Financial Planning

Fundamentals don’t change

Being rich = Money + time

Salary 50000

Investment 5000

Rate of return 14%

Years 30

Total investment 18,00,000

Portfolio value 27,785,278

Graph

₹ 0

₹ 10000000

₹ 20000000

₹ 30000000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Year Your age Total saved excluding interest Interest earned Total saved including interest

0 25 INR 0 INR 0 INR 01 26 INR 60,000 INR 4,550 INR 64,5502 27 INR 120,000 INR 18,137 INR 138,1373 28 INR 180,000 INR 42,026 INR 222,0264 29 INR 240,000 INR 77,660 INR 317,6605 30 INR 300,000 INR 126,682 INR 426,6826 31 INR 360,000 INR 190,968 INR 550,9687 32 INR 420,000 INR 272,653 INR 692,6538 33 INR 480,000 INR 374,175 INR 854,1759 34 INR 540,000 INR 498,309 INR 1,038,309

10 35 INR 600,000 INR 648,222 INR 1,248,22211 36 INR 660,000 INR 827,524 INR 1,487,52412 37 INR 720,000 INR 1,040,327 INR 1,760,32713 38 INR 780,000 INR 1,291,323 INR 2,071,32314 39 INR 840,000 INR 1,585,858 INR 2,425,85815 40 INR 900,000 INR 1,930,028 INR 2,830,02816 41 INR 960,000 INR 2,330,782 INR 3,290,78217 42 INR 1,020,000 INR 2,796,041 INR 3,816,04118 43 INR 1,080,000 INR 3,334,837 INR 4,414,83719 44 INR 1,140,000 INR 3,957,464 INR 5,097,46420 45 INR 1,200,000 INR 4,675,659 INR 5,875,65921 46 INR 1,260,000 INR 5,502,801 INR 6,762,80122 47 INR 1,320,000 INR 6,454,143 INR 7,774,14323 48 INR 1,380,000 INR 7,547,073 INR 8,927,07324 49 INR 1,440,000 INR 8,801,414 INR 10,241,41425 50 INR 1,500,000 INR 10,239,762 INR 11,739,76226 51 INR 1,560,000 INR 11,887,878 INR 13,447,87827 52 INR 1,620,000 INR 13,775,131 INR 15,395,13128 53 INR 1,680,000 INR 15,935,000 INR 17,615,00029 54 INR 1,740,000 INR 18,405,649 INR 20,145,64930 55 INR 1,800,000 INR 21,230,590 INR 23,030,590

“Compound interest is the 8th wonder of the world”“He who understands it, earns it ... he who doesn't ... pays it.”

Salary 50000

Investment 5000

Rate of return 14%

Years 20

Total investment 12,00,000

Portfolio value 65,81,731

Salary 50000

Investment 5000

Rate of return 14%

Years 10

Total investment 6,00,000

Portfolio value 13,10,456

Investing Early - example 1

vijay 1 crore30 yrs

Rs. 3246 p.m. @ 12%

11.7 lacs

Rs. 10871 p.m. @ 12%

20 yrs 26 lacsAjay

Its way too early for me to save

1 crore

Rs. 44636 p.m. @ 12%

10 yrs 26 lacsIts way too early for me to save

Sanjay 1 croreI will save when

I have less expenses

Investing Early - example 2

Ajay

vijay30 yrs

Rs. 1000 @ 12%

Rs. 1500 @ 12%

10 yrs 20 yrs

36 lacs3.6 lacs

54 lacs1.8 lacs

Investing Early - example 3

Rs. X for 30 years at 12%

15 yrs

14%

86%

Investing early lowers your burden later

Investing Early

No. of years of contribution at the end of 30 yr. period

% of corpus generated Total corpus

0 100.0% 1.76 crores

5 97.6% 1.72 crores

10 93.4% 1.65 crores

15 85.7% 1.51 crores

20 71.7% 1.26 crores

25 46.2% 0.81 crores

It doesn’t matter much if you don’t invest in later years

Rs. 5000 @ 12%

Investing Early - example 4

26 yrs old 30 yrs 3.5 crore

1 5000

10 yrs

15000

10 yrs

50000

10 yrs

2 10000

30 yrs

314000

10 yrs 20 yrs

no investment

Investing Early

investments made in early years contribute the most

Investing Early

Years without contribution at the end of tenure

Amount required per month

% increase in investment to reach the same corpus

0 5000 0.00%

5 5120 2.41%

10 5350 7.01%

15 5830 16.6%

20 6980 39.6%

25 10830 116%

29 43100 762%

Save a few more bucks early

SIP of Rs. 1000 p.m.

Last few years contribute the most

Choice of investment asset matters a lot

How to start investing?

life insurance ≠ investment

ISSUES WITH ULIPs

AVOID THESE

ULIPs

Whole life insurance plans

Money back insurance plans

Pension/retirement plans

Child future plans

Any insurance cum investment product

online term insurance

Things to consider

Current liabilities

Future goals of your dependents

provide regular day-to-day expenses

tips while buying

buy before your next birthday

try to diversify

buy early in life for longer tenure

BEST ASSET CLASS?

INVESTING

Ultra-short Time Horizon (< 1 Year)- Cash on Hand- Bank Savings Accounts- Liquid & Ultra-short term debt funds

Short Time Horizon ( 1- 3 Years)- Short term Debt Mutual Funds - Bank Fixed Deposits

Medium Time Horizon (3-5 Years)- Bank Fixed Deposits- Debt Mutual Funds- Medium term Gilt Funds

Long Time Horizon (> 5 Years)- Gold - Equity (Stocks)- Equity Mutual Funds- Real Estate

Different Asset Classes

Asset type Returns post inflation Taxable Pros Cons

Cash -6% No Liquid. Safe No growth

Saving a/c -2 to 0% Above 10,000 Liquid. Safe. No growth. Taxable

Fixed deposit 1 - 3% Above 10,000 Hedge against inflation. Safe Lock-in. Taxable

PPF 2.6% No Extremely safe 7 years lock-in, partial withdrawal

KVP or NSC 2.16% No Safe 8.7 or 6 years lock-in. Offline

Debt MFs 1-3% Yes Liquid. Better than FD. No growth. Taxable

Gold -1 to 4% No. Gold ETF - Yes As good as liquid. Safe. Non taxable.

Returns only in long term

Real estate 6-9% Yes High returns. Non-liquid. Fixed. Maintenance costs. Taxes.

Equity 8-9% > 1 yr. - No Liquid. Best for long term wealth creation. Unsafe in short run

Is Equity really risky?

When you invest in Equity, you are a partner

Learning from history

Learning from history

Learning from history

Learning from history

Investment tenure 1 yr 2 yrs 3 yrs 5 yrs 7 yrs 10 yrs 15 yrs

Total positive instances 22 20 24 23 23 21 16

Total instance 30 29 28 26 24 21 16

% positive instance 73% 69% 86% 88% 96% 100% 100%

Learning from history

0%

25.00%

50.00%

75.00%

100.00%

1 yr 2 yrs 3 yrs 5 yrs 7 yrs 10 yrs 15 yrs

% positive instance

Learning from history

Learning from history

Investment tenure 1 yr 2 yrs 3 yrs 5 yrs 7 yrs 10 yrs 15 yrs

Best return 101% 59% 51% 43% 37% 31% 26%

Worst return -51% -22% -14% -2% -3% 3% 7%

Learning from history

-75.0%

-37.5%

0%

37.5%

75.0%

112.5%

150.0%

1 yr 2 yrs 3 yrs 5 yrs 7 yrs 10 yrs 15 yrs

Best return Worst return

Learning from history

Tenure 1 yr 2 yrs 3 yrs 5 yrs 7 yrs 10 yrs 15 yrs

Best return 101% 59% 51% 43% 37% 31% 26%

Average of 5 best 85% 52% 46% 39% 30% 27% 22%

Worst return -51% -22% -14% -2% -3% 3% 7%

Average of 5 worst -27% -13% -3% 1% 3% 6% 12%

Equity is risky in the short run and quite safe in the long run

Debt is safe in the short run and quite risky in the long run

Real estate vs. Equity

Misconceptions related to Real estate

Real estate prices always rise

It gives better returns than any other form of asset

Reality vs. Equity

Long term real estate returns are 14% CAGR (valid for Mumbai). If you add rental yield of 2-3%, then the total returns are 16-17% CAGR. 20% tax after indexation

The Sensex returned 18% from base 100 in 1978.If you add dividend yield of 1.5%, then you get 19.5% CAGR

5000 p.m. 17% 19.5%

20 yrs 84 lacs 1.44 cr

30 yrs 4.2 cr 10.2 cr

Investing in equity

Should you invest in stocks directly?

How to go about investing in equity?

Invest in Equity MFs

Invest via SIP

Don’t be a MF collector

Investing in MFs

2 Large cap funds1 Large + Mid cap fund1 Equity tax planning1 debt fund

Funds Top stock exposure

Top sector exposure

Top 3 sector exposure Top 10 stocks Large cap +

Mid cap Large Cap

2 funds 5.52% 24.5% 52.8% 37% 96% money in 74 stocks

85% in 49 stocks

5 funds 4.67% 21.07% 46% 34% 97% money in 111 stocks

81% in 59 stocks

10 funds 5.7% 21% 46.5% 37% 98% money in 131 stocks

80% in 60 stocks

valueresearchonline.com

Choosing an MF

Rs. 100,000 at 12%

Expense ratio is important in long run

Buying an MF

- KYC compliance (PAN, POI, POA)

- fundsindia.com- Approach the AMC- Open a Demat account

Few tips about saving and investing

Start with goals in mind

Short term - upgrade to sedan in 2 years

Long term - start a restaurant after 20 years

Save first spend later

Automate

Automate

Salary account Retirement

Setup SIP in mutual fund

10%Future goals

30%

Goal 1 Goal 2

Goal 3

Expense account

60%

All your regular expenses

Don’ts

Get into wrong products for Tax saving

Keep paying for endowment/ULIPs

Not have emergency funds

Buy stocks on the basis of tips given by others

Shop for things you don’t need

If you were to take away single thing from this presentation

Start investing early

Two sites you should refer to:

www.jagoinvestor.com/archives www.investmentyogi.com

Example taken from this book Jagoinvestor - Changing your relationship with money