Financial Planning

Module Number: IV

Savings and Investment Products

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Syllabus

• Savings and investment advice;

• Personal and financial factors affecting choice of savings and investment products;

• Suitability factors in the choice of savings and investment products – Income and capital growth
prospects, guarantees, accessibility/liquidity, penalties, contribution limits, risk, buying and selling
mechanisms, Charging and commission structures, past investment performance, flexibility;

• The features of the savings and investment products: deposit savings accounts, government securities,
gilts, fixed-interest investments; shares- types of shares;

• Mutual Funds and their types. Analysis of the performance of shares and Mutual Funds

• Pension Products.

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AIM:

To equip students with the detailed understanding of the concepts , methods and techniques of
financial planning for designing and implementing an individual client's financial plan.

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Course Objectives:

The Objectives of the module are:

• To Deliberate on saving and investment advice.
• To Enumerate the importance of savings and investments and discuss various products under
savings and investments
• To Explain the features of savings and investment products
• To Elaborate on Mutual funds and its type.

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Course Outcomes :
At the end of the Chapter, Students are expected to:
• Be able to Describe the modes and methods of investment planning and understanding the
process of client assessment.
• Be able to Categories savings and investment products.
• Be able to Discuss the importance of Saving and investments and list various products under
savings and investments.
• Be able to Illustrate the performance of shares and Mutual funds.

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Table of Content:
Sr. No Topics

1 Savings and investment advice

2 Personal and financial factors affecting choice of savings and investment products

3 Suitability factors in the choice of savings and investment products

4 Income and capital growth
5 Prospects, guarantees, accessibility/liquidity
6 Penalties, Contribution limits and risk
7 Buying and selling mechanisms
8 Charging and commission structures
9 Past investment performance, flexibility
10 The features of the savings and investment products: deposit savings accounts, government
securities, gilts, fixed-interest investments; shares- types of shares;
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Table of Content:

Sr. No Topics
11 Mutual Funds and their types. Analysis of the performance of shares and Mutual Funds, Pension
Products.
12 Self Assessment Questions
13 Activity
14 Reading Assignments and Interactive brain storming
15 Document links
16 Video links
17 E-books/e-resources
18 References

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Savings and Investment advice

• There are two approaches to savings:

• A) Reduce the expenditure

• B) Increase the income

• Investment and systematic investment helps in achieving one’s financial goals.

• Thus, when it comes to advising someone on building the saving and growing the investment, the
following aspects need to be considered:

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Savings and Investment advice

First pay to yourself

Create Funds for Emergencies
Be wise in spending and be generous in saving
Get Creative in making money
Take baby steps for building your savings and investments
Allocate assets appropriately
Know the cost of investment
Follow an investment plan
Seek expert advice, if needed
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Savings and Investment advice

Impact of Inflation and the Importance of Investing

• In simple terms, inflation is the general rise in the cost of commodities.

• It reflects the change in the valuation of rupee. With inflation, the value of rupee depreciates, i.e., What
Rs.100 can buy you today, you will not be able to buy the same quantity next year.

• An individual do not have any control over the inflation in the economy.

• The role of an individual is to manage their investments, in a manner that accommodates the rate of
inflation.

• Managing the money against the inflation is the only way to make it grow.
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Personal and financial factors affecting choice of savings and investment products

• When an individual is assessing the choices for investment, they need to look into various variables to
arrive at the final decision.
• The assessment shall answer the investor’s question of Which one should I select? Why?
• There are multiple options that are available to an individual. The true challenge is in identifying the
one that suits the need and meets the investor’s financial goals.
• Thus what is needed is the right assessment of the current financial condition, identifying the financial
goals and arriving at the alternates.
• A wrong assessment or wrong choice of investment option may lead to financial loss, thus one has to be
through in assessing and identifying the right investment vehicle.

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Personal and financial factors affecting choice of savings and investment products

• The below mentioned are the three important personal and financial variables that affects the
choice of savings and investment.

Goal

Age Profile

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Personal and financial factors affecting choice of savings and investment products

i) Age
 Age of the client is an important personal factor that affects the choice of saving and investment
products.
 When the client is young and the responsibilities are less, they tend to go for investments that fetch
higher returns.
 Another advantage with a younger client is the larger time horizon available to plan and build the
wealth.
 Younger client can build portfolio from a long term perspective as there are more professional years in
the baggage of the client.
 As one grows in age, the financial portfolio needs to be continuously assessed and modified.
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ii) Goal
 Investments needs to be looked from the point of time horizon, as the goals are always time bound.
 Investment can be classified as short term, medium term and long term.
 With respect to financial planning , short term is anywhere from few months up to two years, medium
term will be 2-5 years and long term will be above 5 years.
 The choice of investment alternative depends on the goal time line. For a short term investment, the
product range is different and for long range, the options are different
 Generally for shorter duration, one can select fixed returns, with less volatility and for long term
investments, one may select equity and such investment options.
 The choice of right investment vehicle, will ensure financial security and smoothly achieving the future
financial goals.
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iii) Profile
 Another major factor to be consider while choosing an investment option is your profile, both financial
profile as well as risk profile.
 Financial profile gives details of an individual’s present financial condition, whether the client is in a
surplus or a deficit situation.
 The financial status of surplus needs a different financial plan, where as the for a client with deficit
situation, the planning starts with the debt management first.
 Depending on the financial profile, the need for readjustment in the financial and investment portfolio
arises.
 The next variable to be assessed is the risk profile of the client.
 The current investments, financial history and a detailed discussion with clients will help the planner in
categorizing the client’s risk taking ability . 15
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Suitability factors in the choice of savings and investment products

Income and Capital Growth:

• The first factor is the amount of income or return that the client is expecting from the investment.
• This covers the regular income that it should generate year after year.
• Along with regular income the other variable is capital growth.
• Capital growth relates to the increase in the market value of the investment.
• The investment should grow at a certain rate every year to fetch the good sale value.
• Sale value of the capital growth depends on its regular income performance.
• Each investment needs to be looked from these perspective and the investment instrument that
meets the clients requirement needs to be selected finally for the portfolio.

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Suitability factors in the choice of savings and investment products

Prospects:
• The next suitability factor is the prospects of the investment vehicles.
• Prospects relates to the growth possibilities of the investment vehicle.
• It should not be overvalued when the client is purchasing the investment , other wise it will have slow
or no prospects of growth.
Guarantees:
• One should considered the guaranteed returns that the investment should result in.
• The client expects a certain assured returns from each investment as well as portfolio as a whole.
• Thus, the portfolio should have a combination of products that generate fixed income and some which
finally results in the growth of investment.
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Suitability factors in the choice of savings and investment products

Accessibility and liquidity

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Suitability factors in the choice of savings and investment products

Penalties:
• Penalties results from wrong assessment or miscalculations of the investment vehicles.
• If the client end up investing in the products that are already overvalued, it will lead to fall of the
prices and may end up with no profits or a loss situation.
• Thus, one should make all the required assessments before the investment decision, so as to avoid the
penalties of the choice of vehicle.
Contribution Limits & Risks:
• This factor relates to the decision of investment budget for each investment option.
• The client’s portfolio contribution , needs to be well diversified and limits needs to be established to
each and specific type of investment vehicle.
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Suitability factors in the choice of savings and investment products

Buying and Selling mechanisms:
• The other factor that needs consideration for choice of investment , is the inbuilt buying and selling
formalities that each investment product needs.
• Some investment vehicles have lock in periods and thus needs to be informed to the client.
• One variable is the process of buying and exiting the investment with minimal commission as well
as charges involved in the process.
• The buying and selling mechanism needs to explained thoroughly to the client.
• Each investment product may require different procedure , thus it needs to be clearly stated to the
client.

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Suitability factors in the choice of savings and investment products

Charging and commission structures

• Commission-and-fee clients
(younger generation)
• Fee-only (High income and
financially knowledgeable
• Commission-only clients (by older
clients with financial knowledge)

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Suitability factors in the choice of savings and investment products
Past investment performance:
• Before suggesting the composition of the investment portfolio, the financial planner needs to assess
the client’s choice of investments in the past and their relative performances.
• Each individual assets needs to be assessed on the performance parameter for the past few years to
decide its suitability to be included in the portfolio.
Flexibility:
• Flexibility needs to be built in the investment portfolio. The client should be able to modify or
redesign the portfolio with minimal charges or penalties, as and when required.
• The change in the market situation and the personal goals of an individual may need a certain amount
of changes in the portfolio. Thus the element of flexibility should always be present for the client for
the required modifications. 22
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The features of the savings and investment products

Deposit savings accounts:
• A deposit savings account is an interest bearing account opened with the financial institution. The
financial institution that is permitted to open an deposit savings account are banks and post
offices.
• These institutions offer the services of deposit accounts and provides a safe option for saving the
money.
• They pay a very modest rate of interest on the fund balance maintained in the account. This
interest assures the maintenance of the value of the money or the funds as it covers the inflation
effect on the money.
• The savings account are for holding the cash for emergency needs of an individual and the funds
are from a short term perspective.
• The returns of the deposit savings account range from 2.5% to 3.5% per annum.
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The features of the savings and investment products

Government securities:

• Government raises money for its operations by floating various investment instruments to investors in
the market .

• Most of the time these investments are in the form of debt instruments, bearing a fixed return.

• They are issued for a specific or fixed time duration and are generally issues at discount and redeemed
at par. The difference is the gain for the investor.

• Various government instruments that an investor can invest in includes, government bonds, treasury
bills, government security, Cash management bills and dated government securities, special securities
etc.
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The features of the savings and investment products

Gilts:

• The word gilt relates to the investment products that are floated by the government.

• Any investment directly or indirectly made in the government floated or backed investment products
falls in the category of Gilts.

• Gilt instruments could either be floated by central of state government.

• These instruments carry minimal credit risk as the chances of default is zero.

• Gilt instruments are considered as safe instruments with decent returns for medium and long term
investments.

• Investors with the objective of wealth creating over a longer period of time , generally have a certain
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portion of investment done in gilt products.
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The features of the savings and investment products

Fixed-interest investments:

Fixed interest investment products are the options to generated a regular and steady income from the
investments. The below listed are some of the popular fixed interest investment products:

• Post office Recurring Deposit.

• Post-Office Monthly Income Scheme.
• Post-Office Time Deposit.
• Savings Bank Account.
• Bank Recurring Deposits.
• Bank Fixed Deposits.
• Public Provident Fund (PPF)
• RBI 7.75% Savings Bonds. 26
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The features of the savings and investment products

Shares and types of shares:

• Holding a share of a company , gives ownership rights to the holder.

• Shares are the capital raising instruments by offering the participation in the company as owners. Thus the
return is variable and it depends on the performance of the company year after year.

• From an investor perspective, who invests in share capital of the company, more than regular income ,
they look for capital appreciation. The appreciation in the market value of the share over a period of time
is the real gain for an investor.

Types of Shares:
i) Equity Shares ii) Preferential Shares iii) Differential voting right shares

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Mutual Funds
• Mutual fund is an investment vehicle that works on the principal of pooling small funds from multiple
investors and investing in various products in the market to generate a combined return.

• It is a professionally managed investment, even though the individual contribution are of a small fund.

• Mutual funds are investment schemes, that are managed by well qualified professionals and is done
through an asset management company.

• The money invested by an investor in a mutual fund is converted into units , and the holdings of the
investor is stated in no of units held by them.

• The market valuation of a mutual fund scheme is assessed through net asset value (NAV).

• NAV is the market value of the instruments held by the mutual fund scheme.
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Mutual Funds and their types:

Income Equity
funds. funds.

Balanced
Debt funds.
funds.

Money
Index funds.
market funds.
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Analysis of the performance of shares and Mutual Funds:

The following assessment tools are used to analyse the performance of the shares and the mutual funds.

These tools helps in identifying the worth of an investment in these instruments.

1. Create a benchmark and assess the performance against the benchmark on a regular basis.

2. Compare the share/fund history, over a period of time to assess the future of the investment option.

3. Compare various ratios: Expense ratio, Risk adjusted returns, Returns against average maturity and the
return etc.

4. Compare share/fund’s risk variables using alpha and beta values

5. Compare portfolio turnover ratio to know the overall returns that the investment has generated for the
investor. 30
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Pension Products

• Pension products are also called as retirement products as they form a part of retirement planning
for an individual.

• After the retirement, the person is not active enough, physically to generate a regular income for
self and family.

• Thus, planning and investing at an early age towards creating a corpus for retirement is the right
way to secure the post retirement days of an individual.

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In India the pension plans can be classified as follows:

• Plans that are sponsored by an insurer where the investment is solely in debt and are best suited for
conservative investors.

• Plans that are unit-linked and invest in both equity and debt.

• The National Pension Scheme, which invests either 100% in government securities, 100% in debt
securities (other than government securities), or a maximum of 75% in equity.
National Pension System: It is a retirement based financial system, helping client secure the retirement
days.

It includes the mix of varied investment options and is regulated by Pension Fund Regulatory and
Development Authority (PFRDA). The minimum amount as annual contribution required is Rs 1000.
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Summary

• Investment and systematic investment helps in achieving one’s financial goals.

• When an individual is assessing the choices for investment, they need to look into various variables
to arrive at the final decision.

• The assessment shall answer the investor’s question of Which one should I select? Why?

• There are multiple options that are available to an individual. The true challenge is in identifying
the one that suits the need and meets the investor’s financial goals.

• Mutual funds are investment schemes, that are managed by well qualified professionals and is
done through an asset management company.

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Summary

• Government raises money for its operations by floating various investment instruments to investors
in the market .

• Various government instruments that an investor can invest in includes, government bonds, treasury
bills, government security, Cash management bills and dated government securities, special
securities etc.

• A deposit savings account is an interest bearing account opened with the financial institution. The
financial institution that is permitted to open an deposit savings account are banks and post offices.

• Shares are the capital raising instruments by offering the participation in the company as owners.

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Self Assessment Question

1. Employment of funds with the aim of achieving additional income is known as:
a) Investment
b) Speculation
c) Gambling
d) Biting

Answer: Option a

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Self Assessment Question

2. Investment in which principal amount and the terminal value are known with certainty is
________
a) Fixed principal investment
b) Variable principal investment
c) Non – security investment
d) Indirect investment

Answer: Option a

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Self Assessment Question

3. Which one of the following is known as indirect investment alternatives? ____________.

a) Cash

b) Equity shares

c) Pension Fund

d) Antique

Answer: Option c

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Self Assessment Question

4. Investment in which the terminal value are not known with certainty is ________
a) Fixed principal investment
b) Variable principal securities
c) Non – security investment
d) Indirect investment

Answer: Option b

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Self Assessment Question

5. Rising of prices and falling of standard of living is arises at the time of __________
a) Inflation
b) Boom period
c) Normal period
d) Deflation

Answer: Option a

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Self Assessment Question

6. ROI denotes __________

a) Return on Investment
b)Return on Interest
c) Return on Income
d)Risk on Investment

Answer: Option a

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Self Assessment Question

7. A combination of various investment products like bonds, shares, securities, mutual funds and
so on is called as __________
a) Portfolio
b) Investment
c) Speculation
d) Gambling

Answer: Option a

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Self Assessment Question

8. The process by which one choose the securities, derivatives and other assets include in a
portfolio is known as _________________
a) Portfolio selection
b) Portfolio Revision
c) Portfolio diversification
d) None of these

Answer: Option a

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Self Assessment Question

9. The process of addition of more assets in an existing portfolio or changing the ratio of funds
invested is called as ___________
a) Portfolio selection
b) Portfolio Revision
c) Portfolio diversification
d) None of these

Answer: Option b

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Self Assessment Question

10. The main objective of portfolio is to reduce _______ by diversification.
a) Return
b) Risk
c) Uncertainty
d) Percentage

Answer: Option b

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Activity

• Review the article.

• Customer Suitability in the Retail Sale of Financial
Products and Services (iosco.org)
Offline/ Online
Activity
(30 min)

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Activity

• Create a mix of protection plan for an individual

client with the following details:
• Annual Income: 6 lakhs p.a
• Marital Status: singe
• Age: 27 years
Offline/ Online • Liability : Personal loan with EMI of Rs.15000 p.m
Activity
(30 min)
• Monthly expenses: 15,000 Rs

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Activity

• Prepare a one page infographic presentation on the

best investment products in India for coming five
Offline/ Online years (2021-2026)
Activity
(30 min)

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Document Links

Topic URL Notes

https://economictimes.indiatimes.com/wealth/invest/top-
Top 10 investment
10-investment- Reference document for the topic
options
options/articleshow/64066079.cms?from=mdr

5 criteria to consider
https://www.cnbc.com/2018/09/18/5-criteria-to-consider-
when selecting stocks Reference document for the topic
when-selecting-stocks.html

Investment Selection http://news.morningstar.com/classroom2/course.asp?docId Reference document for the topic

Criteria =4439&page=5

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Video Links

Topic URL Notes

https://www.econlib.org/library/Topics/HighSchool/Savinga
Savings and Investments ndInvesting.html NA

https://www.fool.com/investing/how-to-invest/
How to start investing money NA

https://www.rankmf.com/knowledge-center/article/types-of-
Types of Mutual funds mutual-funds/ NA

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E- Book Link

E-book name Chapter Page No. Notes URL

https://rbi.org.in/Financial
Financial Planning by For the full
All Na Education/content/I%20C
Swapna Mirashi course
an%20Do_RBI.pdf

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Book References
1. Introduction to Financial Planning (4th Edition 2017) – Indian Institute of Banking & Finance

2. Pandit, Amar The Only Financial Planning Book that You Will Ever Need, Network 18
Publications Ltd (CNBC TV 18), B.Com.(Hons) CBCS Department of Commerce, University of
Delhi 44
3. Sinha. Madhu, Financial Planning: A Ready Reckoner July 2017 Mc Graw Hill
4. Halan, Monika, Let’s Talk Money: You've Worked Hard for It, Now Make It Work for You, July
2018,Harper Business

Web References

• https://www.economicsdiscussion.net/investment/criteria/investment-criteria-3-things-to-know/13159
• http://news.morningstar.com/classroom2/course.asp?docId=4439&page=6&CN=sample
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