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Investment Planning

  • Investment Planning

    Planning of finances is essential for each and every one, be it a school-going kid or a retired citizen. The more early you begin to manage your money the better it is. Let’s suppose you choose not to plan and keep spending as and when you like and one day you wish to purchase a house but then you cannot as you hardly have any savings left. This is what happens when you don’t plan and end up overspending.

    We tend to overspend when we do not understand what we really need. We keep on spending to fulfill all our requirements and we lose count of how much we spent. One should understand the difference between your needs and wants. Things like daily lunch, dinner and house rent payments are our needs which we will have to incur. But things like play stations, videogames and movies are always an option and can be done without. If even we do want to splurge on our wants we can set aside some of our savings over a time period and can buy important needs like vehicles, house, higher education etc when we have accumulated savings. This is what planning is all about, to plan, save and help us achieve our financial goals. When you start early you can always plan for your future financial goals and have the benefit of meeting them when you want to. This is because you have a longer time horizon to spread out your investments and manage your portfolio across time. Every school-going kid is taught from his childhood to count and save money for his future so that he can use them appropriately to finance his financial goals.

    This tutorial on financial planning presents various aspects of financial planning for college students. Financial planning is very important for every individual. If people understand its significance at a younger age, achieving your future financial goals becomes more convenient

  • Setting Your Goals
    When you set goals, you're defining your dreams for the future. Some of your goals maybe things that you want soon, like paying off your credit card debt or buying a new car. Other goals may be more distant. Do you want to buy or build a new home? Start your own business? Pay for college for your child or grandchild? Retire early?

    Your goals are the foundation of your financial plan because you need to know what you want to accomplish before you can begin Saving or investing. Once you’ve identified and prioritized your financial goals, you can develop a clear-cut savings or investment strategy that can help turn your dreams into reality.

    Smart Goals
    A critical first step in managing your finances is to be able to setup SMART financial objectives. Your goals have to be S (specific), M (measurable, motivated), R (realistic, resource-based), and T (time-bound, can be monitored). Many people make the mistake of setting general goals which, more often than not, will not materialize.

  • How To Achieve your Goals?

    The following excerpt is a conversation between a college student, Shantanu (17), who is pursuing his graduation in Finance, and his elder brother, Nikhil (35), who is working as a financial planner. The conversation gives an insight into planning and introduces the concept of financial planning.

    Table 1: Goals for Mr. Shantanu Age 21

  • Risk V/S Returns

    Every individual has their own risk taking capacity. Your risk-return profile is your level of risk tolerance. If you invest in a high risk business like a start up firm your risk would be high. There are three types of risk return profiles which you can fall under depending upon your source of funds and the investments you choose to make. They are:

    • Conservative i.e. you take minimal risks ensuring your funds are secure. You prefer investing in post office deposit schemes, bank fixed deposits, government bonds
    • Moderate i.e. you are willing to take some risks and prefer investing in mutual fund schemes
    • Aggressive i.e. you are willing to take high risks and prefer investing in equity, commodities markets and you may even be speculating for returns.
    There is an important investment principle which says the level of your returns depends on the level of risk you take. While you stay invested it is crucial you take necessary measures to manage your risk. Once you invest in any asset class you should monitor your investments and keep yourself updated about various market happenings to avoid any pitfalls. Always check the potential risks when quoted returns are unusually high.

  • The Power of Compounding

    Time is an influential factor when it comes to investments. Your returns depend upon the time you enter and exit. Compounding is a concept which when followed with dedication gives great rewards. However, it rewards better when savings are compounded over longer horizons. Compounding, in short, basically means earning interest on previously earned interest. Let us look at an example:

    If you set aside a sum of say Rs 5,000 every month from the age of 25, at a return interest rate of 10%, in 60 years you will have with you funds worth about Rs 1 crore (Rs 10 million) and more. However, if you start at 40 with the same amount and return rate of interest, the retirement fund will amount to only around Rs 33 lakh (Rs 3.3 million). Consider you invest Rs 100 for a period of 5 years.

    Notice here that the Rs 100 that you had invested will fetch you Rs 161.05 in 5 years in terms of fixed interest rate and similar results in terms of floating rate as well. Thus in 5 years you stand a chance of making around 60% return!!!

    Thus compounding is a tool that helps you make phenomenal growth in your investments over a period of time. Thus the more time you have, the more money you are capable of making and this is exactly why financial planning is so very important.

    Recurring deposits and SIPs can help you on this front, ease in payment of this regular investment amount through a direct debit facility or post-dated cheque can help you execute your compounding strategy.

  • Inflation Effects on Investment

    Inflation is rise in prices for goods and services. As the prices rise, lesser number of people can buy them. Let’s say the rate of petrol changes from Rs 40 to Rs 45, with no change in quality. Then the price difference indicates inflation.

    If you are earning returns of 10% over your investment of Rs 5000 which is Rs. 500 after a year and the inflation rate is 11% then you will end up giving your returns due to high inflation rates. Hence always ensure your returns are above the inflation rates. You should also understand the time value of money.

  • Inflation Effects on Investment

    SHANTANU: Yes. I know about the time value of money. I remember our Investment Professor telling us about this. He gave us an assignment to help us understand this. He asked us to find out the value of things in our house, which we use the most, and to list down their price or value today and their value 5 years back. We found out that when we compared their values, their value today was much higher.

    NIKHIL: This is because of the time value of money. As time passes you will realize that if 10 years back you could afford to purchase a full lunch for Rs 10, today you might afford to get few pieces of vegetables only. This means that the value of a thousand rupee note would be higher today than after five years. If you invest Rs 1000 today, at 5% per annum, then after a year you would receive Rs 1050. Thus Rs 1000 received today is equivalent to Rs 1050 received after a year. In order to protect one’s money from losing its value people invest their money. Now I guess you understand your rationale for investing in stock markets was wrong. What you also need to know is that borrowing and spending is not that easy. When you borrow you take up a liability that is you agree to repay and the amount you repay is the original amount you had borrowed along with an interest payment, which is levied upon the amount you borrow.

    Activity 2: List down the various items you often use and write down their value today and its value 10 years back. Compare the two values and observe how the value of money has changed over time.

    Example 1: Now if you want to buy a house after 20 years the amount of saving and investment required to be made every month at various rates of return to build up corpus of various amounts will be;

  • What are the measures I can take to minimize my risk?

    SHANTANU: Why do I need to invest in various asset vclasses? Rather if I invest in just one I don’t have to maintain a huge Portfolio. Also, managing just one asset class sounds a lot easier. I can also save on the portfolio manager’s fees too.

    NIKHIL: Well when it comes to investment one should remember That investing in various asset classes has its own advantage. When You distribute your investment across various asset classes, your risk Is balanced out across the portfolio. Let me give an example (Look at how Nikhil explains diversification in the following steps)

    NIKHIL: Suppose the amount available with you for investing is Rs 10, 000. You make investments in various assets. You invest Rs 3500 each in equity (which are shares or stock of a company) and bonds which may be government securities or corporate bonds. The rest of the funds are allocated to commodities, let’s say gold or silver, which is termed as bullion in commodity markets. Now, say the company’s shares in which you have invested have not performed well then there is a possibility that you may lose money on the capital invested in these shares. However, since you have invested in other asset classes the decrease in value of any one asset will be balanced by the gain in other asset classes. This is the benefit of diversification. Diversification thus reduces the risk of the portfolio. If two asset classes are correlated, it implies that when one asset class does not perform well the other asset also loses value depending upon the extent to which they are correlated. If they are positively correlated the direction of movement would be the same but if they are negatively correlated they would move in opposite directions. Investors park their funds in different asset classes with a motive to even out the losses in one asset with the gains in other asset classes. One should always analyze the fundamentals of the company before investing in its products. If one wishes to invest in equity markets, he or she may choose to do so by investing in blue chip companies which have good fundamentals rather than investing in companies whose business you do not understand.

  • Asset Allocation

    Every asset class has its own risks and returns. Equity investments are considered to be risky investments as they might lead to erosion of entire capital invested, whereas government bonds are considered to be risk free as you are confident that the government will not default on its interest payments. When it comes to choosing what investments would suit you, a financial planner will tell you about various asset classes and will help you allocate your funds appropriately. This is termed as asset allocation. In other words, now you would begin implementing your financial plan. Asset allocation is a technique for investing your money into various asset classes. Your planning consultant will suggest assets that would suit you according to your income and risk appetite. If your risk appetite is high, he would suggest risky assets, but if your risk appetite is low, then he would suggest less risky assets. While allocating your funds to various assets, it is important to see that you distribute your funds across various assets to benefit from diversification.

  • Savings V/S Investments

    Savings mean the funds you keep aside in safe custody like bank saving accounts. While investing on the other hand means to purchase various financial instruments which will pay you a return on some future date. The difference between savings and investment is that savings is simply idle cash while investments help your funds to grow over a period of time. We can meet our short term needs with our savings but to meet our long term goals we need to make investments. Savings help to protect our principal while investments help us earn returns over our investments

  • Loans V/S Investments

    People always are confused whether they should avail a loan or build investments to achieve their financial goal. Both of the options are different and should be availed appropriately. The following points are worth remembering:

    • It purely depends on your financial strength and other factors.
    • Credit card debts and personal loans are very costly
    • If you have a loan with a low interest rate and tax benefits as in the case of home loans, it is advantageous to go for a loan. If you have an investment plan where you can make good return, and then you may opt for investment.
    • You have to be sure that the investment is not risky and will not affect your family if you lose the money. For example, you are investing huge sums in share market, instead of closing the existing debts, that is too much risk.

  • Basics & Dangers of Credit Cards

    SHANTANU: I was thinking of getting a credit card? Should I?

    NIKHIL: People of your age fancy credit cards, they feel that having a credit card is like a status symbol because it gives them the ease of payment at any time but what they forget is the bill they need to pay later.


    • Credit cards come with a lot of additional charges like interest rates, service charges etc. in exchange for the credit offered by them. People forget to read these terms before purchasing a credit card.
    • Credit cards often tempt people to spend more even if they do not have money today as they have the comfort of paying back later.
    • People tend to purchase more credit cards so as to extend their income and later end up piling huge sums of debt
    • Credit cards offer a number of gifts like cash back, holiday vouchers and other coupons on making purchases through using credit cards.
    • Credit cards offer the benefit of traveling without cash.
    • Credit cards offer cash in advance and hence are easier to use.
    It is advised that one should learn to save and manage their funds wisely. Always try to cut back on your spending and rethink before you buy any items other than your basic needs. People at your age are very keen on electronic gadgets and wish to spend on the latest in town. But what you do not realize is these gadgets cost quite a lot on your pockets, squeezing your bank

    SHANTANU: I remember even I need to pay back my educational loan after I complete my graduation. I had completely forgotten about this.

    NIKHIL: I am glad you told me about your loan before you registered for a credit card. If you already have debt to repay why should you go for more debt? It will not help your financial position. You should instead make investments that will help you repay the loan and also support your needs for the future.

  • Investments Vehicles

    Indian markets offer a number of financial instruments like equities, debt, mutual funds, currencies and commodities in addition to other structured products. However their choice should be appropriate for the investor depending upon his or her risk profile and other investment horizon.

    For younger age group individuals since the investment horizon is long one can invest in products which offer capital appreciation or growth on investments. One should always check that he or she has allocated funds to spend on his or her immediate needs before investing.

  • Equity Products

    These are company sponsored instruments like shares or stocks of the company’s capital. These instruments offer the investor with shareholder rights where in investors can participate in the annual general meeting and have the right to vote. These products earn returns depending upon the profits made by the company from its operations. The returns may thus fluctuate depending upon the profitability of the company business. These products offer a number of benefits like Investors should understand the company business very well before investing. One can choose to invest in these instruments when they have a longer investment horizon.

  • Mutual Funds

    A mutual fund is generally a professionally managed pool of money from a group of Investors. These products may range from asset class specific portfolio or a mixed group of asset classes. But the choice of scheme or plan should depend upon your investment objective. Investing in mutual funds helps in diversifying your portfolio and thus reduces the risk in your portfolio. These products are considered to be ideal for beginners who lack the necessary expertise to manage their funds.

    Structure wise there are two types of mutual funds – Open ended and closed ended.

    OPEN ENDED SCHEME sells and repurchases units at all times. When fund sells, investor buys and when the investor redeems, the fund repurchases the units. Buying or redeeming is at a price based on the NAV (Net Asset Value).

    CLOSED ENDED SCHEME, after the offer closes, investors are not allowed to buy or redeem units from the fund. Closed end funds are listed on stock exchanges to enable investors to buy or sell units.

  • Insurance products

    Insurance is more a safety option than an option to invest. We buy insurance to protect
    ourselves from unforeseen events like death, accidents, theft of valuables etc. Some of the
    common insurance plans are:

    • Unit Linked Insurance Plans
    • Term / Term with Return of Premium Plans
    • Health Insurance
    • Personal Accident Insurance
    • Insurance cover for your Home / Car
    • Insurance cover to protect your family from liabilities
    • Travel insurance
    The value of the cover that you opt for should depend on your need for protection. Life insurance helps your dependent family members to cover daily expenditure in case of any sad demise. Medical insurance covers your hospitalization expenses in case of any critical illnesses. Within this category, products may have different payout structures and limits for various heads of expenditure. The hospitalization coverage may be reimbursement based plans or fixed benefit plans. These plans aim to cover the more frequent medical expenses.

  • Investments Strategies

    Systematic Investment Plans:

    Starting early is the key to financial planning; today you don’t necessarily need to inherit wealth from family to get wealthy. SIP or systematic investment plans are an excellent means by which you can start investing small, fixed sums of money at regular intervals, (commonly 1 month) most

  • The Concept of Rupee Cost Averaging

    SIP uses the concept of rupee cost averaging. Let me illustrate this with the help of an example:

    Rs 500 invested in January would fetch you 100 units compared to just 41 units in the month of April. Thus by investing the same amount of Rs 500 every month, you buy more units when the market is down and buy fewer units when the market is up. Thus lowering your average cost per unit. SIP acts as an excellent means by which you can save time and efforts in tracking the stock market movements.

  • How Not to Lose Money?

    Updating oneself with the current happenings is a must for every investor as he will then be aware of various events in the financial markets. In addition to this, there are various matters that need to be looked into to keep a check on your portfolio. If you do not then you will end up losing all your returns

    You should make a habit of analyzing your investments, valuing your investments and rebalancing your portfolio.

    If you are investing in mutual funds, you can keep a watch on the daily NAV (Net asset value) of the particular fund just like you watch the daily stock prices. You should also be aware of various financial ratios like profit margins, solvency ratios and liquidity ratios, which give you an idea of how the said company is in terms of profitability of its projects, share value and other factors. If you are investing in bonds you should be aware of the bond’s maturity, the rate of interest and other elements of the bond. If you are aware that the company has earlier defaulted on its interest payments on its borrowings, then it is better not to invest in securities of that firm. It is always safer to have a good know-how on valuation techniques like ratio analysis and investment pay-off.

    You should keep an eye on how the value of your investments changes depending upon fluctuations in the markets, economic issues and other factors.

    You can analyze your investments by looking at financial statements of the companies, see how they have performed in the past and if you expect that the company will perform well in future, then you can think of investing in that company. You should try to familiarize yourself with the financial statements of the company to understand how the company utilizes its finances. You should be wary of the publicity gimmicks that a company would put up to impress the masses. You should develop a knack to read through what the company writes up on its performance as a part of the results declared. Every investment you make is crucial hence you should monitor it from the time you invest into the investment product till the time you receive your proceeds from the investment. The time period from the beginning of the investment, that is when you pay out from your funds to buy an asset, till the time you receive your proceeds from the sale of the asset is termed as the Investment Life Cycle. Every investor should monitor his investments from the time of entry till the time of exit. Throughout the time horizon you stay invested you should maintain a check on your investments. The time horizon varies across investors. Some may enter and exit trades within few minutes, hours or within a day while some stay invested for years. But it is always advised that investors should remain invested for a longer time horizon to benefit from an investment. The longer you stay invested you attract less taxes also. But many do not do that in the hope of making quick profits.

  • Tax Planning

    Every individual should know about the tax implications on his or her investments. Every
    individual is charged income tax but the charges vary depending upon under which tax
    bracket he falls.

    However when it comes to investments you can get a tax rebate.

    Section 80C of the Income Tax Act allows you to get a rebate up to a limit of Rs. 1, 00, 000 which is irrespective of under which tax bracket you are. This covers investments like

    • Provident Fund
    • Public Provident Fund
    • Life insurance premium
    • Pension plans
    • Equity Linked Saving Schemes of mutual funds
    • Infrastructure bonds
    • National Savings Certificate
    Section 80D of the Income Tax Act also allows you to get a rebate over premium payments of medical insurance plans. This is over and out of the Rs 1 lakh limit offered by Section 80C. 80D provides a deduction up to Rs 30,000. For senior citizens, the deduction up to Rs. 20,000 is allowable. This deduction is available for premium paid on medical insurance for oneself, spouse, parents and children. It is also applicable to the cheques paid by proprietor firms.

    This act also exempts home loan payments. For self occupied properties, interest paid on a housing loan up to Rs 150,000 per year is exempt from tax. However, this is only applicable for a residence constructed within three financial years after the loan is taken and also the loan if taken after April 1, 1999.

  • How to Begin Investing?

    One can begin investing by fulfilling the following steps:-

    1. Investor must have the following documents

    • Personal Identification Proof – PAN Card, Passport Copy, Driving License copy
    • Address proof – Utility bills – Telephone bills, Electricity bills
    2. Investor should approach an intermediary which may be a broker, relationship manager etc.

    3. Investor is then required to fill up the KYC (Know your client) form and should furnish the necessary details. In addition, he would have to fill the broker-client agreement.

    4. Investors then need to open a demat account and a clearing bank account. For this, he or she would have to furnish his or her bank account details.

    Once these steps are completed an investor can begin trading in financial markets.

    In case of any disputes, investors can approach the following authorities –

    SEBI - Securities & Exchange Board of India

    MCA - Ministry of Corporate Affairs

    RBI - Reserve Bank of India

    MOF - Ministry of Finance

    FMC - Forward Market Commission

    IRDA - Insurance Regulatory and Development Authority
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