Summer Internship Project

Importance of Financial Planning in

helping ones Financial Goals
Submitted By :
Manasi Satish Kalgutkar Roll No. A11030 Batch :2011-13 MBA Financial Markets BSE Institute Ltd.

Importance of Financial Planning in helping achieve one's Financial Goals

What is Financial Planning?
Why Financial Planning is important? Components of Financial Planning Investment Planning (Details about various options/products) Risk Planning Tax Planning Estate Planning Retirement Planning

What is Financial Planning?

Financial Planning is the process of meeting

your life goals through the proper management of your finances

Life goals can include buying a house,

saving for your child's higher education or planning for retirement

Financial Planning Process

The Financial Planning Process consists of six steps
Establish and define the client-planner relationship Gather client data, including goals Analyze and evaluate your financial status

Develop and present financial planning

recommendations and/or alternatives

Implement the financial planning

recommendations
Monitor the financial planning

recommendations

Establish and define the Client-Planner Relationship

The financial planner should clearly explain and document

the services that he or she will provide to you and define both his/her and your responsibilities during the financial planning engagement
The financial planner should explain fully how he or she

will be paid and by whom. You and the planner should agree on how long the professional relationship should last and on how decisions will be made

Gather Client Data, Including Goals

The financial planner should ask for information about

your financial situation. You and the planner should mutually define your personal and financial goals, understand your time frame for results and discuss, if relevant, how you feel about risk
The financial planner should gather all the necessary

documents before giving you the advice you need

Analyze And Evaluate Your Financial Status

The financial planner should analyze your information to assess your current situation and determine what you must do to meet your goals. Depending on what services you have asked for, this could include analyzing your assets, liabilities and cash flow, current insurance coverage, investments or tax strategies

Develop And Present Financial Planning Recommendations And /Or Alternatives

The financial planner should offer financial planning recommendations that address your goals, based on the information you provide. The planner should go over the recommendations with you to help you understand them so that you can make informed decisions. The planner should also listen to your concerns and revise the recommendations as appropriate

Implement The Financial Planning Recommendations

You and the financial planner should agree on how the recommendations will be carried out. The planner may carry out the recommendations or serve as your coach, coordinating the process with you and other professionals such as attorneys, accountants or stockbrokers

Monitor The Financial Planning Recommendations

You and the financial planner should agree on who will monitor your progress towards your goals. If the planner is in charge of the process, he or she should report to you periodically to review your situation and adjust the recommendations, if needed, as your life changes

SMART GOALS

Things to be considered while doing Financial Planning

Time horizon and goals
Risk tolerance Liquidity needs Inflation Need for growth or Income

Time Horizon and Goals

It is important to understand what individuals goals are, and over what time period they want to achieve their goals. Some goals are short term goals those that people want to achieve within the year. For such goals it is important to be conservative in ones approach and not take on too much risk. For long term goals, however, one can afford to take on more risk and use time to ones advantage

Risk Tolerance
Every individual should know what their capacity to take risk is. Some investments can be more risky than others. These will not be suitable for someone of a low risk profile, or for goals that require being conservative. Crucially, ones risk profile will change across lifes stages. As a young person with no dependants or financial liabilities , one might be able to take on lots of risk. However, if this young person gets married and has a child, person will have dependants and higher fiscal responsibilities. So persons approach to risk and finances cannot be the same as it was when they were single

Liquidity Needs
When does money is needed to meet the goal and how quickly one can access this money. If investment is made in an asset and expects to sell the asset to supply funds to meet a goal, then it needs to be understood how easily one can sell the asset. Usually, money market and stock market related assets are easy to liquidate. On the other hand, something like real estate might take a long time to sell

Inflation
Inflation is a fact of the economic life in India. The purchasing power of money is going down every

year. Therefore, the cost of achieving goals needs to be seen in what the inflated price will be in the future The bottle of cold drink that is brought today is almost double the price of what would be paid for ten years ago. At inflation or slightly above 4% per annum, a packet of biscuits that costs Rs 20 today will cost Rs. 30 in ten years time. Just imagine what the cost of buying a car or buying a home might be in ten years time!

Need for Growth or Income

As person make investments think about what is required, whether capital appreciation or income. Not all investments satisfy both requirements. Many people are buying apartments, but are not renting them out even after they take possession. So, this asset is generating no income for them and they are probably expecting only capital appreciation from this. A young person should usually consider investing for capital appreciation to take advantage of their young age. An older person however might be more interested in generating income for themselves

Components of Financial Planning

Contingency planning
Investment planning

Risk planning
Tax planning

Estate planning
Retirement planning

Contingency Planning
Contingency means any unforeseen event which may or may not occur in future. Contingency planning is the basic and the very first step to financial planning. It was found that a large number of people have invested in financial planning instrument but have ignored their contingency planning

Investment Planning
Insurance Life insurance Term insurance

Endowment insurance
Whole life insurance

Money back plan

ULIP

Annuities and pension

 Equities
invest in Blue chip stocks Features of Blue Chip Stocks There are no specific criteria for blue chip stocks. The most common characteristics of such stocks include: 1. Revenues: Companies with revenues higher than that generated by industry peers. 2. Earnings: Companies that have been generating healthy earnings on a consistent basis. 3. Dividends: Companies that pay regular dividends to common stockholders, even if their performance has been unsatisfactory in a particular period. Moreover, the dividend payout is raised at regular intervals. 4. Balance Sheet: The balance sheets are robust and their debt liabilities are not extensive.

5. Credit Rating: Their credit ratings in the bond and unsecured debt markets are high. 6. Size: The market capitalization of these companies is higher than that of other companies in the same industry. 7. Product Portfolio: They have extensive and diversified product lines. They also have a wide global presence. 8. Competition: They are cost efficient, with high distribution control and excellent franchise value, all of which contribute towards their competitive advantage

Mutual Funds
A Mutual Fund allows a group of people to pool their money together and have it professionally managed, in keeping with a predetermined investment objective. This investment avenue is popular because of its costefficiency, risk-diversification, professional management and sound regulation

The Advantages of Investing in a Mutual Fund are:

Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated

Types of Mutual Funds Scheme in India

By Structure Open - Ended Schemes Close - Ended Schemes By Investment Objective Growth Schemes Income Schemes Balanced Scheme Money Market Schemes

 Other Schemes
Tax Saving Schemes Special Schemes

Index Schemes
Sector Specific Schemes

Public Provident Fund (PPF)

PPF is considered safe investment avenue. The current interest rate on PPF is 8% per annum.The rate of interest is not fixed. The government modifies the same from time to time. The best part of PPF is that the interest thereon is exempt from tax under section 10(11) of the Income Tax Act. Tax deduction can be claimed on contribution made by an individual into his own PPF account or into the PPF account of his spouse or children

Risk Coverage : Why is it required?

Every individual is exposed to certain type of risk whether it is due to loss or damage of personal property, loss of pay due to illness or disability; or even due to death. Such risk cannot be determined but on occurrence there may be a financial loss to the individual or their family

Types of Risks
Life risk
Health risk Property coverage

Life Risk
Every individual is prone to risk of losing life its a naked truth but what is not certain is the time of death. In this sense everyone is prone to life risk, but the degree of risk may vary. In terms of financial planning, covering life risk means insuring the life of the person through proper life insurance plan. Life insurance, simply put, is the cover for the risks that person run during their lives

Health Risk
Health insurance is an insurance Policy that insures

against any medical expenses. Insured medical expenses will be taken care of by the insurance company provided person pays their premium regularly. Cover extends to pre- hospitalization and post- hospitalization. There are various type of health insurance Disability insurance Critical illness insurance

Property Coverage
Property Coverage insures personal property from damage, destroy or

stolen. Dwelling coverage also known as Homeowners Insurance offers protection against direct physical damage caused to the dwelling, including rooms, fireplaces, carpeting, tile floors and elements of decor. Structures, which are attached to the insured dwelling on the same foundation, such as a garage, are also liable to coverage under this section of Home owners Insurance. Besides, this section of policy covers materials and supplies necessary to rebuild or repair home. Person Property Coverage can insure the contents of home, i.e. the items person regularly use which are not a permanent part of their house's or apartment's structure, such as furniture, television sets, bikes, clothing, appliances, utensils and tools. Personal Property Coverage can be used in appliance to valuable information saved in a hard-copy form or as electronic data. Auto insurance is compulsory in most states, and the insurance has different types of benefits or coverage

Tax Planning
A good plan is one which takes the maximum advantage of

various incentives offered by the income tax laws of the country. However, do understand that the tax incentives are just that, only incentives. Financial planning objective should be getting maximum advantage of various avenues. It is to be remembered that tax planning is a part and not financial planning itself. There are many investments which do not offer tax shelter that does not mean they are not good investments. The prudent investment decision made and the returns that accrue will more than offset the tax outgo. In any case the primary objective of a good financial plan is to maximize the wealth, not to beat the taxmen. However many investment provides great returns which can offset the tax on it

Tax planning under section 80 C

Provident Fund
Voluntary Provident Fund

Life Insurance Premium

ELSS

Home Loan Principal Payment

NSC

 Infrastructure bond Pension funds Bank fixed deposit Mediclaim Interest and dividend received

Estate Planning
Estate planning is the process of managing and maximizing your assets and

the means by which these assets will be bequeathed to your survivors after you die
Making a will is an essential part of retirement planning. Will is a legal

declaration of the intention of the testator (person making the will) with respect to his property which he desires to be carried into effect after his death
When you establish a Will you will also set out who is to be appointed as

your executor or executors. This is the person or persons that you are entrusting with the job of looking after your affairs until your estate is distributed to your nominated beneficiaries
The person can be a member of your family, a friend or, for example, your

advocate or accountant

 Power of Attorney

A power of attorney is a legal document that allows another person to act on your behalf. It ensures that important matters are dealt with by someone you trust if you are unable to deal with them yourself.
Nomination

It is important to nominate beneficiaries for your LIC policies, bank deposits, shares, mutual funds units and other securities to facilitate quick disbursal of proceeds in the event of death.

Reasons Behind Retirement Planning

Life expectancy
Medical emergencies Nuclear families

No government sponsored pension plan

Job hopping Inflation

Retirement Planning

Conclusion
Financial Planning is an integral part of any individual life,

especially in this modern world where value of everything is expressed in terms of money. The active working span of human life is short as compared to the life span. This means people will be spending approximately the same number of years in after retirement what they have spent in their active working life. Thus it becomes important to save and invest while working so that person will continue to earn a satisfying income and enjoy a comfortable lifestyle . Financial Planning enables a person to identify their goals, assess the current position and takes necessary steps to achieve the goals. It helps us to understand how financial decisions made effect our life. Financial Planning is not just about investment planning but it is about life time planning. Thus through proper financial planning a person can have a easy and secured financial life