interest on EPF is 8.5 per cent. This is a
good tool to build a retirement corpus.
2. Public provident fund (PPF)
PPF is another tool to build the retirement corpus. The minimum contribution is
Rs. 500 and the maximum is restricted to Rs. 1 lakh per annum. The current rate
of interest is 8.7 per cent. The contributions as well as the interest earned are tax
free. Its tenure is 15 years and can be renewed by 5 years each time. Moreover,
withdrawal facility is also available after 6 years. This is a good tool to fund your
retirement if you are not covered by EPF. Even those covered under EPF can also
contribute to PPF, for a larger retirement corpus.
3. Pension products from insurance companies
One of the most common investment options for retirement is through pension
plans, which come in the form of either endowment plans or ULIPs. In
endowment plans, the premiums are being invested into primarily debt
instruments only. ULIPs are a combination of mutual funds and insurance cover.
4. New Pension System (NPS)
The New Pension System (NPS) is a new voluntary contributory pension scheme
introduced by the Central Government. Under NPS, individuals can open a
personal retirement account and can accumulate a pension corpus during their

work life to meet financial needs post-retirement. These contributions will grow
and accumulate over the years, depending on the returns earned on the
investment made. When the person retires, he will be able to use these savings to
take care of the needs and expenses of his family during old age. The subscribers
may use the accumulated pension wealth under the scheme to purchase a life
annuity from a life insurance company. Alternatively, depending on the age of the
subscriber, a part of the wealth may be withdrawn as lump-sum.
5. Mutual Funds
Mutual funds are a preferred investment route for many due to the attractive
returns that they provide. If you have a long time for your retirement, investing in
equity mutual funds will generate a sizeable corpus and the long tenure will iron
out the risks involved due to volatility. You should invest in those mutual fund
schemes that have a good performance track record.
B. Life after retirement

If you have already retired or are at the threshold of retirement, it is essential to
invest in low-risk instruments so that there is no capital erosion. Hence it makes
more sense to invest in instruments with a greater exposure to debt.
Some of the preferred options are:
1. Annuity from insurance companies
An Annuity is a very useful retirement planning tool that offers unique benefits to
senior citizens. Annuity is a series of regular payments over a period. An annuity
is a contract with an insurance company under which you receive fixed payments
on an investment for a lifetime or for a specified number of years. Annuities can
be classified into different categories.
On the basis of purpose of the investment, annuities can be termed as deferred

or immediate.

a. Deferred annuities: In this type of annuity, the investor saves in a systematic
manner to build up sufficient funds for retirement. The withdrawals commence
after the retirement of the investor. They are best suitable for a long period and
not suitable for short term wealth generation.
b. Immediate annuities: The holder of immediate annuity makes one-time lump

sum payment, and begins receiving payments immediately. Immediate annuities
provide guaranteed flow of income for the rest of life and for a period defined by
the investor. It is wise to invest in immediate annuities if you are close to
retirement.
On the basis of nature of the investment, annuities can be fixed or variable.
a. Fixed annuities: As the name suggests, holders of fixed annuities receive an

assured rate of interest for a certain period. In this case, both interest and
principal are guaranteed and the payout amount remains constant throughout the
term.
b. Variable annuities: Holders of variable annuities receive varying payouts. This

is to take into account the inflation.
Both deferred and immediate annuities can be fixed or variable.
There are various payment options that annuity holders can opt for. You should
selection the options that suit your specific needs the best.
Annuity payout options

USP Pros Cons
Life annuity Income for life You don’t risk Payment stops on
outliving your death, even if early
corpus
Life annuity with Income for life and Nominee gets the Low payout
return of corpus principal given to money after because only
nominee after investor’s death income is given out

death
Fixed term annuity Guaranteed income Provides income Investor is at risk of
for a fixed period for fixed period as outliving the
specified by chosen term
investor
Joint annuity for After investor dies, Takes care of Low payout
life partner gets expenses of both because term is
income for life partners longer
Joint annuity for After investor dies, Nominee gets the Very low payout
life with return of partner gets money after
corpus income for life investor’s death
Increasing annuity Increased payouts Takes inflation into Needs a bigger
every year account corpus to sustain
over long term
2. Fixed deposits (FD)
FDs as the name suggests provide a fixed return. This is a low risk instrument by
banks and so the returns are also low (7-9 percent). The stability of the returns is
what makes this instrument a very attractive one for conservative investors,
including retired persons. Besides banks, FDs are now provided by Non-banking
Financial Institutions (NBFCs). In comparison, FDs from NBFCs offer higher
interest rates. While investing in these FDs it is essential to look at their credit
rating. The FDs with a high credit rating will offer you stable and higher returns
whereas a low credit score can be slightly risky.
3. Post Office Monthly Income Scheme (PO MIS)
PO MIS currently provides an interest rate of 8.4% percent per annum which is
paid monthly. The minimum amount to be invested is Rs. 1,500 and the
maximum is Rs. 4.5 lakh. PO MIS has a maturity period of 5 years.

4. Senior Citizens Savings Scheme
As the name indicates, this scheme is available for senior citizens. The scheme is
available to - 1. Who has attained age of 60 years or above on the date of opening
of the account. 2. Who has attained the age 55 years or more but less than 60
years and has retired under a Voluntary Retirement Scheme or a Special
Voluntary Retirement Scheme on the date of opening of the account within three
months from the date of retirement. 3. No age limit for the retired personnel of
Defence services provided they fulfill other specified conditions. Investments can
be made in any post-office by opening an account. Only one deposit can be made
in each account; the deposit amount shall be a multiple of Rs.1,000 and should
not exceed Rs. 15 lakh. The scheme has tenure of 5 years. The account can be
extended for a 3 year period by making an application. The current interest rate is
9.20% per annum. Premature closure of account is permitted – 1. After one year
but before 2 years on deduction of one and a half per cent of the deposit. 2. After
2 years but before date of maturity on deduction of 1 per cent of the deposit.
Premature closure is allowed after three years. In case of death of the depositor
before maturity, the account is closed and deposit is refunded without any
deduction along with interest.
5. Monthly Income Plan (MIP)
MIP of mutual fund is a debt-oriented scheme that aims to provide reasonable

returns on a monthly basis through investment in debt (75-80 percent of its
corpus) as well as a small portion in equities. MIPs aim to provide investors with
regular pay-outs (through dividends). They invest predominantly in interest
yielding debt instruments (commercial paper, certificate of deposits, government
securities and treasury bills). The debt investments ensure stability and
consistency while the equity instruments in the portfolio boost the returns.
Beside the regular investment avenues, there may be other resources that can be
tapped to generate income after retirement. This will mainly be an outcome of the
investments that you make along your way to fulfil your financial goals. Some of
the income sources are:
6. House rentals

This can be useful to generate steady returns against your earlier property
investment. If you have a second house and if it is rented out, then it is a good
source of income during your retired life.
7. Reverse mortgage
A reverse mortgage provides income that people can tap into for their retirement.
It is a type of mortgage in which a homeowner can borrow money against the
value of his or her home. No repayment of the mortgage (principal or interest) is
required until the borrower dies or the home is sold. The transaction is structured
so that the loan amount will not exceed the value of the home over the life of the
loan. A senior citizen who holds a house or property, but lacks a regular source of
income can mortgage his property with a bank or housing finance company (HFC)
and the bank or HFC pays the person a regular payment. The advantage is that
the person who has mortgaged his property in this manner can continue staying
in the house for his life and at the same time receiving the much needed regular
payments. So, effectively the property now pays for the owner.
Quick Look — Retirement Planning Products
Taxation/
Return Capital Investment Minimum Tax
Product indicative risk Tenor horizon investment benefits
No tax on
long-term
> 5 years gains;
(with active Short-term
Direct monitoring gains is
equity 12 – 15% High No lock-in >3years) - 15%
No tax on
long-term
No lock-in; gains;
Mutual can be Can be Short-term
funds - redeemed started at gains is
Equity 12 – 15% High any time 5 years Rs. 500 SIP 15%

No tax on
long-term
gains;
Short-term
gains is
PMS 12 – 15% High No lock-in > 3 years Rs. 25 lakh 15%
Investments
under
> Rs. Section 80C
ULPP / 10,000 per are tax
ULIP 6 – 10% Medium 5 years > 5 years annum exempt
Tax
benefits
available
Rs. 5,000 under
ELSS 8 – 15% Medium 5 years > 3 years lump sum Section 80C
Structured
Products 8 – 15% Medium 3-5 years > 3 years > Rs.5 lakh
Short term -
as per slab;
Long term
with
indexation -
20% /
Mutual without
funds - indexation -
Debt 7 – 10% Low No lock-in 1-5 years Rs. 500 SIP 10%
Deposits/
NCD/ 15 days -
Bonds 7 - 9% Low 10 years 1-5 years Rs.1,000 As per slab
Till the Rs. 500 per Tax
individual month or benefits
is 60 years Rs.6,000 available
NPS 8 - 9% Low old > 15 years annually under

Section
80C;
Maturity
benefits are
taxable
5 years
Senior (extendable
Citizen for No; Interest
Saving additional 3 is fully
Scheme 9.20% Nil years) 5 years Rs.1,000 taxable
Up to an 12% of the
individual's basic Yes; up to
EPF 8.50% Nil retirement > 15 years salary Rs.1 lakh
Yes; up to
Rs.1 lakh
under
PPF 8.70% Nil 15 years > 15 years Rs. 500 Section 80C
No tax
benefit
under
PO MIS 8.40% Nil 5 years 5 years Rs. 1,500 Section 80C
Yes; up to
Rs.1 lakh
5-year under
NSC 8.50% Nil 5 years 5 years Rs. 100 Section 80C
Yes; up to
Rs. 1 lakh
10-year under
NSC 8.80% Nil 10 years 10 years Rs. 100 Section 80C
Myths about Retirement
Myths are faulty beliefs with no scientific back up. Given below is the list of
common myths about retirement and how you can tackle them:

Myth 1: I am too young to plan for retirement
Fact: It's never too early to plan for retirement. Lets take a case, wherein a person
starts investing Rs12,000 p.a. from the age of 25 years. He will retire with a corpus
of Rs 25,43,000 at the age 60.
However, if he starts investing the same amount from age 35 instead, he will
retire with a corpus of Rs 10,00,000. A difference of more than Rs 15,00,000!!! No,
that is no magic, but simply the power of compounding, described as the eight
wonder of the world by Albert Einstein himself. Therefore do not postpone your
retirement planning anymore.
Myth 2: I won't live long after retirement
Fact: Everyone believes they will live healthy and retire rich and hate the idea of
being dependant on anybody either physically or financially. They claim, “I do not
want to live beyond age 60, as I do not want to be a burden on anyone”.
However, the average urban life expectancy is 77 years. In fact in another 20
years life expectancy may increase to 85 years, due to better standard of living
and improved health care. This means, even if they plan to retire at age 58, their
retired life will be as long as their work life. The longer you live, the longer your
money has to be stretched.
Myth 3: I will live healthy
Fact: This is a pre assumption everyone loves to live with. However, due to
changing life style, increasing work pressure, high level of stress and faulty food
habits, we will have more health related issues than any of our ancestors did.
Thus one also needs to arrange for the increasing health care expenses during
old age.
Myth 4: I can rely on my children

Fact: Our traditional joint family system is breaking down to nuclear family
system due to changing life styles and due to mobility and relocation for better
career prospects. In fact, it will be considered as unfair for the children if you are
dependant on them during the times of high cost of living.
Everybody will be more happy to be financially secure and independent rather

than depend on your children. Adequate savings will preserve your financial
freedom. If children take care of you consider it as a bonus.
Myth 5: I don't earn enough to save for retirement
Fact: Just as every drop of water makes a mighty ocean, small amounts if
invested regularly, will help you build your retirement nest. If a person aged 35
invests Rs 1000p.m., he will retire with a corpus of Rs 10,00,000 at age 60,
assuming returns at the rate of 10% p.a.
Myth 6: I will plan for retirement once I have paid off my auto loan
Fact: One may assume that he will have more money at his disposal, once he has
paid off the loans. However, in reality your expenses always outpace your
income.
Once you have paid off your one loan, you will probably want to take another
loan for some other thing, and the cycle goes on. And, thus retirement planning
will get further pushed off, as it does not seem as an immediate need.
Myth 7: I have saved enough money for retirement
Fact: While planning for retirement expenses, one must account for inflation as it
will reduce the purchasing power of money over a period of time. For e.g. If a
person aged 35 requires Rs 25,000 p.m. to meet his household expenses, he will
require Rs 95,000 p.m. to meet the same expenses when he retires at the age of

58 and will require Rs 1,92,000 p.m. to maintain the same standard of living by the
time he reaches age 70. This is assuming an inflation rate of 6%.
Thus while planning for retirement one should not only aim for an income which
will take care of his immediate expenses, but also aim for an income which will
keep in pace with inflation.
Case Study of a Pre-Retiree

T.K. Pai, 59, is approaching retirement. After having worked for almost 30 years in
a public sector, he is about to retire in next 6 months. He is happy, but worried
too. Though he would be getting pension and other lump sum retirement
accumulations as provident fund and gratuity, he is not sure whether the pension
would be sufficient. He is also unsure as in how to best utilize his retirement
benefits.
Fortunately, he met a financial planner, who has provided him a clear picture of
his finances and ways to lead a peaceful retired life.
Pai’s key financial assets:

Public provident fund (PPF): Rs 12 lakh
Bank deposits: Rs 10 lakh
Equity: Rs 5 lakh
On retirement:
Employer provident fund (EPF): Rs 20 lakh
Gratuity: Rs 10 lakh
Cash: Rs 1 lakh
Pension p.a: Rs 2.4 lakh
Pai’s key financial liabilities include earmarking approximately Rs 10 lakh for

daughter’s marriage in next 2 years and to upgrade his existing 1-BHK apartment
to 2-BHK apartment, which would entail an additional lump sum amount of Rs 20
lakh. His wife is dependent on him and he needs to support his daughter for at
least next 5 years.

Pai’s financial position (excluding cash) on retirement would be:
PPF: Rs 12 lakh
Bank FD: Rs 10 lakh
EPF: Rs 20 lakh
Gratuity: Rs 10 lakh
Equity Rs 5 lakh
Total: Rs 57 lakh
Considering the life facts that he is on the verge of retirement and has still two
goals left to achieve, viz; funding his daughter’s marriage and upgrading the
apartment, it would be better to play conservative than being aggressive on
investments.
Contingency fund: It is suggested increasing the cash holding by Rs 2 lakh to

bring it up to Rs 3 lakh to ensure that the contingent expenditures are met. The
cash holding has to be periodically reviewed and it is suggested that it should be
increased gradually to cushion the unforeseen expenditures on account of
medical expenditures, etc.
Daughter’s marriage and apartment up-gradation: Pai needs to earmark an
amount equal to Rs 30 lakh for his daughter’s marriage and apartment up-
gradation; to be parked in debt instruments either in bank fixed deposits (FDs) or
debt mutual funds with floating interest rates to keep the value of the investments
intact.
Total expenditure on retirement:

Cash holding: Rs 2 lakh
Daughter's marriage: Rs 10 lakh
Apartment up-gradation: Rs 20 lakh
With this, the financial allocation on retirement would appear as:

Expenditure: Rs 32 lakh
Retirement investments: Rs 25 lakh

The suggested debt-to-equity ratio at this age is: 4:1 i.e. 80% of invest-able
amount in debt and balance in equity, which he should further re-balance to more
conservative ratio of 9:1 i.e. 90% in debt and balance in equity. The re-balancing
to move funds in debt is required for capital protection, which, post retirement is
more important than wealth creation.
Accordingly, as suggested, asset allocation on retirement will be:
Equity: Rs 5 lakh
Debt: Rs 20 lakh
Total : Rs 25 lakh
Pai is advised to invest Rs 5 lakh in diversified equity mutual funds with good
track record. For debt investments, his investment strategy needs to take care of
capital protection, regular periodic income and liquidity.
SESSION 4: INVESTMENT PLANNING
We all work for money. It is equally important to ensure that money works for us.
There are two main ways to make money. 1. We make money by working. 2.
Money makes money – that is, by way of investments. Investment refers to a
commitment of funds to one or more assets as per the goals and risk profile of an
individual.
In order to achieve our goals, it is important that we have a sound investment

plan in place. Investment plan is nothing but the process of making investments
based on our needs.
Why invest?

Investing is the best way to secure your future by accumulating wealth for the
long term. Investing not only helps you beat the effects of inflation but also helps
in generating handsome returns to attain your financial goals. By investing, you
let the power of compounding assist you in generating good returns.
How inflation affects you?
Inflation is a fall in the market value or purchasing power of money. Let’s

understand inflation with a simple example. About 60 years ago, an average Rs.
300 per month was a handsome good amount to support one’s family. Today this
is no less than Rs. 15,000 in an urban area. The prices increase over time and the
value of money, in absolute term, decreases. We get this sense every time we
compare the prices of any commodity today with what it was a few years back.
This is inflation. So it is essentially a real-life value of money which keeps on
reducing.
In technical terms, inflation increases wherever too much money chases too few
goods i.e. the purchasing power of money decreases. But it has some serious
impact on what we save as we will learn in the effects of inflation. Purchasing
power refers to the amount of goods and services a given amount of money can
buy. So Rs. 300 would have been sufficient 60 years ago to run a small middle-
class nuclear family, while the same Rs. 300 at present is insufficient even for one
week’s food for a single person. So the purchasing power of money has gone
down in these 60 years. Inflation is nothing but a fall in purchasing power of
money.
Another way to look at this is that the money you save for tomorrow needs to
grow at a rate, through the investments you make, so that its purchasing power
remains or grows over a period of time.
Simply put, an increase in the general price level for a considerable period of time
is called as inflation. The two major causes are demand pull factors and cost push
factors.
Power of Compounding

To define compounding, it is the ability of an asset to generate returns, which
when re-invested generates further returns. In simple words, when your money is
allowed to remain invested for a long period of time, the interests earned will add
to the seed capital and will in turn earn further interests. This method of
multiplying your investment capital is called compounding.
To work, the compounding process requires two things: (1) re-investing the
returns earned, and (2) time. The more time you give your investments, the more
you are able to accelerate the income potential of your original investment.
Let’s take an example to demonstrate the power of compounding:
Consider, you have Rs.100 and you invest it at10 percent.
Time Principal (Rs.) Interest (Rs.) Total amount (Rs.)
After 1 year 100.00 10.00 110.00
After 2 years 110.00 11.00 121.00
After 3 years 121.00 12.10 133.10
After 4 years 133.10 13.31 146.41
After 5 years 146.41 14.64 161.05
Total Compound Interest earned 61.05
Had you invested the same amount at a simple interest of 10 percent for 5 years,
you would get only Rs. 50 as interest. The difference is because compounding
reinvests the amount earned in order to generate more earnings which is
otherwise ignored.
This method of investing is useful to create a corpus for important financial goals.
Investing small amounts regularly will not pinch your pocket. If you leave this
investment untouched, this will grow into a considerable amount that will fund
your goals. To create a large corpus, you need to give time for the money to
grow. Hence it is always beneficial to start saving early. Starting early always has
its advantages in investing.
Let us consider an example of two friends, Ram and Shyam.

Ram Shyam
Current age (years) 30 35
Retirement age (years) 55 55
Monthly investment (Rs.) 3,000 5,000
Rate of return (%) 12 12
Corpus accumulated (Rs.) 51,06,620 45,99,287
In the above example, Ram, planning to retire at the age of 55, started investing
Rs.3,000 p.m. from the age of 30 for building his retirement corpus. Shyam also
planning to retire at the age of 55, realized the importance of investing a little late
at the age of 35 and hence, started investing a higher amount of Rs.5,000 p.m.
from the age of 35. Though Shyam is investing a higher amount, Ram
accumulates higher corpus for the simple reason that he started 5 years ahead of
Shyam and the difference is huge - Rs. 5,07,333.
Investment Planning Process

Building an investment portfolio largely entails the following steps:
Step 1: Ascertaining risk profile
Every person is unique in various ways. Similarly, your investment capability may
not be the same as your sibling, friend or your colleague. You are the best person
to understand your own ability to invest and bear the risk associated with it. Risk
is a deviation of outcome from the expected standard end result. Risk basically
means future issues that can be mitigated or avoided by taking informed
decisions.

Risk profile can be defined as how much variation in returns from investment can
be easily accommodated by you. Do you want a 10 percent or 50 percent return
annually to make your portfolio strong and achieve your goals? Are you prepared
to accept the impact of volatility in the stock markets? This assessment helps you
in understand your risk profile.
You risk profile helps in deciding which asset classes to invest in. An asset class
can be a group of securities which have common characteristics — risk, maturity,
cost of trading, etc. For example, if you have a considerable risk appetite, you can
invest in derivatives which are taken as the most risky investments. And based on
the knowledge of your risk appetite, you can choose the particular investment to
be made. Risk profile is specific to an investor, i.e., your risk profile is unique to
you.
After realizing the importance of understanding the risk profile, the next task is to
identify it. The factors that affect the risk profile of an investor are: the current
income, knowledge about financial markets and investments, age and life stage of
the investor, time horizon of your financial goal, certainty of income and in
general your attitude to wards taking risks.
Income: Your income has a bearing on your risk profile. It is observed that the
higher you earn, higher is your ability to save and/or invest and thus generate
wealth. This creates an ample opportunity to take risk to earn higher returns.
Hence your risk-ability has a direct relation to your income and accumulated
wealth.
Knowledge of financial markets: If you are aware of the workings of the financial
markets, chances are that you will not be seeking advice from other sources for
your investments. You can gather information from various sources and use your
own expertise and skill to put your money to good use. There are high chances of
you getting into risky investments since you will have strategies lined up just in
case the returns start diminishing. This does not in any way mean that those who
do not invest in risky assets are unintelligible about the financial markets. Chances
are that you may invest a major portion of your investments in less risky assets
and experiment risk with a small part of your portfolio.

Time horizon of your goals: It is generally observed that if you are able to wait for
a long time for your investments to yield the expected returns, you tend to take
greater risks with your investments. This is so because you are not worried about
intermittent losses as you have set your eyes on a certain greater return in the
long term. Besides, it is mathematically proved that over a long term, you even
out the chances of losing money through your investments, thus minimizing your
risks. It is recommended that if you need money in the near future you should
refrain from investing in risky assets as the inherent nature of volatility of those
asset classes can bring down the base value of your investment. Instead, as your
goals come within reach, you should move your investments from risky assets
into low risk category investments.
Age and life stage: We generally observe in our daily life that youngsters are
more prone to excited behaviour and are not afraid of making mistakes. It is
because they think that they can start all over again and still be successful.
Similarly, in financial investments too, your age plays an important role in your
ability to take risks. Wealth is created over a long period of time. The longer you
stay invested chances of generating a greater amount of returns are higher, thus
bringing your risk to a minimum.
If you are young and single, you will have a greater enthusiasm in taking on risk
and invest in assets that bear a great amount of risk, because you do not have
any dependents. Instead, if you are married person, you will be cautious in your
investments since you will have dependents, you need to set up your family, buy
a house, bring up children, and a whole lot of financial goals to be achieved. If
you are retired, you will be even more cautious since your regular income flow
will have stopped, and you need to create a corpus for your winter of life.
Certainty of income: If you have a secure job or business, you can take higher
risks with your investments. You can in this way be almost certain of your future
earnings and can plan your financial investments in accordance to a well set plan.
Your attitude towards risk: In general we are risk and loss averse. However few
of us are more sensitive to potential losses or actual losses. It is important to be

comfortable with the investments that you make. Investment into equity is more
risky and volatile as compared to investments in fixed deposits, however they
promise a potentially higher return too. It is ones comfort level with the risk and
reward of ones investment that defines the attitude towards risk. The ability of risk
is also dependent on the factors that we discussed above and it is a good idea to
follow the life stage asset allocation that we discussed earlier. The broad risk
profiles have been discussed in the next section of this chapter.
Analyzing risk profile: Investors are broadly classified into the following
categories based on their risk profile:
• Conservative
• Moderate
• Balanced
• Aggressive
• Highly aggressive
Let us take a closer look at the various risk profiles.
Conservative: As a conservative investor, you avoid taking undue risks and you
are firm on preserving your investment capital. You are always looking for
investment avenues which will help generate income to beat inflation and at the
same time protect your capital. Since you are risk-averse you prefer investing in
avenues where the risk-return is clearly defined.
Moderate: As a moderate investor, you are likely to make investments that have
very limited levels of risk and generate moderate returns. You prefer slightly
higher returns than in a traditional Bank FD. You are not comfortable with large
drops in the value of your investments even for a short while. You are on the
lookout for a cautious mix of capital protection and growth that generates steady
returns.
Balanced: As a balanced investor, you are willing to accept certain levels of

fluctuations in the value of your investments in order to appreciate your returns
and achieve your goals. You are ready to accept a certain amount of risk and in
most probability you are interested in investing for the long term. You also have a

fair understanding of the benefits of diversification among various asset classes.
Your primary goal is growth of capital and generating income. Your suggested
balanced portfolio has an equal allocation of growth and income generating
assets. This ensures stability to the portfolio in terms of appreciation in your
investment and generating a regular income from it.
Aggressive: As an aggressive investor, you are comfortable with initial

fluctuations in the value of your investments to generate high returns. You
understand that taking larger risks helps earn higher returns. Hence you prefer
investing in avenues such as equity that provide high returns but at the same time
pose high risks. Your primary aim is growth of capital. Equities form the base of
the portfolio.
Highly Aggressive: You are interested in only high growth and do not mind taking
on high levels of risk to achieve your investment objectives. You are not
concerned about the market swings as long as the returns show a steep
appreciation. The possibility of negative returns does not deter you from
investing in high-risk investments to ultimately gain high returns in the long term.
Your primary focus is to earn very high returns with no concerns for the
associated risk. All investments of your portfolio are in equity and related
securities.
Step 2: Identifying appropriate asset allocation according to a risk profile
Asset allocation is the process by which investors can distribute their investment
capital between various asset classes within their portfolio. The goal of asset
allocation is to create a well-diversified portfolio. That is, one which effectively
reduces the overall portfolio risk while maintaining the expected level of returns.
Asset allocation is the process of choosing the right mix of available asset classes
for investment. The major asset classes are: Equity, Fixed income or debt, and
Cash and cash equivalent. A right asset allocation ensures that an individual’s
surplus is apportioned among various asset classes that best suits his/her
financial objectives. An ideal portfolio should have a mix of all the major asset

classes in various proportions depending on the persons risk profile, age and
time period to achieve the goal.
Thumb rule in asset allocation
This rule is used to find out the percentage of equity allocation in your portfolio.
According to this rule,
Percentage of equity allocation in your portfolio (approx) = 100- Your age
For example, if your age is 30 years, then as per this rule your portfolio should
have an approximate equity allocation of 70 percent (100-30).
It is based on the assumption that when you are young you have the ability to
take more risk because in this life stage people mostly have less or no liabilities.
Asset Allocation as per risk profile
Every individual has different risk profile depending on his/her risk taking ability. If
we consider the three major risk profiles, namely aggressive, moderate and
conservative, there will be a different asset mix in them.
A sse t A llocation A sse t A llocation A sse t A llocation

A ggre ssiv e Inv e stor Conse rv ativ e Inv e stor Mode rate 1Inv
10% 0 %e stor
10% 20%
20%
45%
70% 45%
70%
Equity D e bt Cash Equ i ty De bt C as h Equity De bt Ca sh
(This is for illustrative purpose only. Actual allocation may vary)
Generally, the more time you have to achieve the goal, the more aggressive you
can be. It means you can allocate more into equity in such cases as you will have

more time to generate the desired returns. And historically, equity has given more
returns in comparison to other asset classes.
It is important to understand the importance of a right asset mix to achieve the

goals. One should consider various factors like one’s risk taking ability, age and
time duration and allocate assets accordingly.
Broad Asset Classes
Equity is a high risk asset class. Volatility in the prices of stocks is very high and
this can unnerve many investors. But if you are a disciplined investor with a good
amount of risk ability, then this the best type of asset. Over the long term, equities
provide the highest returns, provided you don’t sway with your emotions as the
markets experiences peaks and troughs.
Debt is relatively low-risk asset class. Debt investments, fixed-interest securities

historically provide lower returns than equities. They help reduce the overall risk
of your portfolio and pay a regular interest income.
Real estate is another major investment class with moderate risk attached with it.
The house that you live in or any landed property that you own, constitute this
asset class. Even though the risk is moderate, it is susceptible to fluctuations in
market demand. The major drawbacks are the time and expense involved in
maintaining this asset. But it has the potential to provide you very good returns if
traded at the right time.
Cash is another asset class that you hold in your savings account or fixed
deposits or other money market investments. This type of asset offers very low
returns, but the biggest advantage is that it provides easy access to money when
you suddenly need it.
Commodities are raw materials used to create the products consumers buy, from
food to furniture to gasoline. Commodities include agricultural products such as
wheat and cattle, energy products such as oil and gasoline, and metals such as
gold, silver and aluminium. The gold and silver ornaments in your jewellery

collection constitute this type of asset class. Investing in commodities can be
highly risky as the commodities market is highly volatile and work on the basis of
market demand.
Alternative Assets is another type of asset class that’s fast becoming popular in
India. Art, antiques, collectibles etc. are representative investments under this
asset class. So if you have inherited any special heirloom from your ancestors,
hold on to it as it may be of great value.
Alternativ
Commoditie Real
Parameter Cash Debt Equity e
s Estate
Assets
Governme Shares, Gold and Apartment Art,

Savings
nt bonds, equity precious s, flats, Antiques
accoun
Representativ debt mutual metals, land, and
t,
e mutual funds kitchen and commercia Collectible
Money
investments funds industrial l property, s
market
commoditie real estate
funds
s funds
Risk Low Low High High Medium High
Low Low High High (but Medium to High (but

volatile) High (but Indian
cyclical) market is
Return volatile
and still
needs to
mature)
Inflation Very
Low High High High High
protection low
High High High Medium to Low Low

(except for (except for High
Liquidity bonds ELSS
locked in mutual
for funds - tax

minimum advantage
period) d equity
linked
funds)
Yes Yes Yes in No If you rent No

case of out your
dividend property or
Income
paying land
stocks and
funds
Capital No No Yes (but Yes (but Yes (but Yes (but

appreciation cyclical) cyclical) cyclical) cyclical)
The asset allocation that works best for you at any given point in your life will
depend largely on your life stage, time horizon and your ability to tolerate risk.
Life stage: The different life stages – single, married, married with children, pre-
retirement and post-retirement – are the phases of every person’s life. Depending
upon which stage you are at, you should make your investments to achieve your
life goals based on your needs. If you are young and single, you can afford to be
an aggressive investor. If you are middle-aged and married, it is better to take on
only moderate risk. If you are retired, it is prudent to stay away from risk as the
income sources have depleted.
Time horizon: Your time horizon is the expected number of months, years or
decades you will be investing to achieve a particular financial goal. An investor
with a longer time horizon may feel more comfortable taking on a riskier, or more
volatile, investment because time is not at a premium, and he or she can wait out
slow economic cycles and the inevitable ups and downs of our markets. By
contrast, an investor saving up for a child’s college education in three years will
be wary of taking risks because the parent has a shorter time horizon.
Risk tolerance: Risk tolerance is your ability and willingness to lose some or all of
your original investment in exchange for greater potential returns. The way you
perceive risk depends on a lot of factors. You should analyze your risk taking

ability before taking the plunge to make an investment. An aggressive investor, or
one with a high-risk tolerance, is more likely to take greater risk in order to get
better potential returns. A conservative investor, or one with a low-risk tolerance,
tends to favour investments that will preserve the original investment capital.
Step 3: Have adequate diversification with your asset allocation
When allocating your portfolio between various investments, your goal is to

effectively and efficiently diversify your portfolio. By adding different investments
in your portfolio, you can reduce the overall portfolio risk while maintaining the
average expected return. But for the diversification of capital to be effective it is
more than simply adding different investments to the portfolio. They need to be
the right kind of investments.
For successful diversification, you need to spread your assets so that the same
factors do not affect all the investments in the same way. The ideal situation will
be when one asset class is negatively impacted by a systemic risk, another asset
class benefits from that same factor. This provides protection to your portfolio.
The investor’s goal should be to diversify risks and maximize returns, and this can
be achieved by investing in several asset classes. Each asset class has its own
unique risk and expected return profile. Asset classes react to stimuli such as
changes in the economy, government, monetary and fiscal policy, as well as
other factors. Depending on the specific class, these factors will impact in
different ways.
The correlation between two assets tells how much they will move in tandem. If
they are perfectly positively correlated (correlation coefficient of +1), the prices of
the assets will move together in lockstep. If they are perfectly negatively
correlated (correlation coefficient of −1), their prices will move in opposite
directions. And if they have no correlation (0), the two assets will move
completely independently from each other. Thus correlation plays a very
important role in helping you diversify your portfolio and bringing stability to it.

Besides diversification across asset class, it is also recommended that you
diversify within asset classes as well. Within stocks, you should diversify across
industries and companies. For example, if you invest only in four or five individual
stocks, you need at least a dozen carefully selected individual stocks to be truly
diversified. Within fixed income investments, you should diversify across different
tenure.
Achieving diversification can be challenging, so you may find it easier to diversify

within each asset category through mutual funds rather than through individual
investments from each asset category. A mutual fund is a pool of money from
many investors and invests the money in stocks, bonds or other financial
instruments. Mutual funds make it easy for investors to own a small portion of
many investments. For example, a Nifty index fund will buy all stocks in the same
proportion as the Nifty index.
Taking diversification a step further, the option of diversifying across geographies

is also open for Indian investors. You can buy stocks in overseas markets and
also invest in other assets like real estate.
Step 4: Stay true to your allocation by regularly rebalancing

Asset Allocation is not static. It changes with time, as the age of the investor
increases and risk profile changes. Also, whenever there is a change in the
portfolio mix due to the returns generated by the various asset classes, there is a
requirement for re-balancing the portfolio to bring it back to the initial allocation. If
not rebalanced, the portfolio might take a hit on the returns generated over a
period of time.
Asset class Amount (Rs.) % of allocation
Equity 50,000 50%
Fixed income 30,000 30%
Money market 20,000 20%
Total 1,00,000 100%

20%
Equity
Fixed income
50% Money
market
30%
After a year, this is how his portfolio looks like:
Asset class Returns % p.a Amount (Rs.) with returns % of allocation by

year end
Equity 30% 65000 55%
Fixed income 10% 33000 28%
Money market 5% 21000 17%
Total 19% 119000 100%
17%
Equity
Fixed income
Money
55% market
28%
The asset allocation pattern has changed from the initial allocation, due to the
different returns generated by different asset classes. Hence, we need to re-
balance the portfolio back to the initial allocation pattern by selling some equity
and investing into fixed income and money market instruments. Let's see the
effect of ignoring re-balancing.
Effect of ignoring portfolio re-balancing

Given below are 2 scenarios, one if the investor has ignored portfolio re-balancing
and another, if the investor has rebalanced his portfolio. In the first case, the asset
allocation pattern has changed, whereas in the second case, the investor has sold

some of his equity portion and increased his fixed income and money market
portion to bring back the asset allocation to the initial level.
Ignoring Portfolio Rebalancing Re-Balanced Portfolio
Asset class Amount % of Asset class Amount (Rs.) % of

(Rs.) allocation allocation
Equity 65,000 55% Equity 59,500 50%
Fixed 33,000 28% Fixed 35,700 30%
income income
Money mkt 21,000 17% Money 23,800 20%
market
Total 1,19,000 100% Total 1,19,000 100%
Let's see the effect of both the above scenarios, after completion of Year 2.
Ignored Portfolio Rebalanced

Portfolio
Asset Class Returns Opening bal Closing bal Opening bal Closing
bal
Equity -11.00% 65,000 57,850 59,500 52,955
Fixed 15.00% 33,000 37,950 35,700 41,055
income
Money 8.00% 21,000 22,680 23,800 25,704
market
Total 1,19,000 1,18,480 1,19,000 1,19,714
It clearly reflects that had he not rebalanced his portfolio, his second year's
returns would be negative. But had he rebalanced the portfolio to the initial asset
allocation level, his returns would have been positive. The difference between a
rebalanced portfolio and an ignored portfolio can be significant as the duration
increases. In this case, portfolio re-balancing is the optimal strategy. But if the
stock market rallies in the second year, then the ignored portfolio may realize a
greater appreciation in value than the rebalanced portfolio. But by re-balancing,
one can nevertheless adhere to his risk-return tolerance level.
Common Risks Involved In Investments
All investment products are designed to make a return and are subject to different
types of risks. Risk in simple words means, the chance of a financial loss. The
term risk is interchangeable with uncertainty which refers variability of returns
associated with a financial asset.

Investment risks can be classified into: Systematic risk and non-systematic risk.
Risk associated with the overall economy or market is termed as systematic risk.
Non-systematic risk is associated with a specific firm or a company. Some of the
common investment risks are:
Risks in Equity Investments
Market or economy risk: To some extent the performance of a company

depends upon the economy it operates in. In a prospering economy, the
companies operating in it will benefit in terms of good performance. In a
slowdown, all the sectors will have a damaging impact. Economic risks are
reflected in factors such as gross domestic product (GDP) growth, inflation,
interest rates, etc.
Industry risk: Industrial growth is always cyclical. It goes through the infancy,
expansion, maturity and stagnation stages. Shareholders will be well rewarded
when they invest in growing industries, and during the maturity stage the
dividends will be less forthcoming. Later, when growth starts retarding, investors
may face losses. Industry-specific government regulations too can have an
adverse impact on the returns on investments made therein.
Management risk: The management is the most important aspect of a company

as it is the face of the enterprise and also gives direction to the course of action.
Hence the quality of management has a great say on the company’s performance.
A change in management can have a serious impact on the policies of the
company. An enterprise that can manage competition and prosper in the
challenging environment will gain the most.
Business risk: Business risk is a function of the operating conditions faced by an

enterprise and the variability these conditions impact the company’s profits.
Business risk can be both internal as well as external. Internal business risk
depends on the efficiency of the company to perform within the confines of the
broader environment. External business risk is the result of operating conditions
brought onto it by forces beyond the control of the enterprise.

Financial risk: Financial risk is the manner in which the enterprise conducts its
financial activities. If a company borrows money for business, it has to pay
interests till the complete loan is repaid. This can deplete the shareholders
portions if it goes beyond a specified limit. Moreover, there can be risks of
defaulting and not be able to match up to its liabilities, and as a result turn
bankrupt.
Exchange rate risk: Some companies today earn significantly from exports. Any
appreciation in the rate of exchange vis-à-vis the currency in which the exports
are billed, will result in reduced earnings for the company. This can adversely
affect the share price of the company.
Inflation risk: Rising prices reduces the purchasing power of the common man,
resulting in a slowdown in demand in the economy, spanning across sectors.
Hence the share price of a company can be severely affected since the lack of
demand reduces the expected future earnings of the company.
Interest rate risk: Rising interest rates increase the cost of borrowing, resulting in
an increase in prices of products, which in turn will result in a slowdown in
demand. Hence a rise in interest rates can negatively affect the share price of a
company.
Risks in Debt Investments
Default /credit risk: It refers to the risk of default or non-payment of periodical

interest payments and principal on maturity by the issuer. This could be due to
business risk or financial risk of the issuer.
Interest rate risk: It is the risk of change in market price of a fixed income security
due to change in interest rate in the economy. Interest rate and market price of a
fixed income security share an inverse relation. If interest rate increases, price
decreases. If interest rate decreases, price increases.

Re-investment risk: This is the risk of fall in the interest rate during the period of
receipt of interest rates and at maturity. A falling interest rate will provide less
lucrative re-investment opportunity of periodical interest payments and maturity
amount. If Interest rate rises, reinvestment risk reduces. If Interest rate falls,
reinvestment risk increases.
Purchasing power risk: This is the risk caused by the inflation. When the inflation
increases, the real return on the fixed-income security decreases. Coupon on
fixed income securities compensates for inflation but increasing inflation erodes
the purchasing power of periodical interest payments /maturity amount.
Liquidity risk: Where a fixed income security is traded in a secondary market

then the risk of it not being sold is known as liquidity risk. This may be due to:
Inefficient secondary bond market or Lack of demand.
Call risk: It refers to the risk that a fixed income security may be redeemed before
maturity date. This risk is due to falling interest rates and the issuer would like to
replace a high cost debt for low cost debt. When a call is exercised then a call
premium is paid by the issuer.
Understanding Return Concepts
Absolute Return: The absolute return or simply return is a measure of the gain or
loss on an investment portfolio expressed as a percentage of invested capital.
It is calculated as:
( (End Value – Beginning Value)/Beginning Value ) x 100
The rate of return is converted into percent terms by multiplying by 100.
Example: You invested Rs. 100 in a stock and it appreciated to Rs. 120. The
absolute return would be:
( (120-100)/100) ) x 100
= 20%

Annualized Return: Annualized return is a standardized measure of return on
investments in which the return is computed as percent per annum (% p.a.).
It is calculated as:
(End value - Beginning value)/Beginning value) x 100 x (1/ holding period of
investment in years)
All annualized returns are represented as “% p.a.” If the p.a. is missing, it is

usually a simple absolute non-annualized return.
Total Return: Investments can give returns in different forms such as interest
income (debentures, bank deposits), dividend (mutual funds, equity shares) and
profits on sale (capital gain on selling a house). Total return is the return
computed by comparing all forms of return earned on the investment with the
principal amount. Thus total return is the annualized return calculated after
including all benefits from the investment. Total return can be positive as well as
negative.
For example, consider an equity share of face value Rs.10, which yields a
dividend of 30%. The share is purchased for Rs. 200, but sold for Rs.190 after one
year. Dividends earned= 30% of Rs.10 = Rs.3; Loss on sale= 10 Total return = 3
– 10 = -7 on investment of 200 Rate of return % p.a. = (-7/200) x 100 = -3.5%
In this example the loss component is greater than the positive dividend earned
so the total return becomes negative.
Nominal Rate of Return vs. Real Rate of Return: Suppose we invest Rs.100/- into
a Fixed Deposit for 1 year at an interest rate of 7% p.a. At the end of the year, we
would get Rs.107/-. This 7% here is referred to as the nominal interest rate.

Now suppose the inflation rate is 5% for that year. If we want to buy a basket of
goods now, which was costing Rs.100 in the beginning of the year, it would cost
us Rs.105/-. So after factoring in inflation, our Rs.100 investment into Fixed
Deposit will earn us only Rs.2/-; a real interest rate of only 2%. The relationship
between the nominal interest rate, inflation and real interest rate is described by
the below Fisher Equation:
r =n–i
Where r = Real Interest Rate; n = Nominal Interest Rate; i = Inflation Rate
The above formula can be used for low levels of inflation. For higher levels of
inflation, the below formula will bring out the exact real interest rate.
r = [1+n) / (1+i)] - 1
It is important for us to educate the clients to invest in instruments which will
provide a higher real interest rate, which will ensure inflation not eating much into
the returns being generated.
Tax Adjusted Return: Tax-adjusted return is the return earned after taxes have
been paid by the investor. Since taxes actually reduce the money in the hands for
an investor, it is necessary to adjust for them to get a realistic view of returns
earned. Suppose an investor earns an interest of 10% on an investment of
Rs.1000. If this interest is taxed at 20%, then we calculate tax adjusted return as
follows:
Nominal interest rate = 10%
Interest received = 10% of 1000 = 100
Tax payable = 20% of 100 = 20
Net interest received= 100- 20 = 80
Post tax return = 80/1000 = 8%
In general, post tax or tax adjusted return TR = NR * (1-tax rate)
TR: tax adjusted return
NR: nominal return
Session 5: TAX PLANNING AND ESTATE PLANNING
Tax Planning

Let us begin by understanding the meaning of tax. Tax is a fee charged by a
government on a product, income or activity. There are two types of taxes –
direct taxes and indirect taxes. If tax is levied directly on the income or wealth of a
person, then it is a direct tax e.g. income-tax. If tax is levied on the price of a good
or service, then it is called an indirect tax e.g. excise duty. In the case of indirect
taxes, the person paying the tax passes on the incidence to another person.
The reason for levy of taxes is that they constitute the basic source of revenue to
the government. Revenue so raised is utilized for meeting the expenses of
government like defense, provision of education, health-care, infrastructure
facilities like roads, dams etc.
It would be nice if we could all pay our taxes with a smile, but unfortunately, this
is not so! Therefore, the question arises, how to minimize our tax liabilities? The
answer is - through tax planning.
Tax planning is an arrangement of financial activities in such a way that maximum

tax benefits, as provided in the income-tax act are availed of. It envisages use of
certain exemptions, deductions, rebates and relief provided in the act. It helps
reduce tax liabilities considerably.
“Tax planning is a logical analysis of a financial situation or plan from a tax

perspective, to align financial goals with tax efficiency planning. The purpose of
tax planning is to discover how to accomplish all of the other elements of a
financial plan in the most tax-efficient manner possible. Tax planning thus allows
the other elements of a financial plan to interact more effectively by minimizing
tax liability,” defines Investopedia.
Before we proceed further, let’s take a look at some common terms that we come
across in taxation.
Common Terms When It Comes To Taxation
Assessee: Assessee means a person by whom any tax or any other sum of
money is payable under the Income Tax Act, 1961. It includes every person in

respect of whom any proceeding has been taken for the assessment of his
income or assessment of fringe benefits. Sometimes, a person becomes
assessable in respect of the income of some other persons. In such a case also,
he may be considered as an assessee. This term also includes every person who
is deemed to be an assessee or an assessee in default under any provision of this
Act.
Assessment: This is the procedure by which the income of an assessee is

determined by the Assessing Officer. It may be by way of a normal assessment or
by way of reassessment of an income previously assessed.
Person: The definition of ‘assessee’ leads us to the definition of ‘person’ as the

former is closely connected with the latter. The term ‘person’ is important from
another point of view also viz., the charge of income-tax is on every ‘person’.
The definition is inclusive i.e. a person includes, an individual; a Hindu Undivided

Family (HUF); a company; a firm; an Association of Persons (AOP) or Body of
Individuals (BOI), whether incorporated or not; a local authority, and every
artificial juridical person e.g., an idol or deity.
Income: Income, in general, means a periodic monetary return which accrues or

is expected to accrue regularly from definite sources. However, under the
Income-tax Act, 1961, even certain incomes which do not arise regularly are
treated as income for tax purposes e.g. Winnings from lotteries, crossword
puzzles.
Income normally refers to revenue receipts. Capital receipts are generally not
included within the scope of income. However, the Income-tax Act, 1961 has
specifically included certain capital receipts within the definition of income e.g.
Capital gains i.e. gains on sale of a capital asset like land.
Income means net receipts and not gross receipts. Net receipts are arrived at after
deducting the expenditure incurred in connection with earning such receipts. The
expenditure which can be deducted while computing income under each head is
prescribed under the Income-tax Act.

Income is taxable either on due basis or receipt basis. For computing income
under the heads “Profits and gains of business or profession” and “Income from
other sources”, the method of accounting regularly employed by the assessee
should be considered, which can be either cash system or mercantile system.
Assessment and previous year: Income earned in a previous year is chargeable

to tax in the assessment year. Previous year is the financial year, ending on 31st
March, in which income has accrued/ received. Assessment year is the financial
year (ending on 31st March) following the previous year. The income of the
previous year is assessed during the assessment year following the previous
year. For instance, income of previous year 2012-13 is assessed during 2013-14.
Therefore, 2013-14 is the assessment year for assessment of income of the
previous year 2012-13.
Procedure of Computation o Total Income
Income-tax is levied on an assessee’s total income. Such total income has to be

computed as per the provisions contained in the Income-tax Act. Let us go step
by step to understand the procedure of computation of total income for the
purpose of levy of income-tax:
Step 1: Determination of residential status: The residential status of a person

has to be determined to ascertain which income is to be included in computing
the total income.
In the case of an individual, the duration for which he is present in India

determines his residential status. Based on the time spent by him, he may be (a)
resident and ordinarily resident, (b) resident but not ordinarily resident, or (c) non-
resident.
The residential status of a person determines the taxability of the income. For
e.g., income earned outside India will not be taxable in the hands of a non-
resident but will be taxable in case of a resident and ordinarily resident.

Step 2: Classification of income under different heads: The Act prescribes five
heads of income. These are shown below:
• Income from Salary

• Income from House property
• Income from Business or Profession
• Income from capital gains
• Income from other sources
These heads of income exhaust all possible types of income that can accrue to or
be received by the tax payer. Salary, pension earned is taxable under the head
“Salaries”. Rental income is taxable under the head “Income from house
property”. Income derived from carrying on any business or profession is taxable
under the head “Profits and gains from business or profession”. Profit from sale of
a capital asset (like land) is taxable under the head “Capital Gains”. The fifth head
of income is the residuary head under which income taxable under the Act, but
not falling under the first four heads, will be taxed. The tax payer has to classify
the income earned under the relevant head of income.
Step 3: Exclusion of income not chargeable to tax: There are certain incomes
which are wholly exempt from income-tax e.g. agricultural income. These
incomes have to be excluded and will not form part of Gross Total Income. Also,
some incomes are partially exempt from income-tax e.g. House Rent Allowance,
Education Allowance. These incomes are excluded only to the extent of the limits
specified in the Act. The balance income over and above the prescribed
exemption limits would enter computation of total income and have to be
classified under the relevant head of income.
Step 4: Computation of income under each head: Income is to be computed in

accordance with the provisions governing a particular head of income. Under
each head of income, there is a charging section which defines the scope of
income chargeable under that head. There are deductions and allowances
prescribed under each head of income. For example, while calculating income
from house property, municipal taxes and interest on loan are allowed as
deduction. Similarly, deductions and allowances are prescribed under other

heads of income. These deductions etc. have to be considered before arriving at
the net income chargeable under each head.
Step 5: Clubbing of income of spouse, minor child etc.: In case of individuals,

income-tax is levied on a slab system on the total income. The tax system is
progressive i.e. as the income increases, the applicable rate of tax increases.
Some taxpayers in the higher income bracket have a tendency to divert some
portion of their income to their spouse, minor child etc. to minimize their tax
burden. In order to prevent such tax avoidance, clubbing provisions have been
incorporated in the Act, under which income arising to certain persons (like
spouse, minor child etc.) have to be included in the income of the person who
has diverted his income for the purpose of computing tax liability.
Step 6: Set-off or carry forward and set-off of losses: An assessee may have
different sources of income under the same head of income. He might have profit
from one source and loss from the other. For instance, an assessee may have
profit from his textile business and loss from his printing business. This loss can
be set-off against the profits of textile business to arrive at the net income
chargeable under the head “Profits and gains of business or profession”.
Similarly, an assessee can have loss under one head of income, say, Income from
house property and profits under another head of income, say, profits and gains
of business or profession. There are provisions in the Income-tax Act, 1961 for
allowing inter-head adjustment in certain cases. Further, losses which cannot be
set-off in the current year due to inadequacy of eligible profits can be carried
forward for set-off in the subsequent years as per the provisions contained in the
Act.
Step 7: Computation of Gross Total Income: The final figures of income or loss
under each head of income, after allowing the deductions, allowances and other
adjustments, are then aggregated, after giving effect to the provisions for
clubbing of income and set-off and carry forward of losses, to arrive at the gross
total income.

Step 8: Deductions from Gross Total Income: There are deductions prescribed
from Gross Total Income. (See deductions available below in detail).
Step 9: Total income: The income arrived at, after claiming the above deductions
from the Gross Total Income is known as the Total Income. It is also called the
Taxable Income. It should be rounded off to the nearest multiple of Rs. 10.
Step 10: Application of the rates of tax on the total income: The rates of tax for
the different classes of assesses are prescribed by the Annual Finance Act.
For individuals, HUFs etc., there is a slab rate and basic exemption limit. At
present, the basic exemption limit is Rs. 2,00,000 for individuals. This means that
no tax is payable by individuals with total income of up to Rs. 2,00,000. Those
individuals whose total income is more than Rs. 2,00,000 but less than Rs.
5,00,000 have to pay tax on their total income in excess of Rs. 2,00,000 @ 10%
and so on. The highest rate is 30%, which is attracted in respect of income in
excess of Rs. 10,00,000.
Income Tax slabs and rates for financial Year 2013-14
Income (Rs.) Tax rate
Up to Rs 2 lakh NIL
Rs 2 lakh – Rs 5 10%, less Rs.
1. Individual Tax Payers lakh 2,000
(men and women below 60 years) Rs 5 lakh – Rs 10 20%
lakh
Rs 10 lakh – 1 30%
crore
Above Rs 1 crore 30% + 10%
surcharge
Up to Rs 2.5 lakh NIL
Rs 2.5 lakh to Rs 5 10%, less Rs.
2. Senior Citizens (of 60 years but less lakh 2,000
than 80 years) Rs 5 lakh – Rs 10 20%
lakh
Rs 10 lakh – 1 30%
crore

surcharge
Up to Rs 5 lakh NIL
3. Very senior citizens (of 80 years and Rs 5 lakh – Rs 10 20%
above) lakh
Rs 10 lakh – 1 30%
crore
surcharge
(Above rates are excluding 3% education cess, which needs to payable on you applicable
tax slab)
For firms and companies, a flat rate of tax is prescribed. At present, the rate is
30% on the whole of their total income. The tax rates have to be applied on the
total income to arrive at the income-tax liability.
Step 11: Surcharge: Surcharge is an additional tax payable over and above the
income-tax. Surcharge is levied as a percentage of income-tax. Surcharge is
applicable only in the case of companies. The rate of surcharge for domestic
companies is 5% and for foreign companies is 2%, if their total income exceeds
Rs. 1 crore.
Step 12: Education cess and secondary and higher education cess on income-
tax: The income-tax, as increased by the surcharge, if applicable, is to be further
increased by an additional surcharge called education cess@2%. The education
cess on income-tax is for the purpose of providing universalized quality basic
education. This is payable by all assesses who are liable to pay income-tax
irrespective of their level of total income. Further, “secondary and higher
education cess on income-tax” @1% of income-tax plus surcharge, if applicable,
is leviable to fulfil the commitment of the Government to provide and finance
secondary and higher education.
Step 13: Advance tax and tax deducted at source: Although the tax liability of an
assessee is determined only at the end of the year, tax is required to be paid in
advance in certain instalments on the basis of estimated income. In certain cases,

tax is required to be deducted at source from the income by the payer at the rates
prescribed in the Act. Such deduction should be made either at the time of
accrual or at the time of payment, as prescribed by the Act. For example, in the
case of salary income, the obligation of the employer to deduct tax at source
arises only at the time of payment of salary to the employees. Such tax deducted
at source has to be remitted to the credit of the Central Government through any
branch of the RBI, SBI or any authorized bank. If any tax is still due on the basis of
return of income, after adjusting advance tax and tax deducted at source, the
assessee has to pay such tax (called self-assessment tax) at the time of filing of
the return.
Various Deductions Available Under Several Sections
SECTION 80C - PROVIDES FOR A DEDUCTION FROM THE GROSS TOTAL

INCOME, OF SAVINGS IN SPECIFIED MODES OF INVESTMENTS.
Deduction under section 80C is available only to an individual or HUF. The

maximum qualifying amount is Rs. 1 lakh in respect of deductions under section
80C along with sections 80CCC (in respect of contribution to approved pension
fund) and 80CCD(1) (Contribution of employee-assessee to pension scheme of
Central Government).
The following are the investments/contributions eligible for deduction:
(1) Premium paid on insurance on the life of the individual, spouse or child (minor
or major) and in the case of HUF, any member thereof. This will include a life
policy and an endowment policy. However, where the annual premium on
insurance policies, other than a contract for deferred annuity, issued on or before
31.3.2012, exceeds 20% of the actual capital sum assured, only the amount of
premium as does not exceed 20% will qualify for rebate.
For the purpose of calculating the actual capital sum assured under this clause,
(a) The value of any premiums agreed to be returned or

(b) The value of any benefit by way of bonus or otherwise, over and above
the sum actually assured, shall not be taken into account.
However, the deduction under section 80C for premium or other payment made
on insurance policy, other than a contract for a deferred annuity, shall be
restricted to the 10% of the actual sum assured, in case the insurance policy is
issued on or after 1st April, 2012.
Also, Explanation to section 80C(3A) has been introduced to provide that, in

respect of the life insurance policies to be issued on or after 1st April, 2012, the
actual capital sum assured shall mean the minimum amount assured under the
policy on happening of the insured event at any time during the term of the
policy, not taking into account:
(1) The value of any premium agreed to be returned; or
(2) Any benefit by way of bonus or otherwise over and above the sum
actually assured which is to be or may be received under the policy by any
person.
In effect, in case the insurance policy has varied sum assured during the term of
policy then the minimum of the sum assured during the life time of the policy
shall be taken into consideration for calculation of the “actual capital sum
assured” for the purpose of section 80C, in respect of life insurance policies to be
issued on or after 1st April, 2012.
The following is a tabular summary of the amendments effected in section

10(10D) and section 80C:
From A.Y.2013-14
In respect of policies issued In respect of policies issued on or after
between 1.4.2003 and 31.3.2012 1.4.2012

Exemption u/s Deduction Exemption u/s Deduction
10(10D) u/s 80C 10(10D) u/s 80C
Any sum received Premium Any sum received Only premium
Under a LIP paid to the under a LIP Paid to the
including the sum extent of including the sum extent of 10% of
allocated by way 20% of allocated by way “minimum
of bonus is “actual of bonus is capital
exempt. However, capital sum exempt. However, assured”
exemption would assured” exemption would qualifies
not be available if qualifies for not be available if deduction
the premium deduction the premium 80C.
payable for any of u/s 80C. payable for any of sum
the years during the years during for
the term of the the term of the u/s
policy exceeds policy exceeds
20% of “actual 10% of
Capital sum “minimum capital
Assured. sum assured”
under the policy
on the happening
of the insured
event at
any time during
the
term of the policy
(2) Premium paid to effect and keep in force a contract for a deferred annuity on
the life of the assessee and/or his or her spouse or child, provided such contract
does not contain any provision for the exercise by the insured of an option to
receive cash payments in lieu of the payment of the annuity.
It is pertinent to note here that a contract for a deferred annuity need not
necessarily be with an insurance company. It follows therefore that such a
contract can be entered into with any person.

(3) Amount deducted by or on behalf of the Government from the salary of a
Government employee for securing a deferred annuity or making provisions for
his spouse or children. The excess, if any, over one-fifth of the salary is to be
ignored.
(4) Contributions to any provident fund to which the Provident Funds Act, 1925
applies.
(5) Contributions made to any Provident Fund set up by the Central Government
and notified in his behalf (i.e., the Public Provident Fund established under the
Public Provident Fund Scheme, 1968). Such contribution can be made in the
name of any persons mentioned in (1) above. The maximum limit of investment is
Rs. 1,00,000 in a year.
(6) Contribution by an employee to a recognized provident fund.
(7) Contribution by an employee to an approved superannuation fund.
(8) Subscription to any such security of the Central Government or any such
deposit scheme as the Central Government as may notify in the Official Gazette.
(9) Subscription to any Savings Certificates under the Government Savings

Certificates Act, 1959 notified by the Central Government in the Official Gazette
(i.e. National Savings Certificate (VIII Issue) issued under the Government Savings
Certificates Act, 1959).
(10) Contributions in the name of any person specified in (1) above for
participation in the Unit-linked Insurance Plan 1971.
(11) Contributions in the name of any person mentioned in (1) above for
participation in any Unit linked Insurance Plan of the LIC Mutual Fund, referred to
in section 10(23D) in this behalf.
12) Contributions to approved annuity plans of LIC (New Jeevan Dhara and New
Jeevan Akshay, New Jeevan Dhara I and New Jeevan Akshay I, II and III) or any

other insurer (Tata AIG Easy Retire Annuity Plan of Tata AIG Life Insurance
Company Ltd.) as the Central Government may, by notification in the Official
Gazette, specify in this behalf.
(13) Subscription to any units of any mutual fund referred to in section 10(23D) or
from the Administrator or the specified company under any plan formulated in
accordance with such scheme notified by the Central Government;
(14) Contribution by an individual to a pension fund set up by any Mutual Fund

referred to in section 10(23D) or by the Administrator or the specified company as
the Central Government may specify (i.e. UTI-Retirement Benefit Pension Fund set
up by the specified company referred to in section 2(h) of the Unit Trust of India
(Transfer of Undertaking and Repeal) Act, 2002 as a pension fund).
For the purposes of (13) and (14) above –
(i) “Administrator” means the Administrator as referred to in clause (a) of

section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal)
Act, 2002.
(ii) “Specified company” means a company as referred to in clause (h) of

section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal)
Act, 2002.
(15) Subscription to any deposit scheme or contribution to any pension fund set
up by the National Housing Bank i.e., National Housing Bank (Tax Saving) Term
Deposit Scheme, 2008.
(16) Subscription to any such deposit scheme of a public sector company which
is engaged in providing long-term finance for construction, or purchase of houses
in India for residential purposes or any such deposit scheme of any authority
constituted in India by or under any law enacted either for the purpose of dealing
with and satisfying the need for housing accommodation or for the purpose of
planning, development or improvement of cities, towns and villages or for both.
The deposit scheme should be notified by the Central Government. The Central

Government has, vide Notification No.2/2007 dated 11.1.2007, specified the public
deposit scheme of HUDCO, subscription to which would qualify for deduction
under section 80C.
(17) Payment of tuition fees by an individual assessee at the time of admission or

thereafter to any university, college, school or other educational institutions
within India for the purpose of full-time education of any two children of the
individual. This benefit is only for the amount of tuition fees for full-time education
and shall not include any payment towards development fees or donation or
payment of similar nature and payment made for education to any institution
situated outside India.
(18) Any payment made towards the cost of purchase or construction of a new
residential house property. The income from such property –
(i) Should be chargeable to tax under the head “Income from house
property”;
(ii) Would have been chargeable to tax under the head “Income from
house property” had it not been used for the assessee’s own residence.
The approved types of payments are as follows:
(i) Any instalment or part payment of the amount due under any self-
financing or other schemes of any development authority, Housing Board
or other authority engaged in the construction and sale of house property
on ownership basis; or Any instalment or part payment of the amount due
to any company or a cooperative society of which the assessee is a
shareholder or member towards the cost of house allotted to him; or
(a) The Central Government or any State Government;

(b) Any bank including a co-operative bank;
(c) The Life Insurance Corporation;
(d) The National Housing Bank;

(e) Any public company formed and registered in India with the main
object of carrying on the business of providing long-term finance for
construction or purchase of houses in India for residential purposes which
is eligible for deduction under section 36(1)(viii);
(f) Any company in which the public are substantially interested or any
cooperative society engaged in the business of financing the construction
of houses;
(g) The assessee’s employer, where such employer is an authority or a
board or a corporation or any other body established or constituted under
a Central or State Act;
(h) The assessee’s employer where such employer is a public company or
public sector company or a university established by law or a college
affiliated to such university or a local authority or a co-operative society.
(iv) Stamp duty, registration fee and other expenses for the purposes of transfer
of such house property to the assessee.
Inadmissible payments: However, the following amounts do not qualify for

rebate:
(i) Admission fee, cost of share and initial deposit which a shareholder of a
company or a member of a co-operative society has to pay for becoming a
shareholder or member; or
(ii) he cost of any addition or alteration or renovation or repair of the house

property after the completion of the house or after the house has been
occupied by the assessee or any person on his behalf or after it has been
let out; or
(iii) Any expenditure in respect of which deduction is allowable under

section 24.
(19) Subscription to equity shares or debentures forming part of any eligible issue
of capital approved by the Board on an application made by a public company or

as subscription to any eligible issue of capital by any public financial institution in
the prescribed form.
Eligible issue of capital means an issue made by a public company formed and
registered in India or a public financial institution and the entire proceeds of the
issue are utilised wholly and exclusively for the purposes of any business referred
to in section 80-IA(4).
A lock-in period of three years is provided in respect of such equity shares or

debentures.
In case of any sale or transfer of shares or debentures within three years of the
date of acquisition, the aggregate amount of deductions allowed in respect of
such equity shares or debentures in the previous year or years preceding the
previous year in which such sale or transfer has taken place shall be deemed to
be the income of the assessee of such previous year and shall be liable to tax in
the assessment year relevant to such previous year.
A person shall be treated as having acquired any shares or debentures on the

date on which his name is entered in relation to those shares or debentures in the
register of members or of debenture-holders, as the case may be, of the public
company.
(20) Subscription to any units of any mutual fund referred to in section 10(23D)]
and approved by the Board on an application made by such mutual fund in the
prescribed form. It is necessary that such units should be subscribed only in the
eligible issue of capital of any company.
(21) Investment in term deposit.
(1) For a period of not less than five years with a scheduled bank; and

(2) Which is in accordance with a scheme framed and notified by the Central
Government in the Official Gazette now qualifies as an eligible investment for
availing deduction under section 80C.
Scheduled bank means –
(1) The State Bank of India constituted under the State Bank of India Act,
1955, or
(2) A subsidiary bank as defined in the State Bank of India (Subsidiary
Banks) Act1959,or
(3) A corresponding new bank constituted under section 3 of the –
(a) Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1970, or
(b) Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1980, or
(4) Any other bank, being a bank included in the Second Schedule to the
Reserve Bank of India Act, 1934.
(22) Subscription to such bonds issued by NABARD (as the Central Government
may notify in the Official Gazette).
(23) five year time deposit in an account under Post Office Time Deposit Rules,
1981; and
(24) Deposit in an account under the Senior Citizens Savings Scheme Rules, 2004.
Termination of Insurance Policy or Unit Linked Insurance Plan or transfer of

House Property or withdrawal of deposit:
Where, in any previous year, an assessee:
(i) Terminates his contract of insurance referred to in (1) above, by notice to that
effect or where the contract ceases to be in force by reason of not paying the
premium, by not reviving the contract of insurance, -

(a) In case of any single premium policy, within two years after the date of
commencement of insurance; or
(b) In any other case, before premiums have been paid for two years; or
(ii) Terminates his participation in any Unit Linked Insurance Plan referred to in
(10) or (11) above, by notice to that effect or where he ceases to participate by
reason of failure to pay any contribution, by not reviving his participation, before
contributions in respect of such participation have been paid for five years, or
(iii) Transfers the house property referred to in (18) above, before the expiry of
five years from the end of the financial year in which possession of such property
is obtained by him, or receives back, whether by way of refund or otherwise, any
sum specified in (18) above,
then, no deduction will be allowed to the assessee in respect of sums paid during
such previous year and the total amount of deductions of income allowed in
respect of the previous year or years preceding such previous year, shall be
deemed to be income of the assessee of such previous year and shall be liable to
tax in the assessment year relevant to such previous year.
Further, where any amount is withdrawn by the assessee from his account under
the Senior Citizens Savings Scheme or under the Post Office Time Deposit Rules
before the expiry of a period of 5 years from the date of its deposit, the amount
so withdrawn shall be deemed to be the income of the assessee of the previous
year in which the amount is withdrawn.
Accordingly, the amount so withdrawn would be chargeable to tax in the

assessment year relevant to such previous year. The amount chargeable to tax
would also include that part of the amount withdrawn which represents interest
accrued on the deposit. However, if any part of the amount so received or
withdrawn (including the amount relating to interest) has been subject to tax in
any of the earlier years, such amount shall not be taxed again.
SECTION 80CCC - DEDUCTION IN RESPECT OF CONTRIBUTION TO CERTAIN

PENSION FUNDS

(i) Where an assessee, being an individual, has in the previous year paid or
deposited any amount out of his income chargeable to tax to effect or keep in
force a contract for any annuity plan of LIC of India or any other insurer for
receiving pension from the fund referred to in section 10(23AAB), he shall be
allowed a deduction in the computation of his total income.
(ii) For this purpose, the interest or bonus accrued or credited to the assessee’s
account shall not be reckoned as contribution.
(iii) The maximum permissible deduction is Rs.1,00,000 (However, the overall

limit of Rs. 1,00,000 prescribed in section 80CCE will continue to be applicable i.e.
the maximum permissible deduction under sections 80C, 80CCC and 80CCD(1)
put together is Rs. 1,00,000).
(iv) Where any amount standing to the credit of the assessee in a fund referred to
in clause (23AAB) of section 10 in respect of which a deduction has been allowed,
together with interest or bonus accrued or credited to the assessee’s account is
received by the assessee or his nominee on account of the surrender of the
annuity plan in any previous year or as pension received from the annuity plan,
such amount will be deemed to be the income of the assessee or the nominee in
that previous year in which such withdrawal is made or pension is received. It will
be chargeable to tax as income of that previous year.
(v) Where any amount paid or deposited by the assessee has been taken into
account for the purposes of this section, a deduction under section 80C shall not
be allowed with reference to such amount.
SECTION 80CCD - DEDUCTION IN RESPECT OF CONTRIBUTION TO PENSION

SCHEME OF CENTRAL GOVERNMENT
(i) A “New Restructured Defined Contribution Pension System” applicable to new

entrants to Government service has been introduced. As per the scheme, it is

mandatory for persons entering the service of the Central Government on or after
1st January, 2004, to contribute ten per cent their of salary every month towards
their pension account. A matching contribution is required to be made by the
Government to the said account. The benefit of this scheme is available to
individuals employed by any other employer also on or after 1st January, 2004.
(ii) To give effect to the new pension scheme of the Central Government, a new
section 80CCD has been inserted.
(iii) This section provides a deduction for the amount paid or deposited by an
employee in his pension account subject to a maximum of 10% of his salary.
(iv)The contribution made by the Central Government or any other employer in

the previous year to the said account of an employee, is allowed as a deduction in
computation of the total income of the assessee. However, the deduction is
restricted to 10% of the employee’s salary.
(v)The entire employer’s contribution would be included in the salary of the

employee. However, deduction under section 80CCD would be restricted to 10%
of salary.
(vi)This deduction is now extended also to self-employed individuals. The

deduction in the case of a self-employed individual would be restricted to 10% of
his gross total income in the previous year.
(vii) Further, the amount standing to the credit of the assessee in the pension
account (for which deduction has already been claimed by him under this section)
and accretions to such account, shall be taxed as income in the year in which
such amounts are received by the assessee or his nominee on –
(a) Closure of the account or

(b) His opting out of the said scheme or
(c) Receipt of pension from the annuity plan purchased or taken on such closure
or opting out.

(viii) However, the assessee shall be deemed not to have received any amount in
the previous year if such amount is used for purchasing an annuity plan in the
same previous year.
(ix) No deduction will be allowed under section 80C in respect of amounts paid or
deposited by the assessee, for which deduction has been allowed under section
80CCD(1).
Limit on deductions under sections 80C, 80CCC & 80CCD(1) [Section 80CCE]
This section restricts the aggregate amount of deduction under section 80C,
80CCC and 80CCD(1) to Rs. 1 lakh. It may be noted that the employer’s
contribution to pension scheme, allowable as deduction under section 80CCD(2)
in the hands of the employee, would be outside the overall limit of Rs. 1 lakh
stipulated under section 80CCE.
NEW SECTION 80CCG - ONE TIME DEDUCTION FOR INVESTMENT BY A

RESIDENT INDIVIDUAL IN LISTED EQUITY SHARES AS PER NOTIFIED SCHEME
(i) In the Budget Speech, a new scheme was proposed to be introduced to

encourage flow of savings in financial instruments and improve the depth of
domestic capital market.
(ii) Accordingly, new section 80CCG has been introduced to provide for a one-
timen deduction to a resident individual who has acquired listed equity shares in
a previous year in accordance with a scheme notified by the Central Government.
(iii) The deduction would be 50% of amount invested in such equity shares or Rs.
25,000, whichever is lower. The maximum deduction of Rs. 25,000 would be
available on investment of Rs. 50,000 in such listed equity shares.
(iv)The following conditions have to be satisfied for claiming the above

deduction–
(a) The gross total income of the assessee for the relevant assessment
year should be less than or equal to Rs.10 lakh.

(b) The assessee should be a new retail investor as per the requirement
specified under the notified scheme.
(c) The investment should be made in such listed shares as may be
specified under the notified scheme.
(d) The minimum lock-in period in respect of such investment is three
years from the date of acquisition in accordance with the notified scheme.
In addition to the above, other conditions may also be prescribed, subject to

fulfilment of which, deduction under section 80CCG can be claimed.
(v) If the individual, after having claimed such deduction, fails to comply with any
of the conditions in any previous year, say, he sells the shares before three years,
then, the deduction earlier allowed shall be deemed to be the income of the
previous year in which he fails to comply with the condition. The income shall,
accordingly, be liable to tax in the assessment year relevant to such previous
year.
(vi) If deduction has been claimed and allowed under this section for any
assessment year, the assessee would not be allowed any deduction under this
section for any subsequent assessment year.
SECTION 80D - DEDUCTION IN RESPECT OF MEDICAL INSURANCE PREMIUM
(i) As per section 80D, in case of an individual, a deduction is allowed in respect

of premium paid to effect or keep in force an insurance on the health of self,
spouse and dependent children or any contribution made to the Central
Government Health Scheme, up to a maximum of Rs. 15,000 in aggregate. A
further deduction of Rs. 15,000 is also allowed in case the premium is paid for the
health insurance taken for the health of parents.
An increased deduction of Rs. 20,000 (instead of Rs. 15,000) shall be allowed in

case any of the persons mentioned above is a senior citizen i.e. an individual
resident in India of the age of 60 years or more at any time during the relevant
previous year. Further, deduction would be allowed only if the payment of
insurance premium is made in any mode other than cash.

(ii) Section 80D has been amended to provide that deduction to the extent of Rs.
5,000 shall be allowed in respect payment made on account of preventive health
check-up of self, spouse, dependent children or parents made during the previous
year. However, the said deduction of Rs. 5,000 is within the overall limit of Rs.
15,000 or Rs. 20,000, as the case may be.
(iii) In effect the maximum deduction allowable under this section in any
assessment year shall be to the extent of Rs. 15,000 for self, spouse and
dependent children (Rs. 20,000 in case any of the persons are senior citizen) in
respect of the following payments made –
(1) To effect or keep in force an insurance on the health of self, spouse or

dependent children.
(2) On account of contribution to the Central Government Health Scheme
(3) On account of preventive health check-up of self, spouse or dependent
children.
(iv) A further deduction up to Rs. 15,000 (Rs. 20,000 in case either of parents are
senior citizens) is allowable –
(1) To effect or keep in force an insurance on the health of parents.
(2) On account of preventive health check-up of parents.
(v) The maximum deduction allowable in respect of expenditure on preventive

health check-up of self, spouse, dependent children and parents would be Rs.
5,000.
(vi) Further it is provided that, for claiming such deduction under section 80D, the
payment can be made:
(1) By any mode, including cash, in respect of any sum paid on account of
preventive health check-up;
2) By any mode other than cash, in all other cases.
SECTION 80E - DEDUCTION IN RESPECT OF INTEREST LOAN TAKEN FOR

HIGHER EDUCATION

(i) Section 80E provides deduction to an individual-assessee in respect of any
interest on loan paid by him in the previous year out of his income chargeable to
tax.
(ii) The loan must have been taken for the purpose of pursuing his higher
education or for the purpose of higher education of his or her relative i.e. spouse
or children of the individual or the student for whom the individual is the legal
guardian.
(iii) “Higher education” means any course of study (including vocational studies)
pursued after passing the Senior Secondary Examination or its equivalent from
any school, board or university recognised by the Central Government or State
Government or local authority or by any other authority authorized by the Central
Government or State Government or local authority to do so. Therefore, interest
on loan taken for pursuing any course after Class XII or its equivalent, will qualify
for deduction under section 80E.
(iv) The loan must have been taken from any financial institution or approved
charitable institution.
(v) The deduction is allowed in computing the total income in respect of the initial
assessment year (i.e. the assessment year relevant to the previous year, in which
the assessee starts paying the interest on the loan) and seven assessment years
immediately succeeding the initial assessment year or until the interest is paid in
full by the assessee, whichever is earlier.
(vi) “Approved charitable institution” means an institution established for

charitable purposes and approved by the prescribed authority under section
10(23C) or an institution referred to in section 80G(2)(a).
(vii) “Financial institution” means –

(1) A banking company to which the Banking Regulation Act, 1949 applies
(including a bank or banking institution referred to in section 51 of the
Act); or

(2) Any other financial institution which the Central Government may, by
notification in the Official Gazette, specify in this behalf.
SECTION 80G - DEDUCTION IN RESPECT OF DONATIONS TO CERTAIN FUNDS,

CHARITABLE INSTITUTIONS ETC.
Where an assessee pays any sum as donation to eligible funds or institutions, he

is entitled to a deduction, subject to certain limitations, from the gross total
income.
SECTION 80U - DEDUCTION IN THE CASE OF A PERSON WITH DISABILITY
(i) Section 80U harmonizes the criteria for defining disability as existing under the
Income-tax Rules with the criteria prescribed under the Persons with Disability
(Equal Opportunities, Protection of Rights and Full Participation) Act, 1995.
(ii) This section is applicable to a resident individual, who, at any time during the
previous year, is certified by the medical authority to be a person with disability.
A deduction of Rs. 50,000 in respect of a person with disability and Rs. 1,00,000 in
respect of a person with severe disability (having disability over 80%) is allowable
under this section.
(iii) The benefit of deduction under this section has also been extended to
persons suffering from autism, cerebral palsy and multiple disabilities.
(iv) The assessee claiming a deduction under this section shall furnish a copy of
the certificate issued by the medical authority in the form and manner, as may be
prescribed, along with the return of income under section 139, in respect of the
assessment year for which the deduction is claimed.
(v) Where the condition of disability requires reassessment, a fresh certificate

from the medical authority shall have to be obtained after the expiry of the period
mentioned on the original certificate in order to continue to claim the deduction.
SECTION 24 - DEDUCTIONS FROM INCOME FROM HOUSE PROPERTY

Income chargeable under the head "Income from house property" shall be
computed after making the following deductions, namely:
(a) A sum equal to thirty per cent of the annual value;
(b) Where the property has been acquired, constructed, repaired, renewed or
reconstructed with borrowed capital, the amount of any interest payable on such
capital:
Provided that in respect of property referred to in sub-section (2) of section 23,

the amount of deduction shall not exceed Rs. 30,000.
Provided further that where the property referred to in the first proviso is acquired
or constructed with capital borrowed on or after the 1st day of April, 1999 and
such acquisition or construction is completed 77[within three years from the end
of the financial year in which capital was borrowed], the amount of deduction
under this clause shall not exceed Rs. 1,50,000.
As you can see, there are number of deductions/tax-saving instruments available.

Which one to choose? As discussed earlier, tax planning is a coherent element of
any financial plan. No financial plan is complete without tax planning. Tax
planning does not mean only saving taxes. One should be able to achieve goals
as well in the tax planning process. Here we look at how proper planning can take
care of your taxes and at the same time help you achieve your financial goals.
Financial Goals and Taxes
Tax planning with your financial goals in perspective will make your financial
planning wholesome. Let us take a look at the financial goals and the right tax-
saving instruments that will aid in achieving those goals.
Insurance and tax benefits:

Insurance is one of your most important financial goals and the most widely used
tax-saving instrument. You need insurance but buying insurance mindlessly every
year just to save on tax is a big drainer on your financial planning process. Your
family should be able to live with the same level of comfort even when you are
long gone from their lives. Insurance plays a very important role on this front.
Life insurance - A rule of thumb suggests that your life insurance should be at
least 8-10 times your gross annual income. A Rs 25 lakh term cover for a 35-year-
old costs just around Rs 9,500 per annum or Rs 800 per month (premiums are
indicative in nature). Besides, insurance helps you counter some of the exigencies
you may face. Insurance are of different types. Life insurance and general
insurance are the main distinctions in insurance. With the help of life insurance
you will be able to protect the financial needs of your family in case of your death
or disability due to accidents. The investment in an insurance plan helps save tax
under Section 80C.
Asset protection - General insurance covers various other aspects of life that
includes health insurance, asset insurance, travel insurance, etc. Your house may
be one your biggest asset — financial as well as emotional. Hence it is very
important to protect your house from being destroyed due to calamities. By
securing asset insurance for your house you will be able to claim for the damages
to your house. If you purchase your house with a home loan, a home insurance
will help pay off the debt in case of your death or disability and thus your loved
ones will not be rendered homeless. You can protect your most valuable asset,
your home, by paying just Rs 5,000 per annum for a Rs 50 lakh cover (premiums
are indicative in nature). This includes the structure and its contents.
Health guard - Health and wellness form an important aspect of your life. Health
insurance helps you save your investment and capital in the event of a critical
illness in the family. With health insurance you can also avail tax benefits of Rs
15,000 under Section 80D. If you pay for health insurance of your senior citizen
parents then you can avail tax benefits of up to Rs 20,000. Ascertain if your
existing health insurance, whether your own or that provided by your employer,
is adequate. Remember, if your employer provides the cover it can go away with

your job. A family of 2 adults and 2 children can get a Rs 2 lakh cover for just Rs
6,300 per annum (premiums are indicative in nature).
Buying a house and tax benefits:
You may want to buy a house to stay in or as an investment option. If a loan has
been availed, tax benefits can be claimed for both the principal repayment as well
as the interest payment as per the Income Tax Act, 1961. Interest on borrowed
capital is deductible up to Rs 150,000. These deductions are available to you
under Section 24(b). In addition to this, principal repayment of the loan/capital
borrowed is eligible for deduction of up to Rs 100,000 (in a financial year) under
Section 80C. You and your spouse (being tax-payers with independent sources of
income) can get separate tax deduction benefits with respect to the same home
loan. However, it is important that the house is in your joint names. This property
can also be looked at as a retirement plan — the rent can help build cash flows
after retirement.
Children’s education & marriage and tax benefits:
The upbringing of your children, their education and their marriage are some of
the responsibilities that you cannot shy away from. These goals are typically over
8-10 years away. Hence you can look at some of the long-term plans while
investing in tax-saving instruments. Children’s plans enable your child pursue
their dreams, give them strength to face challenges, and the guarantee to live life
to its fullest even in the face of uncertainties. Depending on the time horizon for
the goal, you may invest in Public provident fund (PPF), National Savings
Certificates (NSC), bank deposits or Unit linked insurance plans (ULIPs). For
example: If your child’s marriage is just 5-6 years away, invest in bank deposits or
NSC; if your child is just 3 years of age and there is about 15 years remaining for
her higher studies, invest in a PPF. Thus by saving small amounts during a year,
you can help your child achieve their dreams. Besides saving, some expenses can
also benefit for tax deductions. The tuition fees paid for your child’s education can
be used to avail deductions. However, the tuition fees here means the annual fees
paid to any university or recognized educational institution; it does not include
any hostel fee or mess charges or building fund donation. All these tax-saving

instruments —Child plans, ULIPs, PPF, NSC, bank FD, tuition fee— are deductible
under Section 80C.
Retirement planning and tax benefits:
It is never too late or too early to plan for your retirement. The sooner you start
the better. If your investments in tax-saving instruments can help you save up a
kitty for your golden years, why not put it to the best use?
To build a Rs 1 crore corpus for retirement by the age of 60 you will need…
Starting at age 25 at a return of 8% - Rs 58,033 per annum.
Starting at age 35 at a return of 8% - Rs 1,36,788 per annum.
Starting at age 45 at a return of 8% - Rs 3,68,295 per annum.
Investing in equities is a useful way of creating wealth for the long term. Equity
linked saving scheme (ELSS) helps you be invested in equities and avail tax
benefits under Section 80C. Mutual funds are fast becoming a popular way to
generate wealth by participating in the stock market movements. A caveat here is
that the returns are market related and hence there is a risk of losing capital. But
over the long term, equities have given the highest returns. If you are risk averse,
you may invest in debt instruments like infrastructure bonds, NSC, PPF or Senior
Citizen Savings Scheme (SCSS). You may also invest in some pension plan
offered by private financial companies. Investments in all these instruments are
deductible under Section 80C subject to a maximum of Rs 1 lakh. Your
contribution towards employee's provident fund (EPF) also falls within the Rs 1-
lakh ambit. You can also ask your organisation to deduct a higher amount
towards EPF, over and above the minimum that is normally deducted from your
salary.
Summing up
The tax-saving instruments are the very investments that one anyway makes and
therefore they need to be integrated into the larger picture in line with your risk
profile and financial goals. The tax saving is just the icing on the cake. In other
words, while tax deduction is an important aspect to look at, it is more essential

to consider what you would achieve out of that investment. The purpose of the
investment is more important than the investment itself. Always remember to
consult a certified financial consultant to plan your taxes as well as for creating a
financial plan.
Disclaimer
This module is not intended to be a formal opinion of tax consequences, and,
thus, may not contain a full analysis of all relevant tax authorities. The
conclusions contained in this article are based on our understanding of current
tax laws and published tax authorities in effect as of the date of this article, which
are subject to change. If the tax laws change, the conclusions and
recommendations would likewise be subject to change. I-Sec assumes no
obligation to update the article for any future changes in tax law, regulations, or
other interpretations and does not intend to do so.
Bibliography
icai.org.in
law.incometaxindia.gov.in
Suggested Readings
1.Bhagwati Prasad, Law and practice of Income Tax, Navaman Prakashan, Aligarh.
2. Mahesh Chandra & S.P. Goyal, Income Tax Law and practice, Himalaya
Publishing House, Delhi.
3. Vinod K. Singhania, Monica Singhania, Students Guide to Income Tax,
Taxmann Publications Private Ltd.
4. Girish Ahuja & Ravi Gupta, Simplified Approach to Income Tax and Sales Tax,
Sahitya Bhawan Publishers and Distributors Ltd., Agra.
5. Dinkar Pagare, Law and practice of income tax, Sultan Chand and sons.
Estate Planning
You may have seen or heard of stories of families being affected by legal hurdles
after the patriarch passes away. These problems occur when there is no proper
inheritance and succession plan in place. A very important aspect of planning
your life goals is to plan for the future and for your heirs. This is where estate
planning comes in.

Estate planning, as the name suggests, is all about creating a plan for your estate
assets, including all your holdings in equity, debt, commodities, real estate, gold,
and alternate investments like art, gemstones, etc. If you intend to keep your
estate assets intact for the sole benefit of your heirs, you have to know how to
protect these assets.
What is estate planning?
Estate planning is the process of arranging for the distribution of your asset
holdings to your heirs by anticipating and avoiding different scenarios that can
create a conflict among them. It attempts to eliminate uncertainties associated
with planning for one’s estate in the event that he/she becomes incapacitated and
for when he/she is deceased. Guardians are often designated for minor children
and beneficiaries in incapacity. Estate planning helps preserve the value of your
estate for the benefit of your heirs by implementing proven estate and inheritance
planning strategies to minimize estate settlement expenses and taxes.
Importance of estate planning
The most common misperception among people about estate planning is that
they don’t think they have an estate in the first place. For many, the word “estate”
is associated only with big real estate properties and trust funds, but the reality is
that your estate is anything you leave behind at death, be it a mansion or mobile
home; crores of rupees or just a paltry sum. Now that you realize any of your
asset holdings is indeed an estate, it is of utmost importance that you engage in
some estate planning with the guidance of a professional.
What happens if there is no estate plan in place?
If you do not take steps to ensure that your estate passes on to those you want it
to pass to, a judge will decide who gets what based on the intestacy laws, which
are triggered when you die without a Will. A person who dies without making a
will is known as “intestate”.

If you have minor children, part of your estate plan will include designating who
you would like to serve as guardian for them should they be orphaned… If there
is no Will containing a guardianship designation, then a judge will need to make
the designation based on what he or she decides is in the best interests of your
child.
Let’s understand the consequences of dying intestate with an example:
Navi Mumbai-based Ram is in his late 40s and is struggling to live life peacefully.
His father gifted most of all the belongings to his three daughters during his life
time. Ram was said to get his forefathers house (valued at Rs 1 crore). After few
months, his father passed away (without having an estate plan in place). Now,
Ram`s three sisters are demanding a share in the house. With this, Ram will be
left with 1/4th of the house. If there was an estate plan in place by his father, Ram
would have got that house as per his father’s wish.
Having an estate plan in place: Benefits
Pune-based Mr. Soneji, 45 is not taking any chances. He has recognized the
importance of an estate plan and has one in place. He says that he does not want
his loved ones to run around to obtain what belongs to them. So he has planned
his estate that specifies in detail how the assets would be divided between his
heirs.
Would you like to walk follow Ram’s father’s footsteps or Mr. Soneji’s? The
prudent would choose the latter.
Remember, without estate planning a lifetime of work can be destroyed after your
life. It will be a very sad experience for the surviving heirs to see a substantial
shrinkage in the value of their inheritance, something that could have been
avoided through estate planning.
Also, it must be noted that there is no predefined age for starting to create an
estate plan. Anyone who has some asset holding in his/her name and is above
the age of 18 should create one.

How to plan? Tools of estate planning
There are different tools to take care of your assets. Wills and Trusts play
important roles in the organization and preservation of your estate. A will is the
cornerstone for an estate plan and deals with all matters regarding the
distribution of your estate assets. Creative use of wills and trusts can not only
protect the interests of your heirs, but can also help reduce the impact of taxes
and probate fees.
Tool 1: Wills
Will is a written document in which an individual specifies how his wealth should
be distributed or utilised after his death. In India, it is generally noticed that people
refrain from creating a will and usually tend to leave the future to fate. This is a
thought that should be avoided for the benefit of your heirs.
When a person dies intestate i.e. in the absence of a will, intestacy laws are
triggered. Intestacy laws are not concerned with whether you want to provide
different gifts to different children, based upon their special needs or other
factors. Intestacy laws are not concerned with whether your surviving spouse or
partner needs your estate’s assets in order to provide for his or her basic needs,
while your surviving parents have no need for your money whatsoever. In fact,
intestacy statutes don’t care whether you even have a relationship with your
parents or children at all. Intestacy laws also don’t care about distributing your
estate in a way that provides the maximum tax benefit to those who inherit your
estate.
There are numerous such scenarios that might come up in the absence of a Will
and that can lead to entirely unwanted, even tragic, outcomes (as we saw in
Ram’s case noted above).
Prevailing succession laws if there is no Will in place

The succession laws in India are so diverse and complex that it will create
unnecessary hassles for your surviving heirs and the costs incurred in terms of
time and money will be immense.
The law of succession in India falls within the realm of personal law. Because of
this, we have many different succession laws, each purporting to reflect the
diverse and differing aspirations, customs, and traditions of the community to
which the statute in question applies.
You have the Hindu Succession Act, the Parsi Succession Act, and the Indian
Succession Act (which applies to Christians). As far as Muslims are concerned,
the law of succession falls into two broad streams, the Sharia law of succession
and the Hanafi law of succession. Both these laws of succession form part of the
common law of India and are recognized as having the force of law by virtue of
the Sharia Laws (Application) Act.
Writing a Will is the simplest form of Estate Planning.
With a Will, you can make proper arrangement for the protecting and
preservation of your assets for the benefit of your family and loved ones. It helps
you reduce a lot of hassles for beneficiaries and at the same time ensures that
wealth is distributed in the right hands.
Here is the sample of a will:
Sample Will
I Sri._______________________ S/o.____________________ residing

at________________________________________________ aged about ________ years
_________ by religion, occupation _______________ do make this my last Will and
testament.

1. I have not made any will or other testamentary document, but if any made, I
hereby revoke all previous Wills and codicils, if any and declare this to be my last
Will and testament.
2. I appoint (1) Sri._______________________ S/o.____________________ residing at

________________________________________________ aged about ________ years
_________ by religion, occupation _______________aged about ________ years as
the executor of this Will and trustees of my estate.
3.My family consists of _____________________
4. My property consists of:

(a)
(b)
(c)
5. I bequeath all my property in whatever form existing at the time of my death to

the said executor and trustees to hold the same on trust for the benefit of my wife
Smt._____________________ for her life time and till her death as herein after
provided.
6. My executors and trustees shall, after spending the necessary money for the
management of the said property out of the income thereof, pay the net income
to my wife and the same will belong to her absolutely without liability to account
for the same. My executor and trustees will also spend out of the corpus of estate
such amounts as may be required by my wife for medical expenses or for
pilgrimage. But my executor and trustees will not be entitled to sell my
immovable property above mentioned or mortgage the same.
7. On the death of my and if she predeceases me then on my death all my estate

then existing whether mentioned in this will or not, will belongs to my children,
(a) ____________________
(b) ____________________
(c) ____________________ absolutely in equal shares and the trustees for the time
being of the said estate under this will shall transfer the same among said children

by executing proper document or documents.
8. Provided that, if at the time of death of my wife or myself as the case may be
any of the said children is a minor, the trustees shall hold the said property on
trust until the youngest attains the age of majority and till then the net income of
the said property will given or spend for maintenance and education of the said
children.
9. My executor and trustees shall obtain probate of this will from a competent
court, if required in law and shall pay all the probate duty and other expenses
required for such probate and also pay as first charge all my other liabilities by
way of taxes or otherwise howsoever.
10. I have made this Will out of my free Will and when I am in sound health and in
good understanding and in witness thereof I have put my signature hereunder in
the presence of witnesses on this _________ day of _____________ month of
______________ year.
Signed by the within named testator}
Sri. _________________________} opposite in the presence of witnesses,}

TESTATOR who in presence and at his request and} in the presence of each
other have put} their signature as witnesses hereunder.}
1. Sri. __________________________
Full Address: _________________
. _________________
2. Sri. __________________________
Full Address: _________________
. _________________
Source: Department of Stamps & Registration, Government of Karnataka
Can you make changes to the Will once drafted?

Yes, you can change your will as often as you would like. You can do so by using
a codicil. It is like an appendix/ a supplement to a will. It is a testamentary
instrument intended to alter an already drafted will. You should use a codicil only
to make small changes to a Will. Otherwise, it has the potential to complicate the
interpretation of the Will. For example, if you have purchased a new asset e.g. a
new car after making your will, you can add a codicil to your will mentioning who
would inherit that asset.
Key points to ponder while making a will
• A Will can be hand written but if possible should be typed (for legibility)
• It is not necessary to write it on a stamp paper or even get it registered, but it’s
advisable to get it registered. It will cost you just Rs 200-300.
• It is prudent to name more than one executor to control the estate and allocate
it as per your wish.
• The Will must be signed by you in the presence of at least two witnesses who
must also sign the Will at the same time. Their full names and addresses should
be given.
• The executor or beneficiary cannot attest the Will as a witness.
• The executor of the Will can also be named as a beneficiary and vice versa.
• Sign each page of the Will
• Keep your Will in a safe place
• Review your Will regularly to take care of changes in your financial or family
circumstances.
Even when a Will exists, to actually execute it, a probate is required.
Probate of Will
Probate means copy of the will certified under the seal of a court of a competent
jurisdiction. Probate of a will when granted establishes the Will from the death of
the testator and renders valid all intermediate acts of the executor as such. It is

conclusive evidence of the validity and due execution of the will and of the
testamentary capacity of the testator.
Where a Will was executed by a deceased, succession to his property is regulated

by the provisions of the Will. If an executor is named in the Will, he has to get the
Will probated as it is mandatory under section 213 of the Indian Succession Act.
After obtaining probate, it is the duty of the executor to carry out the distribution
of the property in accordance with the provisions of the Will. Probate can be
granted only to the executor appointed under a Will as is provided under section
222. If no executor is appointed by the Will, anyone of the persons claiming a
right under the Will can file a petition for obtaining letters of administration as is
provided under section 219.
Probate can be granted only to the executor appointed by the will. The
appointment may be express or implied by necessary implication. It cannot be
granted to any person who is a minor or is of unsound mind, nor to any
association of individuals unless it is a company satisfies the conditions
prescribed by the rules made by the state government.
A probate differs from succession certificate. A probate is issued by the court,

when a person dies testate i.e. having made a will and the executor or beneficiary
applies to the court for grant of probate. In case a person has not made a will his
legal heirs will have to apply to the court for grant of a succession certificate
which will be given as per applicable laws of inheritance.
Case study: know here how to ensure smooth transfer of your assets through a
will
Passing on the baton
A perfect rainy day in July and Jignesh Parekh was busy finalizing his books just
before filing his tax returns at his Grant Road office in Mumbai. In his mid-forties,
the self-made businessman was chatting with Sumit, his tax consultant to explain
how he had donated Rs. 1 lakh to a school and the same will bring him a tax

break. Sumit readily agreed to rework the tax calculations and finished filing the
income tax online much ahead of the deadline of the exchequer.
"I like your idea of donating money to the school," said Sumit getting ready to
leave the office.
"School is a necessity. I plan to build one school using money I have earned over
my lifetime," Parekh said smiling at Sumit - his friend, philosopher, guide and also
tax consultant.
"But have you planned for it? And how about your kids? How are you going to
take care of them? God forbid, if you die before building a school how will it go
through?" questioned Sumit.
For a moment Parekh was speechless. He knew that creation of wealth is difficult.
But now he has realized that conserving it and passing it on to someone is a more
difficult job. "I have just plans but there is no concrete step I have taken towards
them," Parekh could barely manage to utter.
"If you are around I am sure you will do it the way you want to. But if you are not
around, only a will can help you. If you know what you want to do with your
wealth, why not consider making a will now?" suggested Sumit.
"Writing a will? That too at this moment? Do you think I am going to die
tomorrow," Parekh turned to grab a glass of water. "It is not about death. It is
about ensuring one’s wishes, even when one is not around. If you know the way
you want to dispose off your wish, better prepare a will now. In simple words,
Will is a written document in which an individual specifies how his wealth should
be distributed or utilized after his death. And the best time to create a will is now –
a time when you have wealth and know what you want to do with it. It is an
extension of your asset allocation plan. It will take care of wealth allocation when
you are not around," Sumit explained.
"But how do I write a will? Isn’t it too complex a document to write?" Parekh
asked.

"Not really. A will can be written on a simple piece of paper. Contrary to many
misconceptions, it is one of the simplest documents to write. There is no need to
involve a lawyer as such while writing a will and it is not at all mandatory to
register a will. You can start with a piece of paper and two witnesses. You just
have to write down in clear words your wishes. Ambiguity of any type must be
avoided at any cost while writing a will. Never use a word which has multiple
meanings. Avoid using nick names and pet names in the will," Sumit was wearing
his guide’s hat now.
"Sumit it will be great if you can explain it with an example. But first let us grab a
cup of coffee," said Parekh. Sumit sipped coffee and started, "Assume you want to
give all the gold jewellery kept in a bank locker to your younger daughter. The
same should be mentioned in the will as —‘I wish to give all the gold jewellery
kept in the ABC Bank locker number LMN, Fort Branch, Mumbai, to my younger
daughter –Her full name- who is also known as Hansa.’ This means that your
younger daughter will get only the gold jewellery in the specified locker. She
cannot claim other articles kept in the locker if there is no such mention. She
cannot also claim any other jewellery made of say Silver, if there is no mention to
that effect. ‘I wish to handover all jewellery to my younger daughter’ is a
summary statement and opens up a possibility of disputes." "You may write about
conditional transfer of wealth. For example, you may choose to give the second
house to your son, if he is married at the time of your death. But in no
circumstances can you introduce immoral conditions or impossible conditions for
transfer of wealth," Sumit added.
"That looks good. But where should I start?" asked Parekh. "It is better to make a
list of your assets and then allocate their ownership as per your wish. The will can
be mainly contested on two grounds. One is the ambiguity and second is the
possibility of making the testator – the individuals who gives away his wealth
using a will – write a will using coercion or he being under a state of unsound
mind. A clearly worded will does away with ambiguity. To deal with the second
issue, you can choose for video shooting," explained Sumit.

"All that is fine. But who will execute this?" asked Parekh. "Executor is a person
who executes your will. Put simply, he will carry out all your directions and
ensure that all your wishes are put into reality by getting the wealth transferred as
per your will. Appointing an executor ensures that there will be smooth
implementation of your wishes. It is better to appoint one who does not have a
beneficiary interest in your wealth. In other words, do not appoint an individual
who is given some wealth in your will. It is better to appoint a third party –
preferably a friend or a distant relative – who is close to you and your family.
Presence of an executor appointed by you not only ensures a quick
implementation of your will but also brings down the disputes. You may choose
to pay the executor for the execution of the will. But the same must be clearly
mentioned in the will. The payout to such an executor should be clearly funded
by the testator and the will must have a clear mention of the same. If you forget to
appoint an executor, the court will appoint an administrator. The administrator
appointed by a court may not be the person you would like to take care of your
estate," Sumit replied.
"That sounds good. I would like to appoint you as the executor of my will. So dear
Mr. Executor what else do I have to do?" said a relaxed Parekh. "A will must be
duly signed by the testator and by witnesses. Never get someone to sign as a
witness to a will any individual who is also a beneficiary of the will. Legacy stands
lapsed to an individual or his spouse, if he is a witness to the will. This provision
is the outcome of conflict of interest. The one who attests the will knows the
content of the will and this can bring in conflict of interest. Put simply, the witness
to your will and executor of the will should not have a beneficiary interest in the
will," Sumit explained it further.
"One last thing – what if I missed mentioning something in my will. Say, I forgot to
write about one of my assets?" Parekh raised his eyebrows. "You can appoint a
residuary legatee. He is a person who will receive whatever not specified in the
will but forms a part of your wealth or wherever the legacy has lapsed. For
example, if the testator has not mentioned anything about his farm house in the
will, and if there is a clear mention of a residuary legatee, then such farm house
will go to him. Assume, the testator has mentioned that the flat in which he stays
should go to his wife after his death. But it is found out that his wife is dead on the

date of testator’s death. In that case, the residuary legatee will get the flat. If the
testator has not mentioned a residuary legatee in his will, all such assets and
wealth will go to all the legal heirs of the testator," Sumit replied.
Sumit continued, "You may choose to update your will. You can change your will
as many times you want. A new will automatically cancels the previous will.
Updating your will is a must to reflect changes in your wish-list. For example, you
may want to give some share in your wealth to your recently born grandson or
you may want to give your recently bought car to your younger son. A simple
and clearly written Will will help the executor carry out the testator’s wishes.
So write one and relax." "Yes, I think, now is the time I should work on my Will,"
said Parekh thoughtfully.
Documents that work when there is no Will
Succession Certificate: For a succession certificate, one has to apply to a

magistrate or a high court. A succession certificate is a document that gives
authority to the person who obtains it from a competent court, to represent the
deceased for the purpose of collecting debts and securities due to him or payable
in his name. Along with death certificate and succession certificate most of the
legacy problems pertaining to movable property are solved.
Nominations: Nomination and a death certificate works in case of bank accounts,

demat accounts and other financial assets such as insurance policies. The
nominee can claim the assets in such accounts where the nomination is
registered with the bank. One should note that the will prevails over all the
nominations. For example, if an individual has mentioned his son’s name as a
nominee in his life insurance policy but mentions his wife as a beneficiary of all
the proceeds of the life insurance policy, then in that case his son has to ensure
that the proceeds reach the wife of the deceased. Nomination thus can be at the
most seen as creation of trustees for the safe keeping of assets and not
necessarily transfer of ownership rights. But nominations ensure that the wealth
stands transferred from the deceased. If there is no will carrying a contrary
provision or a claim, the nominee gets to enjoy the asset peacefully.

Here’s a brief about nomination rules in different investment instruments:
Nomination All bank deposits come with nomination facility. While opening a
in Bank new account, there is a column for nomination in the same form
Savings and you should fill it. However if not done while account opening, it
Account: could be done later on or could be changed also.
Nomination You can nominate more than one person in your PPF account. If
in Public you want to change or cancel the nomination, you can do so by
Provident using Form F. In case of minor, no nomination could be made.
Fund (PPF)
Account: In case of death of the investor without a nomination, if the balance
is up to Rs. 1 lakh, it will be settled to the legal heirs of the
deceased on receipt of application in prescribed form, supported
with necessary documents without production of succession
certificate. If the balance is more than Rs. 1 lakh, it is necessary to
produce a succession certificate.
Nomination Nomination in mutual funds could be made in the application form
in Mutual itself. Later, you have the provision to change the nominee, by
Funds: submitting the relevant form for that. A minor can be a nominee
provided a guardian is specified.
Please note that the nomination is Folio specific and if you make
any further investments in the same folio, the old nomination is
applicable to the new units also.
Nomination A life insurance policy holder has the right to nominate a person or
in persons who shall receive the insured amount in case of death. In
Insurance fact a nomination is asked at the time of proposal itself. In case of
Policies: demise, the nominee needs to submit the policy document along
with Death certificate, etc.
In insurance policies, to protect the rights of a wife and children or

both, an MWP addendum could be used to protect the nominee
rights so that a nominee is not superseded by Will or other
claimants. It is protected by section 6 of Married Women's Property

Act 1874 and such an addendum is usually available with all
insurance companies.
Nomination The role of nominee is different in the case of shares. Here, in case
in Shares: of death of the shareholder, the nominee will get the right of the
shares even though he is not the legal heir. In case of shares
/demat a/c, you need to ensure nomination is done in favor of the
person whom you want your interest to pass on.
As per the Companies Act, nomination supersedes Will. So, the

nominee in your share investment will become the absolute owner
after your demise.
Mutual agreement: When there is no will and the deceased has left assets that
are claimed by a large set of legal heirs, mutual agreements can come to the
rescue. Here an agreement is reached at between all legal heirs about enjoyment
of the assets, which in turn facilitates smooth transfer of ownership of assets and
the peaceful enjoyment of the same. But one must understand that the mutual
agreements work only with a succession certificate.
Tool 2: Trusts
A trust can be a valuable estate planning tool in many situations, but many do not
know exactly how creating a trust may benefit their estate. For the more affluent,
who own businesses governed by families, a trust is a vehicle that provides

effective and hassle-free wealth management, asset protection and tax efficiency.
First, creating a trust involves several people:
• Settlor: The person who has the trust created.

• Trustee: A person or business that manages the trust property for the
benefit of the beneficiary.
• Beneficiary: The person named within the trust documents that will
benefit from the trust.
A trust is simply a legal arrangement in which the settlor transfers ownership of

property to the trust, the named trustee then manages and controls the assets for
the benefit of the named beneficiary. A living trust is a trust that is created while
the settlor is still living, and in that case, they may also be the trustee as well as
the beneficiary until a triggering event, such as their incapacitation or death, after
which named successors take over. This allows a living trust to also act as a
mechanism for managing finances in the event you can no longer manage them
on your own.
Assets that can be transferred and owned by a trust include real estate, stocks,
bonds, valuable personal property and businesses. A trust, in relation to an
immovable property, must be in writing and registered.
A trust structure comes with certain inherent advantages. A trust provides the
flexibility to be set up in more than one form or in hybrid forms as per the
requirement. A trust can be either private or public. A private trust is a trust
generally for the convenience and support of individuals of families. Trust can be
structured as revocable or irrevocable.
A revocable trust can enable the settlor to exercise control over the property but
can be prone to clubbing provisions under the tax laws. An irrevocable trust can
provide safeguard against future creditor claims on the assets in case of
bankruptcy, since the settlor ceases to have the title to the trust property, yet at
the same time enable indirect control over the property through terms of the trust
deed. This is one the prime benefits of a trust structure which allows for
preservation of your wealth.

Summary
Estate planning is a key component of financial planning. It is a mechanism by

which you can preserve your asset holdings and pass it on to your heirs and thus
meet the needs and goals of your family, while taking into account current estate
tax law and other variables. There is no specific age to create an estate plan and
anyone who has some asset holding in his/her name should create one. The use
of wills and trusts in the right manner enables you in building an estate plan. It is
essential that you consult an expert professional in estate planning to take the
appropriate steps in creating a plan that suits your needs and desires.
For Further Reading, you may refer:

www.vakilno1.com
www.indlaw.com
www.universaltrustees.co.in
SESSION 6: ASSET CLASSES & PRODUCT SUITABILITY AND GOAL PLANNING
Asset Classes & Product Suitability
Asset classes refer to the various assets that are available for investment. Each
asset class has different risk and return characteristics, and functions in a unique

way in different market environment. Depending on the risk appetite and
investment horizon of an individual, he can choose to invest in a combination of
asset classes to optimize his returns.
Asset classes include a group of securities with varying degrees of risk. These
are: Equity, Fixed Income/Debt, Cash and cash equivalents, Real Estate, Gold and
Other Alternative Assets. Under these asset classes, there are several investment
products/avenues. This section describes some of these investment products in
detail.
Investment
products/
Avenues under
different asset
classes
Equity Fixed Cash and Real Estate Gold Alternative

Income/Debt cash Assets
equivalents
Direct equity, FDs, Debt T-Bills, Buying Buying PMS,

Mutual funds MFs, Bonds, Money market land/flats, physical gold, structured
(MFs) small saving mutual funds, Realty MFs, Gold ETFs, products, art,
schemes, etc. etc. REITs, etc. etc. antiques, etc.
A. Products/Avenues under Equity Asset Class
Equity (also known as a stock or share) is a portion of the ownership of a

company. A share in a corporation gives the owner of the stock a stake in the
company and its profits Risk level and potential return is high in this asset class.
Liquidity is also high when compared to other asset classes. Long term capital
gains (held for more than 1 year) are tax-free. Short term capital gains are taxed at
15 per cent.
You can invest directly in equities (individual companies) and could also choose
to invest in equity mutual fund schemes.
1. Direct equity/shares

Equity shares or stocks refer to what a company issues to its owners and which
denotes their ownership of the company’s business. Investment in shares of
companies is investing in equities.
Stocks can be bought/sold from the exchanges (secondary market) or via IPOs –
Initial Public Offerings (primary market). Stocks are the best long-term investment
options wherein the market volatility and the resultant risk of losses, if given
enough time, is mitigated by the general upward momentum of the economy.
A ‘stock’ is a share in the ownership of a company. At some point every company

needs to raise money for its functioning. For this, companies can either borrow it
from somebody or raise it by selling part of the company. This is termed as
issuing stock or a share. The first sale of a stock, which is issued by the private
company itself, is called the initial public offering (IPO). Shareholders earn a lot if
a company is successful, but they also stand to lose their entire investment if the
company isn't successful.
As you acquire more stocks, your ownership stake in the company becomes
greater. Sometimes different words like shares, equity, stocks, etc., are used. A
stock is listed on an index, like National Stock Exchange (NSE) or Bombay Stock
Exchange (BSE). An index is basically an indicator that gives you a general idea
about whether prices of most of the stocks have gone up or down.
A ‘stock market’ is an electronic platform where investors come together to buy

and sell their equity shares. Like any other market, here the price of an equity
share gets decided upon on a continuous basis, depending on the factors of
demand and supply. Stock prices change every day because of market forces of
supply and demand. If more people want to buy a stock (demand) than sell it
(supply), then the price moves up, and conversely if there are many sellers then
the price goes down.
There are two streams of revenue generation from equity investment — Dividend
and Growth. Periodic payments made out of the company's profits are termed as
dividends. The price of a stock appreciates commensurate to the growth posted
by the company resulting in capital appreciation.
2. Equity mutual funds

A mutual fund is a trust that pools together the savings of individuals, and invests
it in a variety of equity and debt instruments, according to a specific investment
objective as established by the fund. Mutual fund issues units to the investors in
accordance with quantum of money invested by them. Investors of mutual funds
are known as unit holders. The returns generated by the mutual fund are shared
with the investors in proportion to their investments. A mutual fund can generate
returns in two ways: A security can pay dividends or interest to the fund (i.e.
regular income) or a security can rise in value (i.e. capital appreciation). A fund
can also lose money and drop in value.
Equity mutual funds are one type of mutual funds and invest a major chunk of the
portfolio in shares. Equity funds, also known as growth funds, primarily look for
growth of capital with secondary emphasis on dividend. Such funds invest in
shares with a potential for growth and capital appreciation. Growth funds
generally incur higher risks in an effort to secure more pronounced growth. These
are ideal for investors having a long-term investment horizon seeking
appreciation over a period of time.
Within equity funds, there are various sub-categories, such as equity diversified
funds, sectoral funds, index funds and tax-saving funds.
Equity diversified funds which invest across different sectors and market
capitalizations such as large-cap, mid-cap, and small-cap to achieve capital
appreciation.
Specialty or sector funds invest in securities of a specific industry or sector of the

economy such as such as technology, infrastructure, banking, pharmaceuticals
etc. The funds enable investors to diversify holdings among many companies
within an industry, a more conservative approach than investing directly in one
particular company. These funds are ideal for investors who have already decided
to invest in a particular sector or segment.
Index funds replicate the portfolio of a particular index such as SENSEX, NIFTY,
etc. Their portfolios consist of only those stocks that constitute the index. The
percentage of each stock to the total holding is identical to the stocks index
weight age. And hence, the returns from such schemes are more or less

equivalent to those of the Index. These are ideal for investors who are satisfied
with a return approximately equal to that of an index.
Tax-saving funds or equity-linked saving schemes (ELSS) are similar to equity

diversified funds but with tax benefits under Section 80C and a lock-in period of
three years.
B. Products/Avenues under Debt Asset Class
Debt instruments are types of fixed-income avenues that provide stability to your
portfolio with indicative rate of return. Investors with low-to-moderate risk
appetite, looking to meet their short-to-medium term objectives can consider
investing in these instruments. There is wide belief that debt avenues are risk-free
instruments. However, that’s not the case. No doubt, these instruments offer
assured returns, but there are some inherent risks associated with them. Some of
these risks are
1. Bank and corporate fixed deposits (FDs)
In India, bank fixed deposits have been the default choice for many investors for
their noticeable reasons i.e. safety of capital and lack of market risk. Especially
when interest rates are higher levels, many rush to park their funds with bank
FDs.
Of late, corporate FDs also have caught the attention of many on back of their
higher returns as compare to bank deposits. But still, development of corporate
FDs among retail investors is at nascent stage. Interest rates offered by corporate
FDs range between 9-10.50% p.a. Some companies offer interest rates as high as
12% p.a. also. You can choose interest frequency across monthly, quarterly, bi-
annual and annual cumulative deposits.
Liquidity is high as most of the issuers offer 75% of the investment amount as
loan at 2% over the interest rate on the deposit, as well as a pre-mature
withdrawal option.
However, one should be careful when opting for corporate FDs. One should
check the fundamentals of the issuer and credit ratings of schemes offered by

them and should opt for schemes that have higher credit ratings such as AAA or
AA+.
2. Debt mutual funds
The most effective option under asset class is debt mutual funds. Debt funds are
something suitable for almost all types of investors as there are varieties of
schemes available under debt funds. The main objective of these funds is to
generate steady returns while preserving your capital. It helps bring stability to
your portfolio. These are best suited for the medium to long-term investors who
are risk-averse and seek capital preservation and are also more tax efficient.
Types of debt mutual funds
Gilt funds: Invest in government securities. Investors looking for higher level of
safety and reasonable rate of return can consider it.
Income funds: Invest majority of amount in liquid, fixed income securities.

Investors looking for idyllic debt-oriented schemes for short-term horizon can
consider income funds.
Short term funds: Invest in short maturity debt and money market securities for
time horizon from 3 months to 6 months. Investors with short (3 to 6 months)
time horizon and those looking for funds that seeks to provide returns linked to
fixed income markets, without taking significant risk.
Liquid funds: Also known as money market schemes provide easy liquidity and
preservation of capital with time horizon of 1 day to 3 months.
Ultra short term funds: Earlier known as liquid plus funds provide easy liquidity
and preservation of capital with time horizon of few months to 1 year.
Dynamic bond funds: Dynamic bond funds aim to actively manage a portfolio of
debt as well as money market instruments so as to provide reasonable returns
and liquidity.
Floating rate funds: Floating rate funds invest into floating rate debt securities.
Most of the debt securities in this type of fund mature within a year. It invests

65% to 100% of corpus into floating rate instruments and the rest in other debt
securities.
Fixed Maturity Plans (FMP): FMPs primarily invest in bonds, corporate

debentures, government securities and money market instruments depending
upon the tenure of the scheme for time horizon of minimum 30 days to maximum
of 1 year; very rarely it comes with the tenure of more than one year. Investors
with short term horizon can consider them.
Monthly Income Plans (MIPs): MIPs invests the major chunk of funds (at least
80%) into fixed income securities like commercial papers, (CPs), government
securities, corporate bonds, and the like, while the remainder is invested into
equities. Investors who prefer a dominant debt allocation and like equity exposure
to be in large liquid diversified stocks can consider investing in MIPs.
There are plethoras of options under debt mutual funds. One should select the
funds based on one’s financial goals and time horizon. For example: If someone
needs funds to meet ultra short-term goals say 3 to 12 months, he may invest in
short-term/ultra-short term funds. If you are looking to park money for little longer
term, say 15 to 18 months, gilt or income funds can be looked upon.
3. Small saving schemes
Small saving schemes offered by the government of India such as EPF, PPF,
POMIS, NSC, SSC, etc. form a part of debt instruments.
Employees’ provident fund (EPF)

• EPF is a good tool to build a retirement corpus.
• Your contributions towards EPF are eligible for deduction under section
80C (maximum limit: Rs. 1 lakh).
• The current interest rate for EPF is at 8.5%.
Public Provident Fund (PPF) Account
• Ideal investment option for both salaried as well as self employed classes.
• Non-Resident Indians (NRIs) are not eligible.

• Investment up to Rs. 1,00,000 per annum qualifies for Income Tax Rebate
under section 80 C of IT Act.
• The rate of interest on the subscriptions made to the fund on or after
01.12.2011 and balances at credit of the subscriber in the existing PPF
account shall bear interest at the rate of eight point seven per cent (8.70%)
per annum.
• Loan facility available from 3rd financial year up to 5th financial year. The
rate of interest charged on loan taken by the subscriber of a PPF account
on or after 01.12.2011 shall be 2% p.a. However, the rate of interest of 1%
p.a. shall continue to be charged on the loans already taken or taken up to
30.11.2011.
• Withdrawal permitted from 6th financial year.
• Free from court attachment.
• An individual cannot invest on behalf of HUF (Hindu Undivided Family) or
Association of persons.
Type of Account Minimum limit Maximum limit

Public Provident RS. 500 in a financial year RS. 1,00,000 in a financial
Fund(Individual account on year
his behalf or on behalf of
minor of whom he is the
guardian)
Post Office Monthly Income Scheme (MIS) Account
• Safe & sure way to get a regular monthly income.

• Specially suited for retired employees/ Senior Citizens or any one with
high sum for investment.
• Rate of interest 8.40%.
• Maturity Period - Five Years.
• No Bonus on Maturity w.e.f. 01.12.2011.
• Auto credit facility to savings bank (SB) Account.
Type of Account Minimum limit Maximum limit

Single Rs. 1500 Rs. 4.5 lakhs
Joint Rs. 1500 Rs. 9 lakhs

Above scheme operates automatically, if you open a saving bank account and
give a request for automatic transfer of Monthly Income Scheme interest to
Recurring Deposit through Saving Bank account.
National Savings Certificates (NSC)

NSC VIII Issue
• Scheme specially designed for Government employees, Businessmen and

other salaried classes who are Income Tax assesses.
• No maximum limit for investment.
• No Tax deduction at source.
• Certificates can be kept as collateral security to get loan from banks.
• Investment up to RS. 1,00,000 per annum qualifies for IT Rebate under
section 80C of Income Tax Act.
• Trust and HUF cannot invest.
• Maturity value of a certificate of Rs.100 purchased on or after 1.4.2012
shall be Rs. 151.62 after 5 years.
NSC IX Issue
• No maximum limit for investment.

• Rs. 100 grows to Rs. 234.35 after 10 years.
• Minimum Rs. 100 No maximum limit available in denominations of Rs.
100, 500, 1000, 5000 & Rs. 10,000.
• A single holder type certificate can be purchased by an adult for himself or
on behalf of a minor or to a minor.
• Maturity value of a certificate of Rs.100 purchased on or after 1.4.2012
shall be Rs. 236.60 after 10 years.
Senior Citizen Savings Scheme (SCSS) Account
• A new avenue of investment and return for Senior Citizen.

• The account may be opened by an individual:
1. Who has attained age of 60 years or above on the date of opening of

the account?
2. Who has attained the age 55 years or more but less than 60 years and
has retired under a Voluntary Retirement Scheme or a Special

Voluntary Retirement Scheme on the date of opening of the account
within three months from the date of retirement.
3. No age limit for the retired personnel of Defence services provided
they fulfil other specified conditions.
• The account may be opened in individual capacity or jointly with spouse.

• Non-resident Indians (NRIs) and Hindu Undivided Family (HUF) are not
eligible to open an account.
• The individual may open one or more account in the multiple of Rs.1000,
subject to a maximum limit of Rs.15 lakh.
• No withdrawal shall be permitted before the expiry of a period of five
years from the date of opening of the account. The depositor may extend
the account for a further period of 3 years.
• Premature closure of account is permitted:
1. After one year but before 2 years on deduction of 1 ½ % of the

deposit.
2. After 2 years but before date of maturity on deduction of 1% of the
deposit:
• Premature closure allowed after three years.

• In case of death of the depositor before maturity, the account shall be
closed and deposit refunded without any deduction along with interest.
• Interest @ 9.20% per annum from the date of deposit on quarterly basis.
Interest can be automatically credited to savings account provided both
the accounts stand in the same post office.
• Interest rounded off to the nearest multiple of rupee one.
• Post Maturity Interest at the rate applicable to the deposits under Post
Office Savings Accounts from time to time is admissible for the period
beyond maturity.
• Nomination facility is available in the Scheme.
• The investment under this scheme qualifies for the benefit of Section 80C
of the Income Tax Act, 1961 from 1.4.2007.

Monthly Income Scheme (MIS) and Senior Citizen Saving Scheme (SCSS) are the
best for Senior Citizens who desire monthly/quarterly interest. Invest in MIS /
SCSS and transfer interest into RD account through SB account through written
request and earn a combined interest of 10.5 % (approx.).
This is the safest investment option for the Senior Citizens.
Post Office Savings Account
• Any individual can open an account.

• Cheque facility available.
• Group Account, Institutional Account, other Accounts like Security Deposit
account & Official Capacity account are not permissible.
• Rate of interest 4% per annum.
Post office Time Deposit Account
• Any individual (a single adult or two adults jointly) can open an account.
• Group Accounts, Institutional Accounts and Misc. account not permissible.
• Trust, Regimental Fund or Welfare Fund not permissible to invest.
• 1 Year, 2 Year, 3 Year and 5 Year Time Deposit can be opened.
• In case of premature closure of 1 year, 2 Year, 3 Year or 5 Year account on
or after 01.12.2011, if the deposit is withdrawn after 6 months but before
the expiry of one year from the date of deposit, simple interest at the rate
applicable to from time to time to post office savings account shall be
payable.
• In case of premature closure of 2 year, 3 year or 5 year account on or after
01.12.2011, if the deposit is withdrawn after the expiry of one year from
the date of deposit, interest on such deposits shall be calculated at the
rate, which shall be one per cent less than the rate specified for a period of
deposit of 1 year, 2 year or 3 years as mentioned in the concerned table
given under Rule 7 of Post office Time Deposit Rules.
• Rate of interest - 8.20%, 8.20%, 8.30%, 8.40% compounded quarterly for
1,2,3 & 5 years TD account respectively.
• The investment in the case of 5 years TD qualify for the benefit of Section
80C of the Income Tax Act, 1961 from 1.4.2007.

Type of Account Minimum Deposit Maximum Deposit
1,2,3 & 5 Year TD Rs.200 and in multiples of No limit.
Rs. 200 thereafter
4. Non-convertible debentures (NCDs)
NCDs are debt investment instruments that offer high returns with moderate risk
while giving you the flexibility of choosing between short and long tenures. An
NCD is a fixed-income debt paper issued by a company. In other words, the
issuer agrees to pay a fixed interest on your investment. As the name suggests,
these debentures cannot be converted into shares of the issuing company like
convertible debentures where investors have the option of getting shares in the
issuing company on conversion. NCDs have a fixed coupon or interest which is
paid to the holder of the instrument at maturity.
If you sell an NCD in the secondary market when the interest rate is higher than
that being offered by the debenture, your return will be less or even negative as
the buyer will pay only that amount which allows him to get the return equal to
the prevailing market rate. If the interest rate goes down, your effective return will
be higher than that being offered on the NCD. Apart from the risk of lower return
or loss of capital, there is the risk of default by the company even though the
chances are low as most of the firms are under supervision of the RBI and SEBI.
An NCD can be both secured as well as unsecured. For secured debentures,

which are backed by assets, in case the issuer is not able to fulfill its obligation,
the assets are liquidated to repay the investors holding the debentures. Secured
NCDs offer lower interest rates compared with unsecured ones.
If you want a regular income from NCDs, you can pick those that pay interest on a
monthly, quarterly or annual basis. If you just want to grow your wealth, you can
opt for cumulative option where the interest earned is reinvested and paid at
maturity. For the purpose of tax, interest is added to an investor’s income and
taxed at marginal rate of tax. With many companies expected to come to market
with these instruments, you will have options. Investors with high risk appetite
can invest in NCD with five-year horizon to pocket higher coupon rate and a
possibility to participate in capital appreciation before maturity, if rates fall. But a

caveat here, NCDs may not be liquid on stock exchanges, and hence invest in
them only with a long-term investment view.
5. Bonds
The main types of bonds are zero coupon bond, convertible bond and treasury
bills.
Zero coupon bonds: A zero-coupon bond is a bond bought at a price lower than
its face value, with the face value repaid at the time of maturity. It does not make
periodic interest payments, or have so-called ‘coupons,’ hence the term zero-
coupon bond. Investors earn return from the compounded interest all paid at
maturity plus the difference between the discounted price of the bond and its par
(or redemption) value. For example, company ABC Ltd issues bonds having face
value and redemption value (value at maturity which the company pays back the
investor) of Rs 100. If the bonds are issued at discount at Rs 80 and will be
redeemed on maturity, the investor gains Rs 20, the difference between the
redemption value and face value.
Convertible bonds: Convertible bonds are those types of bonds that offer the
customer the option to convert the bond into equity shares at a fixed price after a
certain fixed period from the date of issuance. For example, company ABC Ltd
can issue convertible bonds of face value Rs 100, offering the option to the
investor of converting it into 10 equity shares at a price of Rs 10 per share after 5
years from the date of allotments of the bonds.
6. National Pension system (NPS)
NPS is a defined-contribution product, where your contributions grow and

accumulate over the years, depending on the returns earned on the investment
made. When you retire, you will be able to use these savings to take care of the
expenses post-retirement.
Any citizen of India, whether resident or non-resident, who is in the age bracket of
18-60 years, can subscribe to this product.

NPS begins with a mandatory Tier I account, a non-withdraw-able account, which
helps you save regularly to build your pension corpus. A Tier II account is like a
voluntary savings account, which offers withdrawal facility.
The minimum annual contribution for Tier I account is Rs.6000 (with a minimum
monthly contribution of Rs.500). For Tier II account, there is a minimum
contribution amount of Rs.250 and the account holder should have minimum
balance of Rs.2000 at the end of financial year. There is no upper cap on the
contributions for both the NPS accounts.
In case, the said amount is not contributed, except for the year in which the NPS
account is opened, the account gets marked as dormant. The same can be re-
activated by bringing in the un-contributed amount and a penalty of Rs.100 per
year.
NPS is a long-term product. Your savings get accumulated till the age of 60. After
you turn 60, you get up to 60% in your hands and the remaining goes into buying
annuity to ensure regular payment. Before the age of 60, you can withdraw 20%
and rest has to be annuitized. This product discourages early withdrawals, which
is crucial for building pension corpus.
NPS is perhaps the most flexible retirement investment option. You can choose
your own asset allocation and investment choices as well as the fund manager
(from the six designated pension fund managers).
With NPS, you are free to decide as to how your pension wealth is to be invested
across three asset classes:
E: Equity,
C: Corporate bonds or fixed-income securities other than government
securities, and
G: Government securities
You can invest in NPS in two ways:

Active choice: Here you can specify the investment and allocation pattern among
three asset classes E, C and G. Note, a maximum of 50 per cent only is allowed to
invest in E (equity) class.
Auto choice: Under this option, the discretion of asset allocation pattern rests
with the pension fund manager based on your age. Up to 35 years, 50% is
allocated towards equity, 30% in corporate bonds, and 20% in government
securities. As the age of subscriber increases, the allocation-mix gradually
increases towards fixed income and government securities and decreases
towards equity. This gives stability to your portfolio as you near the retirement
age.
You can either choose an active option or an auto option. You can also change
the investment option from active to auto and vice a versa, once in a financial
year. You also have the liberty to switch your pension fund manager if you are
not satisfied with the performance of your fund manager, once in a financial year.
What makes NPS an attractive pension product is its low cost and flexibility.
As you can open two accounts for NPS – Tier I and Tier II, it gives the most
desirable flexibility. You can maintain Tier I account with minimum yearly
contribution and invest more in Tier II (having the option of withdrawals). At the
age of 60, you can take a call of either transfer full/part of the funds from NPS Tier
II to NPS Tier I or you may continue to hold the funds in NPS Tier II account and
withdraw the same before or on attending the age of 70. This gives NPS an edge
over other retirement products.
Coming to the cost and charges, NPS is perhaps the world’s lowest cost pension
scheme. The point of presence (POP) charges for initial registration charges are
Rs. 100 with contribution charges (at the time of initial/subsequent) of 0.25 % of
the amount subscribed, subject to minimum of Rs. 20 and maximum of Rs. 25,000
plus service tax. POP also provides non-financial services (viz. change/registration
of nominee, change of pension fund manager, etc.), for which they are allowed to
charge Rs.20 plus applicable service charges.

The Central Record-Keeping Agency (CRA) charges include Rs 50 for permanent
retirement account (PRA) opening, Rs 190 for annual PRA maintenance charges,
Rs. 4 per transaction.
The custodian charge (On asset value in custody) includes 0.0075% p.a. for
Electronic segment & 0.05% p.a. for Physical segment and fund management
charge of 0.0009% of the fund value per annum.
Apart from its low-cost and flexibility benefits, NPS is also a safe product, strongly
regulated by PFRDA under its strict guidelines. You can invest in and maintain
records online. All transactions can be tracked online through CRA system. You
can check fund and contribution status through CRA website.
Further, you can operate your NPS account from anywhere in the country with
the help of your Permanent Retirement Account Number (PRAN) and this number
remains the same even if you change jobs or location.
Though NPS scores well in terms of cost and flexibility, it loses some shine when
it comes to taxability.
At present, the contributions get tax benefit under Section 80C. However, the
withdrawals at maturity are taxable as per income tax slab. However, under DTC,
NPS is proposed to have EEE (exempt, exempt, exempt) tax regime, in sync with
EPF and PPF, which could make it the best product for pension planning.
C. Products/avenues under Cash Asset Class
These are highly liquid and safe instruments which can be easily converted into
cash, treasury bills and money market funds are a couple of examples for cash
equivalents.
1. Treasury bills (T-Bills)

Treasury bills are short term bonds, with maturity of one year or less, issued by
the government. They are promissory notes issued at discount and for a fixed
period. Treasury bills are issued by RBI and sold through fortnightly or monthly
auctions at varying discount rate depending upon the bids.
2. Money Market Funds/Liquid Funds
For the cautious investor, these funds provide a very high stability of principal
while seeking a moderate to high current income. They invest in highly liquid,
virtually risk-free, short-term debt securities of agencies of the Indian
Government, banks and corporations and Treasury Bills. Because of their short-
term investments, money market mutual funds are able to keep a virtually
constant unit price; only the yield fluctuates. Therefore, they are an attractive
alternative to bank accounts. With yields that are generally competitive with - and
usually higher than -- yields on bank savings account, they offer several
advantages. Money can be withdrawn any time without penalty. Although not
insured, money market funds invest only in highly liquid, short-term, top-rated
money market instruments. Money market funds are suitable for investors who
want high stability of principal and current income with immediate liquidity.
D. Products/Avenues under Real Estate Asset Class
Avenues under real estate asset class can be divided into two parts: 1. Direct
Investment and 2. Indirect Investment.
1. Direct Investment
Historically, Indians have preferred direct way of investing in real estate (buying
physical property – land, flats/apartments, commercial store, etc). This route
offers some of the very best features, including a stream of rental income,
potential for capital appreciation, ability to hedge inflation and diversification.
Returns: The returns on property investments have been rather spectacular in

India. These have largely been driven by real demand though speculation also
drives the return. The returns are also magnified because of longer holding
periods in real estate, unlike in equities, which being the most liquid asset class,
sometimes investments are not held for longer periods. Further, the ability to

leverage, i.e. taking loan means that while you have invested 20% as your own
money, the gain that accrues to you is on the entire 100% of the investment.
The returns in real estate depend on the location of the property and
demand/supply situation in the city or area. Therefore, assigning a value to the
property based on average values may not be correct.
You need to have at least 5-year horizon for investing in real estate. For short-
term investments, it is purely speculative and one needs to be careful.
Risks: Direct investment in property has specific risks. First, as investment in this
asset class can be large, it can destabilize your portfolio. Diversifying within real
estate (including indirect ways listed below) could help reduce the risk.
Liquidity is another risk. A panic sell can drastically bring down the returns. And
this can get amplified if the markets are down or the property markets are low.
Though in India we haven’t seen any crash in real estate markets, many
developed countries have seen it. For instance, the crash of Japanese asset price
bubble from 1990 on has been very damaging to the Japanese economy. The
United States, on the other hand, saw housing prices peaked in early 2006,
started to decline in 2006 and 2007, and reached new lows in 2012. (Source:
Wikipedia).
It is extremely difficult to know why or when a country can go through phases of

bubble and burst. Hence, it is important that you consider investing into real
estate only after analyzing your personal financial profile.
Overleveraging is also the risk. Investing in property by taking a mortgage loan

can amplify the returns, but can also do the same if the markets go down. For
instance, you find a very good deal, and decide to go over-leverage. Say after a
period of time, real estate market gets caught into a down cycle (as it moves in
cycles), chances are you may lose your money.
Further, as investing in real estate is a big-ticket item, it is important that before

investing you have a clear picture of your objectives. If your objective is to earn
capital gains, a residential property may suit you better as appreciation in
property prices are better. On the other hand, if you are looking for a regular

income, a commercial property may prove to be the better option as it generally
carries higher rental yield of ~ 7-8% annually as compared to a 4-5% in case of
residential property.
Investing directly in real estate requires more time and effort. It’s a long process
that involves identifying a good location with growth potential, looking for a
property, carrying our due diligence, paper work, etc. To avoid these hassles, you
may look at some of the indirect ways of investing in real estate listed below:
2. Indirect Investments
a) Realty PE funds: In a realty private equity (PE) fund, you just need to put in
your money. The rest is taken care of by the fund. These funds typically have
tenure of 5-8 years. The returns from these funds depend on the performance of
broader real estate market. You can generally expect an average annualised
return of 12-15% over the life of the fund. These funds are largely suitable for
high net-worth individuals (HNIs) as the minimum ticket size is Rs 1 crore.
ICICI Venture, Tata Realty and Infrastructure, Indiareit Fund Advisors, HDFC Real
Estate Fund, ASK Property Investment Advisors and Kotak Realty Fund are some
of the PE funds in India.
b) Realty PMS: Portfolio Management Service (PMS), on the other hand, is a

collective pool of investments handled by the portfolio manager. Through PMS,
you can get an exposure to a variety of residential and commercial properties
such as retail, office spaces and warehouses. It offers much greater diversification
as the portfolio manager under PMS can spread the risk over a number of
properties, instead of investing in a single property. The profits made on sale are
then shared among the investors. This option is suitable for retail investors as the
minimum ticket size is Rs 25 lakh. However, in some cases, it is Rs 1crore, or even
more, depending on the PMS.
c) Real Estate Investment Trusts (REITs): A Real Estate Investment Trust is a

company that buys, develops, manages and/or sells real estate assets. REITs
allow you to invest in a professionally-managed portfolio of real estate properties.
REITs can be classified as equity REIT (investing in properties), mortgage REITs
(providing direct debt finance) and hybrid REITs (mix of equity and mortgage).

An equity REIT typically pools money from various investors to acquire
commercial real estate and manages it. The rent collected is the income
generated by REIT. REITs are very popular in the developed nations, especially in
US, UK, Australia, Japan and Singapore. In India, the concept is yet to take off.
d) Real Estate Mutual Funds: A real estate mutual fund (REMF) functions like any
other mutual fund. Instead of investing in equities or fixed-income securities, an
REMF invests directly in property or indirectly in the equity of real estate
companies. There are no pure real estate mutual fund schemes available in India
as such. The 10th Five-Year Plan ending in 2007 had proposed that SEBI
(Securities and Exchange Board of India) would regulate the real estate mutual
funds in India. SEBI then introduced brief guidelines for the same in 2008.
However, no consensus has been reached on the valuation norms to be followed.
Lack of expertise in valuing the individual land parcels or projects along with
inadequate supporting data, complex corporate structure, lack of transparency
and high beta nature of stocks due to high sensitivity nature of the sector to
dynamic macro variables, and limited number of listed companies is keeping
Indian domestic fund managers shying away from taking aggressive sector bet or
launching specific real estate mutual fund scheme. Globally, these funds are very
popular.
e) Realty Stocks: Those with limited funds can consider investing in listed stocks
of realty companies. They are the most liquid option. Before investing in realty
stocks, it is important that you keep a watch on number of factors. It includes:
Whether the sales volume and cash flow of the company are improving, whether
it has strong balance sheet (leverage position), whether it has execution
capabilities to execute the entire land bank on schedule time, quality of land bank
and finally corporate governance.
E. Products/Avenues under Gold Asset Class
Gold as an asset class plays a significant role in one’s investment portfolio. It not
only provides hedge against inflation, but also has low correlation with other
asset classes such as equity and debt. This makes gold suitable for diversification
and asset allocation.

Avenues under gold asset class also can be divided into two parts. 1. Direct
Investment and 2. Indirect Investment.
1. Direct Investment
a) Jewellery: This is the most common way of buying gold in India. However,
many people buy it for ‘consumption’ purpose and not for ‘investment’ as such.
The good part about this option is that it’s the simplest and easiest way to invest
in gold. However, it may not qualify for prudent way of investing given the fact
that one has to face significant loss of value on sale due to making charges and
wastage. The making charges vary from jeweller to jeweller and according to
design, but on an average, it is around Rs 200 per gram. One is never able to
recover these charges.
The purity of gold is another issue. Most of the times, it may not be of the level
that is being claimed. There are concerns even with the hallmarked jewellery.
Besides, the hallmark certification adds up to the cost.
Go for this option if you want to start using the ornaments immediately or give
them as a gift.
b) Coins, bars & biscuits: These can be bought from jewellers, banks or bullion
traders. The big advantage of this form of gold is purity. Most of them come with
assay certification (indicating quality) and in tamper-proof packs (prevents
damage during transit).
You can choose from a range of coins and bars that are generally available from 5
grams to 100 grams.
This option is suitable for meeting some distant future goals like your sister’s or
daughter’s marriage. But purchase it from a reputed jeweller, who will buy them
back when you need the money.
2. Indirect Investment
a) Gold ETFs: Gold exchange traded funds (ETFs) as an investment option is

gaining popularity in India. These are open-ended mutual funds that put your

money in physical gold and issue units to you in demat form (opening a demat
account with a broker mandatory to invest).
Each unit is backed by physical gold held by the custodian of the scheme. One
unit represents approximately 1 gram or half gram of gold.
Gold ETFs are listed on the NSE and can be purchased and sold on the exchange
just as you buy and sell equity shares using the trading platform.
Gold ETFs score over physical gold in many ways. First, unlike physical gold, you
here are assured of transparency in pricing as there are no making charges or
premium involved and units are traded on the exchange. Another advantage is
that investments through ETFs do not attract wealth tax provisions. Capital gains
are exempt if held for more than one year and short term capital gains tax is
applicable if units are sold within one year. Gold ETFs are a cheaper proposition,
as there is no entry or exit load on it. However, they have expense ratio, which is
usually 1 per cent.
b) Gold FoFs: Gold fund of funds (FoFs) invest the corpus in either their own gold
ETFs or a foreign gold fund which is the mother fund. Opening a demat account is
not mandatory for investing in these funds. However, there are other charges
which eat into your overall returns. There is exit load of usually1-2% exit load if
the investment is redeemed within a year. And expense ratio ranges between 0.5-
2 per cent.
c) e- Gold: e-Gold is a product by the National Spot Exchange Limited (NSEL)

wherein you can purchase gold in electronic form in denominations as small as 1
gram and can also be converted into physical gold. One e-gold unit is equal to
one gram of gold, which can be bought and sold via the spot exchange (from 10
am till 11.30 pm on weekdays) just like shares, making it a very liquid investment.
However, e-Gold loses out to gold ETFs/FoFs when it comes to taxation, as the
units need to be held for more than three years to get long-term capital gains tax
benefit, unlike gold ETFs/FoFs that need to be held only for one year. e-Gold also
invites wealth tax.

Further, if you want to convert your e-gold units to physical gold, you need to
have a minimum of 8 grams or in multiples of 8, 10, 100 grams or 1 kg. Upon
conversation to physical gold, VAT and other local taxes are also levied. As per
the current rates, VAT is charged at 1 per cent of the value of goods.
NSEL currently has only three delivery centres at Ahmadabad, Delhi and Mumbai.
In case physical delivery is lifted in Mumbai, octroi at 0.1 % of the value of
delivery will also be applicable.
Apart from e-Gold, NSEL also offers other e-series products such as e-silver, e-
platinum, etc.
d) Gold mining stocks: In India, there is only one listed gold mining company -
Deccan Gold Mines. If you wish to invest in such more companies, you may look
at investing overseas. But keep in mind, the increase in gold prices may not result
in increase in share price of gold mining companies. This is because equities are
affected by several other factors as well.
If you are willing to take risks and understand that gold prices and shares of gold
mining companies don't always move together, you could opt for this option.
e) Gold futures: Investors with higher risk appetite may trade in gold futures
though commodity exchanges like MCX and NCDEX. Basically, a gold futures
contract is an agreement to buy (or sell) a certain specified quantity of gold at a
price determined today on a specified date in the future. When you buy gold
futures, you assume that the price of gold will be higher at the time of maturity.
While trading in gold futures offers a significant upside, there is an equal chance
of incurring huge losses. As such this option is ideal only for traders and
speculators who have a high appetite for risk.
f) Gold deposit schemes: If you want to put your physical gold into productive
use, you may opt for gold deposit schemes. These schemes are offered by
selected banks, which allow you to earn interest on the gold lying idle with you.
The gold can be deposited in the form of jewellery, bars or coins. The minimum
quantity varies from bank to bank. The tenure of these deposits is typically in the

range of 3-7 years. The interest is generally low and is exempt from tax. The value
of the gold offered is also exempt from wealth tax.
6. Products/avenues under Alternative Assets
1. Portfolio management services (PMS)
Under portfolio management service (PMS), a portfolio manager creates and

manages an investment portfolio on your behalf based on your needs,
requirements, investment objectives and risk profile. He invests money in shares,
debt and other securities. A portfolio manager develops a separate plan for each
of his clients unlike mutual funds, wherein a fund manager collectively manages a
fund for all its unit holders.
PMS services are primarily offered by banks, asset management companies,

brokers and independent wealth management firms, among others. Broadly,
there are three types of PMS services available:
Discretionary: Under this service, the portfolio manager himself makes

investment decisions and implements them within the purview of an investment
strategy.
Non-discretionary: Here, a portfolio manager only recommends investment

ideas. The execution is done by a portfolio manager only after taking an investor’s
consent.
Advisory: Under this service, portfolio manager only suggests investment ideas.
Choice as well as execution of investments is taken care of by investor himself.
In India, majority of PMS providers offer discretionary services.
Minimum ticket size: Earlier, one could open a PMS account with just Rs 5 lakh.
Now, as per the Securities and Exchange Board of India (SEBI) guidelines, the
minimum investment amount required to open a PMS account is Rs 25 lakh.

However, different service providers have different minimum investment
requirement ranging between Rs 50 lakh to Rs 1 crore.
For building a truly customized portfolio, you may need to have minimum
investment amount of Rs. 1 crore. There is no upper limit on the amount you can
invest in a PMS.
Fees and charges: Typically, there are two models for fees: Fixed-fee model and
profit-sharing model.
Under fixed-fee model, one-time charges are levied at the time of starting an
investment portfolio. It is generally in the range of 2-3% of your investment
amount.
Some PMS schemes also have a profit-sharing model (in addition to fixed fees),
wherein the service provider charges a certain percentage of profit made over the
hurdle rate for a particular period of time. Hurdle rate is the rate of return that the
portfolio manager must beat before collecting profit-sharing fees.
Let’s understand this with an example: Suppose PMS XYZ has fixed charges of
2% plus a charge of 20% for return generated above 15% (hurdle rate) in the
year. In this case, if the return generated in the year by the scheme is 20%, the
fees charged by the PMS will be 2% + [(20% - 15%)*20%].
Besides, there are usual charges like brokerage at the time of transactions,
management fees and other statutory levies viz., stamp duty, securities
transaction tax; service tax etc.
Returns: PMS is a high-risk product and returns are significant only in the long
term. Good PMS products can offer slightly better returns than mutual funds in
the long run. Remember, as per SEBI rules, a portfolio manager cannot offer/
promise you indicative or guaranteed returns. However, in the long run, well
managed portfolios can yield up to 20-25% returns p.a.

Lock-ins: Generally, PMS firms do not have lock-ins. However, a portfolio
manager can charge exit load, generally in the range of 1.5-2.5% p.a. of the AUM
for an early exit. You can also withdraw profits as and when you want, provided
you maintain the minimum ticket size.
Documentation and procedure: Signing on these services is like a legal binding

arrangement. You will typically be required to go through a registration process,
including a bi-partite agreement. Since the portfolio manager will be making
transactions on your behalf, you will need to give them a power of attorney. A
new demat and bank account will have to be opened exclusively for PMS
portfolio. The documentation is broadly standard across all the service providers
and is designed to make you aware of the key features and risks involved in your
investment.
Suitability: These products are generally offered to HNIs. If you have Rs 25 lakh
to invest, want to invest in equities for long term and have a desire for
personalized investment solution and greater level of service, you may consider
investing in PMS. A portfolio manager prevents you from the dilemmas of where
and how to invest your money and helps you reduce overall risk of your
investment portfolio. Some of the benefits of PMS include: it excels in individual
attention, provides expert advice and personalized asset allocation and is
transparent and convenient option.
Tax implications: Under PMS, there can be two ways of generating returns:
Dividend income and capital gains. Dividends received by shareholders are
exempt from tax u/s 10(34) of Income Tax Act. However, a company distributing
dividends is liable to pay dividend distribution tax.
Capital gains: Under PMS, each transaction is considered as an independent

trade and capital gain taxes are applicable accordingly (whether short term or
long term). Long term capital gains (if shares are held more than 1 year) are
exempt from tax. Short term capital gains are chargeable at 15%, currently.
A comparative look: PMS vs. equity mutual funds vs. direct equities:
Parameter PMS Equity MFs Direct
Equities
Customization Yes Not possible Yes

Professional Yes Yes Yes, if done
Management consciously
Concentrated Yes Not possible Yes, if done
portfolios consciously
Flexibility to High Limited, minimum Yes
move across equity allocation
assets required at all times
Strategies Unique strategies Common strategies for N.A.
possible all investors
Alignment to High. Fund Low. Fund manager N.A.
investment manager can truly must provide for
objective follow investment unplanned liquidity
strategy requirement
Choosing a PMS provider: Points to ponder
• Make sure that the PMS you opt for is SEBI registered.
• Choose the PMS based on your requirements and personal investment
goals. Remember, PMS is not a short-term product. If you are wealthy with
the long-term view, you may consider it.
• It is critical to know the investment philosophy of your portfolio manager.
Ensure you keep a tab on what a portfolio manager is doing with your
portfolio and how he is diversifying your investments to reap gains. Stay
away if your portfolio manager cannot explain you his investment strategy.
Ensure that you would be able to see your portfolio on regular basis.
• Check on the fees and charges of a PMS provider. It is often advisable to
go for a fixed and variable fee (profit-sharing) structure.
• Track the performance record of your portfolio manager. Over the long
run, your PMS scheme should outperform its benchmark indices such as
Sensex or Nifty. If it is not performing well over a period of 2-3 years, you
should switch to a different PMS provider.
2. Structured Products

As the name suggests, these are customized products that comprise of various
financial instruments - derivatives, shares, bonds and debentures, among others.
In simple words, these can be defined as pre-packaged products, which are
issued in the form of non convertible debentures (NCDs), whose returns are
linked to underlying assets.
The underlying component in a structured product can be interest rates, a specific

equity, bond, commodity or an index. As a result, the returns of a structured
product are highly sensitive to changes in the value of these underlying assets.
These products are largely suitable for HNIs. You can buy these products from
wealth managers. In some cases, a structured product may have a credit rating
from rating agency. The minimum investment is usually in the range of Rs 10
lakh-Rs 20 lakh. The wealth manager may charge 0.5-3% of the amount invested
as one-time fee. The main payout for structure products is in the form of a
coupon or interest rate.
The primary objective of these products is to protect the principal and at the same
time give returns linked to equities. However, there are structured products
available that do not offer capital protection features. In India, most structured
products have principal protection function, meaning protection of principal if the
investment is held till maturity.
Let’s understand with an example: There is a simple Nifty-linked capital

protection structure. You are investing, say, Rs 200 in a product with tenure of 60
months. Of this, Rs 150 is invested in debt securities, yielding a return of 7% per
annum. Thus, over a period of 60 months, you could get Rs 60 as interest on
these debt securities. Hence, this ensures that your capital of Rs 200 is protected.
The balance of Rs 50 (out of Rs 200) is invested in the Nifty index. If the Nifty rises
by 20% in 60 months, Rs 50 will become Rs 60. Thus the value of your Rs 200 will
be Rs 270 at the end of the period, giving you an absolute return of 35%.
On the other hand, if the Nifty were to fall by say 30%, then Rs 50 invested would
become Rs 35, thereby giving you Rs 245 back, giving you an absolute return of

22.5%. This strategy ensures that at any given time your capital is protected and
you will get Rs 200 back at the end of 60 months.
Risks involved
Credit risk: The primary risk linked to structured products is credit risk or the risk
that the issuer may default. This essentially means you take the risk, irrespective
of it being a capital-protected structure, that the issuer may not be able to pay you
back. SEBI has mandated that credit risk of the issuer should be explicitly
mentioned in the offer document.
Market risk: This comes from the underlying part of the structured product. If the
underlying asset does not perform as analyzed and estimated, the final payout
would vary. For instance, if underlying asset is Nifty, a 5-year structure product
may be designed with the analysis that Nifty will return up to 10% during the
tenure. If it does not reach that level, final returns would be less.
Despite the risks involved, structured products has a unique proposition, which
allows making money regardless of market conditions. Before you choose to buy
this product, you need to have some idea where the underlying asset price is
headed. You also have to consider other features such as credit rating, coupon
rate and tenure. Investments in structured products should be made only after
clearly understanding them, risks involved and returns projected.
Suitability: These products are generally suitable for investors who want to
diversify their portfolio with lower risk products that protect their principal and
still offer the opportunity to realize capital gains. It is also suitable for those who
have long-term investment horizon.
3. Private Equity
Private equity (PE) is another options, a growing number of HNIs can consider
investing in. Private equity can be defined as an equity investment made in a
private companies through a negotiated process. It can also be defined as
providing medium to long-term finance to potentially high growth companies
(quoted and/or unquoted) in exchange for an equity stake in the company.

PE funds can be used to develop new products and technologies, to expand
working capital, to make acquisitions, or to strengthen a company’s balance
sheet. Private equity often requires a long-term focus before investments begin to
produce any meaningful cash flow if indeed they ever do. Private equity also
typically requires a relatively large investment and is available only to qualified
investors such as pension funds, institutional investors and wealthy individuals.
Private equity can take many forms. The following are some examples:
• Angel investors are individual investors who provide capital to startup

companies and may have a personal stake in the venture, providing business
expertise, industry experience and contacts as well as capital.
• Venture capital funds invest in companies that are in the early to mid-growth
stages of their development and may not yet have a meaningful cash flow. In
exchange, the venture capital fund receives a stake in the company.
• Mezzanine financing occurs when private investors agree to lend money to an

established company in exchange for a stake in the company if the debt is not
completely repaid on time. It is often used to finance expansion or acquisitions
and is typically subordinated to other debt.
• Buyouts occur when private investors often part of a private equity fund
purchase all or part of a public company and take it private, believing that either
the company is undervalued or that they can improve the company's profitability
and sell it later at a higher price.
Risks involved:
• High risk of erosion of capital

• Illiquid investment, valuation impacted by limited exit routes available
• Staggered investment, based on drawdown calls which are not pre-
determined
• Long investment horizon
• Returns dependent on performance of portfolio companies

• Risks related to political, social and economic environment
Suitability: Aggressive investors, who are high risk takers, can consider having 5-
6% exposure of their total equity portfolio in PE funds. It may help may increase
the expected returns and reduce risk in the long run.
4. Art, antiques, gems and collectibles

One may invest in these options. However, their value can be unpredictable and
can be affected by supply and demand, economic conditions, and the condition
of an individual piece or collection.
Asset Classes & Product Suitability Based On Investment Horizon
Every investment avenue/ product needs to be held or invested for different time
periods, according to the nature of the product.
The below table indicates different investment products and their tenor and
ideal investment horizon.
S Product Tenor Investment

No Horizon
1 Equity No lock-in > 5 years (>3

years with active
monitoring)
2 Mutual Funds – Equity No lock-in for open- > 5 years

ended
3 Portfolio Management Service Lock-in usually < 6 > 3 years

(PMS) to12 m

5 Equity Linked Savings Scheme Lock-in 3 years > 3 years
(ELSS)
6 Structured Products 3 to 5 years > 3 years
7 Private Equity 5 to 9 years > 5 years
8 Mutual Funds – Debt No lock-in for open- 1 – 5 years

ended
9 Fixed Deposits 15 days to 10 years 1 – 5 years
10 NCD / Bonds 3 to 10 years 3 – 5 years
11 New Pension System (NPS) Till the age of 60 years > 15 years
12 Senior Citizen Savings Scheme 5 years (extendable by 5 years

3 y)
13 Employees' Provident Fund Till retirement > 15 years

(EPF)
14 Public Provident Fund (PPF) 15 years (extendable > 15 years

by 2 terms of 5 years
each)
15 Post Office MIS 5 years 5 years
16 National Savings Certificate 5 years and 8 years 5 years and 8

(NSC) years
Goal Planning
Each individual’s aspirations and goals are different and so each one has to plan
as per his/her need. Planning your goals gives you a bird’s eye view of your
finances and helps you be better prepared for your future. Let’s take a closer look
at the process of planning for your goals.
Goal Planning Process
Step 1: Set your goals and list it down

Setting goals is the very first step to a road of secured future. When you set a
financial goal, for example buying a new car or retiring comfortably, you actually
define what you want to achieve in life. Most of us have a fair idea on the key
financial goals, however writing them down and actually planning for them puts
in a rigor and improves the odds. So take out some time and set goals that you
may want to achieve.
A goal must be SMART as described by Paul J. Meyer in “Attitude is everything”.

SMART stands for Specific, Measurable, Attainable, Relevant and Time-bound.
Specific: When you set a goal, be particular about it. For example: Instead of
saying I want to buy a car, say I want to buy a Honda City (or any other car for
that matter).
Measurable: Have a yardstick to measure your goals. In this case clearly the cost
of the car. Some goals may be difficult to quantify, for example leading a happy
retired life. But there are ways to quantify by calculating the appropriate cost of
living at the time of retirement.
Attainable: Choose an attainable goal. Do not set goals that are out of your reach
currently. But you can always revise your goals as you progress financially.
Relevant: A relevant goal must represent an objective toward which you are
willing and able to work. It’s a good idea to divide your goals into discretionary
and non-discretionary goals. Prioritize goals that are necessary (non-
discretionary) over the good to have (discretionary). Planning for retirement or
children education should precede say a goal to buy a new car.
Time-bound: A goal must have a time-limit, a target date. Again this puts the
rigor that is required to achieve a plan.
Once you have set SMART goals, it is imperative to write it down on a piece of
paper. Written-down goals help you do things that will bring you closer to achieve
your goals. A goal that is not written down is just a dream. “Write it down. Written
goals have a way of transforming wishes into wants; cant’s into cans; dreams into

plans; and plans into reality. Don’t just think it - ink it!” – As rightly put by
Anonymous.
Step 2: Categorize your goals

Divide up your goals, according to how long it will take to meet each goal, into
three categories:
Short-term goals (less than a year): These are your immediate needs and wants,
such as buying a home theatre next month or a car next year. Since these goals
are, by definition, less than a year from being realized, they are relatively easy to
estimate and plan.
Medium-term goals (one to five years): These are things that you and your family
want to achieve during the next five years. For example: Taking a vacation or
renovating your home. These goals require more planning and careful estimation
of their costs.
Long-term goals (more than five years): These goals extend well into the future,
such as planning for your retirement or for your child’s education. These goals
require the most planning, including estimating the cost, forecasting your income,
and estimating the growth of your investments. You may need expert help to plan
for these goals.
Step 3: Prioritize your goals
Don’t set too many goals, try to narrow down and set goals that matter you the
most. Put simply, prioritize your goals. Here’s the general order of priorities
based on various life stages:
Life stage Investment goals Protection goals
Single • Planning for • Life cover, if there
own/siblings' are dependents
marriage
• Personal accident

• Buying a home cover
• Planning for • Medical cover

Retirement
• Critical Illness
• Buying a car cover
• Going for a dream • Home insurance

vacation cover
• Setting up new
business
Married (no kids) • Buying a home • Life cover
• Planning for • Personal accident

Retirement cover
• Buying a car • Medical cover
• Going for a dream • Critical Illness

vacation cover
• Setting up new • Home insurance

business cover
Married (young kids) • Children's • Life cover

Education
• Children's Marriage cover
• Buying a home • Medical cover
• Planning for • Critical Illness

Retirement cover
• Buying a car • Home insurance

cover
• Going for a dream
vacation
• Setting up new

business
Married (grown-up kids) • Children's • Life cover

Education
• Children's Marriage cover
• Planning for • Medical cover

Retirement
• Setting up new cover
business
• Home insurance
• Going for a dream cover
vacation
• Buying a second
home
• Buying a second
car
Married (close to • Planning for • Medical cover

retirement) Retirement
• Setting up new cover
business
• Home insurance
• Going for a dream cover
vacation
Retired • Immediate pension • Medical cover
• Going for a dream • Critical Illness

vacation cover
• Home insurance
cover
Step 4: Estimate the cost of each goal

After you assign priority to your goals, it is important to determine the cost of
each goal in today’s value. For example, if your goal is to buy a house, estimate
the cost of it, say e.g. Rs. 50 lakh. The greater the cost of a goal, the more
alternative goals must be sacrificed in order to achieve that goal.
Step 5: Project the future cost
To calculate the future cost of your goals, you need to factor into inflation. There
are two ways to estimate the rate of inflation for your goal. You may observe
current and past inflation rates and make some assumptions as to the rate of
inflation for the period of your goal. Or you may find out what experts are
predicting in the industry in which you are interested. For example, if your goal is
to buy a new car, find out the rate of inflation for the auto industry by reading the
financial newspapers. By finding out what it costs today and factoring in the rate
of inflation, you can now project the cost of all of your goals in the future. It is
crucial that your estimate be as accurate as possible, especially for your long-
term goals.
For your short-term goals, inflation is not a big factor, but for your medium- and
long-term goals, you need to factor in the inflation so that you have a more
accurate estimate of their costs. Inflation can be a very tricky issue in dealing with
long-term goals. Even a relatively modest inflation rate can increase the cost of
your goal by 2 to 3 times over a 20-year period. However, there is no need to
panic, since time is also on your side. If invested properly, the money you will be
saving toward that goal can also grow at a rate that will outpace inflation.
Step 5: Calculate how much you need to invest regularly to achieve your goals
Once you have some idea about the future cost of your goals, your next step is to
determine how much you should put aside each period to meet all your goals.
You may want to have a separate investment strategy, however, for your short-
and long term goals.
Let’s take an example of a short-term goal. You want to buy a car one year down
the line and have not made any specific investment towards this goal. Assuming
an increase in the cost of the car to be 10%, the future value of Rs. 1,00,000 for

this goal will be Rs. 1,50,000 after 1 year. So you have to start investing Rs. 5,000
per month for 1 year in an investment avenue which gives you 15% returns. This
may help you stick to your plan and make your dream of buying a car into a
reality.
Let’s take another example of a long term goal, say child’s education. Suppose
you expect to incur an expense of Rs. 8,00,000 (in today's value) 7 years down the
line for your child's education and you have not made any specific investment
towards this goal. So, assuming an increase in the cost of education expenses to
be 10%, the future value of Rs. 8,00,000 for this goal will be Rs. 15,00,000 after 7
years. So you have to start investing Rs. 5,000 per month for 7 years in an
investment avenue which gives you 15% returns. This may help you stick to your
plan of saving enough for your children's education.
Step 6: Create a schedule for meeting your goals
List all your goals according to their priority. Then write down the amount of
money needed, when you will need it, and how many installments you will need
to meet your goals. It will give you a picture of how much money you need to
save every month to achieve all your goals.
Things to Keep In Mind While Planning For Goals
1. Start early
Investing early is best explained by the concept of Power of Compounding.

There's a famous quote which says 'Compounding is the eighth wonder of the
world'. The more time you stay invested and leave it to grow, compounding will
work better. Let's understand this with an example. Suppose you invest Rs.1 lakh
at 15% p.a and leave it to grow for 5 years, it would have grown to Rs.2.01 lakh.
Had you stayed invested for 20 years instead of 5 years, Rs.1 lakh would have

grown to Rs.16.36 lakh. But had you invested for 30 years, Rs.1 lakh would have
grown to Rs.66.21 lakh!
To get more time for the investment to grow, one should start early. The below
example clearly brings out why one should start investing early and also tells us
why one should not start late. In the below example, Person A, planning to retire
at the age of 55, started investing Rs.3,000 p.m from the age of 30 for building his
retirement corpus. Person B, also planning to retire at the age of 55, realized the
importance of investing a little late at the age of 35 and hence, started investing a
higher amount of Rs.5,000 p.m from the age of 35.
Though person B is investing a higher amount, person A accumulates higher

corpus for the simple reason that he started 5 years ahead of person B & the
difference is a whopping Rs.22.4 lakh!
Particulars Person A Person B

Current Age 30 years 35 years
Retirement Age 55 years 55 years
Investment per month Rs.3,000 Rs.5,000
Rate of Return 15% p.a. 15% p.a.
Accumulated Corpus Rs.97,30,589 Rs.74,86,197
Thumb Rules to calculate the compounding effect
i) Rule of 72
This rule is used to calculate the number of years it will take for your lumpsum
investment made today to double (grow by 2 times).
No. of years = 72 / Rate of interest

E.g.: If you are investing Rs.1 lakh into a fixed deposit (FD) which is giving 9% p.a.
compound interest, then it will take 8 years (72 / 9) for it to double i.e.; become
Rs.2 lakh.

ii) Rule of 114
investment made today to triple (grow by 3 times).

E.g.: If you are investing Rs.1 lakh into a mutual fund (MF) which is giving 12%
p.a. compound interest, then it will take 9.5 years (114 / 12) for it to triple i.e.;
become Rs.3 lakh.
iii) Rule of 144

investment made today to quadruple (grow by 4 times).

E.g.: If you are investing Rs.1 lakh into Equity which is giving 15% p.a compound
interest, then it will take 9.6 years (144 / 15) for it to quadruple i.e; become Rs.4
lakh.
All the above thumb rules will give you approximate answers only, which you can
use for instant calculation.
2. Invest regularly by way of SIP
A systematic investment plan (SIP) is nothing but a planned investment

programme. The basic idea of SIP is that it works like a recurring deposit of a
bank. In case of recurring deposit of a bank a person invests a fixed amount every
month. Similarly, in SIP, you can invest a fixed amount periodically either
monthly, quarterly, etc. As the amount is invested every month you get the cost
advantage. Investors should remember that no one can time the market, so it is
always better to invest systematically to get the advantage of market conditions.
When the market is in a downtrend you will receive more number of units and

when market is in an uptrend, you will receive lesser number of units. So you can
average out your buying cost. Further, if you have opted for the Electronic
Clearance Service (ECS) or direct debit facility, you don’t have to sign a cheque
every time; money will be directly debited from your bank account on a particular
date chosen by you. If you are opening more than one SIP, it is better to opt for
different dates for each SIP, so that you get cost advantage of market conditions
at different dates.
Overall, an SIP is a simple device that helps you to save and invest in a disciplined
manner without having to time the market.
3. Invest in different products
As the adage goes, “Do not put all the eggs in one basket.” Look at a mix to
achieve your goals: Equities, Mutual funds, Fixed income instruments and
Insurance (child plans). Equities have the potential to increase in value over time
and can provide your portfolio with the growth necessary to reach your long-term
investment goals. Mutual funds (debt and equity) help you meet all your short
term and long term goals. Fixed income investments provide you steady returns.
Insurance helps plan your life goals. Simultaneously, it provides for your child's
future. It is a dependable route that secures the child's future in case of any
unfortunate event. Put simply, invest in different investment avenues to build a
strong portfolio.
4. Have a proper asset allocation
Your asset allocation should depend on the time horizon of your goal. If the age
of your child is, say, 7 years and you are planning for his higher education, a
higher equity allocation can be looked at. If your child is 15 years old, since the
goal horizon is lesser, you can have a moderate allocation that includes debt
(fixed income) investments. For child’s marriage, which in most cases will have a
long time horizon, an aggressive allocation into equities can be considered.
5. Account for inflation

As discussed earlier, it is important to account for inflation while planning for
goals. For example, an MBA at a cost of Rs 8 lakh today will cost much more 15
years hence. The value of your money depreciates – that is the effect of inflation.
When you plan for your goals you should estimate the amount you will actually
need in the future and not what it costs currently.
6. Involve your family and child in the planning
Last, but not the least, while planning for your goals, it is important that you
involve your family and child in the process. You should sit down with your family
to discuss the goals and aspirations of each member. This helps in prioritizing the
goals that you wish to achieve.
Life Stage Investing To Achieve Your Goals
Life stage investing is a great methodology and framework to plan your

investments. Asset allocation models, risk taking ability and time-horizons are a
function of age and responsibilities. Let’s take the case of Ram who is 25 years
old. When he starts investing, he is independent and tends to invest smaller
amounts. While it is always important to mitigate risk, the risk-taking ability of an
investor in this age group is high. As a general thumb rule, desired allocation to
equity can be calculated as 100 - age. So, if Ram is 25, then an ideal allocation of
his investible surplus to equity can be around 75 percent.
As Ram gets older and marries, he and his wife are both earning members and
don't have much to spend on. They decide that they want to buy their own house
when Ram is around 30 years old. This is the time they need to start looking at
their goals and save up for the house. A home loan is definitely on the cards, but
they still need to accumulate the required down payment money. It is generally
during this phase that most people take their first step into the domain of financial
planning.
As Ram's family grows, so does his commitments. He needs to start planning for
his children's education and other goals. He is now in his mid-30s and has bought
a home. He now needs to start saving in a children's education plan while paying

off his mortgage. This phase is crucial because it largely determines how his
children's future will shape up. At the same time, Ram also needs to start planning
for his retirement and buying a second home as an investment.
However, since his family obligations have increased, it is important to diversify

his risk and for this he will have to balance his portfolio. Investing in a retirement
plan is on the cards and Ram has to assess his insurance coverage needs to
ensure his family’s safety in an unfortunate event.
Hence, as we can see, life stage investing is all about managing your wealth
efficiently and investing in asset classes that suit your life-stage, to achieve your
life goals while mitigating risks and avoiding extreme uncertainties.
Age Portfolio
80% in equity
below 30 10% in cash
10% in fixed income
70% in equity
30 to 40 10% in cash
20% in fixed income
60% in equity
30% in fixed income
50% in equity
40% in fixed income
40% in equity
above 60 10% in cash
50% in fixed income
Listed here is a broad classification of the different life stages and investment
strategies centered on these life stages.

Single: This is when you are single, in your twenties and working. It is crucial to
learn to manage your spending habits and start saving. Remember to save and
invest wisely. While a lot of us want to shop, travel and live the good life, it is
important to remember that investing in appreciating assets is very important in
the long run. When you buy something, ask yourself if it is an appreciating asset.
Assets such as stocks, real estate, mutual funds will help you grow your wealth.
Wise investments combined with good saving and spending habits will help you
achieve your goals relatively early in life and will help you avoid getting into
needless and expensive debt later in life. Credit card debt is an example of
expensive debt. High interest rates (25-35 percent) eats into savings and erodes
wealth. Avoiding such debt early in life will ensure a healthy financial lifestyle in
the long run.
Investing in equities and equity products with a long-term view will help you
achieve high returns. For example, if you want to have a million rupees before
you turn 30, you should plan to invest around Rs 10,700 per month in equity
mutual funds for 5 years (assuming an annualized rate of return of 18 percent).
Hence, you would need to start investing at the age of 25 itself.
Married: This is the stage when you are young and just married. It is the time
many couples enjoy a double-income and have various life plans and goals in
mind. This is an ideal time to combine the incomes and invest a larger amount
towards achieving financial goals.
Buying a house, car and other purchases are on the agenda. Set time lines, plan
your monthly expenses, keep some money aside for contingencies and invest in
products that offer a mix of capital protection and appreciation.
A good financial plan evolves with your changing needs and goals. As incomes
rise and goals change, a financial plan must be updated to reflect new realities
and changes.
Married, and have kids: This is the stage when your risk-appetite must shift
towards being slightly moderate. A shift towards balanced assets that invest
some portion in debt is desirable. Children's education goals are the priority and

one must consider starting investments towards this goal at an early stage. There
are various products available that cater to this specific need.
Insurance is often treated as an instrument for tax planning and not what it is
actually intended for. For example, home insurance is crucial as it ensures your
home loan payments in the unfortunate event of the borrower's death. Such
policies go a long way in protecting your loved ones. Understanding how much
insurance is adequate is essential. A good financial plan will help you understand
whether you are under-insured or over-insured.
Pre-retirement: A general thumb rule is that 70 percent of your current income is

enough to sustain the same lifestyle post-retirement. Like mentioned earlier, it is
never too late to start financial planning. If you are in your 50s and plan to retire in
a few years, this is a good time to get a 'financial health checkup'. Understanding
your true net worth and your goals post-retirement is helpful to know where you
stand today. Even investing for the next 10-12 years wisely can make a huge
difference.
However, it is important to remember that your risk profile at this stage is very
different from what it used to be earlier. If you are invested heavily in equity or
other higher-risk avenues, it is important to re-balance your portfolio towards a
mix of debt, equity, and contingency cash. Generally, an equal allocation to equity
and other safer avenues like debt and bank deposits is considered as an ideal
asset allocation model at this stage, though a lot also depends on individual
situations.
Retired: This is the stage which requires the most amount of planning.
Considering inflation and increasing life expectancies, it is important to plan well
for retirement. Some of the most important retirement goals are to continue to
maintain the same or desired standard of living as enjoyed during your working
years.
During the retirement phase there are certain tax benefits and tax efficient
investments that senior citizens must consider investing in. Asset allocation must
be done in such a way so as to minimize risk while ensuring returns that stay
ahead of inflation. In such a scenario, returns are not sufficient to sustain a

desired lifestyle. Hence, it is important to have a mix of investments that keep the
risk-reward ratio in view.
Medical contingencies are often inevitable in this life stage and it is essential to be
medically insured and have enough savings to tide over uncertainties. There are
also various options such as reverse mortgage which help senior citizens
generate steady cash flows from their house without the worry of losing their
home as long as they live.
Funding For Goals
While planning for goals, it is very important to know that how are you aiming to
achieve these goals, i.e. through own funds or from borrowed money. If you are
going for a loan, then you need to appraise on how much loan can be expected.
Goal Type of Loan Margin payment Maximum Loan

available
Buying a new / Home Loan 20 to 25% 75 to 80%

resale home
Buying a new car Car Loan 10 to 15% 85 to 90%
Buying a resale car Car Loan 25 to 35% 65 to 75%
Going on a dream Personal Loan NIL 100%

vacation / own or
sibling's marriage
expenses
Own / sibling's Mortgage Loan 40 to 60% 60% (residential
marriage expenses property);
(if having own 40% (commercial

property) property)
Buying an Land / Property 30 to 40% 65 – 70% (land);

investment loan
60% (commercial
property
property)

Understanding the concept of Equated Monthly Installment (EMI)
You have to repay the loan borrowed through Equated Monthly Installments
(EMIs). The EMI paid will have 2 components – principal and interest portion.
During the initial years of the repayment tenure, the interest portion will be higher
when compared to the principal portion.
During the final few years of the repayment tenure, the interest portion will be
lesser and the principal portion would be higher. This can be better understood
with an example:
Principal amount (Loan) - Rs.10 lakh Interest Rate - 8.5% p.a
Tenure- 20 years EMI- Rs.8,679/-
Month EMI Principal portion Interest portion
1 8679 1596 7083
50 8679 2255 6424
100 8679 3209 5470
150 8679 4568 4111
200 8679 6501 2178
240 8679 8621 58
If going for a loan, it's better to have an insight on what will be the likely Equated
Monthly Installment (EMI), which you will be paying, using the below table.
EMI table for a loan amount of Rs.1 lakh

Tenure EMI @ EMI @ EMI @ EMI @ EMI @ EMI @ EMI @
8% p.a 9% p.a 10% 11% 12% 13% 14%
p.a p.a p.a p.a p.a
3 years 3134 3180 3227 3274 3322 3370 3418
5 years 2028 2076 2125 2175 2225 2276 2327
10 years 1214 1267 1322 1378 1435 1494 1553
15 years 956 1015 1075 1137 1201 1266 1332

20 years 837 900 966 1033 1102 1172 1244
Calculating Eligibility for Home Loan

Details Example
Gross Monthly Income A Rs.45,000
Rental Income B -
Other Income C -
Total Monthly Income D = Rs.45,000

A+B+C
Applicable Fixed Obligation to Income Ratio (FOIR) % E 50%
Income available to service loan F=DxE Rs.22,500
Existing Monthly Obligation (Any EMIs currently paid) G Rs.7,500
Net available income for servicing new home loan H=F–G Rs.15,000
EMI for Rs.1 lakh at 9% interest rate for 15 years I Rs.1015

(refer above table)
Home Loan Amount Eligible J=H/I Rs.14.78
lakh
The Fixed Obligation to Income Ratio (FOIR) may change from one company to another.
Aligning Existing Investments towards Goals
Some of you would have already invested money into various avenues with
specific goals in mind. In such a case, we need to understand which investments
are earmarked for which goals. If you do not have specific earmarking done, then
there is a need to align the existing investments towards the goals. For this, we
need to classify all goals into:
- Short-term goals (< 3 years)

- Medium-term goals (3 to 8 years)
- Long-term goals (> 8 years)
After classifying the goals as above, then suggest existing investments as per the
below table:
Goals Existing Investments
Short-term goals ( < 3 years ) Short-term FDs, Balanced & Large-cap

MFs
Medium-term goals ( 3 – 8 years ) Equity, All Equity MFs, PMS
Long-term goals ( > 8 years ) Equity, All Equity MFs, Endowment and
unit linked insurance policies, Long-
term debt instruments like PPF, FDs,
NPS
For very short term goals (< 1 year), it is better to utilize the existing investments,
rather than starting to invest afresh.
SESSION 7: SUMMARY AND IMPORTANT CALCULATIONS
Summary
• Financial Planning is a process of meeting your life goals through proper

management of your finances.

• A good financial plan requires analyzing your financial status, outlining
your goals and understanding the means for achieving these goals.
• Setting realistic time horizons to achieve goals and achieving them with
discipline and planning is what a good financial plan helps in
accomplishing.
• The ability to mitigate risks when investing is another important facet that
financial planning addresses.
• Financial Planning provides direction and meaning to your financial

decisions.
• One feels more secure and more adaptable to life changes, once they
measure that they are moving closer to realization to their goals.
• Implementing a financial plan offers an unrivaled peace of mind. It

removes components of fear and uncertainty from your day-to-day life.
• Financial planning is a process consisting of following 6 steps:
1) Establishing and defining the client-planner relationship

2) Gathering client information (current finances and goals)
3) Analyzing and evaluating financial status
4) Developing and presenting the financial plan
5) Implementing the financial plan
6) Monitoring the financial plan
• We live in an uncertain world. We are associated with several risks in life.

Risk is a possibility of any harm, injury, loss, danger or destruction of an
individual or their belongings. So it is important to insure our life and
assets through insurance.
• Insurance is an important component of financial planning.

• Insurance is mainly of two types-life insurance and general insurance.
• Life insurance covers the risk associated with the life of an individual. Term
Endowment, Money-back, Whole-life, ULIP and Pension plans are various
types of life insurance plans.
• The best way to take a life cover is through a term insurance plan as it’s a
pure protection plan.
• Ideally, one should have a life cover to take care of: a) Family expenses till
lifetime, b) Liabilities outstanding, and c) Family & children goals.
• As a thumb rule, every earning individual has to have a life cover of 10 to

20 times of annual income depending on their age.
• Under general insurance, one should take cover for health, vehicle, motor,
home and property, and travel insurance.
• As one grows older, retirement is an inevitable stage of life. Therefore, it is

essential to create a plan that will fulfil one’s needs right through ripe old
age.
• Planning for retirement is about ensuring that one has adequate income to
meet the expenses post retirement.

• Increasing life expectancy, no benefits from employers, rising medical
expenses and inflation, and increased standard of living are a few factors
that necessitate planning for retirement well.
• Retirement planning is a process that contains following steps:
1. Identifying your life stage

2. Estimating the cost of retirement
3. Assessing how you are prepared for it
4. Calculating the gap
5. Building your retirement fund
• Some of the typical retirement investment products are: EPF, PPF, Pension
products from insurance companies, NPS, Mutual Funds.
• Investment options that could be used post retirement for regular income
are: Annuity from insurance companies, FDs, Post Office Monthly Income
Schemes, Senior Citizens Savings Scheme, Monthly Income Plans, House
rentals, Reverse mortgage, etc.
Session 4: Investment Planning
• Investing is the best way to secure your future by accumulating wealth in

the long term.
• Investing helps you beat the effects of inflation.
• An increase in the general price level for a considerable period of time is

called as inflation.

• Inflation decreases the surplus amount in the hands of an individual.
• Invest your money in asset classes that will give you good returns.
• Investment planning largely entails the following steps:
1. Ascertaining risk profile

2. Identifying appropriate asset allocation according to a risk profile
3. Having adequate diversification with your asset allocation
4. Staying true to your allocation by regularly rebalancing
• Patience and discipline are keys to investing. Invest regularly and remain
invested for the long term.
Session 5: Tax planning AND Estate Planning
• Tax planning is an arrangement of financial activities in such a way that

maximum tax benefits are availed of, to reduce tax liabilities considerably.
• Tax planning is a coherent element of any financial plan. No financial plan

is complete without tax planning.
• Tax planning does not mean only saving taxes. It should also help you
achieve your goals in the whole process. Put simply, tax planning should

be done taking into consideration your various goals, such as insurance
(life and health), child’s education, retirement, etc.
• Estate planning, as the name suggests, is all about creating a plan for your
estate assets, including all your holdings in equity, debt, commodities, real
estate, gold, and alternate investments like art, gemstones, etc.
• Estate planning is the process of arranging for the distribution of your

asset holdings to your heirs by anticipating and avoiding different
scenarios that can create a conflict among them.
• There are different tools to take care of your assets. Wills and Trusts play
important roles in the organization and preservation of your estate.
• A Will is the simplest tool of estate planning. It deals with all matters
regarding the distribution of your estate assets.
• A trust can be a valuable estate planning tool for the more affluent, who
own businesses governed by families. A trust is a vehicle that provides
effective and hassle-free wealth management, asset protection and tax
efficiency.
Session 6: Asset classes & product suitability AND Goal planning
• Asset classes refer to the various assets that are available for investment.
These include: Equity, Fixed Income/Debt, Cash and cash equivalents,
Real Estate, Gold and Other Alternative Assets. Under these asset classes,
there are several investment products/avenues.
• Each asset class has different risk and return characteristics, and functions
in a unique way in different market environment.

• Depending on the risk appetite and investment horizon of an individual,
one can choose to invest in a combination of asset classes to optimize his
returns.
• Each individual’s aspirations and goals are different and so each one has
to plan as per his/her need. Planning your goals gives a bird’s eye view of
finances and helps to be better prepared for a secured future.
• Goal Planning is a process that contains following steps:
1. Setting goals and listing it down
2. Categorizing goals into short, medium and long term goals
3. Prioritizing goals by ranking them
4. Estimating the cost of each goal
5. Projecting the future cost by taking into consideration the rate

of inflation
6. Calculating how much one needs to invest regularly to achieve

his goals
7. Creating a schedule for meeting all goals
• Starting early and investing regularly are the keys to achieve various
financial goals.
Important Calculations
1. Time Value of Money
It refers to the concept that money available at the present time is worth more
than the same amount in the future due to its potential earning capacity.
Example: Let's understand this concept better with an example. If you are given
two options – A) Receive Rs.10,000 now OR B) Receive Rs.10,000 in 3 years.

Which one would you choose? Most people would obviously choose Option A
and receive the money now, rather than wait for 3 years to receive the same
amount. Why? Although the amount is the same, you can do much more with the
money if you have it now because over time you can earn more interest on your
money.
In this example, if you invest the Rs.10,000 you receive now even at 6% p.a., you
would be having Rs.11,910 at the end of 3 years, which is a significant 19.1%
more money than Rs.10,000 after 3 years. In the above example, Rs.10,000 to be
received now is called the Present Value & Rs.11,910 to be received after 3 years
is called the Future Value.
2. Future Value (FV) of a Fixed Amount
Formula: FV = PV * (1+i)n
Where PV = Present Value

i = Interest
n = Number of period
When can you use this?
- To calculate the future value of today's cost of education, marriage, buying a

house, car, etc.
- To calculate the expected future value of today's lump sum (one-time)
investment.
Examples:
1) Cost of Engineering today = Rs.5,00,000 (PV);

Inflation rate = 10% p.a (i);
Number of years = 15 years (n).
FV = 5,00,000*(1+10%)15 = Rs.20,88,624

Today's cost of Rs.5 lakh for engineering would cost Rs.20.88 lakh after 15 years
@ inflation rate of 10% p.a.
2) Investment into a single premium plan today = Rs.3,00,000 (PV);

Rate of return = 15% p.a (i);
Term of the plan = 20 years (n).
FV = 3,00,000*(1+15%)20 = Rs.49,09,961
Investment of Rs.3 lakh today into a single premium plan would yield a maturity
amount of Rs.49.09 lakh after 20 years @ 15% p.a
How to calculate using MS Excel / Openoffice Calc
Open MS Excel or Openoffice Calc. Go to 'Functions' as shown below.
Choose 'Financial' under 'Category' dropdown and then, choose 'FV' under
'Function' dropdown; and then, click 'Next'.

Enter the following fields:
Rate = 15% (inflation rate / rate of return)

NPER = 20 years (Number of period)
PMT = Leave it blank (required to be filled only when there are regular payments
involved)
PV = -3,00,000 (Present Value) (To be entered in negative, since MS Excel will
consider this field as an outflow, which needs to be captured in negative in MS
Excel)
'Result' field will give the solution – 'Future Value'

3. Future Value (FV) of an Annuity (Regular Payment)
Formula: FV = PMT * [((1+i)n – 1 ) / i]
Where PMT = Regular payment (Fixed amount) per period

i = interest rate per period
n = Number of payments
- To calculate the expected future value of regular investments like SIP, Recurring
Deposit, Regular premium Insurance policies, etc.
Examples:
1) Annual premium – Rs.50,000

Expected Return - 15% p.a
Term - 15 years
FV = 50,000 * [((1+15%)15 – 1) / 15%] = Rs.23,79,020

Investment of Rs.50,000 p.a. into a regular premium plan would yield a maturity
amount of Rs.23.79 lakh after 15 years @ 15% p.a.
2) Monthly SIP – Rs.3,000

Expected Return – 15% p.a.
Term – 15 years
FV = 3,000 * [((1+1.25%)180 – 1) / 1.25%] = Rs.20,05,520
Investment of Rs.3,000 p.m. into a MF through SIP would yield a maturity amount
of Rs.20.05 lakh after 15 years @ 15% p.a.
Note: 'n' refers to number of payments and hence, for monthly investments, 'n'
will be no. of years multiplied by 12. Similarly, 'i' refers to interest rate per period
and hence, for monthly investments, 'i' will be annual interest rate divided by 12.
Use 'FV' function under 'Financial' category.
Rate = 1.25% (per month) (inflation rate / rate of return)

NPER = 180 months (Number of period)
PMT = -3000 (per month) (Regular investment per period) (To be entered in
negative, since MS Excel will consider this field as an outflow, which needs to be
captured in negative in MS Excel)
PV = To be left blank (Needs to be filled only if there is a lumpsum investment
today)
'Result' field will give the solution – 'Future Value'

In the same example, if one invests Rs.2 lakh as a lumpsum today and then, adds
the above Rs.3000 p.m into the same instrument for 15 years, then input -2,00,000
in the PV field, and the future value (FV) would be calculated as Rs.38,76,787.

4. Present Value (PV) of a future fixed amount
Formula: PV = FV / (1+i) n
Where FV = Future Value

i = Interest
n = Number of period
- To calculate the value of lumpsum investment to be made today to build a

required corpus in the future.
Example:
Corpus required in the future = Rs.50 lakh (FV);

Required after (Term) = 15 years (n);
Expected Rate of Return = 15% p.a
PV = 50,00,000 / (1+15%)15 = Rs.6,14,472
An amount of Rs.6.14 lakh needs to be invested as a lumpsum today @ 15% p.a.

to build a corpus of Rs.50 lakh in 15 years.
Use 'PV' function under 'Financial' category. Choose 'Financial' under 'Category'
dropdown and then, choose 'PV' under 'Function' dropdown; and then, click 'Next'.
Rate = 15% (inflation rate / rate of return)


PMT = Leave it blank (required to be filled only when there are regular payments
involved)
FV = 50,00,000 (Future Value)
'Result' field will give the solution – 'Present Value' (which will come in negative,
since MS Excel will consider this field as an outflow, which will be captured in
negative in MS Excel)
5. Present Value (PV) of an immediate annuity (Regular Payment)
Formula: PV = PMT * [(1-(1 / (1+i)n)) / i]
Where PMT = Regular payment (Fixed amount) per period

n = Number of payments

To calculate the retirement corpus required today, based on the regular pension
amount required in the future for a fixed period – To determine how much to
invest in an Immediate Annuity plan.
Example:
Pension expected - Rs.25,000 per month (PMT)

Interest rate per period - 0.50% (per month) (6% p.a return expected from the
corpus)
Number of period - 240 months (Pension required for 20 years post-
retirement)
PV = 25,000 * [(1-(1 / (1+0.50%)240)) / 0.50%] = Rs.34,89,519
For receiving a pension of Rs.25,000 per month for next 20 years, one needs to
invest a corpus of Rs.34.89 lakh as of today @ 6% p.a
Use 'PV' function under 'Financial' category.
Rate = 0.60% (per month) (inflation rate / rate of return)

NPER = 240 months (Number of period)
PMT = 25000 (per month) (Regular payment per period)
FV = To be left blank (Needs to be filled only if there is a lumpsum corpus to be
left behind after 20 years)
'Result' field will give the solution – 'Present Value' (which will come in negative,
since MS Excel will consider this field as an outflow, which will be captured in
negative in MS Excel)

In the same example, if one wants to leave a lumpsum corpus of Rs.25 lakh
behind for the family after getting pension for 20 years, then, input Rs.25,00,000
in the FV field & the corpus required as of today (PV) will be calculated as
Rs.42,44,759.

6. Annuity (PMT) – Regular Payment
Formula: PMT = FV / [ ( (1+i)n – 1 ) / i] or PV * [ i (1+i)n / (1+i)n - 1]
Where FV = Future Value

PV = Present Value
n = Number of periods
- To calculate the regular investment required to build a corpus in the future

- To calculate the regular pension to be received from a corpus (Immediate
Annuity)
- To calculate EMI to be paid while taking a loan
Examples:
1) Future Value of Child's higher education – Rs.40 lakh (FV)

No. of years left - 15 years (n)
Interest Rate expected - 15% p.a (i)
PMT (Investment) = Rs.84,068
For building a corpus (FV) of Rs.40 lakh for child's higher education in the next 15
years, one has to invest Rs.84,068 per annum for 15 years.
2) Retirement Corpus available – Rs.30 lakh (PV)

Interest rate expected - 6% p.a (0.50% p.m) – Annuity Rate (i)
No. of years pension required – 20 years (240 months) (n)
PMT (Pension) = Rs.21,492

With a corpus of Rs.30 lakh available, one can get a pension of Rs.21,492 per
month at an annuity rate of 6% p.a. for the next 20 years.
3) Home Loan taken – Rs.20 lakh (PV)

Interest rate - 9% p.a. (0.75% p.m.) (i)
Term - 15 years (180 months) (n)
PMT (EMI) = Rs.20,285
For a home loan of Rs.20 lakh taken at an interest rate of 9% p.a., one has to pay
an EMI of Rs.20,285 per month for a period of 15 years.
Use 'PMT' function under 'Financial' category.
Rate = 15% p.a ( rate of return)

PV = To be left blank (to be filled only wherever required)
FV = 40,00,000 (FV of child's education after 15 years)
Either PV or FV or both fields, whichever required, needs to be entered.
'Result' field will give the solution – 'PMT' – Regular investment / payment (which
will come in negative, since MS Excel will consider this field as an outflow, which
will be captured in negative in MS Excel)

Other practical examples
We can use a combination of some of the above formulae for our practical
purposes.
Example 1
Current Age - 30; Planned Retirement Age – 55;

Monthly pension required after retirement – Rs.50,000
No. of years pension required - 20 years (240 months).
Annuity Rate expected – 6% p.a (0.5% p.m.)
How much to invest every year from now till age 55 for the same?
Step 1
Use 'PV of Immediate Annuity' formula to find out the retirement corpus required
to be built for a pension of Rs.50,000 p.m. for 20 years (240 months) at an annuity
rate of 6% p.a. (0.5% p.m.).

The corpus to be built till the age of 55 is Rs.69.79 lakh.
Step 2
Now, with the above Rs.69.79 lakh as Future Value to be obtained at his age of 55,
use 'PMT (Regular Payment) formula to find out how much regular investment is
required every year for building the corpus.
FV = Rs.69.79 lakh;
No. of years = 25 years (55 minus 30);
Expected Return (RATE) – 15% p.a.

An annual investment of Rs.32,797 is required from the age of 30 till 55 to get a
monthly pension of Rs.50,000 for 20 years after retirement (till age of 75).
Example 2
In the same case as above, if client wants to invest only for 10 years till the age of
40 & then leave it invested till age of 55 and have similar benefits.
Current Age - 30; Planned Retirement Age – 55; Regular investment planned till
age of 40;
Monthly pension required after retirement – Rs.50,000
No. of years pension required - 20 years (240 months).
Annuity Rate expected – 6% p.a. (0.5% p.m.)
How much to invest every year from now till age 40 for the same?
Step 1
Same step as in the first example. Use 'PV of Immediate Annuity' formula to find
out the retirement corpus required to be built for a pension of Rs.50,000 p.m. for
20 years (240 months) at an annuity rate of 6% p.a. (0.5% p.m.).

The corpus to be built till the age of 55 is Rs.69.79 lakh.
Step 2
Use 'PV of future fixed amount' formula to find out how much value this corpus of
Rs.69.79 lakh would be at his age of 40, assuming he's staying invested @ 15%
p.a. from age 40 till 55.

No. of years (NPER) - 15 (55 minus 40)
Future Value – Rs.69.79 lakh

He has to build Rs.8.58 lakh till the age of 40, which when kept invested at 15%
p.a for another 15 years till retirement, would give a corpus of Rs.69.79 lakh.
Step 3
Now, use 'PMT (Regular Payment)' formula to find out how much every year he
has to regularly invest from his age of 30 till 40 to build this Rs.8.58 lakh.
FV = Rs.8.58 lakh;
No. of years = 10 years (40 minus 30);

An annual investment of Rs.42,243 is required for 10 years till his age of 40 at
15% p.a. and the same needs to be kept invested at 15% p.a. for another 15 years
till his age of 55 to get a monthly pension of Rs.50,000 for 20 years after
retirement (till age of 75).

SESSION 8: ASSESSMENT TEST
1. Financial planning is ___________

a. Investing to achieve good returns
b. Planning to have comfortable retirement
c. A process to help you achieve financial goals
2. Analyzing assets and liabilities of clients is a part of ___________ step in the

financial planning process?
a. Gathering client data, including goals
b. Analyzing and evaluating financial status
c. Developing and presenting the financial plan
3. Financial planning and tax planning is same.

a. True
b. False
4. Restructuring existing assets into productive/growth assets by clients is a part

of ___________ step in the financial planning process?
a. Analyzing and evaluating financial status
b. Implementing the financial planning recommendations
c. Developing and presenting the financial plan
5. If one is already saving enough, he need not opt for financial planning.
a. True
b. False
Answers: 1 – c; 2 – b; 3 – b; 4 – b; 5 – b

1. Which of the following products is a pure insurance product?

a. Endowment plan
b. Money back plan
c. Term plan
2. In ___________ option, you get annuity for life and on death the initial purchase
price (premium paid in the beginning) is returned back to the nominee.
a. Life annuity
b. Life annuity with return of purchase price
c. Life annuity for fixed-period guarantees
3. The premium payable on a ULIP is higher for the same sum-assured as a term
policy because ___________.
a. The period of cover is longer
b. A portion of the premium is used for investment
c. The risk is higher
4. The term of general insurance policies is typically ___________.

a. Decided by the insurer
b. One year
c. Flexible
5. Health insurance premium tends to decrease with age - more the age, lesser
the premium.
a. True
b. False
Answers: 1 – c; 2 – b; 3 – b; 4 – b; 5 – b

1. Inflation does which of the following to retirement planning?

a. Reduces the periodic savings required
b. Increases the retirement corpus required
c. Reduces the return generated by an investment
2. The current rate of interest on EPF is ___________ per cent.

a. 8.5
b.8.6
c. 8
3. NPS is a voluntary contributory pension scheme introduced by ___________.

a. Central Government
b. State government
c. Reserve Bank of India
4. ___________ is a type of mortgage in which a homeowner can borrow money

against the value of his or her home.
a. Home loan
b. Reverse mortgage
c. Loan against property
5. Senior citizens savings scheme can be opted by any individual.

a. True
b. False
Answers: 1 – b; 2 – a; 3 – a; 4 – b; 5 – b

Session 4: Investment planning
1. As a thumb rule of asset allocation, a person aged 35 years, should have equity
allocation of ___________ per cent in the portfolio.
a. 60
b. 65
c. 70
2. Equity is a high-risk / low-returns asset class.

a. True
b. False
3. Risk of default or non-payment of periodical interest payments and principal on

maturity by the issuer is ___________.
a. Interest rate risk
b. Principal risk
c. Credit risk
4. A standardized measure of return on investments in which the return is

computed as percent per annum is knows as ___________.
a. Compounded annual growth rate (CAGR)
b. Absolute return
c. Annual return
5. ___________ investor avoids taking undue risks and is firm on preserving

investment capital.
a. Balanced
b. Conservative
c. Moderate
Answers: 1 – b; 2 – b; 3 – c; 4 – c; 5 – b

Session 5: Tax planning AND Estate Planning
1. Commission received from business forms part of income from ___________.

a. Business and profession
b. Capital Gains
c Other sources
2. Long term capital gain from sale of shares is ___________.

a. Taxed at 20%
b. Exempt from tax
c. Taxed at 15% with indexation
3. For financial Year 2013-14, there is no tax for the income up to Rs. ___________.
a. 1,90,000
b. 2,00,000
c. 1,80,000
4. A Will cannot be hand-written.

a. True
b. False
5. Copy of the Will certified under the seal of a court of a competent jurisdiction is
known as ___________.
a. Codicil
b. Probate
c. Succession certificate
Answers: 1 – a; 2 – b; 3 – b; 4 – b; 5 – b

Session 6: Asset classes & product suitability AND Goal planning
1. T-Bills form part of which asset class?

a. Debt
b. Cash and cash equivalents
c. Alternate assets
2. Individuals above the age of 60 years can subscribe to NPS.

a. True
b. False
3. The minimum ticket size for PMS, according to SEBI guidelines, is Rs.
___________.
a. Rs. 1 crore
b. Rs. 50 lakh
c. Rs. 25 lakh
4. ‘A’ in SMART goals, stands for ___________.

a. Active
b. Alternative
c. Attainable
5. Rule of ___________ is used to calculate the number of years it will take for your
lump sum investment made today to triple (grow by 3 times).
a. 114
b.144
c. 141
Answers: 1 – b; 2 – b; 3 – c; 4 – c; 5 – a

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JOINT CERTIFICATION PROGRAM (JCP) ON

MANAGING PERSONAL FINANCES

Session 1: Introduction and Steps of Financial Planning

Session 2: Insurance Planning

Session 3: Retirement Planning

Session 4: Investment Planning

Session 5: Tax Planning AND Estate Planning

Session 6: Asset Classes & Product Suitability AND Goal Planning

Session 7: Summary AND Important Calculations by Our Team

Session 8: Assessment Test

Session 9: Case Study Contest

ICICI Securities Page 1 of 194 JCP on Managing Personal Finances

As we go through various life stages, we aspire to attain various goals. And to

What is financial planning?

Why financial planning?

ICICI Securities Page 2 of 194 JCP on Managing Personal Finances

The importance of financial planning cannot be overstated. Among others, two

The second factor is changing lifestyles. With higher disposable incomes, it is

Moreover, there are contingencies like medical emergencies or unplanned

ICICI Securities Page 3 of 194 JCP on Managing Personal Finances

Features of financial planning

Myths about financial planning

Myth 1: I need to have a substantial sum of money/assets before thinking about

ICICI Securities Page 4 of 194 JCP on Managing Personal Finances

Myth 3: I cannot afford a financial planner or financial plan.

Myth 4: I am too young to worry about financial planning.

Myth 5: I am nearing retirement. Isn't it too late for financial planning?

ICICI Securities Page 5 of 194 JCP on Managing Personal Finances

Myth 6: My children will take care of me post-retirement. I don't need to think

ICICI Securities Page 6 of 194 JCP on Managing Personal Finances

Steps of Financial Planning Process

Financial planning requires financial advisors to follow a process that enables

ICICI Securities Page 7 of 194 JCP on Managing Personal Finances

Gather client data:

Analyze and evaluate

Develop the plan:

Implement the plan:

Monitor the plan: Periodic

ICICI Securities Page 8 of 194 JCP on Managing Personal Finances

The general scope of the work includes:

• Explaining services provided, the process of planning, and the required

• Client's income status

ICICI Securities Page 9 of 194 JCP on Managing Personal Finances

4. Develop and present financial planning recommendations: The planner makes

• Filling the savings gap

5. Implement the financial planning recommendations: This involves executing

ICICI Securities Page 10 of 194 JCP on Managing Personal Finances

6. Monitor the financial planning recommendations: The financial situation of a

ICICI Securities Page 11 of 194 JCP on Managing Personal Finances

An individual undergoes various life stages, each characterized with specific

ICICI Securities Page 12 of 194 JCP on Managing Personal Finances

The answer is risk transfer.

To understand the concept of insurance better, let us use an example.

Insurance works on the same concept of forming a pool of funds.

Insurance is a fixed sum of money contributed to form a pool. The money is

What are the key benefits of insurance?

ICICI Securities Page 13 of 194 JCP on Managing Personal Finances

Now, let us see what an insurance company does.

What are the types of insurance?

Now let us see life insurance in detail.

Need for life insurance

ICICI Securities Page 14 of 194 JCP on Managing Personal Finances

How much life insurance should one buy?