Financial Planning for Young Investors

An initiative of SEBI & NISM

Need for financial education

World of finance has been changed drastically over the last few years. Only those have adequate financial knowledge can look forward to a secure future. Deterioration of personal finances Increase of new and complex financial products

 Well informed decisions to be taken before investing ones hard earned money.

Agenda
Introduction Financial planning SMART goals How to achieve your goals Risk v/s return The power of compounding Inflation effects on investments Savings v/s investments Loans v/s investments Savings and investment related products Protection related products Borrowing related products Investment strategies How not to lose money How to begin investing Advantages of financial education Investor protection and grievances

WWHAT IS FINANCIAL PLANNING?

Financial planning is a process laid down to help an investor reach from the current financial position to the desired financial position.

The financial planning process

Gather financial data Identify goals and risk appetite Identify gaps

Prepare a plan to bridge the gaps

Implement the plan Review periodically

Gathering financial data

What is the source of income and what is its nature

Monthly Salary Business Income

How much are your monthly expenses

Exercise

Identify Goals

Your goals Short term

Medium term

Long term

Identify gaps or issues

Are there any expenses which have to be met on a priority, due to which plan may have to be changed Are there any liabilities which are already existing or worse still, may crop up suddenly?

Prepare the financial plan

Financial goals

Risk taking ability

Expenditure

Assets

Income

Risk taking ability

Liabilities

SMART GOALS

Objectives Specific Measurable

Incorrect approach I need money to pay my college fees I will pay off my debts

Correct approach I will save Rs. 50,000 to pay my college fees in a years time In the next six months, I will return Rs. 3,000 I owe to my friends I will save Rs. 2000 every month by cutting down on eating out and partying

Attainable

I will save money

Realistic

If I save money, I will be rich

If I save regularly, need not borrow more money, I can pay off my debts by next year and will have enough savings till I begin to earn
I will save Rs. 10000 a year for the next 2 years for my vehicle

Time-bound

I will save money for my vehicle

How to achieve goals

Arrange goals in order of their time to reach (short term, followed by medium term and lastly long term) Plan investments for each goal.

Implementing the plan, the real challenge

RISK AND RETURN

Risk and Return

Risk and investing go hand in hand Risk increases as the expected potential return increases No-risk, whats that? Manage the risks

Risk v/s returns

Risk category Low risk Medium risk High risk Instruments Cash, bank FD Debentures, bonds, fixed income mutual funds Equity shares, equity mutual funds

The power of compounding

Simple interest (I)=PNR compound interest (C.I)=p(1+r/n)

Simple interest I= PRT.

1000 x 6% x 2 = $120 .

 Solution: Using the compound interest formula, we get, P = $1000, R= 6% = (6/100) = 0.06, n = 4 (Remember, interest is compounded quarterly) and t = 2 years.

A = 1000(1 + 0.06/4) A= $1126.492 or $1126 (approximately)

The eighth wonder - compounding

Year
1 2 3 4 5 20 25 30

Rs.1 lac invested @ 10%

Simple interest @ 10% p.a. 1,10,000.00 1,20,000.00 1,30,000.00 1,40,000.00 1,50,000.00 3,00,000.00 3,50,000.00 4,00,000.00 Compound interest @ 10% p.a. 1,10,000.00 1,21,000.00 1,33,100.00 1,46,410.00 1,61,051.00 6,72,749.99 10,83,470.59 17,44,940.23

The rule of 72
YEARS TO DOUBLE = 72/INTEREST RATE

RS.1,00,000 RATE OF INTEREST = 8% YEAR TO DOUBLE =72/8=9YRS

WHAT IS INFLATION? Inflation is defined as a sustained increase in the general level of prices for goods and services

Effects of Inflation
Item Sugar (1 kg) Cooking oil (5 liters) Rice (1 kg) Petrol ( 1 liter) Price in 2001-02 Rs. 16 Rs. 290 Rs. 14 Rs. 33.46 Price in 2009-10 Rs. 40 Rs. 500 Rs. 35 Rs. 52.83

Basics of Savings and Investment

Savings
Short term Value remains stable Lower returns over long term

Investing
Long term Value moves up and down in short term Potentially higher returns over long term

Price of procrastination
Twin brothers: Anil and Sunil Anil saved from the age 25 years till 35

years. He did not withdraw till 60 Sunil started saving at 35 years, but continued till 60 years Both saved Rs. 50,000 per year and earned 10% p.a. on their investments

Price of procrastination
Twin brothers: Anil and Sunil Amount accumulated at 60 years
Rs. 86 lacs

Rs. 49 lacs

CHOOSING THE RIGHT INVESTMENT OPTIONS

Safety

Liquidity

Returns

Loans v/s Investments

 Before you borrow:

Financial strength Credit card debt and personal loans Low interest rates Tax benefits Loan for investments

THE PRODUCTS

Savings & investment related products

Bank deposits Small savings schemes Bonds / debentures Company fixed deposits Mutual funds Equity shares
Depository system

Protection Related Products

Insurance
Life insurance
Term life insurance Endowment policies Annuities / Pension plans ULIPs

Health insurance
Comprehensive health insurance Hospitalisation policy Critical illness plan

Borrowing Related Products

Personal loans Home loans Reverse mortgage Loan against securities Credit card debt

 Steps to avoid excess debt:

Set debt limits Shop carefully for debts Dont give into temptation Automatically have money go towards your bills

How not to lose money

Ponzi schemes
Ponzi schemes promise high returns and low risk Initial investors may get high promised returns Money from initial investors is given to new investors thus it is only rotation of funds, not investment of funds If its too good to be true its probably not true. Its a Ponzi!

PURCHASING FINANCIAL PRODUCTS

Selection of intermediary
Registration with regulator or a body approved by regulator, e.g. AMFI or stock exchange

Steps to become securities market investor

Know Your Client (KYC) form and documents PAN Card Personal identification proof Address proof Demat accounts & trading accounts required for equity investing For investing in MF, demat is optional

Advantages of Financial Education

Helps build a secure financial future Prepared for financial emergencies

Protection from marketing gimmicks

Feeling a sense of accomplishment Disciplined approach to money

Awareness of questionable practices

Setting a good example for your family Benefit other aspects of your life

Regulators

Various regulators in Indian financal markets are:

Securities & Exchange Board of India (SEBI) Reserve Bank of India (RBI) Forward Markets Commission (FMC) Insurance Regulatory & Development Authority (IRDA) Ministry of Corporate Affairs (MCA) Ministry of Finance (MoF)

THANK YOU!