wealth mgt 03
TRANSCRIPT
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Economic cycles in WM
The level of economic activity changes
constantly giving rise to various economic
cycles also known as business cycles. An
economic cycle goes through following stages:
A) expansion
B) Recession economic activity slow down
C) Depression activity comes to stand still
D) recovery
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Role of Financial statements
Financial goals can be achieved only afterthoroughly understanding one`s currentfinancial condition and developing financial
plans accordingly. Balance sheet
P & L account
Budgets/Forecast Lets prepare a Financial P&L and B/s for an
individual
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Balance sheet
Liquid Assets cash, savings account, FDs, MF.
Investments Real estate, bonds, stocks
Real property SOP, LOP
Personal property- Vehicles, Jewelery, Artwork,etc.
Current liabilities utilities, rent, medical bills,
bank credit, credit card balance Long term liabilities Mortgage, Loans,
educations loans, etc.
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Analyze the following:
Asset 2011 2010 2009 Liabilities 2011 2010 2009
Cash 30000 30000 50000 Utilities 60000 50000 45000
savings a/c 40000 50000 50000 Rent 85000 80000 75000
FDs 100000 Medical 25000 18000 15000
Real estate 200000 300000 300000 bank credit 50000
MF 20000 5000 edu loans 120000 150000 180000
Mortgage 50000 70000 90000
Stocks 110000 5000 Net worth 210000 122000 95000
Jewellery 50000 50000 50000
Vehicles 50000 50000 50000
Total 600000 490000 500000 600000 490000 500000
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Income and expenditure
Particulars 2011 2010 2009Salary 250000 225000 200000
Bonus 20000
commission
Pension and annuity
Investment income 10000 5000
Total income 280000 230000 200000
ExpenseHousing 90000 80000 75000
Utilities 60000 50000 45000
Food 30000 25000 20000
Transportation 6000 4000 2000
Medical 4000 3000 1000
Clothing 6000 3000 2000
Insurance 8000 8000 8000
Taxes 3000 2500 2500
Recreation 5000 4000 1000
Personal care 5000 4500 3000
Edu loans 30000 30000 0
TOTAL EXPENSES 247000 214000 159500
Cash surplus 33000 16000 40500
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How to collect personal financial data
for WM
Types of records:
Bank accounts
Credit card statements Taxes
Property documents
Insurance documents
Investment and retirement accounts
Trusts and wills
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Managing taxes
While doing FP/WM we need to know the updated taxlaws.
Income tax
Wealth tax More importantly the tax benefits available:
LTCG tax free, Dividend tax free, Investments undersec 80C of I-tax act.
Benefits on transfer of house property, etc.
& Clubbing provisions
Gift tax provisions
Also, TAX planning as an HUF
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Managing cash and savings
Role of CM: cash mgt deals with day to day
managing ones cash and near cash resources
in order to achieve ones long term objectives
and goals.
Establishing a proper savings program is
another aspect of cash management and
personal financial planning.
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Financial services information
Financial Institutions in India:
RBI
Commercial Banks
Scheduled banks Non-scheduled banks NBFCs
Credit rating agencies CRISIL,ICRA,CARE
Merchant banks equity issues, loan syndica.
Mutual Funds
Insurance companies LIC and General
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Savings program
FP dictates that a certain portion of the assets should be kept liquid
However, idle cash should also not exist
We look at INTERERT RATES
Simple interest 2000 * 8 /100 *1 year = 160
Effective rate of interest is the annual rate of return earned in the timeperiod when the funds are held
ERR = Amount of interest / Amount of money invested
160 / 2000 = 8%
Compounding = Cal. FV
FV = PV(1+r)^n.
3000 @ 6% for 5 years = 4014 3000 * (1.06)^5 = 4014
3000 * 1.338 = 4014
Where 1.338 is the FV interest factor for 5 years and 6%
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Channels of savings
T-bill:
14 day t-bill
91 day t-bill
Etc. Yield on t-bill = {F/P 1 } x 365/D where
F = face value, P = price of t-bill, D = number of days tomaturity
Example: the face value of a 364 day bill is Rs. 100, Ifthe purchase price is Rs. 88.24 calculate the yield.
=> 100/88 -1 x 365/364 = 13.36%
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CoDeposit
The next lowest risk asset is CoD, after T-bill issued by banks andfinancial institutions.
The secondary market of CoDs does not have a depth buy theinstrument is highly secured
CoDs are available to individuals, compnaies, trusts, etc. FV =500,000 minimum.
Return on CoD (disc rate) = F/ {1+[I*N]/365*100}
F = face value, I = discount rate, N = days to maturity
Example: if the face value is 100,000 and effective interestrate is 6%. The issuance period is 90 days. Calculate the rateof return for the CoD.
100000/ {1+ [0.06*90/365]} = 98522.17
Therefore, yield = 100000-98522.17 / 100000 = 1.47%
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Automobile purchase planning
Possessing an automobile has become a necessity for today'sgeneration.
Before buying a car, it is essential to know what one can afford.Whether purchase is outright or is it going to be financed by loan
What would be the regular cash outflow
Operating costs of automobile installment, insurance, license fee,fuel and oil and repairs and maintenance costs.
Whether brand new or second hand
Features of car
Reliability and warranties
Purchase of car
Price negotiation
Financing schemes
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EMI plan of buying a Car
Types of Finance schemes
Margin money outflow
Advance EMI
EMI
Residual value
Step up scheme Refinancing
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Apartments
Are generally the most common form of
housing facility available today
Apartments are available for ownership andalso for renting
Motives for buying a house
Tax shelter Inflation hedge
Retirement home
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Apartment
Cost of ownership
Down payment
Mortgage fees
Closing costs
Mortgage payments
Property and Taxes and insurance Maintenance and operating costs
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Home affordability analysis
Amount of annual income
Monthly income
Lenders affordability ratio
Maximum loan payment
Average Interest Rate
Funds available for making a down payment
Maximum purchase price
Repayment charges if any
Home buying process:
http://www.loanscalculator.org/
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House buying decision
Eligibility criteria
Comparative analysis of different LOANS.
Compare EMI
Compare Interest rate fixed/floating/teaserloan
Prepayment charges
Quality of service
Loan processing duration
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Rental contract
House taken on rental basis
Cost of rent brokerage, etc.
Initial deposit
Rent outflow per month
Closing costs if any damages, etc.
Renewal costs if any
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Documentation
KYC norms
Salary slip
Form 16
IT returns past years
PAN card
Residential proof ,etc.