Financial Planning
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Financial Planning
Presented by Sundar Sankaran, Director Advantage-India Consulting Pvt. Ltd April 2002 D1
Advantage-India Consulting Pvt. Ltd
PRESENTATION STRUCTURE ¾Concept • Life cycle & Wealth cycle • Financial Planning Strategies • Model Portfolios D2
Advantage-India Consulting Pvt. Ltd
Concept of FP Financial Planning is an exercise aimed to ensure availability of right amount of money at the right time to meet the individual’s financial goals D3
Advantage-India Consulting Pvt. Ltd
Concept of FP Financial Goals refer to the dreams of the investor articulated in financial terms. Each dream implies a purpose, and a schedule of funds requirements for realising the purpose D4
Advantage-India Consulting Pvt. Ltd
Concept of FP Asset Allocation refers to the distribution of the investor’s wealth between different asset classes (gold, property, equity, debt etc.) D5
Advantage-India Consulting Pvt. Ltd
Concept of FP Portfolio Re-balancing is the process of changing the investor’s asset allocation D6
Advantage-India Consulting Pvt. Ltd
Concept of FP Risk Tolerance / Risk Preference refers to the appetite of the investor for investment risk viz. risk of loss D7
Advantage-India Consulting Pvt. Ltd
Concept of FP Financial Plan Is a road map, a blue print that lists the investors’ financial goals and outlines a strategy for realising them D8
Advantage-India Consulting Pvt. Ltd
Concept of FP • Steps to FP, recommended by Certified Financial Planner – Board of Standards (USA) – Define the Client – Planner relationship – Define Client goals – Evaluate Client financial status – Recommend a financial plan – Implement the financial plan – Monitor the financial plan D9
Advantage-India Consulting Pvt. Ltd
Concept of FP • Financial plan would depend on the prospect’s – Financial goals – Current wealth – Likely future income – Preferred asset allocation – Risk Tolerance – Tax D 10
Advantage-India Consulting Pvt. Ltd
Quality of the Financial Plan is a function of how much information the prospect shares, which in turn depends on comfort that the planner inspires D 11
Advantage-India Consulting Pvt. Ltd
PRESENTATION STRUCTURE • Concept ¾Life cycle & Wealth cycle • Financial Planning Strategies • Model Portfolios D 12
Advantage-India Consulting Pvt. Ltd
Life Cycle & Wealth Cycle • Life Cycle
Childhood Young - unmarried Young – married – without children Young – married – with young children Married with older children Impending Retirement Retirement D 13
Advantage-India Consulting Pvt. Ltd
Life Cycle & Wealth Cycle • Wealth Cycle
Accumulation / Sowing Transition Reaping / Harvesting Inter-generation transfer Windfall / Sudden-wealth D 14
Advantage-India Consulting Pvt. Ltd
Life Cycle & Wealth Cycle Goal oriented investing is an approach where each financial goal is viewed in isolation. The alternative approach is to view all financial goals together against the background of the wealth cycle stage. D 15
Advantage-India Consulting Pvt. Ltd
PRESENTATION STRUCTURE • Concept • Life cycle & Wealth cycle ¾Financial Planning Strategies • Model Portfolios D 16
Advantage-India Consulting Pvt. Ltd
Financial Planning Strategies • Compounding • SIP / SWP / STP – Rupee Cost Averaging – Value Averaging – Jacob’s approach
(mix of Aggressive growth fund & money market fund) D 17
Advantage-India Consulting Pvt. Ltd
Financial Planning Strategies • Strategic Asset Allocation • Tactical Asset Allocation • Fixed Asset Allocation • Flexible Asset Allocation D 18
Advantage-India Consulting Pvt. Ltd
Financial Planning Strategies Review of Investment Options Return Equity FI Bonds Co. Debentures Co. FDs Bank Deposits PPF Life Insurance Gold Real Estate Mutual Funds
Safety
High
Low
Moderate Moderate
Volatility Liquidity Convenience High
High
High Moderate Moderate Moderate Moderate Low
Moderate High Low
Moderate
Low
Low
Low
Moderate
Low
High
Low
High
High
Moderate Low
High High
Low Low
Moderate Low
High Moderate
Moderate
High
High
Moderate
High
Low
Low
High
High
Moderate
High
High
Moderate Moderate
Gold
Source - AMFI Mutual Fund Test - Workbook (2001) D 19
Advantage-India Consulting Pvt. Ltd
Financial Planning Strategies Risk Hierarchy of Mutual Fund Schemes Money Mkt. Funds
Gilt Funds
Debt Funds
Hybrid Funds
Equity Funds Aggressive Growth Funds
Flexible Asset Allocation Funds R I S K
L E V E L
Growth Funds High Yield Debt Funds Diversified Equity Funds Index Funds Value Funds Focussed Debt Funds Growth and Income Funds Equity Income Funds Balanced Funds Diversified Debt Funds Gilt Funds Money Mkt. Funds Source - AMFI Mutual Fund Test - Workbook (2001)
D 20
Advantage-India Consulting Pvt. Ltd
Financial Planning Strategies Jacob’s recommendation – • Low Risk Portfolio – 50% Government Securities Funds; 50% Money Market Funds • Moderate Risk Portfolio – 40% Growth & Income Funds + 30% Govt. Bond Funds + 20% Growth Funds + 10% Index Funds • High Risk Portfolio – 25% Aggressive Growth Funds + 25% International Funds + 25% Sector Funds + 15% High Yield Bond Funds + 10% Gold Funds D 21
Advantage-India Consulting Pvt. Ltd
Financial Planning Strategies Fund Selection Parameters – • Pedigree • Track Record – Past performance • Investor servicing record • Size • Expense Ratios • Investor Concentration • Investment Concentration • Risk D 22
Advantage-India Consulting Pvt. Ltd
Financial Planning Strategies Risk Measures – • Standard Deviation • Volatility • Beta Co-efficient • Duration • Ex-Marks / R-Squared D 23
Advantage-India Consulting Pvt. Ltd
Financial Planning Strategies Risk Adjusted Returns – • Sharpe Ratio • Treynor Ratio D 24
Advantage-India Consulting Pvt. Ltd
PRESENTATION STRUCTURE • Concept • Life cycle & Wealth cycle • Financial Planning Strategies ¾Model Portfolios D 25
Advantage-India Consulting Pvt. Ltd
Model Portfolios Investor in accumulation phase Diversified equity, sector & balanced Funds 65 – 80% Income & Gilt Funds
15 – 30%
Liquid funds & Bank Deposits
5%
Source – AMFI Mutual Fund Test – Workbook (2001) D 26
Advantage-India Consulting Pvt. Ltd
Model Portfolios Investor in distribution phase Diversified equity & balanced Funds
15 – 30%
Income Funds
65 – 80%
Cash Funds
5%
Source – AMFI Mutual Fund Test – Workbook (2001) D 27
Advantage-India Consulting Pvt. Ltd
Give the investor a financial plan that will help realise the financial goals within the accepted risk tolerance. If financial goals cannot be realised mention it upfront to the prospect. Monitor the progress to ensure that the financial goals continue to be Realisable. D 28
Advantage-India Consulting Pvt. Ltd
Presented by Sundar Sankaran, Director Advantage-India Consulting Pvt. Ltd April 2002 D1
Advantage-India Consulting Pvt. Ltd
PRESENTATION STRUCTURE ¾Concept • Life cycle & Wealth cycle • Financial Planning Strategies • Model Portfolios D2
Advantage-India Consulting Pvt. Ltd
Concept of FP Financial Planning is an exercise aimed to ensure availability of right amount of money at the right time to meet the individual’s financial goals D3
Advantage-India Consulting Pvt. Ltd
Concept of FP Financial Goals refer to the dreams of the investor articulated in financial terms. Each dream implies a purpose, and a schedule of funds requirements for realising the purpose D4
Advantage-India Consulting Pvt. Ltd
Concept of FP Asset Allocation refers to the distribution of the investor’s wealth between different asset classes (gold, property, equity, debt etc.) D5
Advantage-India Consulting Pvt. Ltd
Concept of FP Portfolio Re-balancing is the process of changing the investor’s asset allocation D6
Advantage-India Consulting Pvt. Ltd
Concept of FP Risk Tolerance / Risk Preference refers to the appetite of the investor for investment risk viz. risk of loss D7
Advantage-India Consulting Pvt. Ltd
Concept of FP Financial Plan Is a road map, a blue print that lists the investors’ financial goals and outlines a strategy for realising them D8
Advantage-India Consulting Pvt. Ltd
Concept of FP • Steps to FP, recommended by Certified Financial Planner – Board of Standards (USA) – Define the Client – Planner relationship – Define Client goals – Evaluate Client financial status – Recommend a financial plan – Implement the financial plan – Monitor the financial plan D9
Advantage-India Consulting Pvt. Ltd
Concept of FP • Financial plan would depend on the prospect’s – Financial goals – Current wealth – Likely future income – Preferred asset allocation – Risk Tolerance – Tax D 10
Advantage-India Consulting Pvt. Ltd
Quality of the Financial Plan is a function of how much information the prospect shares, which in turn depends on comfort that the planner inspires D 11
Advantage-India Consulting Pvt. Ltd
PRESENTATION STRUCTURE • Concept ¾Life cycle & Wealth cycle • Financial Planning Strategies • Model Portfolios D 12
Advantage-India Consulting Pvt. Ltd
Life Cycle & Wealth Cycle • Life Cycle
Childhood Young - unmarried Young – married – without children Young – married – with young children Married with older children Impending Retirement Retirement D 13
Advantage-India Consulting Pvt. Ltd
Life Cycle & Wealth Cycle • Wealth Cycle
Accumulation / Sowing Transition Reaping / Harvesting Inter-generation transfer Windfall / Sudden-wealth D 14
Advantage-India Consulting Pvt. Ltd
Life Cycle & Wealth Cycle Goal oriented investing is an approach where each financial goal is viewed in isolation. The alternative approach is to view all financial goals together against the background of the wealth cycle stage. D 15
Advantage-India Consulting Pvt. Ltd
PRESENTATION STRUCTURE • Concept • Life cycle & Wealth cycle ¾Financial Planning Strategies • Model Portfolios D 16
Advantage-India Consulting Pvt. Ltd
Financial Planning Strategies • Compounding • SIP / SWP / STP – Rupee Cost Averaging – Value Averaging – Jacob’s approach
(mix of Aggressive growth fund & money market fund) D 17
Advantage-India Consulting Pvt. Ltd
Financial Planning Strategies • Strategic Asset Allocation • Tactical Asset Allocation • Fixed Asset Allocation • Flexible Asset Allocation D 18
Advantage-India Consulting Pvt. Ltd
Financial Planning Strategies Review of Investment Options Return Equity FI Bonds Co. Debentures Co. FDs Bank Deposits PPF Life Insurance Gold Real Estate Mutual Funds
Safety
High
Low
Moderate Moderate
Volatility Liquidity Convenience High
High
High Moderate Moderate Moderate Moderate Low
Moderate High Low
Moderate
Low
Low
Low
Moderate
Low
High
Low
High
High
Moderate Low
High High
Low Low
Moderate Low
High Moderate
Moderate
High
High
Moderate
High
Low
Low
High
High
Moderate
High
High
Moderate Moderate
Gold
Source - AMFI Mutual Fund Test - Workbook (2001) D 19
Advantage-India Consulting Pvt. Ltd
Financial Planning Strategies Risk Hierarchy of Mutual Fund Schemes Money Mkt. Funds
Gilt Funds
Debt Funds
Hybrid Funds
Equity Funds Aggressive Growth Funds
Flexible Asset Allocation Funds R I S K
L E V E L
Growth Funds High Yield Debt Funds Diversified Equity Funds Index Funds Value Funds Focussed Debt Funds Growth and Income Funds Equity Income Funds Balanced Funds Diversified Debt Funds Gilt Funds Money Mkt. Funds Source - AMFI Mutual Fund Test - Workbook (2001)
D 20
Advantage-India Consulting Pvt. Ltd
Financial Planning Strategies Jacob’s recommendation – • Low Risk Portfolio – 50% Government Securities Funds; 50% Money Market Funds • Moderate Risk Portfolio – 40% Growth & Income Funds + 30% Govt. Bond Funds + 20% Growth Funds + 10% Index Funds • High Risk Portfolio – 25% Aggressive Growth Funds + 25% International Funds + 25% Sector Funds + 15% High Yield Bond Funds + 10% Gold Funds D 21
Advantage-India Consulting Pvt. Ltd
Financial Planning Strategies Fund Selection Parameters – • Pedigree • Track Record – Past performance • Investor servicing record • Size • Expense Ratios • Investor Concentration • Investment Concentration • Risk D 22
Advantage-India Consulting Pvt. Ltd
Financial Planning Strategies Risk Measures – • Standard Deviation • Volatility • Beta Co-efficient • Duration • Ex-Marks / R-Squared D 23
Advantage-India Consulting Pvt. Ltd
Financial Planning Strategies Risk Adjusted Returns – • Sharpe Ratio • Treynor Ratio D 24
Advantage-India Consulting Pvt. Ltd
PRESENTATION STRUCTURE • Concept • Life cycle & Wealth cycle • Financial Planning Strategies ¾Model Portfolios D 25
Advantage-India Consulting Pvt. Ltd
Model Portfolios Investor in accumulation phase Diversified equity, sector & balanced Funds 65 – 80% Income & Gilt Funds
15 – 30%
Liquid funds & Bank Deposits
5%
Source – AMFI Mutual Fund Test – Workbook (2001) D 26
Advantage-India Consulting Pvt. Ltd
Model Portfolios Investor in distribution phase Diversified equity & balanced Funds
15 – 30%
Income Funds
65 – 80%
Cash Funds
5%
Source – AMFI Mutual Fund Test – Workbook (2001) D 27
Advantage-India Consulting Pvt. Ltd
Give the investor a financial plan that will help realise the financial goals within the accepted risk tolerance. If financial goals cannot be realised mention it upfront to the prospect. Monitor the progress to ensure that the financial goals continue to be Realisable. D 28
Advantage-India Consulting Pvt. Ltd
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