UNIT 2

Comprehensive Financial Planning

What Is Comprehensive Financial
Planning?
Comprehensive Financial Planning is more than the active management of investments. It is more
than the creation of a retirement plan and it goes well beyond regular check-ups of a portfolio.
 Comprehensive Financial Planning is the act of planning for, and prudently addressing life events.
It addresses everything from running a business, to planning for a child’s education,
preparing for eventual retirement or creating a plan for your estate. It should also addresses
potential events that can drastically alter your long-term financial security. This is true
Comprehensive Financial Planning.
In simple Words, Comprehensive financial planning involves the detailed review and analysis of
all facets of your financial situation. This includes areas such as cash flow analysis,
retirement planning, risk management, investment management, tax management and estate
planning.
 Importance of Comprehensive Financial
Planning
• Discovery

• Align Resources

• optimized investing

• Surviving Disasters

• Protecting your Interest

How to Overcome your Debt and Financial
Stress?
If you are going through a financial stress or are unable to manage your financial debt, the first steps
should be to have a conversation about it. According to financial planners, most people are ashamed
to talk about their money mistakes and find it uncomfortable to talk about them.

1. Talk about your money mistake.

2. Start by paying off your debt.

3. Cut down on your expenses

 What is Debt Counselling?
A counseling service offered to address those debts that are beyond a person’s debt paying ability
is called debt counseling. This facility could help one come out of serious debts by ensuring the right
budgeting and repayment plan on right time and at the right place.

Debt counseling agencies not only provide their clients with wise advice, but also negotiate with
creditors on their behalf, in order to work out a reasonable payment plan and thereby help you to come
out of the debt web.

It serves three purposes:

1. First, it examines the ways to solve current financial problems.

2. Second, by educating about the costs of misusing a credit, it improves financial management.
3. Third, it encourages the distressed people to access the formal financial system.
 Is debt counselling a good idea?
• The answer is undoubtedly that debt review is a very good thing for
over-indebted consumers. Your debt counsellor will ensure that you
can afford your repayments again, by negotiating with your creditors
to have your instalments and interest rates reduced.
 Debt Counsellor - Your Credit & Finance
Advisory
Debt Counsellor is committed to helping every citizen of country to improve their
credit profile and creditworthiness. Our aim is not just to assist people in
resolving their default accounts, but to empower them to make sound financial
decisions. Counsellor will provide the following personalized service.

• Experience and Knowledgeable Team

• Personal Attention

• Result Oriented Services

 Financial Liquidity and Financial
Planning
1. Financial liquidity is the simplicity with which any asset can be converted into ready
cash either to spend or to invest.

2. The lower the time taken to convert the asset to cash the more liquid the asset, like
bank fixed deposits, listed equities and open-ended mutual funds.

3. The lower the cost incurred to convert to cash the more liquid the asset. Some assets
have penalty or applicable exit load which adds to the cost.
4. The lower the price fluctuation in a quick sale of an asset the more liquid the asset.
Liquid equity stocks can be sold without significantly lowering its price like the index
stocks.
5. In personal financial planning it is recommended to maintain about six months’
expenses worth amount in liquid assets for emergencies.
Financial Goals of Investors
Template for Goal Setting
 Understanding Risk - Return
Principle
The risk-return trade-off is the concept that the level of return to be earned from an investment
should increase as the level of risk increases.
Conversely, this means that investors will be less likely to pay a. high price for investments that
have a low risk level, such as high-grade corporate or. government bonds.
The returns potential of an investment option is of prime importance for every investor. But, while
every investor would want to generate the highest possible returns, the quantum of risks involved
is often overlooked.
The inherent nature of financial markets, irrespective of the type of investment you select, is
such that the returns potential of the investment is directly linked to its risk. This
phenomenon is known as risk-return trade-off.
 Risk Profiling- Meaning
Risk profiling is a process Advisers use to help determine the optimal levels of investment risk for clients. It
aims to identify the risk required to meet your investment objectives, your risk capacity, and your tolerance to
risk.
 Risk Required – refers to the level of risk required to be taken on investments to achieve your desired
level of investment return.
 Risk Capacity – refers to the level of investment risk (or losses) that you can afford to take.
 Risk Tolerance – refers to the level of risk you’re comfortable taking.
 Risk Profiling Measurement
Risk profiling can be measured with the help of a questionnaire. This questionnaire
usually captures three key aspects:
a) Current situation of the investor – This covers variables like age, monthly
income, stability of income, expenses, number of dependents, and financial goals.
b) Past knowledge and experience of the investor – This includes current exposure
in the various asset class, experience, and knowledge of various financial products,
along with the number of years invested in various financial products.
c) Attitude of the investor to various situations – This vector helps gauge the
investor's ability to think and express the likely reaction to various scenarios. This
also helps in determining the risk tolerance of the investor.
Classification of Risk Profile
 Classification of Risk Profiling-
Contd---
a) Conservative – Investors having a conservative risk profile have a very low-risk
appetite. Their portfolio should be oriented towards capital protection with minimal
risk to the principal invested. Investments should be largely in asset classes with
low prevalent risk and allocation of the asset should be determined in such a way
that in bad market conditions, the risk on the principal is minimized.
b) Moderate - Investors having a moderate risk profile have an average risk appetite
and are willing to expose a meaningful portion of their portfolio to asset classes
with higher prevalent risk to generate potentially higher returns than the
Conservative portfolio.
c) Aggressive - Investors having a very high-risk appetite are willing to expose a
large portion of their portfolio to asset classes with higher prevalent risk to generate
potentially higher returns than the 'Moderate Portfolio''.
 A Score card to find Out the Risk Profile
of an Investor
• Step 1: Assess the client’s exposure to risk

• Step 2: Educate the client on mitigating risks

• Step 3: Decide how much loss the client wants to protect against

• Step 4: Research insurance products

• Step 5: Present the options, reach agreement, and implement the plan
Note: For score Card Format Refer your Group
 Individual Investors Life cycle
Individual investor life cycle indicates the investment behavior of investor over
the different age of their life. The investment decision is based on the age,
financial condition, future plans and risk characteristics of an individual.

Investor mainly invests in getting a return which can compensate the sacrifice of
present for more future earnings and security.
As a financial plan investor can adopt different insurance policies or reserve cash
for future. Although investor has to take risk of reserving cash or investing the
cash they are ready to take some risk according to their risk-taking behavior.
 Individual Investors Life Cycle-
Contd---
 Investors Life Cycle – contd---
Common Short-term Common Long-term
Lifecycle Stage  
Objectives Objectives
- Paying off student
debt - Saving for children's
Accumulation
- Buying real estate education
Stage (Ages 20-35)
- Building emergency - Accumulating wealth
savings
- Taking vacations
Preparation Stage - Funding children's - Planning for
(Ages 35-60) education retirement

- Achieving desired
Retirement Stage lifestyle
- Estate planning
(Ages 60+) - Covering medical
expenses
 Assets Allocation-Meaning

Asset allocation is an investment strategy that aims to balance risk and reward by dividing an investment portfolio among different

types of asset classes such as equity, fixed income, cash and cash equivalents, real estate, etc. The theory is that asset allocation

helps the investor to lessen the impact of risk their portfolio is exposed to as each asset class has a different correlation to one

another.
 How Assets Allocation Works?
• Let’s understand the working of asset allocation with the help of an example. Imagine a store that
specialises in selling winter apparels like jackets, boots, scarves, gloves, etc. It also sells winter gears
such as ice skates and skies. As a result, it does significant business around the winter season. However,
come summer, the store tends to do zero business. Now the store decides to expand its range of
products. They open a section where they sell all kinds of apparels which could be worn in warmer
seasons as well. They even begin to sell other accessories such as regular roller-skates, skateboard, etc.
• Now, the store generates business in both winter and summer. What’s more, the store further decides to
open several departments that sell books, groceries, furniture, electronics, etc.
• Now, once a tiny, little window store is a huge departmental store that does great business all-year
around. Earlier, the entire business of the store depended on winter and the hope that they do not face
any competition around that time. However, with a departmental store that sells all kinds of products
all-year-around, the business now continues to run come rain or shine with much lower risk.
• Asset allocation works on a similar concept wherein the risks are minimized with the help of
diversification of investments across asset classes.
Key Benefits of Assets Allocation
 Model Portfolios
What is a Portfolio ?
• A portfolio refers to a collection of investment tools such as stocks, shares, mutual
funds, bonds, cash and so on depending on the investor’s income, budget and
convenient time frame.

Types of Portfolio
1. Market Portfolio
2. Zero Investment Portfolio
3. Defensive Portfolio
 Portfolio Concepts- contd
What is Portfolio Management ?
• The art of selecting the right investment policy for the individuals in terms of
minimum risk and maximum return is called as portfolio management.
• Portfolio management refers to managing an individual’s investments in the
form of bonds, shares, cash, mutual funds etc so that he earns the maximum
profits within the stipulated time frame.
• Portfolio management refers to managing money of an individual under the
expert guidance of portfolio managers.
• In a layman’s language, the art of managing an individual’s investment is
called as portfolio management.
 Types of Portfolio Management

1. Active Portfolio Management: As the name suggests, in an active portfolio management

service, the portfolio managers are actively involved in buying and selling of securities to
ensure maximum profits to individuals.
2. Passive Portfolio Management: In a passive portfolio management, the portfolio manager
deals with a fixed portfolio designed to match the current market scenario.
3. Discretionary Portfolio management services: In Discretionary portfolio management
services, an individual authorizes a portfolio manager to take care of his financial needs on his
behalf. The individual issues money to the portfolio manager who in turn takes care of all his
investment needs, paper work, documentation, filing and so on. In discretionary portfolio
management, the portfolio manager has full rights to take decisions on his client’s behalf.
4. Non-Discretionary Portfolio management services: In non discretionary portfolio
management services, the portfolio manager can merely advise the client what is good and bad
for him but the client reserves full right to take his own decisions.
 Who is a Portfolio Manager ?
An individual who understands the client’s financial needs and designs a
suitable investment plan as per his income and risk taking abilities is called a
portfolio manager. A portfolio manager is one who invests on behalf of the
client.

A portfolio manager counsels the clients and advises him the best possible
investment plan which would guarantee maximum returns to the individual.

A portfolio manager must understand the client’s financial goals and objectives
and offer a tailor made investment solution to him. No two clients can have the
same financial needs.