introduction to finance

Introduction to Finance

Expectation

Time value of money PV, FV Power of compounding NPV ( Net Present Value )

Planning retrials Comparing projects Short term investment plan Invest in stock

SIP

Tips on saving on Tax Invest in Gold and option Buying home vs renting Insurance

Term insurance Health insurance Top up plans Critical illness insurance

Agenda

Time Value of Money

Get a Rs. 60 lacs on your retirement by investing 3000 per month

What does 60 lacs mean for you after 30 years ?

Is 3000 per month reasonable ?

SMS Hangama

PV, helps us to answer those questions.

PV gives us the present value of the future money.

[ To Excel ]

Present Value (PV)

Opposite of PV

FV helps us understand what will be present money will be worth in the future.

Problem:“Pay 50000 now and get 500000 after 20 years”

What should be the return if your rate of return is 12% ?

[ Excel ]

Future Value (FV)

Compounding

“Imagine if you have two investment option, one earns 8% and the other one earns 9%. Let us say you put 1 lakh”

What would be the return in actual at the end of 20 years ?

Difference in return rate

Net Present Value (NPV)

“Does going for refinancing of your existing loan benefits you”

“Should you go for investing on land or apartment”

“Should you go for Used car vs New car”

Any two options can be compared from financial perspective using NPV

NPV helps solving these problems

What is NPV

Ct = net cash inflow during the period

Co= initial investment

r = discount rate, and

t = number of time periods

C 0

Problem

“A sales rep visits you and proposes to replace all of your fluorescent lamps with LEDs. The replacement costs you 10000. She claims that it will save you 50% of lighting electricity cost. Your lighting electricity cost as of now is Rs. 600 per month. The life of the lamp is 3 years and covered under warranty. Should you buy this or not.”

Assumptions: 1. Your electricity bill gives spit of lighting usage and other

usage ( for ease of calculation )2. The electricity cost does not change over next 3 years

Comparing Projects

Comparing Using NPV

Calculate the NPV of each of the affordable investment option and chose the one with Highest NPV.

[ Housing calculation example ]

Buying vs Renting

[Go to excel ]

Evaluating Worth of Asset

Problem

“You are planning to buy a property which is earning a rent of 20000 per month. The expected rental growth is 5% per year. The life of the property is 50 years. The land cost in the area is 18 lakhs, the land cost is expected to grow at 9% every year.”

Planning Retire

Key Questions

1. When do you want to retire?

2. How much money you may needed to lead retired life?

3. How much money I should start saving to get the corpus

[ To Excel ]

How and where to Invest

Real Estate

1. The asset is constant

2. Demand increases as the population grows.

3. Nothing can beat Real-Estate.

Stock Market

1. Stocks are considered as the next best alternative 2. Assuming you cannot invest your own business directly3. Risk is higher especially if you fail to pick the right stock. 4. Stock market has generated more than 12% of returns

which can beat the inflation5. Trust worthy advisors can be hired for a fee to pick stocks6. It is very similar to Real-estate investment, you should

hold for long term and not should not be panic for general market variations

7. Registering for SIP would give levy from market variance

Small Caps, Mid Caps, Large Caps

1. Small Caps gives higher return and imposes higher risk

2. Large Caps gives lower returns and are less risk

3. Investment can be made splitting in these segments– 20%, 50%, 30% respectively.

4. As you grow older, reduce small cap and invest in large caps

Equity Mutual Funds

1. This is to reduce the risk of wrong stock picking.

2. Fund managers will manage the fund.

3. A fund management fee will be there which is typically 0.5 – 2 % of the invested amount.

Liquid Mutual Funds

1. This is carefully managed fund for protecting the capital.

2. So, this can be treated as short term investment

3. Most % of investment would go to bond.

4. Returns are less

5. Better than FD as it can be withdrawn anytime whereas FD has fine involved for pre-matured withdrawal

Invest in Gold

1. Gold should not be treated as primary investment instrument

2. It helps at the time of higher inflation

3. 5% of your overall investment can be invested in Gold

4. Gold ETF or Gold Funds can be purchased.

5. Directly buying good is not a good option as it involves protecting the asset

Choosing Mutual Funds

1. Find the Expense Ratio. It should be lesser

2. Find the track record of fund managers

3. Find Entry/Exit load

Diversify

1. Split your investment into different instruments

2. An example split for Mid Age would be like this

Equity - 65%

Debt Fund - 30%

Gold - 05%

Tips on Saving Tax

1. You can pay rent to your Father/Mother if staying together

2. Buying house helps in saving tax.

3. Let out property would save more tax at the initial years

4. Interest paid when house is under construction can be claimed as loss for 5 consecutive years split equally

5. Long term gains in stock market ( 3 years ) does not incur any income-tax

Insurance

Term Insurance

1. Buy pure term insurance to at least cover your liabilities

2. Do not club insurance and investments. Keep them separate

3. At least 5 times your annual income + your liabilities should be your cover

Other Insurance

Health insurance

Top up plans

Critical illness insurance