Transcript Personal Financial Planning

Personal Financial
Planning
Kamlesh H Bhatt
Insurance Magician
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Personal Financial Planning
WHAT?
Systematic approach for Attainment of
Financial Goals of an individual
• Not only for rich
• Not only for old & retired
• It is for all those who wish to create
and protect Wealth.
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Personal Financial Planning
WHY?
• Increased life expectancy
• Increasing Cost of Services
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– medical expenses
– Education
Declining job certainty
Absence of social security system
Disintegration of joint families
Multiplicity of financial products
Tax Structure
Inflation
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Personal Financial Planning
HOW?
PRESENT FINANCIAL POSITION
( Income + Assets(F&NF)-Liabilities)
GAP
FUTURE FINANCIAL GOALS
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BRIDGE GAP
With Areas of Financial Planning
• Tax Planning
How to minimize taxes in a legal way
( HUF/MWPA)
• Investment Planning
Understanding of Investment options
• Liability Planning
Understanding of borrowing options
• Insurance Planning
Life and General
• Retirement Planning
Preparing for retirement
• Estate Planning
After Life
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Personal Financial Planning
HOW?
Financial Planning is not a onetime Process
Evaluate
financial
health
Define
your
financial
Goals
Develop
a Plan of
Action
Implement
Review, Reevaluate, Revise
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Financial Life Cycle
Life Cycle
Activities
Foundation Years- mid
20s to mid 30s
•Young, just started
working
• single or recently
married
•Start saving right away
•Curb the tendency to overuse credit
cards and other forms of credit
•Start Planning for future
Acquisition Years- mid
30s to mid 40s(Wealth
Accumulation)
•In prime
•Married with young kids
•Save/Invest before spending
•Monthly budgeting
•Start saving for house/children
•Aim to build a big retirement corpus
•Insure your life/possessions
•Buy a health plan
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Financial Life Cycle
Approaching
Retirement (mid
40s to mid 50s)
•A few more
years to go
•Consolidate your wealth
•Shift from High Risk Investments to Low Risk
•Retirement based investment opportunities
•Take care of Health Plan
Retirement Years
(late 50s to late
retirement)
•Enjoy change
•Shift to regular income plan
•Take care of health plan
•Plan for succession
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Financial Life Cycle
Stage 1 – Wealth
Accumulation
Stage
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Stage 3 The
Retirement Years
Approaching
Retirement
Tax Planning
Saving & Investment
Estate Planning
Insurance Planning
Liability Planning
Assets Acquisition
Initial Goal Setting
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30
40
50
60
70
80
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SAVINGS &
INVESTMENTS
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Savings & Investments
• Incorporate saving into your plans
• Not as residual
• Start Early-
• advantage of compounding compounding-Annuity.xls
• Treat money from different sources alike
• Risk & Return go together
• Make investment automatic
– To enforce discipline
• Take advantage of tax incentives
– Post tax return
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Diversification
• Diversification helps to reduce risk
– When the returns are negatively correlated
• Avoid over-diversification
– Portfolio may become unmanageable
• Certain risks can’t be diversified
– Systematic risk
• Risk Profile
– Attitude towards risk
– One can assume more risk as investment time
horizon lengthens
• Risk reduces over time
• There are more opportunities to make
adjustments
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Asset Allocation
• 100 minus your age
Age
30
50
% in Equities
70
50
% in Debt
30
50
60
40
60
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Equities
• Why Equities
– Better Return
– Diversification
– Liquidity
• Basic Requirements
– Time
– Training
– Temperament
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Equities- Tax Aspects
• Long Term Capital Gain on Securities covered
by STT( 01.10.04) (Section 10(38))
• Equity
• Transaction on a recognized Stock Exchange
• Transaction is chargeable to STT
• Short Terms Capital Gain on Equity Shares
• Lower rate of tax (10% plus surcharge plus
education cess)
• Transactions on a recognized stock exchange
• Subject to STT
• Dividend on Equity Shares in tax free in the hands of
Investors
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Mutual Fund
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Why Mutual Fund
• Diversification
– Reduction in risk with small investment
• Professional Management
– Training, Time, Temperament
• Transaction Cost
• Liquidity
– Open ended or listed on the stock exchange
• Varied Investment objectives
– Risk-return profile of the investor
• Convenience
• Transparency
• Tax benefits
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Classification of Mutual Fund
Scheme
• By Structure
• By Objectives
• By Other Schemes
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By Structure
• 1.Open Ended Schemes: In this the scheme
is open for subscription all through year
• 2.Close Ended Scheme: In this the scheme
is opened only during a specified period
• 3.Interval Schemes: It combines the
features of open and close ended funds.
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By Objectives
• Growth Fund: It’s objective is to provide
capital appreciation over the medium to long
term.
• Income Fund: It’s objective is to provide
regular and steady income to investors.
• Balanced Fund: It’s objective is to provide
both growth and regular income to investors
• Money Market Scheme: It’s objective is to
provide easy liquidity, regular income to
investor.
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By Other Schemes
• Tax Saving Scheme: It’s objective is to
offer tax rebates to investors under
specific provisions of IT act.
• Industry Specific Scheme: In this the
money is invested only in industries
specified in the offer document
• Load schemes: In this commission is
charged each time the investor buys or
sells units
• No Load Scheme: In this no commission
is charged each time the investor buys
or sells units
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Services
• Investment Plans
– Systematic Investment Plan (Automatic
Investment)
• Investment of a pre-determined amount every period by
post dated cheques or direct debit to the designated
account
– Systematic Withdrawal Plan (SWP)
• Investment made is withdrawn on pre-determined dates
and denominations
• Minimum investment/ encashment is mentioned in the
scheme
– Automatic Reinvestment Plan
• Reinvestment of dividend instead or receiving in cash
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Income Tax Aspects
• Deduction under Section 80C
– ELSS/Infrastructure MF – Up to Rs.1,00,000 along
with other qualifying investments
• Dividend
– Dividend is tax-exempt in the hands of the
recipients
– Dividend distribution tax – 12.5% plus surcharge
plus education cess
– No dividend distribution tax on equity oriented
schemes
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Income Tax Aspects
• Capital Gain = Sale Consideration – Cost of acquisition
• Units held for more than 12 month are considered Long
Term Assets
– Lower tax rate
– Indexation
• Long Term Capital Gain
– Equity oriented MF -50% invested in equity shares of
domestic companies – Nil; Subject to STT
– Others – 10% without indexation, 20% with
indexation
• Short Terms Capital Gain
– Units of equity oriented mutual fund
• 10% plus surcharge plus education cess; Subject
to STT
– Other at normal rate of tax
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Indexation
• Indexed Cost of Acquisition and Indexed cost
of improvement
• Cost Inflation Index notified by the Central
Government
• Indexed Cost
81-82: 100
85-86:133
89-90:172
92-93:223
96-97:305
00-01:406
04-05:480
82-83 : 106
86-87:140
90-91:182
93-94:244
97-98:331
01-02:426
05-06:497
83-84:116
87-88:150
91-92:199
94-95:259
98-99:351
02-03:447
06-07:519
84-85:125
88-89:161
91-92:199
95-96:281
99-00:389
03-04:463
CII for the year of transfer
X
CII for the year of acquisition/
Improvement
Cost of
acquisition/
Improvement
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Capital Assets
Financial Assets
Non Financial Assets
Period of
Holding > 12
Months
Period of
Holding < 12
Months
Period of
Holding > 36
Months
Long Term
Capital Gain
Short Term
Capital Gain
Long Term
Capital Gain
Short
Term
Capital
Gain
20%
Normal
Rate of
Tax
Equity/ Equity
Oriented
Mutual Funds
Exempt
Other Mutual
Funds/ G Sec
20% with
Indexation or
10% without
indexation
sec.112
Equity/ Equity
Oriented
Mutual Funds
Other Mutual
Funds/ G Sec
10%
sec. 111A
Normal
Rate of
Tax
Period of
Holding < 36
Months
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Tax Saving Schemes
Scheme
Rate of
Interest
Limit
Tax benefits
1,2,3,5 years 1 yr: 6.25%
PO deposit
2 yr :6.50%
3 Yr: 7.25%
5 Yr. 7.50%
Minimum : 200
Maximum : No
Limit
Nil
6 Year
National
Saving
Certificates
8% compound half
yearly payable on
maturity
No Limit, In
denomination of
100,500, 1,000,
5,000, 10,000
Investment and Interest
qualifies for Deduction
under Section 80 C
5 years PO
Recurring
Deposit
Interest compounded
quarterly payable on
maturity
No Limit
Nil
15 years
Public
Provident
Fund
8% compound annually
payable on maturity
Minimum : Rs.500
Maximum : 70,000
per financial year
Interest exempt under
Section 10(11)
Investment qualifies for
Deduction u/s 80 C
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Tax Saving Schemes
Scheme
Rate of
Interest
Limit
Tax
benefits
Post Office
Saving Bank
Account
3.5% per annum
Minimum Rs.20
Interest exempt
under Section
10(15)(i)
Post Office
Monthly Income
(6 years)
8% per annum payable
monthly plus 10%
bonus on maturity
Maximum Rs.3 lakhs in
a single account and
Rs.6 lakhs in joint
account
Nil
8% (6 years)
Saving (Taxable)
Bonds
8% payable half
yearly or compounded
with half yearly rest
No Limit
Nil
5 years Senior
Citizen Saving
Scheme 2004
9% per annum payable
quarterly
Rs.15 lakhs by a
individual 60 years of
age or 55-60 years of
age retired under VRS
Nil
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MANAGING CREDIT
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Managing Credit
• Why Credit
– Enjoy now pay later
– To overcome large outlays that can not be
postponed
– Financial Emergencies
– Convenience
– Investment purposes
• Improper Use of credit
– Basic expenses
– Impulse purchases
– Delinquency
• Understand the cost of credit
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Managing Credit
• Don’t use revolving credit facility on
the credit card
• Personal loans are more expensive
than vehicle loan/housing loan
compounding-EMI.xls
• Take tax benefits into account
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Tax Benefits
• Housing Loan
– Interest up to Rs.1,50,000 deductible from the Net
Annual Value
– Interest of pre-purchase/pre-construction period is
deductible in five equal installments
– Tax benefit under section 80 C – repayment of
principal is eligible for rebate up to Rs.1,00,000
• Deduction under Section 80 E towards interest
component in repayment of education loan
– For his own higher education from approved institution
– For a period of 8 years or till repaid whichever is
earlier
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INSURANCE
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Life Insurance
• Why Life Insurance
– To protect your dependents from financial hardship
in event of untimely death
– As an Investment vehicle – protection of wealth
• Who does not need life insurance
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Single with no dependents
Children
Non-earning members of family
Retired with no dependents
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Calculating Insurance Need
How much insurance you need?
Two Approaches
– Earnings Multiple Approach
– Needs Approach
• Earnings Multiple Approach
– Life cover equivalent to a multiple of your gross
annual income (5-15 times)
– You want to replace a stream of annual income that is
lost due to the death of the breadwinner
– The longer you need to replace the income stream,
greater the multiple
– Higher the return you can earn on settlement the
lower the multiple
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continued………
Needs Approach
• Determine the need of the family after the
death of the primary breadwinner
• Assessing Needs
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Immediate needs at the time of death
Debt elimination
Immediate Transitional funds
Family Expenses
Educational Expenses/ Marriage Expenses
• Take stock of available resources
• Needs minus resources
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Term Policies
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Pure risk cover with no investment component
Risk cover for a fixed term
Premium paid goes towards risk cover
Sum assured payable only in case of death of
the insured during the term
Nothing payable in case of survival
Premium paid is significantly lower compared
to investment based policies
No loan against policies
Suitable for taking a huge cover at a low cost
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Term Policies
• Renewable Clause
– The policy can be renewed by the policy owner
without medical examination
– No need to prove continued insurability
– Premium will be adjusted at each renewal
– Restriction in terms of numbers of renewal or age
• Convertible Clause
– Option to convert a term policy into a whole life or
endowment policy
– Conversion takes place from the date of
commencement of the original policy or from the
attained age
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Whole Life Policies
• A variation of term insurance where the
term is equal to the life of the insured
• Term insurance for the longest term
• Sum assured is paid to the nominees on the
policyholder’s death
• Premium is higher than term policy as every
policy eventually would have a claim
• Variations
– Pure Whole Life Insurance – Premium is payable
throughout the life
– Limited Payment Whole Life Insurance – Premium
is payable for a limited period
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Endowment Policies
Investment based policies
• Dual benefit
– Life cover for a specific tenure
– Wealth accumulation
• Insurance money is payable to the
insured/nominee
– In the event of the death of the insured during the
endowment period
– In the event of insured surviving till the end of the
endowment term
• A combination of Term Insurance and Pure
endowment
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Endowment Policies
• Money-back policies
– A variation of endowment policy
– A part of the sum assured is paid to the
insured at regular intervals
• Unit Linked Insurance Plans
– A variation of endowment policy
– Investment as per the choice of the insured
e.g.
• Equity
• Balanced
• Debt
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Health Insurance Plans
• Covers medical expenses due to hospitalization from
sudden illness or accident
– Covers pre-hospitalization (30 days) and posthospitalization (60 days)
– Covers Domiciliary hospitalization
• Age group of 5 to 80 years. Children can be
covered from the age of 3 months provided atleast one of the parents is covered
• Benefits
– Reimbursement of medical expenses
– Discount on family package
– No claim bonus
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Health Insurance Plans
• Cash Less Facility
– Third Party Administrators
• Maintain data-base of policyholders
• Issue identity cards to policyholders
• Handle claim settlements
• Advise as to whether the ailment is covered by
the policy
• Exclusions
– Hospitalization within 30 days
– Certain diseases within the first year
– Pregnancy/child-birth
• Indicative premium for Rs.3,00,000 cover –
Rs.3,500
• Premiums paid are eligible for deduction under
section 80D of Income tax Act.
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Critical Illness Plan
• Financial assistance in the event of insured
contracting any of the covered critical illness.
• The policy covers First Heart Attack, bypass
surgery (Coronary artery), Stroke, Cancer, Kidney
failure, Major organ transplantation, Multiple
sclerosis, Aorta graft surgery, Primary pulmonary
arterial hypertension, Paralysis.
• Clams to be supported with a certificate from the
specialist confirming occurrence of the critical
illness
• Premiums paid are eligible for deduction under
section 80D of Income tax Act.
• Exclusion
– Illness contracted within 90 days
– Death within 30 days after diagnosis
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Critical Illness Plan
• Indicative premium for age 45 years
Cover
Premium
1,00,000
800
2,00,000
1600
5,00,000
4000
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Hospital Daily Allowance
• Cash benefits in the event of insured persons being
hospitalized due to sickness or accident.
• Age group of 3 months to 60 years.
• Daily allowance for every day of Hospitalization Rs.500/-, Rs.1000/- or Rs.2000/- per day
• Maximum of 30/60 days of hospitalization per policy
period
• Premium paid eligible for Tax benefit u/s 80 D of IT
Act
• ICU admission double the scheduled amount (maximum
of 7 days)
• Indicative Premium for 25-40 years old for Rs.2000
per day for 30/60 days - Rs.600/ Rs.1020 per annum
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RETIREMENT PLANNING
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Building Retirement Pool
• Common Pitfalls
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Start too late
Put away too little
Invest too conservatively
With drawing your retirement benefits
every time you change your job
• To get maximum advantage of
compounding, avoid the above pitfalls
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Planning for Retirement
• Age at Retirement
• Retirement Goals
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Quality of life
Hobbies
Any unfulfilled financial obligation
Place to live
• Estimating Income Needs
– Reduction in post retirement expenses
– Inflation
• Estimating retirement Income
• Funding the shortfall
– How much the retirement pool must be
– How much to save every year
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Features of Annuity Plans
• Retirement plans to provide pension from a chosen
retirement date
• Most of the plans are Deferred Annuity type
– Accumulation phase
– Annuity or Pay-out phase
• Age at entry – 18 years to 65 years
• Retirement Age/ Vesting date – optional 45 years
to 70 years
• Single premium or periodical payments with monthly,
quarterly, half yearly, yearly options
• Premium based upon the target amount and the
vesting date
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Features of Annuity Plans
• Some annuity plans are offered as Unit Linked with
a choice to the investor to decide the portfolio
– Choice to shift the investment option
• Riders
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Family Income Benefit with Waiver of Premium
Life Cover till vesting date
Critical illness
Hospital Cash Benefit
Accident Protection
• No Loans are allowed
• Flexibility to increase the premium amount to reach
the target sum sooner
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Benefits
• On death before the vesting date
– Under a life cover option
• Life cover sum assured along with the
amount in Personal Pension account is paid
as lump sum to the nominee. Nominee can
opt for a life long pension.
– Under without life cover option.
• Amount in Personal Pension account is paid
as lump sum to the nominee.
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Benefits
• On survival to the vesting date
– Cash option – a portion of the accumulated
amount (25%) can be withdrawn in cash and
the balance to avail an annuity
• Pension options –
– Fixed annuity amount for whole of life
– Pension for life with return of purchase
price on death
– Fixed annuity amount for a minimum
guaranteed period of 5, 10, 15 or 20 years
and thereafter for life. If the annuitant
dies before completion of the minimum
guaranteed period, the nominee would
receive the annuities for the remaining
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guaranteed period.
Benefits
– Family Pension payment - payment of annuities
during the lifetime of the annuitant, and
thereafter to annuitant's spouse till death
• At the same rate of pension as drawn by the
annuitant
• Half of pension as opted at the beginning.
– Increasing life annuities - progressively higher
pensions year after year by 1, 2 or 3%.
• Tax benefits
– Contribution to Pension Fund (80C)
• Contribution to the annuity plan of a life insurer
for receiving pension
• Out of income chargeable to tax
• Up to Rs.1,00,000 together with other
investments
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ESTATE PLANNING
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Need for Estate Planning
• To ensure that the assets are distributed
in accordance with your wishes avoiding
legal hassles
• In absence of a will, estate will be divided
in accordance with one’s religion
– Hindus, Sikhs, Jains, Buddhists – Succession Act
– Muslims – Muslim Personal Law
• Nomination is not enough
– Nomination is merely a right to collect assets
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Contents of a Will
• Introductory Clause
– Name and address of testator
– Revocation statement
• Direction of payments of liability/taxes
• Disposition of property
– Identify the property
– Beneficiaries
– Conditional Will
• Appointment Clause
– Executors – to administer the estate
– Guardians for minor children
– Trustees
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Will
• A written legally enforceable expression or
declaration of a person’s wishes concerning
disposition of his property on death
• Requirement of a valid will
– Sound Mind
• Capable of taking a decision
• Not suffering from any mental illness
– Freedom of choice
• Not under coercion, threat, undue influence
– Proper Execution
• Execution as per the law
• No legal format
• No need for any registration
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Contents of a Will
• Execution
– In writing
– Signing of the Will by the testator
– Initial each page to avoid fraudulent insertion
• Witness
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Signed, name and address of the witness
Minimum two witnesses
Witness need not know the content of the Will
Only attestation that the Will is signed by the
testator
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Other Aspects
• Safeguarding a will
– One with your lawyer or any one you trust
– One in your locker
• Changing or revoking a will
– Will can be changed/ revoked by the
testator any time during his life time
– Codicil – minor changes to an existing will
– Better to make a new Will rather than
modifying
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Few Sites to Visit
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amfiindia.com
cnbcindia.com
moneycontrol.com
investopedia.com
taxmann.com
Mail [email protected]
Contact 9840057089
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