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IIFL Training TeamIIFL Training Team
Financial planning
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What is financial planning?
It is the process of advising investors on how to manage their finances and investments so as to help them achieve their financial goals.
An excellent financial advisor can do good to people like any doctor.
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Common questions
What is my income?
What is my life expectancy?
How many dependents do I have?
How much risk can I take i.e. what is my risk appetite?
What is risk and return trade off?
Who am I?
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Earnings
Expenditure
The money you earn
Savings
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Birth & Education Earning Years Retirement
Over 25 - 30 yrs22 yrs 38 yrs
Housing
Child Education
Children’s Marriage
Phase I Phase IIIPhase IIIncome
Age
Marriage
Children
22 yrs 60 yrs
Financial planning for the future
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Who am I?
Status/age < 30 years 30 - 45 years 45 – 55 years > 55 years
Single no kids Carefree
Building wealth
Adding to wealth
Carefree retirement
Married - no kids
Property Top priority
Building wealth
Planning Retirement
Carefree retirement
Married - 2 kids
Property Top priority
Planning Childs future
Property for Children
Retired / Children on
own
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Planning for your child’s education
8,2938,689242,0002,00,00015
2,2752,7193,89,7432,00,00010
1,1961,671627,6872,00,0005
7191,1991,010,8942,00,0000
return of 20% p.a.
return of 15% p.a.
At the age of 17 (Rs.)*
Today (Rs.)
Savings needed per monthCost of engineering degree at
IITAge ofchild
* assuming inflation @ 10%p.a.
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Risk
The chance that an investment’s actual return will be different than expected.
The chance or possibility of loss.
The greater the amount of risk that an investor is willing to take on, the greater the potential return.
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Need based investment strategy
Age group Growth Income Liquidity
(years) (Equity) (Bonds) (Banks)
25-40 75% 15% 10%
41-50 50% 35% 15%
51-60 35% 45% 20%
Above 60 25% 50% 25%
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RISK
RETU
RN
Low High
Hig
h
RBI Bonds
Small Savings
Bank Deposits
Insurance
Gold
Real Estate
Direct EquityPortfolio Schemes
Art
Debt Funds
Derivative Products
Equity FundsBalanced
Funds
Investment options
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Risk hierarchy of mutual funds
Money Market Funds
Gilt Funds
Debt Funds
Balanced Funds
Equity Funds
Risk level
Returns
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Simple interest
Simple interest= PNRP= Invested amountN= Period for which money is investedR= Rate of return
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Example Miss Kareena invested Rs. 10,000/- which earns a simple interest of
10% p.a. Calculate the total amount received after 2 years.
Total amount received = amount invested + interest earned = 10000 + 2000 = 12000
Simple interest = PNR= 10000 x 2 x 0.10= 2000
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Compound interest
Interest earned not only on the principal amount but also on the interest
Formula for compound interest :
FV = PV (1+R)n
Compound interest = FV - PV
FV= Future valuePV= Present valueR= Rate of returnn= Number of compounding periods
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Example Miss Kareena invested Rs. 10,000/- which earns a compound
interest of 10% p.a. Calculate the total amount received after 2 years and the amount of compound interest earned
FV = PV (1+R)n
= 10000(1+0.10)2
= 12100
Hence compound interest = FV – PV = 12100- 10000 = 2100
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Rs. 808
Rs. 237
Rs. 66
Rs. 17
Rs. 4
Re. 1 invested for 30 years
5% 10% 15% 20% 25%
Effect of compounding
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Why long term investing? The power of compounding– Einstein called it the eighth wonder in the world– Over a long period of time it makes your money grow
exponentially
Lets look at three investors each investing Rs. 25,000 till they turn 60 at 12% p.a.– One invests at the age of 35– Second invests at the age of 40– Third invests at the age of 45
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0
450,000
Year 1 Year 25
The Power of Compounding at work
Rs. 425,002
Rs. 241,157
Rs. 136,839
35 40 45
Power of compounding
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But, aren’t investments in equity markets risky?
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Inflation Gold
Bank FD Co. FD Equities
9.19%7.62%
9.74%
14.47%
20.16%
Over a 20 year TenureInvestment performance
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“Patience is the companion of wisdom” -- Anonymous
Success and consistency are not the same It is not possible to spot every trend
It is impossible to know when to exit
There is a trend born every minute
Money made in one trend is likely to be lost in another
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Consistent success in equity requires Being invested
Being focused on the long term
The ability to understand that companies grow over a long period of time. However all companies face tough times, squeezed margins, lower profits and crises
Resisting greed and overcoming fear
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Online mutual funds
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Thank You
