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FINANCIAL PLANNING IN INDIA

Financial Planning Introduction Financial planning is a process of setting objectives, assessing assets and resources, estimating future financial needs, and making plans to achieve monetary goals. Many elements may be involved in financial planning, including investing, asset allocation, and risk management. Tax, retirement, and estate planning are typically included as well.

Need For Financial Planning Financial planning plays a starring role in helping individuals get the most out of their money. Careful planning can help individuals and couples set priorities and work steadily towards longterm goals. It may also provide protection against the unexpected, by helping individuals prepare for things such as unexpected illness or loss of income, unemployment. Financial planning may mean different things to different people. For one person, it may mean planning investments to provide security during retirement. For another, it may mean planning savings and investments to provide money for a dependent's college education. Financial planning may even involve making career-related decisions or choosing the right insurance products. All too often, people delay planning for the future. They may feel such planning should take a back seat to staying financially afloat in the present. However, even those living from pay check to pay check can benefit from financial planning by creating a budget. A budget can be used to determine what is actually spent each month and find ways to trim or even eliminate unnecessary or out-of-control expenditures.

Global Perspective Financial planning has been around from start but its importance has increased in recent years due to changing economic situation of the country and volatility in the market. The importance of financial planning (especially in the present scenario) cannot be overstated. Among others, two factors are responsible for the same i.e. inflation and changing lifestyles. Inflation is a situation where too much money chases a limited number of goods. This leads to a fall in the value of money. It is also expressed as a rise in the general price level. For example, a product that costs Rs 100 at present would cost Rs 105 a year from today, assuming that prices rise at 5 per cent. This is the impact of rising prices over one year; over a 30-Yr period, assuming that inflation continues to rise at 5 per cent, the same product will be available at Rs 432! Financial planning can ensure that one is equipped to deal with the impact of inflation, especially in phases like retirement when expenses continue but income streams dry up. The second factor is changing lifestyles. With higher disposable incomes, it is common for individuals to upgrade their standard of living. For example, objects like cars that were considered luxuries not too long ago, have become necessities today. Financial planning has a role to play in helping individuals both upgrade and maintain their lifestyle as well.

Finally, there are contingencies like medical emergencies or unplanned expenditures that an individual might have to cope with. Sound financial planning can enable him to easily mitigate such situations, without straining his finances.

Steps in Financial Planning Establishing Client planner Relationship This comprises of initial relationship building with the clients. The important part is asking right kind of questions and understanding about clients. The best way to do this is by avoiding any presumptions. Planner must be ready to answer any questions of the client and have a list of questions prepared in advance to be asked to the client. The financial planner should clearly explain or document the services to be provided to the client and define both their and the clients responsibilities. The planner should explain fully how he/she will be paid and by whom. The client and the planner should agree on how long the professional relationship should last and on how decisions will be made. It is important to define the scope of the work so that one might not over commit to something that planner cannot provide.

Need Analysis and Goal Setting This is learning clients attitude to risk, ethical investments and financial concerns like what happens if he falls ill and can't work or will his partner and family have enough money to survive should he die. The idea is to identify the areas of personal concern and to tailor a personal strategy that deals with the issues raised. Every client is different and has different financial concerns based on whether they are married or living with a partner, whether they have children and the amount of money that would maintain their lifestyle in retirement. Of course, many clients may have a financial status that needs a different level of advice - from the well off to those on a more modest income. The leading advisors have the experience and resources to help every client make the best of their financial circumstances, whatever they are. The planner must understand clients current situation (quantitative data), his future aspirations (qualitative data), and converting future aspirations into monetary form (quantitative data). Planner must have clear idea about financial goals of the client. Planner must create a list of goals. Separate lists are then combined to determine common family goals and private financial goals. Not all goals have the same timeline.


Short-term goals can be done in a week or a few months, but no longer than a year. Buying new clothes and saving for a family vacation are short-term goals. Intermediate-term goals can be accomplished in one to five years, such as buying a new car or paying off debts. Long-term goals are five years or more, like buying a house or saving enough money to put your children through college. Client will have all three types of goals, but keep them realistic. Goals that are set too high will create frustration and tempt you to abandon them. Goals that are vague won't motivate. Rigid goals won't work when situation changes. Leave some space to adjust goals. Of the ones which have been listed, which are the most important as an individual? Which are the most important to ones family? Financial Planning and evaluation

In this step planner needs to identify the financial position of the client the cash flow of the client the time durations when this cash would come in the amount that will be utilized in daily expenses, or the amount that will be needed to meet the short term goals. A mans worth is not the amount of money he earns but the amount of money he can save. The planner will have to identify the investments that client has made, and the cash flow generated by them. Cash Flow Statement - current income & expenses & any savings capacity, Statement of Net Worth clients current financial position and the amount of money that he would need and at what time to meet his goals. The financial planner should analyse the clients information to assess the clients current situation and determine what the client must do to meet their goals. Depending on what services the client has asked for, this could include analysing the clients assets, liabilities and cash flow, current insurance coverage, investments and tax strategies. Where investment strategies are being analysed and evaluated the planning could incorporate looking at asset classes, investment returns, risk, fund mandates and their impact on the financial planning status of the client.

Developing and presenting the Financial Plan The financial planner should offer financial planning recommendations that address the clients goals, based on the information the client provides. Planner needs to identify the shortcomings in the clients financial plan, whether he is properly secured, he has adequate insurance coverage etc. He must identify the monetary objectives at each stage of life and should develop a plan to cover contingencies in case of demise. The planner should go over the recommendations with the client to help the client understand them so that the client can make informed decisions. The planner should also listen to the clients concerns and revise the recommendations as appropriate.

Planner needs to decide the appropriate mix of investments. This all must be done in a written format and must be discussed with client so that he may understand remember and keep a copy and be accountable for his decisions.

Implementation The client and the planner should agree on how the recommendations will be carried out. The planner may carry out the recommendations or serve as the clients 'coach,' coordinating the whole process with the client and other professionals such as attorneys, accountants and or stockbrokers. Include an implementation schedule to ensure all of the actions have been completed. The client must know how all of this plan would be implemented and will affect his financial position; either planner must take his consent at each step of the implementation or must be entrusted by the client to take decisions on his behalf. Planner must draft a time line with which each activity must be completed.

Monitor and Review As discussed earlier coming back to the plan and reviewing is very necessary. The economic conditions keep changing so do the priorities and plans of an individual, thus the financial plan must be flexible enough for some adjustments to accommodate some new objectives, might be short term or intermediate term goals. The client and the planner should agree on who will monitor the clients progress towards their goals. If the planner is in charge of the process, he/she should report to the client periodically to review their situation and adjust the recommendations, if needed, as the clients life changes. Implement plan alterations if life circumstances alter such as, birth, illness, marriage, retirement etc. Monitoring must be continuous, it includes making sure that the portfolio made is doing what it was made to do. Reviewing must be periodically and the period must be discussed in advance like monthly, quarterly, half yearly or annually. It is recommended that review must be done at least annually to keep the clients position safe. Data Collection Type of Data to be collected This is the most important part of our financial planning process. It helps us determine what the needs of our client are and what steps are needed to bridge the gap between current financial position of client and the goals that he wants to achieve. A planner needs to collect the following details about the client. (This is a comprehensive list but not exhaustive)

Risk Profiling This step helps planner to identify the type of portfolio to be designed for the client. It helps a lot if planner is clear about risk taking ability of the client. Planner should know about the time horizon of the investments and the flexibility in goals of the client. Some useful information in this regard might be: Approx value of investment portfolio Percentage of total investment portfolio represent Intermediate and short term need Significant cash withdrawal/contribution of principal Taxable or partially taxable portfolio Investment time horizon Expectation of annual return from portfolio Expected inflation rate Level of concerns for different attributes of investment like Capital preservation Growth Low volatility Protection against inflation Current cash flow Aggressive growth etc Constraints in any class of Assets T bills, CD, etc Government bonds Corporate bonds Municipal bonds Foreign bonds High yield bonds Domestic equities S&P500 Domestic equities OTC Foreign equities Real estate What would be the percentage of short term and long term investment needs. Concerns with short term and long term volatility. Acceptance of time to recover if portfolio takes a dip in short term. If portfolio falls short would there be any possibility to change goals. Concern with volatility of stock/market. Overall risk level preference (risk versus return). Risk taking tendency (risk averse or risk taking). Surety in decision. Risk tendency in past. Experience in market. Psychometric test should be conducted to determine risk aversion tendency

Ideal Asset Allocation Ideal asset allotment can be different for different clients; all clients need cannot be met with same type of portfolio as each client has different short and long term needs, and different level of risk capacity, Some might be more flexible on goals than others. Security in investment is the most important feature that every client wants from a planner/advisor. Destimoney has devised a portfolio allocation plan which provides adequate security as well as flexibility, but this may not

apply to every clients need. The investment may be divided into three parts, 40% may go into equity, 50% into debt investment and rest 10% into alternative investments. The advantage of this is that if market takes a fall the debt investment will swell and compensate for equity loss. Moreover this ratio is kept constant by reviewing earnings each quarter to keep the edge sharp. But this allocation gives averagely 8% to 10% returns which may not suffice for different client needs. Thus separate plan has to be made for different clients. The more the return needed, the greater the risk has to be undertaken.

Goal Setting Today, individuals are living longer and healthier lives. However, ensuring that you can enjoy a longer and more active retirement makes it imperative to establish financial goals and plan ahead or a secure future. Rising health care costs, changes in employer-sponsored benefit plans and potential future changes in Social Security benefits can affect the quality of your retirement. Ironically, financial worries derive not necessarily from lack of money, but often from lack of planning. Solid financial planning can help take the uncertainty out of your financial future. The first part would be identifying clients short term and long term goals. Eg Short term goals (2 years or less) Pay debt in full. Establish a good credit reputation. Implement a disciplined savings and investment plan. Create an emergency fund of 36 months of basic living expenses. Purchase a vehicle. Purchase insurance coverages appropriate for your situation. Prepare and execute a will and power of attorney.

Intermediate term goals (2 to 5 years) Make the down payment on a home. Plan for a wedding. Increase income for additional goals or to reach your goals sooner. Prepare for the birth or adoption of a child. Provide for your advanced education. Long term goals (5 years or more) Establish and work toward your retirement goals. Provide for your childrens college education. Plan to support aging parents. Consider long-term health care. Maintain desired standard of living for your lifetime. Assess housing options and needs for retirement. Then next step would be to define a time line to these goals and prioritize them. Time line must be such that each goal must have somewhat definitive year or time horizon. And prioritize them as to which goals are more important than the other. Next we need to identify clients current net worth and the sources of income. And most important is to save regularly for these goals, might be a monthly saving budget etc has to be created and followed.

There are 4 components of planning let us see them one by one, Insurance Planning When it comes to life insurance, it is quite difficult to estimate the exact need of insurance. We have to understand the reason for taking any insurance and also to calculate the appropriate quantum of insurance. Insurance is an arrangement where a number of persons pay a small amount each to an insurance company which in turn assures to pay a specific amount if a particular event occurs and which results in a financial loss to the person who had bought the insurance. So if we have to get our car insured, we will pay the premium which will be around 34% of the value of the new car and the insurance company is bound to compensate for any financial loss to the insured article, in this case, the car. Once the contract period of one year is over and if there has been no loss to the insured article, the insurance company is not bound to pay any thing to the person who had taken the insurance. Now in the above example, we do not have to think much about the amount of insurance since it is already on records. A new car is insured depending on the price paid for it to the company and an old car is depreciated for every year of use. But the problem in life insurance is: how to determine the value of a human being? There are certain methods to determine it a few of them are :-

Income replacement value: in which we calculate the total income that would be lost in the case the bread provider of the home is unable to do so today. We apply simple mathematics to find out the replacement value: income per year X the number of years family would need to self sustain.

Need analysis: it calculates the need of family in future years in case the family income is abruptly stopped, in event of death or otherwise. That value becomes the insurance amount. But the main shortcoming of these two methods is that they do not take into account the future value of the requirement. This is overcome in the next method

Human Life Value: It is a calculation which is used worldwide for determining how much insurance should be taken for any human being. The loss which arises upon the death of a person can be of two types, financial and personal (emotional). The life insurance policies can only compensate for a financial loss which is calculated before issuing the policy and it is done by using a Human Life Value Calculator . The financial loss in case of the death of a working person is the loss of all his future earnings till the age of retirement minus the expenses he would have made on himself. The logic behind this is that if the person is not alive any more, the actual earning loss is of the money he would bring in after deducting his personal expenses. For example if a person is 28 years of age and wishes to retire at 60, the financial loss in case of his death would be 32 years of earning, and the simple way of calculating his human life value would be the total of all his future salaries. Let us assume his monthly salary is Rs 20,000 so a simple calculation would come to Rs 2,40,000 for every year of earning left i.e., 32 years and the total comes to Rs 76,80,000. But then we have to calculate not the absolute value of future earnings but the present value of future earnings. Present value of any money is less than the actual amount received in future since the value of money is decreasing every year due to the prices of all items going up gradually, a phenomenon called inflation. So assuming that the inflation is 5% per year (meaning thereby that the overall price increase is 5% in one year) if I am expecting to get Rs 1 Lakh next year, its present value is close to only Rs 95,000 and 1 Lakhs received two years from now will be worth only Rs 90,700. Applying the same logic to the above example, the present value of all his future earnings i.e. his Human Life Value is Rs 38.43 Lakhs which is just half of his total future earnings. Now if we go into detail, not only do we have to deduct his personal expenses while calculating his human life value, we also have to take into consideration the annual increase in personal expenditure due to inflation and also the annual increase in his earnings. In simple form HLV= Annual income X number of years family needs to self sustain + Loan liability (like home loan, vehicle loan etc) +Critical bills of children (e.g. Marriage, education etc) - Existing insurance cover - Saleable assets (e.g. equity, debt investments, mutual funds, PE funds and any property held as an investment etc ) = Insurance Cover Requirement. This cover requirement is the present Human Life value, we have to invest this in such a way that it takes care of the inflation and gives an inflated value at the end of the maturity period.

Retirement planning Retirement planning is another important phase of personal finance planning. Let's look at a married couple that is thinking about retirement planning.For this example, let's consider our married couple to be age 40, with twin children 2 years old, and a goal to retire at age 65.Of course, the need for a formal plan, as compared to an informal plan, is so much more important for retirement planning, than for a young person who is just setting out. The couple needs to consider the possibility of future college funding for the children, perhaps paying for a wedding, and other milestone events during the years. At the same time, the couple needs to consider having enough money for retirement and perhaps a vacation home. Of course the couple needs to include insurance needs for the both of them, an estate plan, a will, and taxable and tax-deferred savings vehicles. Often in this situation we will develop a formal, personal budgeting planas part of overall retirement planning. In that personal budget, we consider many itemssuch as current salaries, possible future inheritances, college costs, monthly budgets, inflation rates, and assumed rates of returns on investments. On several occasions, we have come across clients who had goals of retirement at a specific age, and we brought to their attention that their retirement planning goals and reality were not in sync with each other. For example, a couple might require annualized investment returns of 15% to achieve their retirement goals. In this case, we would stress to the couple that 15% is not a realistic long-term rate of return and that the risk involved (in attempting to get such a high, long-term return) can be very harmful to capital preservation. In a situation as this, we might suggest that the client postpone retirement for 3 more years, so that their other retirement planning goals could be achieved. Again, the importance of retirement planning is vital. We should encourage people to write down their retirement goals and revisit them every so often. Goals for retirement should be set at a realistic level. And, the goals should be reviewed, on at least an annual basis, by a competent retirement planning professional. This review process will allow for adjustments, changes, explanations, and perhaps the addition of some fresh new ideas.

Investment Planning Investment planning focuses on identifying effective investment strategies according to an investors risk appetite and financial goals. There is a wide variety of investment options, including shares, bonds, mutual funds, bank deposits, real estate and futures and options. Through investment planning, one can identify the most appropriate portfolio mix. Investment planning begins after you have taken into account clients current and expected income level and have laid down his/her financial goals. The important aspects of investment planning are: Capital growth versus regular income: Investors aiming at long-term goals focus on capital growth. A long-term investment will allow you to tide over rough times without changing clients plans. Stocks, mutual funds and real estate represent investment options for capital growth. On

the other hand, if client is investing to meet a short-term goal or to give a regular flow of funds to complement his present salary, you should opt for income investments. These investments generate a regular flow of income in the form of dividends and interest and include fixed-income investments, such as bonds and certificates of deposit (CDs). While making a selection, you should consider the tax implications and associated risks. Risk: Every investment option represents a unique risk-return trade-off. Typically, more risky investments offer higher returns in order to make it worthwhile for investors to take on the additional risk. Investment planning should take into account an investors risk appetite, which dependents on clients current income level, savings, lifestyle and responsibilities. Determine clients investment profile: This can be done by considering your risk appetite. There are mainly four types of investment profiles: Conservative (Low Risk Tolerance): Such portfolios comprise mainly (about 70%) of income assets, such as fixed interest and cash. Balanced (Average Risk Tolerance): This refers to portfolios with an equal emphasis on growth and income assets. Growth (High Risk Tolerance): Such portfolios comprise mainly (up to 80%) of growth investments, such as stocks and foreign currencies. High Growth or Aggressive (Very High Risk Tolerance): This refers to portfolios with more than 90% of the funds in growth investments. Review clients investment plan regularly: This helps in fine-tuning a portfolio to suit your current financial situation and a change in risk preference.

Tax Planning Tax Planning India is an application to reduce tax liability through the finest use of all accessible allowances, exclusions, deductions, exemptions, etc, to trim down income and/or capital profits. Salaried individuals in India are not fully aware of the tax planning exercise which is why they rush at the end of the tax-planning season and make investments to reduce their tax liability. This has negative effect on tax payable by them and they eventually end up paying more taxes than they are required to. Make full use of the entire Section 80C deduction - The maximum reduction available in Section 80C is Rs 100,000 and salaried citizens whose gross salary is Rs 250,000 or more are entitled to use the full Rs 100,000 limit. Reduction of tax liability beyond Section 80C deductions - If your salary surpasses Rs 250,000 pa and the reductions under Section 80C are not enough to minimize the general tax liability consider the following: Home loan: Interest payments of uptoRs 150,000 pa are entitled for reduction under Section 24.

Medical insurance: A deduction of uptoRs 15,000 pa under section 80D is applicable under this. Donations: Tax advantages under Section 80G entitle the donations to particular funds/institutions. Assert tax advantages on house rent paid - If HRA is not included in the salary structure then the salaried individuals can asset rent paid by them for residential lodging. This reduction is accessible under Section 80GG and is smallest amount of the following: 25% of the total earnings or, Rs 2,000 every month or, Surplus of housing charge paid over 10% of total salary Reorganize the salary - Reorganizing the salary and incorporating certain apparatus can help in the long run in minimizing the tax liability. In order to assert tax benefits salary reform is a more competent measure. The following can be included in an individual's salary structure: Food coupons can release up to Rs 60,000 per year from tax. Medical expenses which are compensated by the employer spare up to Rs 15,000 per year. House Rent Allowance (HRA) should be incorporated in the salaries of individuals who stay in rented houses Transport allowance discharge uptoRs 800 per month.

Go for a combined home loan - The primary reimbursement on a home loan is entitled for a reduction of up to Rs 100,000 pa and the interest rewarded is entitled for a reduction of up to Rs 150,000 pa. When a home loan is for a considerable amount then the interest and chief reimbursement surpass the allotted limit. A salaried individual can go for a combined joint home loan with his parent, spouse or sibling, to guarantee the best utilization of tax advantages.

Scope of Financial Planning in India The demand for Financial Planning professionals is growing day-by-day; various factors have catalyzed this demand first; growing income levels and affluence, according to McKinsey, nearly a million households in India will have assets of US$ 100,000 or more by 2010. Second, constant changes in the tax structure and desire of individuals to minimize their tax out-go by planning their investments. Third, rapid decline in interest rates have posed challenge to individuals to take higher risks to get better returns to beat the inflation. Fourth, increasing complexity of financial products and the financial services companies has led to cluttering of the market place and hence a need for professionals who are abreast with various products available and their risk-return profile. Lastly, growing willingness of middle class to seek financial advice from others and let others handle personal finances. It offers two major career paths: one, a corporate career and second, the option of starting ones own practice. A financial planner may join financial services company like mutual fund companies, insurance companies, PMS Providers, equity and broking houses, and banks especially in their private banking, wealth management and financial planning divisions etc. A Financial Planner can start on his own, if he/she has an entrepreneurial spirit but having a dignified name associated with you is always to an advantage both in terms of credibility and knowledge. Financial Planners are among the highest paid professionals viz. a viz. doctors, lawyers etc. in the developed countries. Financial Planners starting on their own may earn income in variety of ways: first, fees charged to the client based on an hourly rate, a flat rate per plan, a percentage of the value of the client's assets and/or income or a combination of these methods; second, commissions from sales of financial products like mutual funds, insurance, equity broking

services, bonds, Small Savings Schemes, loan disbursements etc. Or else it can be a combination of both fees and commissions based on clients comfort level and the planners operational systems. It is an ideal job for one with good understanding of finance, and who likes to interact & help people managing their finances.