Financial Planning and Its Relevance in Indian Families-heena Di

8/4/2019 Financial Planning and Its Relevance in Indian Families-heena Di

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Study on

Financial planning&

Its relevance in Indian familiesAt

Prepared in partial fulfillment of the degree of

Masters of Business Administration (M.B.A)2007-09

Submitted by - Jaiparvesh

University enroll - 0591483907

MAHARAJA AGRASEN INSTITUTE OF TECHNOLOGY

Guru Gobind Singh Indraprastha University

Psp Area, Sector-22 Rohini, Delhi- 110085, Ph : 25489493-94

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CERTIFICATION

This is to certify that the project entitled Financial planning and its relevance in Indian family

made by Priya Bhatia has been completed under my guidance and I am satisfied with the work

carried out by her. The project is an original work, has not been submitted earlier to any other

institution. The project was successfully carried out for the partial fulfillment of MBA from

MAHARAJA AGRASEN INSTITUTE OF TECHNOLOGY ROHINI DELHI affiliated to

GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY, during the academic year 2007

-09.

Mrs. Mona Kawatra.Project Guide

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DECLARATION

I here by declare that the project work entitled FINANCIAL PLANNING AND ITS

RELEVANCE IN INDIAN FAMILIES, is an authentic work carried out by me under the

guidance of administration and this has not been submitted anywhere else for the award of any

degree/diploma.

Priya Bhatia.

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ACKNOWLEDGEMENT

Acknowledgement is an individuals feeling towards many people who directly or indirectlystimulated and influenced ones intellectual development in ones student and professional life.

This formal statement of acknowledgement will hardly meet the ends of justice in the matter ofexpression of my sense of gratitude and obligation to all those who helped me in the completionof this project.

With great reverence I would like to express my profound gratitude to my project guide Mrs.Mona Kawatra for her enormous help and guidance on the topic. A special thanks and gratitudeto Mr. Ashwini Kumar Sharma, Relationship Manager (Rajendra Place Branch,way2wealth) for being a mentor and for his unceasing interest, critical evaluation, learnedguidance, constant inspiration and immense encouragement there by giving me the chance tolook more closely into the field of my interest, during the period of summer training.

My sincere thanks also extend to all the staff of Way2wealth for providing a hospitable andhelpful work environment and making my summer training an exciting and memorable event. Ialso wish to thank MAHARAJA AGRASEN INSTITUTE OF TECHNOLOGY for makingthis experience of summer training in an esteemed organization possible. The learning from thisexperience has been immense and would be cherished throughout life. Last but not the least Iwould also like to thankour Institutes Director DR. N.K. Kakkar who helped to the fullest ofhis extent with his valuable suggestions directly or indirectly at every stage of my training.

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TABLE OF CONTENTS

Title pageCertificateDeclaration

AcknowledgementExecutive summaryCompany profileObjective of the studyResearch methodology

CHAPTER NO. SUBJECT PAGE NO.

Ch #1 Financial planning : An overview.

Ch # 2 Investment through financial planning.

Ch # 3 Analyzing the different investment avenues.

Ch # 4 Findings.

Ch # 5 Conclusions and limitations.

Ch # 6 Bibliography.

Annexure.

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For the ease the whole project has been divided into various chapters :.

1) Starting with the introduction of the company.

2) The next chapter briefly introduces the scope of financial planning.

3) The next chapter projects investment through financial planning.

4) Next on the list is the explanation of different investment avenues.

5) A small set of limitations, conclusions and suggestions have also been given in the reportto make the study useful.

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INTRODUCTION

Way2Wealth is a premier Investment Consultancy Firm, launched with the aim of makinginvesting simpler, more understandable and profitable for the investors. Way2Wealth brings awide range of product offerings from Equity and Derivatives (NSE), Fixed Income Securities,Insurance (Life & Non-Life), Mutual Funds to Portfolio Management Services for theconvenience and benefit of it customers. Way2Wealth today has over 60 easily accessibleInvestment Outlets spread across 25 major towns and cities in India.

HERITAGE

Sivan Securities started in 1984, has a long and illustrious track record of being amongst thepremier Financial Intermediaries in the country as well as being an incubator for IT start-upfirms.The Venture Capital division came to be known as Global Technology Ventures -GTV

and the Financial Intermediary Division was spun off as Way2Wealth in the year 2000.Over theyears, Way2Wealth has developed a strong reputation for navigating its investors through all theups and downs in the market. Way2Wealth has inherited these same values in addition to a baseof 100,000 individual customers, over 500 corporate/institutional clients.Its group company arelisted below :

1. Global Technology Ventures GTV, has provided venture capital to companies such asKshema Technologies, MindTree, Ivega etc.

2. Amalgamated Bean Coffee Trading Company Ltd. (ABCTCL), Indias largestcoffee conglomerate and coffee exporter, pioneering Indias first concept cafs Caf

Coffee Day, a chain of youth hangout coffee parlors. From a handful of cafs in six citesin the first 5 years, Caf Coffee Day has today become Indias largest and premier retailchain of cafes with 483 cafes in 84 cities around the country.

ACCOLADES

Caf Coffee Day today is Indias largest retail chain of cafes. V.G. Siddhartha is awarded the Entrepreneur of the year 2003 by The Economic

Times for crafting a successful pan Indian brand for a commodity business and givingIndian consumers a new lifestyle experience that is within reach of the common man.

Amalgamated Bean Coffee Trading Company Ltd. today is the largest exporter of green

coffee from India and perhaps one of the two fully integrated coffee companies of Asia,involved in all sectors of Coffee from plantations to retailing to exports.

Coffee Day Group today is the only fully integrated and largest coffee conglomerate inIndia and is attributed with creating the coffee revolution in India - acknowledged bythe Coffee Board of India

And now, he is actively involved with Way2Wealth and committed in realizing its visionof making way2wealth 'set new standards in the retail financial services in India'.

Mr. V.G. Siddhartha - Chairman

He is the visionary behind Way2Wealth and the founder of Sivan Securities. He has been

involved in the Indian Capital Markets since 1984. During his early years of his work-life he has

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spent valuable years with J.M. Morgan Stanley, this experience stood him in good stead when hebecame a successful investor. Having a Masters in Economics from Mangalore University, he isan avid reader and traveler with a yen for creating companies and brands.Mr Siddharthas

business interests spreads across Coffee retailing, Plantations, Real estate, Venture Capital andFinancial Services.

GTV today a Billion$ company, partners withexceptional entrepreneurs, who have a gut for theoriginal, and are passionately dedicated to buildingcategory-leading tech companies. Investing intechnology ventures across all stages, GTV providesaccess to capital and resources to companies withglobal market leadership potential

Took over Sivan Securities Ltd, in 1984

Founded the Amalgamated Bean Coffee Trading

Company Limited ABCTCL, in 1994.

-Indias largest coffee conglomerate and coffeeexporter

-Largest exporter of green coffee from India

-One of the two fully integrated coffee companies ofAsia, involved in all sectors of Coffee from plantationsto retailing to exports

Pioneered the caf concept in India in 1996 with Caf

Coffee Day, popularly know as CCD

- Chain of youth hangout coffee parlors

Founded Global Technology Ventures in 2000 - acompany that identifies, invests and mentors companiesengaged in cutting edge technologies.

Founded the real estate company Tanling, developsworld-class infrastructural facilities for Technologyenterprises.

Global Village on the outskirts of Bangalore, housingcompanies like EDS, Mindtree,

TechBay on the oceanfront at Mangalore

Some of his large investments include: Mindtree,Kshema Technolgies, I-Vega Consulting

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http://www.gtvltd.com/tanglin.htmlhttp://www.gtvltd.com/http://www.cafecoffeeday.com/http://www.coffeeday.com/http://www.gtvltd.com/


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MISSION:

To be the pre-eminent destination for personalized financial solutions helping individuals createwealth

PHILOSPHY:

We believe that "our knowledge combined with our investors trust and involvement will lead tothe growth of wealth and make it an exciting experience".

LOGO:

Blue symbolizes Knowledge.Knowledge is limitless, so is the sky and sea, both of which are blue in colour.Knowledge applied leads to creation of wealth for our Investors.

Red symbolizes Trust.Red is the color of blood and the heart. Trust is a matter of the heart. Our knowledgebears fruit only when the investor places his Trust in us.

Yellow symbolizes Excitement and Involvement of the investor.We strive to make investing an exciting and involving experience for our investors.

Green symbolizes Growth.Growth in Nature is visible in the form of plants and trees; all of which are green.

Knowledge, Trust and Excitement should ultimately lead to Growth of the investors wealth.

PRODUCTS AND SERVICES :

Services and solutions that cater to the retail and institutional investors at large that encompassprimary and secondary market instruments:

1. Equity Trading2. Derivatives Trading3. Commodities Trading4. Distribution Services: IPOs, Mutual Funds and Fixed Income products5. Advisory services: Asset Allocation Planning and End to end personalised investment

management services for Wealth Generation, Retirement Planning and Capital Build up at

different stages of life.6. Wealth Management Services: Portfolio Management Services7. Online Services & Tools - Online Trading, Portfolio tracking in-depth research reports

and much more.8. Insurance Marketing Life and Non-Life Plans9. In-house Research & Analytics10. Depository Services11. Tax planning12. Financial planning

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THE WAY2WEALTH ADVANTAGE :

Personalised Investment Solutions: All our customers receive individual attention

Full choice of Investments: Mutual funds, Life Insurance, Fixed Income Instruments,Equity and Derivatives

Processing support: We take care of all your paper work and provide service at yourdoorstep.

Investor eligibility criteria: Customers with a minimum investment amount as low asRs. 5000 per month can avail of our services.

This unique Way2Wealth concept can be easily experienced through the innovative and customerfriendly network of 60 Investment outlets that spans 25 major towns and cities in the country. Inaddition to the national branch infrastructure,

Way2Wealth also has an online presence to enhance its value proposition to its customers.

Established Brand 20+ years in the financial services industry Rich pedigree - part of the billion$ Global Technology Ventures (GTV) group Top quality management having a combined experience of 100+ years in the financial

services industry Network of 60 full service branches covering 25 Indian cities / towns Reputed Research Desk for Fundamental & Technical analysis Structured product offering for HNI & Corporate clients 100,000+ client acquaintances (30,000+ satisfied retail relationships) Over 3000+ channels partners 750+ wealth managers across the country Dedicated PEG & PCG Desk for servicing HNI clients Exclusive Corporate Advisory Desk catering to key corporate clients.

PROFESSIONAL EXCELLENCY :

Personalized Investment plan for the short term, medium term and long term goals of theinvestors.

Expert advice on Investment products ranging from the Fixed Return Investments andLife Insurance to the highly volatile Shares and Derivatives

Avail Tax saving, Retirement planning and VRS investment services Facilitate Equity, Derivative and Commodities trading, Initial Public offerings (IPO) of

Companies, Mutual funds and Make investments Government of India/InfrastructureBonds

Specialized team catering to the distinct needs of Corporate and Institutional clients out ofthe five regional offices.

UNIQUE INVESTMENT OUTLETS :

Way2Wealth Investment outlets are designed to be places where retail investors can come intouch with Investment opportunities in an atmosphere of convenience and comfort. The look and

feel of the offices across India project a consistent branch image for the company. The featuresthat enable a unique facility for retailing financial services include among others:Easily visible

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branches set up in the commercial spaces of potential investment zones ranging between 750sftto 1000sft.

Most branches are located in the ground floor sporting huge glass frontage promotingeasy accessibility and reflecting our attitude of complete transparency.

The major portion of the branch area dedicated for customer use. The furniture is in CKDformats to add flexibility in using the branch for Investors purposes.

Connectivity to NSE for trading facilities. TV and other electronic mediums to facilitate real time update and dissemination of

information to the customers.

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RESEARCH METHODOLOGY

Research methodology refers to the tools and methods used for obtaining information for thepurpose of subject study. Research refers to the search for knowledge. Research can be definedas a scientific and systematic study for pertinent information on a specific topic. It is an art of

scientific investigation.

OBJECTIVES OF RESEARCH

The purpose of research is to discover answer to questions through the application of scientificprocedures.

To gain familiarity with a phenomenon or to achieve new insights into it.

To portray accurately the characteristics of a particular individual situation or a group.

To determine the frequency with which something occurs or with which it is associated

with something else.

METHODS OF DATA COLLECTION

Data can be collected from primary or secondary sources or both.

PRIMARY DATA

Primary data can be obtained by a study specially designed, the data are original in character andare generated in a large number of surveys conducted mostly by government and also by someindividual institutions and research institution and research bodies. The method of collecting

primary data are observation method, interview, questionnaire.

SECONDARY DATA

The secondary data are not originally collected but rather obtained from published andunpublished sources. The method of collecting secondary data are internet, magazines,newspapers etc.

SOURCES OF PRIMARY DATA

Discussion and observation with customers and staff of way2wealth.

Questionnaire.

SOURCES OF SECONDARY DATA

Internet.

Wealth Compass : Investors monthly magazine from way2wealth.

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FINANCIAL PLANNING:

AN OVERVIEW

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FINANCIAL PLANNING

Financial planning is the process of meeting your life goals through the proper management ofyour finances. Life goals can include buying a home, saving for your child's education or

planning for retirement. The financial planning process consists of six steps that help you take abig picture look at where you are financially. Using these six steps, you can work out where youare now, what you may need in the future and what you must do to reach your goals. The processinvolves gathering relevant financial information, setting life goals, examining your currentfinancial status and coming up with a strategy or plan for how you can meet your goals givenyour current situation and future plans. Personal financial planning is broadly defined as a

process of determining an individual's financial goals, purposes in life and life's priorities, and

after considering his resources, risk profile and current lifestyle, to detail a balanced andrealistic plan to meet those goals. The individual's goals are used as guideposts to map a courseof action on 'what needs to be done' to reach those goals. Alongside the data gathering exercise,the purpose of each goal is determined to ensure that the goal is meaningful in the context of the

individual's situation. Through a process of careful analysis, these goals are subjected to a realitycheck by considering the individual's current and future resources available to achieve them. Inthe process, the constraints and obstacles to these goals are noted. The information will be usedlater to determine if there are sufficient resources available to get to these goals, and what otherthings need to be considered in the process. If the resources are insufficient or absent to meet anyof the goals, the particular goal will be adjusted to a more realistic level or will be replaced with anew goal.

Planning often requires consideration of self-constraints in postponing some enjoyment today forthe sake of the future. To be effective, the plan should consider the individual's current lifestyleso that the 'pain' in postponing current pleasures is bearable over the term of the plan. In timeswhere current sacrifices are involved, the plan should help ensure that the pursuit of the goal willcontinue. A plan should consider the importance of each goal and should prioritize each goal.Many financial plans fail because these practical points were not sufficiently considered.

BENEFITS

Financial planning provides direction and meaning to your financial decisions. It allows you tounderstand how each financial decision you make affects other areas of your finances. Forexample, buying a particular investment product might help you pay off your mortgage faster orit might delay your retirement significantly. By viewing each financial decision as part of a

whole, you can consider its short and long-term effects on your life goals. You can also adaptmore easily to life changes and feel more secure that your goals are on track.

SCOPE

The only thing permanent in life is change. Times change. People change. So does life. Youexpect life to be much better tomorrow than it is today. Tomorrow, you hope to fulfil all yourdreams and aspirations. But what happens if things take an untoward turn? Or, if there is aneventuality? Perhaps it's time for you to change the way you plan your investments.Financial

planning is the process of solving financial problems and achieving financial goals by developingand implementing a personalized "game plan." In order to be effective this "plan" must take into

consideration an individuals overall picture. It must be:

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coordinated comprehensive continuous

Financial planning is like all other phases of life; it involves choices

Spend now or save for later?

Pay off existing bills or increase retirement savings?

Focus savings dollars on short term or long term goals?

A true financial plan does not focus one aspect or product, but instead seeks to take all areas ofplanning into consideration when making financial decisions.

IT Includes

Cash Flow Management

This aspect of planning deals with the day to day allocation of income; and its effectiveuse in paying for current living expenses and in accumulating assets which will be used inmeeting financial goals.

Tax Planning and Management

This area focuses on the understanding of and application of federal and state income taxlaw, estate and inheritance taxes; and, when possible, minimizing these taxes.

Risk Planning and Management

This area of planning deals with the risk of losing life, income, or property. It includes theuse of insurance products and strategies.

Investment Planning and Management

Almost everyone has accumulation goals for which investments must be made andmanaged. These could include buying a home; planning for college; or providing forretirement.

Retirement Planning and Management

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By far the most common accumulation goal is the ability to become financiallyindependent. Retirement strategies encompass the understanding of the Social Securitysystem; employer-sponsored retirement plans; and personal savings accumulation plans.

Estate Planning and Management

The final phase of planning is for the transfer of assets to our heirs with minimization oftaxes and other costs.

FINANCIAL PLANNER

A financial planner is someone who uses the financial planning process to help you figure outhow to meet your life goals. Click here for more information. The planner can take a big pictureview of your financial situation and make financial planning recommendations that are right foryou. The planner can look at all of your needs including budgeting and saving, taxes,investments, insurance and retirement planning. Or, the planner may work with you on a single

financial issue but within the context of your overall situation. This big picture approach to yourfinancial goals sets the planner apart from other financial advisers, who may have been trained tofocus on a particular area of your financial life. Financial planners job function:A financial

planner specializes in the planning aspects of finance, in particular personal finance, ascontrasted with a stock broker who is only concerned with the actual investments, or with a lifeinsurance intermediary who advises on risk products

Financial planning is usually a six-step process, and involves considering the client's situationfrom all relevant angles to produce integrated solutions. The six-step financial planning processhas been adopted by the International Organization for Standardization (ISO). Financial plannersare also known by the title financial adviser in some countries, although these two terms aretechnically not synonymous, and their roles have some functional differences.Although there aremany types of 'financial planners,' the term is used largely to describe those who consider theentire financial picture of a client and then provide a comprehensive solution. To differentiatefrom the other types of financial planners, some planners may be called 'comprehensive' financial

planners.Other financial planners may specialize in one or more areas, such as insuranceplanning and retirement planning.Financial planning is a growing industry with projected fasterthan average job growth through 2014.

OBJECTIVES

People enlist the help of a financial planner because of the complexity of knowing how toperform the following:

Providing direction and meaning to financial decisions; Allowing the person to understand how each financial decision affects the other areas of

finance; and

Allowing the person to adapt more easily to life changes in order to feel more secure.

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The Financial Planning Process

The financial planning process consists of the following six steps:.

1.Establishing and defining the client-planner relationship.The financial planner should clearly explain or document the services to be provided to you anddefine both his and your responsibilities. The planner should explain fully how he will be paidand by whom. You and the planner should agree on how long the professional relationshipshould last and on how decisions will be made.

2. Gathering client data, including goals.The financial planner should ask for information about your financial situation. You and the

planner should mutually define your personal and financial goals, understand your time frame forresults and discuss, if relevant, how you feel about risk. The financial planner should gather allthe necessary documents before giving you the advice you need.

3. Analyzing and evaluating your financial status.The financial planner should analyze your information to assess your current situation anddetermine what you must do to meet your goals. Depending on what services you have asked for,this could include analyzing your assets, liabilities and cash flow, current insurance coverage,investments or tax strategies.

4. Developing and presenting financial planning recommendations and/or alternatives.The financial planner should offer financial planning recommendations that address your goals,

based on the information you provide. The planner should go over the recommendations with

you to help you understand them so that you can make informed decisions. The planner shouldalso listen to your concerns and revise the recommendations as appropriate.

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Financial Planning Process

1. Determine the financial goals

2. Compilation of necessary data anddiscussion of strategies

3. Setting up a personal analysis

4. Creation of a personalfinancial plan

5. Implementation of the personalfinancial plan

6. Periodic review of the personalfinancial planStep by step

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5. Implementing the financial planning recommendations.You and the planner should agree on how the recommendations will be carried out. The plannermay carry out the recommendations or serve as your coach, coordinating the whole process withyou and other professionals such as attorneys or stockbrokers.

6. Monitoring the financial planning recommendations.You and the planner should agree on who will monitor your progress towards your goals. If the

planner is in charge of the process, she should report to you periodically to review your situationand adjust the recommendations, if needed, as your life changes.

INVESTMENT PLANNING

Everyone needs to save for a rainy day. Once you have saved enough to take care ofemergencies, you should start thinking about investing and to make your money grow. We canhelp you plan your investments so that you can reap adequate benefits and achieve your financial

goals. Essentially, Investment Planning involves identifying your financial goals throughout yourlife, and prioritising them. Investment Planning is important because it helps you to derive themaximum benefit from your investments Your success as an investor depends upon your abilityto choose the right investment options. This, in turn, depends on your requirements, needs andgoals. For most investors, however, the three prime criteria of evaluating any investment optionare liquidity, safety and return. Investment Planning also helps you to decide upon the rightinvestment strategy. Besides your individual requirement, your investment strategy would alsodepend upon your age, personal circumstances and your risk appetite. These aspects are typicallytaken care of during investment planning.

Investment Planning also helps you to strike a balance between risk and returns. By prudentplanning, it is possible to arrive at an optimal mix of risk and returns, that suits your particularneeds and requirements.

IMPORTANCE OF INVESTMENT PLANNING

Investment means putting your money to work to earn more money. Done wisely, it can help youmeet your financial goals like buying a new house, paying for college education of your children,of your enjoying a comfortable retirement, or whatever is important to you. You do not have to

be wealthy to be an investor. Investing even a small amount can produce considerable rewardsover the long-term, especially if you do it regularly. But you need to decide about how much you

want to invest and where. To choose wisely, you need to know the investment options thoroughlyand their relative risk exposures. Investment planning is necessary for every one who wishes toachieve any financial goal. You have to plan your limited resources to avail the maximum benefitout of them. You should plan your investments to fulfill major needs like:

Creating wealth over the long term Acquiring assets like a dream house or a dream car Fulfilling your need for financial security

Thus, Investment Planning is nothing but a holistic approach to meet your life's goals.

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These are investors who take major risk on investments in order to have high (above-average)returns like speculative or unpredictable equity shares, etc.

As a matter of fact, the investment approach of an investor is directly linked to his or her abilityto shoulder risk. The ability to take risks depends largely on personal circumstances and factors

like age, past experiences with investing, level of responsiblility, etc.

RISK VS RETURN

Risk and returns go hand in hand. Higher the risk, higher is the possibility of earning a goodreturn. Thus, it follows that all types of investment have some form of risk attached to it.Theoretically, even 'safe' investments (such as bank deposits) are not without some element ofrisk. Broadly, here are the various types of risks that you might have to face as an investor.

Credit Risk

The risk is that the issuer of the security will default, or not repay the principal amount. This isvalid for corporate bonds etc.

Liquidity Risk

If you invest in securities, stocks, bonds, you are risking their sellability. In other words, yourmoney gets stuck unnecessarily, creating an asset-liability mismatch.

Market Risk

Financial markets are volatile in nature. Volatility means sudden swings in value from high tolow, or the reverse. The more volatile an investment is, the more profit or loss you can make,since there can be a big spread between what you paid and what you sell it for. But you also haveto be prepared for the price to drop by the same amount. Those who invest in stocks and mutualfunds typically run this risk.

Interest Rate RiskDepending on the interest rate movement in the economy, the rates of interest investmentinstruments may go up or come down, resulting in a subsequent reverse movement of their

prices. Such a scenario of economic instability might effect mutual funds etc.

The whole idea behind investment planning is to evaluate the risk associated with various type ofinvestments and take steps so as to balance it with the desired return.

INVESTMENT PLANNING STEPS

Investment Planning is the key to successful investing. It is a scientific process, which, if done inthe right spirit, can help you achieve your financial goals.

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Here are the basic steps of Investment Planning

Step 1 : Identify your financial needs and goalsThe starting point of a sound investment plan is to begin with a clear understanding of youfinancial needs and goals. Typically, any financial need or goal would translate into determining

the tenure of your investment (investment horizon). All investment needs and goals can thereforebe translated into short-term (less than 1 year), medium-term (more than 1 year) and long-term(more than 5 years). Here is an example of the financial goal of a typical household (a couplewith two childrens).

Financial GoalsExpected Cost (attodays prices in Rs)

Time Frame Investment Horizon

Anils computer 0.5 Lakhs Next month Short-term

Sunitas schooladmission

0.35 Lakhs 6 months Short-term

Vacation 0.5 Lakhs 1-2 years Medium-term

Buying a second car 5 Lakhs 2-3 years Medium-term

Anils education 2 Lakhs 10-12 years Long-term

Sunitas education 2 Lakhs 12-15 years Long-term

Retirement 20 Lakhs 20-25 years Long-term

Step 2 : Understanding investment choicesThere are three basic investment categories: Equity, Debt and Cash. Any investment can be

classified into one of these three categories, or asset classes. The key to investment success lies inunderstanding how each asset class performs over the various investment horizons, the choiceswithin each category and the risks involved in making investment decisions in each of thesechoices.

Equity or Stocks are ownership shares investors buy in a corporation. When you make equityinvestments, you become part-owner (to the extent of your shareholding) of the company youhave invested in. However, there is no particular rate of return indicated while investing. Thecurrent value of your holding is reflected in the price at which the stock/share is traded in thestock markets. Hence, these constitute a relatively riskier form of investment.

Debt instruments or Bonds are loans investors make to corporations or the government. Theypromise a fixed return at the time of making the investment. Also the promise of getting themoney back is dependent on who is making the promise. In case of the Government, the promisewill certainly get fulfilled, but if the issuer of debt is a company or an institution, the quality ofthe issuer needs to be adjudged, to ascertain its ability to keep the promise. Debt investments,therefore, provide you with the promise that your principal will be returned along with theinterest payable thereon.

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Cash includes money in bank savings accounts and other liquid investment options.

Asset Classes Instruments Risk

CashSavings deposits in a bank, Liquid Mutualfunds Low

Debt

GOI Relief Bonds, Public Provident Fund,National Savings Certificate, Company FixedDeposits, Debt-based Mutual funds,Debentures/Bonds

Low to Medium, depending on thetype of issuer. In case the issuer isGovt, the risk of default isnegligible

EquityEquity-based Mutual Funds Stocks/sharesissued by various companies

High

Step 3 : Decide an appropriate mix of various investment choices (Asset Allocation Plan)Making an asset allocation plan is about determining the proportion of investments in each of the

three basic asset classes. Essentially this depends upon your profile as an investor. Whateverstage of life you are at, you would need to invest part of your money for security and liquidity. A

part of your investments should generate regular income and part of it should contribute togrowth and capital appreciation. The proportion however, will vary based on individual goals,time horizons available to meet those goals and one's risk profile (the tolerance reaction to anydown turn in the stock/debt markets). The key to investment success lies in determining theappropriate mix of the above mentioned categories and not just the individual investments thatare done within each category.

INFLATION DEVIL

Inflation, the rate at which the general level of prices for goods and services rises, can steadilyerode the purchasing power of your income. That is why you should invest a portion of yoursavings at a rate higher than the inflation rate to recover the loss of purchasing power. Thismeans that over time a rupee will be able to buy a lesser amount of goods and services. If theinflation rate is 5%, then Rs. 100 worth of goods will cost Rs. 105 after a year. The followingtable indicates how the value of Rs 1,00,000 will change over time at different levels of inflation

.

Inflation % p.a.

Years 2 3 4 4.5 5 6

5 90,573 86,261 82,193 80,245 78,353 74,726

10 82,035 74,409 67,556 64,393 61,391 55,839

15 74,301 64,186 55,526 51,672 48,102 41,727

20 67,297 55,368 45,639 41,464 37,689 31,180

25 60,953 47,761 37,512 33,273 29,530 23,300

30 55,207 41,199 30,832 26,700 23,138 17,411

Table indicating the value of Rs 1,00,000 at different levels of inflation over time

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THE POWER OF COMPOUNDING

Regardless of where you choose to put your money - cash, stocks, bonds, or a combination ofthese - the key to saving for the future is to make your money work for you. This is done throughthe power of compounding. Compounding investment earnings is what can make even small

investments become larger, given enough time. You are probably already familiar with theprinciple of compounding. The money you put into a bank account earns an interest. Then, youearn interest on the money you originally put in, plus on the interest you have accumulated. Asthe size of your account grows, you earn interest on a bigger and bigger pool of money.Thefollowing table shows how much your money would grow when you invest a fixed amount permonth over a period of 10, 15, 20, 25, and 30 years, assuming an interest rate of 10% p.a.

Amount (Rs)

Years 1000 2000 3000 4000 5000

5 78,082 156,165 234,247 312,330 390,412

10 206,552 413,104 619,656 826,208 1,032,760

15 417,924 835,849 1,253,773 1,671,697 2,089,621

20 765,697 1,531,394 2,297,091 3,062,788 3,828,485

25 1,337,890 2,675,781 4,013,671 5,351,561 6,689,452

30 2,279,325 4,558,651 6,837,976 9,117,301 11,396,627

How power of compounding makes your money grow, when you invest a fixed amount everymonth Here's how much your money would grow if you make an lump sum (one-time)

investment and leave it untouched. The interest rate has been assumed to be 10%.

Amount (Rs)

Years 100000 200000 300000 400000 500000

5 161,051 322,102 483,153 644,204 805,255

10 259,374 518,748 778,123 1,037,497 1,296,871

15 417,725 835,450 1,253,174 1,670,899 2,088,624

20 672,750 1,345,500 2,018,250 2,691,000 3,363,750

25 1,083,471 2,166,941 3,250,412 4,333,882 5,417,353

30 1,744,940 3,489,880 5,234,821 6,979,761 8,724,701

The real power of compounding comes with time. The earlier you start saving, the more yourmoney can work for you. To attain certain amount of corpus within a set period of time, a pro-active investment style is preferable. Thus, no matter how young you are, the sooner you beginsaving for the future, the better it is.

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NEED FOR INSURANCE PLANNING

"Insurance is not for the person who passes away, it for those who survive," goes a popularsaying that explains the importance of Insurance Planning. It is extremely important that every

person, especially the breadwinner, covers the risks to his life, so that his family's quality of life

does not undergo any drastic change in case of an unfortunate eventuality. Insurance Planning isconcerned with ensuring adequate coverage against insurable risks. Calculating the right level ofrisk cover is a specialised activity, requiring considerable expertise. Proper Insurance Planningcan help you look at the possibility of getting a wider coverage for the same amount of premiumor the same level of coverage for the same amount of premium or the same level of coverage fora reduced premium. Hence, the need for proper insurance planning.

Insurance, simply put, is the cover for the risks that we run during our lives. Insurance enables usto live our lives to the fullest, without worrying about the financial impact of events that couldhamper it. In other words, insurance protects us from the contingencies that could affect us. Sowhat are the risks that we run? To name a few - the risk on our lives that is, the worries of

replacement of the incomes that we contribute to the running of the household), the risks ofmedical contingencies (since they have the capability of depleting our wealth considerably) andrisks to assets (since the replacement of these can have tremendous financial implications). If wecan imagine a situation where our goals are disturbed by acts beyond our control, we can realizethe relevance of insurance in our lives. Insurance Planning takes into account the risks thatsurround you and then provides an adequate coverage against those risks. There is no risk notworth insuring yourself against, and insurance should first and foremost be looked as a measureto guard against risks - the risk of your dreams going awry due to events beyond your control.

RETIREMENT PLANNING:

Some like it. Some dont. But retirement is a reality for every working person. Most youngpeople today think of retirement as a distant reality. However, it is important to plan for yourpost-retirement life if you wish to retain your financial independence and maintain a comfortablestandard of living even when you are no longer earning. This is extremely important, because,unlike developed nations, India does not have a social security net. Retirement Planning acquiresadded importance because of the fact that though longevity has increased, the number of workingyears havent.

WHY PLAN FOR RETIREMENT ?

In simple words, retirement planning means making sure you will have enough money to live onafter retiring from work. Retirement should be the best period of your life, when you can literallysit back and relax or enjoy your life by reaping benefits of what you earn in so many years ofhard work. But it is easier said than done. To achieve a hassle-free retired life, you need to make

prudent investment decisions during your working life, thus putting your hard-earned money towork for you in future.

Why is it important?

India, unlike other countries, does not have state-sponsored social security for the retired people.And after several decades when pensions provided many people with a large chunk of money

they needed to live comfortably after they retired, things are changing. While you may be entitledto a pension, or income during retirement, in the new economic era, you are increasingly likely to

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be responsible for providing for your own needs. Although the compulsory savings in providentfund through both employee and employer contributions should offer some cushion, it may not

be enough to support you throughout your retirement. That is why retirement planning is extremely important for every one. There are many reasons for the working individuals to secure theirfuture emergence of nuclear families and its attendant insecurity, increasing uncertainties in

personal and professional life, the growing trends of seeking early retirement and rising healthrisks are among few important risks. Besides falling interest rates and the sustained increase inthe cost of living make it a compelling case for individuals to plan their finances to fund theirretired life. Planning for retirement is as important as planning your career and marriage. Lifetakes its own course and from the poorest to the wealthiest, no one gets spared. "Everyone growsolder". We get older every day, without realising. However, we assume that old age is nevergoing to touch us. The future depends to a great extent on the choices you make today. Rightdecisions with the help of proper planning, taken at the right time will assure smile and success atthe time of retirement.If you are in young, retirement may be the last thing on your mind. But ifyou think you have a long way to go for to plan for retirement, think again. It is never too early to

prepare for retirement, especially if you want to maintain the same standard of living that you

would have got accustomed to by then.

Let us take a hypothetical example. Let's assume that you are a 35 year old, earning Rs.3 lakh perannum. Your salary grows at 5% per annum and you plan to retire after 25 years. Under thesecircumstances, assuming your post-retirement requirement would be 60% of your last annualincome (Rs.10 lakh approx), you would need about Rs.6 lakh per annum after retirement. Toachieve this, you need a retirement corpus of Rs.75 lakh assuming you earn a return of 5% perannum over a period of 20 years. To meet this goal, you would have to invest more than Rs.9,000

per month at 7% per annum for the next 25 years. Inflation and tax implications have not beenconsidered for simplicity.

Steps for making Retirement a Success.

People have different plans for retired life. For example you may think of retirement as a time torelax, to laze around, to spend more time with family, travel or write a masterpiece. Attainingfinancial independence after retirement will not be just a dream if the following steps arefollowed with steady discipline, perseverance and if smart investment strategies.

Start saving early

Nobody takes retirement seriously. But the fact is that even a small sum of money savedregularly and invested regularly makes a big amount which will come in very handy afterretirement. One should not believe that after retirement, one can place all savings into incomegenerating investment and spend rest of life in happiness. If you don't plan early, you cound endup eroding your principal savings in order to have to supplement your monthly income. The keyto a financially independent future is "sooner the better". Cautious investors believe in this

principal and plan their retirement accordingly. They not only save, they save early and regularly.. The catch is to make the power of compounding work one's benefit.

Retirement should be your top priority

Retirement should be kept as a top priority because if one does not keep it at the top one might

end up depending on one's children, which probably no one would relish.

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Create a Retirement Plan

Develop a plan for saving based on your requirements at the time of retirement. The goals youkeep for saving depend on your lifestyle but you will need at least about 66% of your pre-retirement income to maintain your standard of living when you stop working.

Understand your pension planIf your employer offers on pension plan, understand carefully your benefit level, financialstability of plan and the vesting period. Use retirement plans even if you already have enoughmoney. With retirement plans your money grows in a tax efficient manner and compoundinginterest over time makes it one of the best investment options.

Balance your risk tolerance and your investment strategy

Evaluate your risk profile and then balance your investment strategy to invest in various avenuesto get the most out of your retirement money keeping your risk profile unhampered.

Diversify your investments & allocate your assets carefully. Depending on your work profile

divide your savings into equity , bonds, Mutual Funds, and other investment avenues. Don'tinvest too heavily in one sector or one company, since the risk associated with putting all youreggs in one basket is indeed very high.

Save and Invest Regularly

Saving and investing regularly makes a big difference at the time of retirement. Investing atregular intervals builds your retirement fund over time and helps you to minimize risk and givesa tension free retirement-a time to pursue your hobbies, fulfill your dreams and passions.

Retirement Planner

The amount you would need at the time of your retirement. Rs.

Expected rate of Inflation. %

When do you plan to retire.

Lumpsum amount that you have already saved for retirement. Rs.

Return that you expect on your lumpsum amount. %

How much amount can you save monthly. Rs.

The interest rate at which you will make the monthly investment.

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TAX PLANNING:

Proper tax planning is a basic duty of every person which should be carried out religiously.

Basically, there are three steps in tax planning exercise. These three steps in tax planning

are: Calculate your taxable income under all heads ie, Income from Salary, House Property,Business & Profession, Capital Gains and Income from Other Sources.

Calculate tax payable on gross taxable income for whole financial year (i.e.,From 1st April to31st March) using a simple tax rate table, given on next page. After you have calculated theamount of your tax liability. You have two options to choose from:

1. Pay your tax (No tax planning required)2. Minimise your tax through prudent tax planning.

Most people rightly choose Option 'B'. Here you have to compare the advantages of several tax

saving schemes and depending upon your age, social liabilities, tax slabs and personalpreferences, decide upon a right mix of investments, which shall reduce your tax liability to zeroor the minimum possible.Every citizen has a fundamental right to avail all the tax incentives

provided by the Government. Therefore, through prudent tax planning not only income-taxliability is reduced but also a better future is ensured due to compulsory savings in highly safeGovernment schemes. We sincerely advise all our readers and clients to plan their investments insuch a way, that the post-tax yield is the highest possible keeping in view the basic parameters ofsafety and liquidity

TAX SAVING SCHEME:

After assessing your tax liability, the next step is tax planning. It involves selecting the right taxsaving instruments and making investments accordingly.

Deductions from Taxable Income:

Deduction under section 80C

Under this section, a deduction of up to Rs. 1,00,000 is allowed from Taxable Income in respectof investments made in some specified schemes. The specified schemes are the same which werethere in section 88 but without any sectoral caps (except in PPF).

Specified Investment Schemes u/s 80C

Life Insurance Premiums Contributions to Employees Provident Fund/GPF Public Provident Fund (maximum Rs 70,000 in a year) NSC Unit Linked Insurance Plan (ULIP) Repayment of Housing Loan (Principal) Equity Linked Savings Scheme (ELSS) Tuition Fees including admission fees or college fees paid for Full-time education of any

two children of the assessee (Any Development fees or donation or payment of similar

nature shall not be eligible for deduction). Infrastructure Bonds issued by Institutions/ Banks such as IDBI, ICICI, REC, and NHAI.

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Interest accrued in respect of NSC VIII issue.

Notes:

1. There are no sectoral caps (except in PPF) on investment in the new section and the

assessee is free to invest Rs. 1,00,000 in any one or more of the specified instruments.2. Amount invested in these instruments would be allowed as deduction irrespective of the

fact whether (or not) such investment is made out of income chargeable to tax.3. Section 80C deduction is allowed irrespective of assessee's income level. Even persons

with taxable income above Rs. 10,00,000 can avail benefit of section 80C.

Section 80 CCE

Aggregate deduction u/s 80 C, u/s 80 CCC and 80 CCD can not exceed Rs. 1,00,000.

Deduction under section 80D.

Under This section, a deduction up to Rs 15,000 (Rs 20,000 in case of senior citizens) is allowed

in respect of premium paid by cheque towards health insurance policy, like "Mediclaim". Suchpremium can be paid towards health insurance of spouse, dependent parents as well as dependentchildren.

Deduction under section 24(b)

Under this section, Interest on borrowed capital for the purpose of house purchase or constructionis deductible from taxable income up to Rs. 1,50,000 with some conditions to be fulfilled

CASH FLOW PLANNING:

In simple terms, cash flow refers to the inflow and outflow of money. It is a record of yourincome and expenses. Though this sounds simple, very few people actually take the time out tofind out what comes in and what goes out of their hands each month. Cash flow planning refersto the process of identifying the major expenditures in future (both short-term and long-term) andmaking planned investments so that the required amount is accumulated within the required timeframe.Cash flow planning is the first thing that should be done prior to starting an investmentexercise, because only then will you be in a position to know how your finances look like, andwhat is it that you can invest without causing a strain on yourself. It will also enable you tounderstand if a particular investment matches with your flow requirement.So does it involvelooking at future cash flows only? Not really. You should always do a cash flow for yourself ason date, and you will realize that you could have a potential savings amount within each month

of your working life. This is the amount that you should look at saving for meeting your financialgoals. The best way of doing this is to have a personal budget.

CASH FLOW BASICS:

The idea behind cash flow planning is to match expenses on life goals with the available income.Cash flow planning begins with identifying the sources and the amount of income andexpenditure.'Income' includes maturities of investments, income from other sources, dividends,etc. 'Expenses' include loan repayments, and all other outflows etc.

The next crucial step is to list out the life goals and assigning a time frame for achieving

them. For example, your list could look like this:

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Going abroad on a vacation next year Buying a car in 2 years Buying your child a computer next year

The next step is to prioritize these goals. As you will notice, some of these goals (like buying

your child a computer, which is important for his or her education; or a wedding in the family)are high priority, while others (such as going abroad on a vacation) could be assigned a relativelylower priority. High priority goals are those where you do not have the liberty of compromisingeither on the time frame or on the amount. Low priority goals, on the other hand, can be tweakedaround a bit. Finally, take care to ensure that you have a contingency fund to tackle anemergency. Ideally, the size of your contingency fund should be two-three times your monthlyexpenditure, if you are a working person. If you are a retired person, the amount should be threeto five times. Thereafter, your financial planner can help you work out the right investmentstrategy by using the principles of Investment Planning. Essentially, this involves calculating theamount of investment required to realise the goal, taking inflation into account.

WAY TO MAKE YOUR PERSONAL BUDGET :

The first thing you will need to do is to collect all your bills, receipts and other documents whichwill help you monitor your spending for the month. A good idea is to jot down all your expensesin a notebook. Include both fixed and variable expenses in your list.

Fixed expenses are those that stay the same every month (at least for a relatively long period).These are expenses that have been committed for a long term. For example, rent, school fees ofyour children, wages paid out to domestic helps, etc are all fixed expenses.

Variable expenses, on the other hand, are those that change from month to month. Expenses onfood, clothing, electricity and phone bills, entertainment, etc. could be clubbed under this head.You have a relatively higher control over some of these.

If you have just started the budgeting exercise, it may be difficult to keep all records. Do notworry, and do your best to keep records. Start keeping track of as many expenses as you can. Themore accurate and complete this exercise is, the easier and more effective will your cash flow

planning be.

Steps to Creating an Effective Personal Budget

Make a list of all of your monthly income. If you have have received an annual bonus,divide this number by 12. Do the same to all other lump sum incomes of an annual nature.It is important to list all sources.

Next, make a list of all your monthly expenses. If an expense occurs less frequently,convert it to the monthly format. Be sure to include all expenses as housing, food,transportation, utilities, entertainment, etc. It is wise to track your spending for a fullmonth during this stage.

Now you can see for yourself if your income covers all of your current expenses. If theanswer is no, then you need to cut down on your expenses.

Depending on the amount of the shortfall, you may choose to reduce some of yourvariable expense (such as spending money on movies or junk food!) or increase your

earnings. For example, you could take up a part-time job after your regular work hours, orgive tuitions.

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If your income is in excess of your expenses, consider investing the difference instead ofspending it.

Importance of cash flow planning

Cash flow plans are commonly used by business houses. Without a viable cash flow plan, acompany could easily spend more than its revenue, putting it in peril. Unfortunately, most of usdo not realise that a cash flow plan is as important for people like us as well. The principles thatapply to corporate finance and to our personal lives are largely the same. There has never been a

bigger need than today for families and individuals to work out cash flow plans. Without propercash flow planning one could easily get caught in the debt trap. Of course, it goes without sayingthat creating a plan is not enough. One also needs to implement the plan, besides bringing about achange in the spending habits. Cash flow plan brings you face-to-face with what you shouldideally be saving, and investing in a systematic and regular manner, and what would it mean toyou to withdraw from your portfolio after a couple of years. It brings down in numbers what yourfinancial future has in store for you, and gives a crystal clear view (as much as is possible with

inflation and the interest rate scenario).

Childrens future planning

Like every parent, you too must be overjoyed to watch your child grow. All parents want to givethe best possible upbringing to their children. This includes good education and security, in caseof any eventuality. Soon, your little bundle of joy will grow up, and it will be time to provide forhis or her higher education and wedding. The purpose of Children's Future Planning is to create acorpus for foreseeable expenditures such as those on higher education and wedding, and to

provide for an adequate security cover during their growing years. Children's Future Planningacquires added importance because children's education and wedding are high priority life goals,which can neither be postponed nor can there be a compromise on the amount. Good educationhas always been the passport to a secure future. Today, career opportunities have grownmanifold, and there are many professional course that your child can aspire for. However, costsof higher education have also increased exponentially. Like most parents, you might be savingregularly to ensure a safe tomorrow for your child. However, savings alone is no longer enough.For ensuring adequate funding of your child's education, you as a parent, need to do two things:

1. Invest appropriate amount systematically and at regular intervals2. Provide for a financial security blanket to cover any eventuality

It is never too early to start saving and investing for your child's future. Especially in today'scontext. For example, the cost of a professional degree today is approximately Rs 2.5 lakhs. Ifyour child is one-year-old today, after 17 years when he/she goes to college, you may require asum of Rs 6.3 lakhs, assuming an annual rate of inflation of 6%.There are many products whichyour Financial Planner can use to achieve the above objectives. For example, he could suggest aChildren's Future Plan offered by any good insurance company, to build a corpus for your child'shigher education, and provide for a security cover in the event of the parent's unfortunate demise.Children's plans are also available under unit-linked option. Being unit-linked, they offer accessto investments in all kinds of asset classes - equity, debt and cash.

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How To Make Financial Planning Work For You

You are the focus of the financial planning process. As such, the results you get from workingwith a financial planner are as much your responsibility as they are those of the planner. To

achieve the best results from your financial planning engagement, you will need to be prepared toavoid some of the common mistakes shown above by considering the following advice:

Set measurable financial goals. Set specific targets of what you want to achieve andwhen you want to achieve results. For example, instead of saying you want to becomfortable when you retire or that you want your children to attend good schools, youneed to quantify what comfortable and good mean so that you'll know when you'vereached your goals.

Understand the effect of each financial decision. Each financial decision you make canaffect several other areas of your life. For example, an investment decision may have tax

consequences that are harmful to your estate plans. Or a decision about your child'seducation may affect when and how you meet your retirement goals. Remember that allof your financial decisions are interrelated.

Re-evaluate your financial situation periodically. Financial planning is a dynamicprocess. Your financial goals may change over the years due to changes in your lifestyleor circumstances, such as an inheritance, marriage, birth, house purchase or change of jobstatus. Revisit and revise your financial plan as time goes by to reflect these changes sothat you stay on track with your long-term goals.

Start planning as soon as you can. Don't delay your financial planning. People whosave or invest small amounts of money early, and often, tend to do better than those whowait until later in life. Similarly, by developing good financial planning habits such assaving, budgeting, investing and regularly reviewing your finances early in life, you will

be better prepared to meet life changes and handle emergencies.

Be realistic in your expectations. Financial planning is a common sense approach tomanaging your finances to reach your life goals. It cannot change your situationovernight; it is a lifelong process. Remember that events beyond your control such asinflation or changes in the stock market or interest rates will affect your financial

planning results.

Realize that you are in charge. If you're working with a financial planner, be sure youunderstand the financial planning process and what the planner should be doing. Providethe planner with all of the relevant information on your financial situation. Ask questionsabout the recommendations offered to you and play an active role in decision-making.

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Common Mistakes Consumers Make When Approaching Financial Planning

1. Don't set measurable financial goals.2. Make a financial decision without understanding its effect on other financial issues.

3. Confuse financial planning with investing.4. Neglect to re-evaluate their financial plan periodically.5. Think that financial planning is only for the wealthy.6. Think that financial planning is for when they get older.7. Think that financial planning is the same as retirement planning.8. Wait until a money crisis to begin financial planning.9. Expect unrealistic returns on investments.10. Think that using a financial planner means losing control.11. Believe that financial planning is primarily tax planning.

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INVESTMENT THROUGH

FINANCIAL PLANNING

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Section 80C: Rooting for financial planning

The annual tax-planning exercise for most investors tends to be divorced from their financial

planning process. As a result factors like risk appetite, investment objective and tenure ofinvestment are often overlooked when tax-planning investments are made. While apathy or lack

of awareness on the investors' part could be partly 'credited' for this, the restrictive nature of

Section 88 of the Income Tax Act should also shoulder the blame.

Section 88

Investors are required to make investments in stipulated tax-saving instruments for claiming tax

rebates under the given section. the investor's income level is the key in determining the rebate he

was entitled to; a higher income level translated into lower rebates. Investments eligible for the

purpose of claiming tax benefits included Public Provident Fund (PPF), National SavingsCertificate (NSC) and tax-saving funds among others. The upper limit (in monetary terms) for

the purpose of tax-saving investments was pegged at Rs 100,000. However the hitch was that

'sectoral caps' existed on the various investment avenues. For example investments in tax-saving

funds (also referred to as ELSS) of upto Rs 10,000 were eligible for claiming tax benefits.

Similarly investments in instruments like PPF, NSC, tax-saving funds and avenues like insurance

premium, repayment of home loan (principal component of the EMI only) among others

accounted only for a Rs 70,000 benefit. The balance Rs 30,000 (Rs 100,000 less Rs 70,000) was

reserved for infrastructure bond investments. Effectively, the investor had little choice in

selecting the tax-saving investments. Instead it was Section 88 which determined how each

individual would make his investments. An investor with a high risk appetite had to choose thesame investment avenues as a low risk investor because of Section 88's restrictive nature.

Enter Section 80C

Section 88 was scrapped in Finance Bill 2005, instead Section 80C was introduced. All avenues

which were eligible for tax benefits under Section 88 were brought under the Section 80C fold.

However instead of offering tax rebates, investments (upto Rs 100,000) under Section 80C

qualified for deduction from gross total income. Hence a new system of claiming tax benefits

was introduced; furthermore a new tax structure was introduced as well.

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PERSONAL TAX RATES

For individuals, HUF, Association of Persons (AOP) and Body of individuals (BOI):

For the Assessment Year 2008-09

Taxable income slab (Rs.) Rate (%)

Up to 1,50,000Up to 1,80,000 (for women)Up to 2,25,000 (for resident individual of 65 years orabove)

NIL

1,50,001 3,00,000 10

3,00,001 5,00,000 20

5,000,001 upwards 30*

*A surcharge of 10 per cent of the total tax liability is applicable where the total income exceedsRs 1,000,000.

Note : -

Education cess is applicable @ 3 per cent on income tax, inclusive of surcharge if there isany.

A marginal relief may be provided to ensure that the additional IT payable, includingsurcharge, on excess of income over Rs 1,000,000 is limited to an amount by which theincome is more than this mentioned amount.

Agricultural income is exempt from income-tax

The biggest advantage Section 80C offered was that sectoral caps on tax-saving instruments were

removed. As a result investors were given the freedom to select investment avenues of their

choice for tax-planning purpose.

Why Section 80C scores over Section 88:

Investing in line with one's risk appetite is a tenet of financial planning and Section 80C

promotes the same. Removal of sectoral caps on investments for the purpose of tax-planningmeans investors can invest in line with their risk appetites and needs. A risk-taking investor can

invest his entire corpus of Rs 100,000 in a high risk instrument like ELSS; conversely a risk-

averse investor can select small savings schemes like PPF and NSC. As a result, every investor's

tax-saving portfolio can now reflect his individual preferences. Another advantage Section 80C

offers is for investors whose gross total income is greater that Rs 500,000. Under the earlier tax

regime, these investors were not eligible for Section 88 tax rebates. However Section 80C has

done away with this disparity and investors across tax brackets can claim the Rs 100,000

deduction.

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Eligible avenues for Section 80C

1. Payment of life insurance premium.

2. Contribution to provident fund.

3. Repayment of principal amounts on housing loans.

4. Payment of tuition fees.

5. Investments in PPF

6. Investments in NSC.

7. Investments in ELSS

8. Investments in Infrastructure Bonds.

What should investors do?

Clearly Section 80C has ensured that the onus of conducting the tax-planning exercise in line

with one's risk profile has shifted to investors. Investors now need to utilise the opportunity by

making the right investments. Investors would do well to remember that investments made for

the purpose of tax-planning can have a significant impact on their finances over the long-term

horizon, hence due importance should be accorded to it. Our advice - engage the services of a

qualified investment advisor, make an investment plan for your tax-planning investments andstick to it; finally don't deviate from your risk appetite.

Tax-saving schemes at a glance

Particulars PPF NSC ELSS Infrastructure

Bonds

Tenure (years) 15 6 3 3

Min. investment

(Rs)

500 100 500 5,000

Max. investment

(Rs)

70,000 100,000 100,000 100,000

Safety/Rating Highest Highest High Risk AA/AAA

Return (CAGR) 8.00 8.00 12.00 - 15.00 5.50 - 6.00

Interest

frequency

Compounded

annually

Compounded half

yearly

No assured

dividends/returns

Options available

Taxation of

interest

Tax free Taxable Dividend & capital

gains tax free

Taxable

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Money control section 80c : Choices galore

The last few budgets have thrown open a variety of investment options to invest to save tax. The

most important question is which area of investment to choose. Three most importantinvestments which as far as possible should be taken advantage of by all individual tax payers in

particular are:

(a) Investment in a residential house property;

(b) Investment upto a maximum of Rs 1 lakh so as to enjoy the tax deduction u/s 80C /80CCC;

(c) Investment upto Rs.10,000/- in a mediclaim medical insurance policy, popularly knownas Mediclaim Policy.

If you want to achieve the highest score of tax planning with reference to your investments, thenone must make it a point to buy one residential house property for self-occupation especiallywhen you do not own a residential property in your name. As per the provisions contained insection 24 of the Income Tax Act, 1961, a deduction equal to Rs 1,50,000 is permissible forevery individual in respect of interest on loan for residential self-occupied house property. Thisinterest on loan is allowed as a deduction irrespective of the person from whom you take theloan. Hence, even if you take a loan not from a banker but from a relative or your spouse andmake the payment of the interest still then the deduction in respect of interest on loan would beallowed.

The maximum amount of deduction as per section 24 in respect of interest on loan for residentialhouse property is Rs 1,50,000 per year. If you don't have a housing loan, it really makes senseright now to start hunting for housing loan and try to get the occupation of the property before theclose of 31st March so as to enjoy the full deduction on account of interest on the housing loan.Please do remember that in case the house is not ready the benefit of deduction will not beavailable in this year. Your investment in residential house property for self-occupation can alsoget you another tax deduction in terms of section 80C whereby deduction from your income uptoRs 1 lakh is permissible even in respect of repayment of the housing loan to bank, financialinstitution, employer etc. Those interested should refer to the exact provisions of section80C.Now, it is time to judge your preference for making investment in various vistas available as

per section 80C of the Income Tax Act, 1961. However, please do remember that one or more

items taken together the total investment amount should be a maximum of Rs 1 lakh to entitleyou to a deduction u/s 80C. One can also opt for contribution to the Pension Plan wherebydeduction u/s 80CCC is permissible upto Rs 1 lakh. However, the combined deduction of section80C and section 80CCC for Pension Plan is Rs 1 lakh only.

Hence, it implies that there is no separate specific deduction for pension plan contribution.Nowcoming to the most important area of tax deduction by making investment in tune with the

provisions contained in section 80C of the Income Tax Act, 1961, we find that the comparativelypopular areas in which investment can be made by the tax payers are payment of life insurancepremium, contribution to public provident fund, investment in NSC, investment in NSS (National

Saving Scheme), payment of the children tuition fee, investment in ELSS and repayment of thehousing loan. Thus, all together one can pick and choose from all these investment options as

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also the pension plan and thereby target the total investment to the figure of Rs 1 lakh, whichhappens to be the maximum amount which one can contribute by way of investment for tax

benefit.

Another happy news of making investment for the purposes of section 80C is investment in bankfixed deposit of any scheduled bank having a maturity period of minimum five years. Thus, yourinvestment in bank fixed deposit during the current year for five years or more will entitle you totax deduction in terms of section 80C of the Income Tax Act, 1961.

How to choose the best investment?

Now let us try to analyze which investment is good for which category of tax payer. It is a well-known fact that the tax payers can be classified into different categories depending upon the tax

bracket in which they are assessed. For example, the first category of tax payers would bepersons having income in excess of Rs 1 lakh but upto Rs 1,50,000. All those tax payers cominginto this category are required to pay income tax of just 10%. I would like to recommend thisgroup to make investment especially in insurance, NSC, NSS and bank fixed deposit.

Now comes the next category of those tax payers who are having annual income exceeding Rs1,50,000 per annum and going upto Rs 3,00,000 per annum. All those tax payers coming in this

bracket are required to pay income-tax at 20%. The best module of investment for this categoryof tax payers would be insurance, payment of tuition fees of the children, ELSS, repayment ofhousing loan and PPF. Now comes the last category of tax payers who come within the income

bracket of more than Rs 3,00,000 where the maximum marginal rate of income tax is 30%. Thiscategory of individual tax payers should invest in insurance, PPF, ELSS and repayment of thehousing loan. However, the investment in various investment instruments can vary from personto person depending upon his profile of investment and his liking or otherwise. However, purelyfrom the point of view of tax and investment planning it makes no sense to invest in bank fixeddeposit especially by those tax payers who are having high income and high rate of income tax.This conclusion is drawn from the fact that if a person having, say, income in excess of Rs3,00,000 makes investment in the bank fixed deposit for five years to achieve the benefit ofsection 80C deduction, he enjoys tax deduction but on his income from bank fixed deposit hewill be required to make payment of income tax at the rate of 30%. Hence, we would like torecommend investment in bank fixed deposit as a part of investment strategy to achieve taxdeduction u/s 80C only for those tax payers who are coming within the lowest income bracket.

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ANALYZING:

DIFFERENT INVESTMENT AVENUES

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Avenues of investment

An investor has wide array of investment avenues available. They are as under:

1. Mutual funds.

2. Bonds.

3. Life insurance policies .

4. Non marketable financial assets:

Bank deposits.

Post office deposits. Company deposits.

Provident fund deposits.

5. Precious metals : These are items generally small in size but highly valuable in monetary

terms. They are :

Gold and silver.

Precious stones.

Other valuable objects.

6. Financial derivatives.

7. Real estate.

8. Equity shares and preference shares.

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MUTUAL FUND

Understanding Mutual Funds

Mutual fund is a trust that pools money from a group of investors (sharing common financialgoals) and invest the money thus collected into asset classes that match the stated investment

objectives of the scheme. Since the stated investment objectives of a mutual fund schemegenerally forms the basis for an investor's decision to contribute money to the pool, a mutualfund can not deviate from its stated objectives at any point of time. Every Mutual Fund ismanaged by a fund manager, who using his investment management skills and necessaryresearch works ensures much better return than what an investor can manage on his own. Thecapital appreciation and other incomes earned from these investments are passed on to theinvestors (also known as unit holders) in proportion of the number of units they own.

When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets

of the fund in the same proportion as his contribution amount put up with the corpus (the totalamount of the fund).

Mutual Fund investor is also known as a mutual fund shareholder or a unit holder.Any change in the value of the investments made into capital market instruments (such as shares,debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as themarket value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme iscalculated by dividing the market value of scheme's assets by the total number of units issued tothe investors.

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For example :

A. If the market value of the assets of a fund is Rs. 100,000B. The total number of units issued to the investors is equal to 10,000.C. Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000 or 10.00

D. Now if an investor 'X' owns 5 units of this schemeE. Then his total contribution to the fund is Rs. 50 (i.e. Number of units held multiplied by

the NAV of the scheme)

MUTUAL FUND INDUSTRY IN INDIA. The mutual fund industry can be broadly put intofour phases according to the development of the sector. Each phase is briefly described as under.

First Phase - 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by theReserve Bank of India and functioned under the Regulatory and administrative control of the

Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial DevelopmentBank of India (IDBI) took over the regulatory and administrative control in place of RBI. Thefirst scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700crores of assets under management.

Second Phase - 1987-1993 (Entry of Public Sector Funds)

Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Canbank MutualFund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in1990. The end of 1993 marked Rs.47,004 as assets under management.

Third Phase - 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fundindustry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year inwhich the first Mutual Fund Regulations came into being, under which all mutual funds, exceptUTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged withFranklin Templeton) was the first private sector mutual fund registered in July 1993.The 1993SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised MutualFund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund)

Regulations 1996.The number of mutual fund houses went on increasing, with many foreignmutual funds setting up funds in India and also the industry has witnessed several mergers andacquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs.1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management wasway ahead of other mutual funds.

Fourth Phase - since February 2003

This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is theSpecified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January2003). The Specified Undertaking of Unit Trust of India, functioning under an administrator andunder the rules framed by Government of India and does not come under the purview of the

Mutual Fund Regulations.

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The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registeredwith SEBI and functions under the Mutual Fund Regulations. With the bifurcation of theerstwhile UTI which had in March 2000 more than Rs.76,000 crores of AUM and with thesetting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and withrecent mergers taking place among different private sector funds, the mutual fund industry has

entered its current phase of consolidation and growth. As at the end of September, 2004, therewere 29 funds, which manage assets of Rs.153108 crores under 421 schemes. Mutual Funds areamong the hottest favourites with all types of investors. Investing in mutual funds ranks amongone of the preferred ways of creating wealth over the long term. In fact, mutual funds representthe hands-off approach to entering the equity market. There are a wide variety of mutual fundsthat are viable investment avenues to meet a wide variety of financial goals

STRUCTURE OF MUTUAL FUND

SEBI Regulations 1996 defines a mutual fund established in the form of a trust to raise money

through the sale of units under one or more schemes for investing in securities. So a mutual fund

is constituted in the form of a trust under the Indian Trust Act, 1882. There are several

constituents of a mutual fund structure. Different constituents of a mutual funds structure are :

a) SPONSOR: Sponsor means any person who, acting alone or in combination with another

body corporate, establishes a mutual fund. Sponsor also creates a Board of Trustees.

b) BOARD OF TRUSTEES: The Board of trustees holds the property of the mutual fund in

the trust for the benefit of the unitholders. The board has a responsibility to ensure that the

mutual fund is managed under the statutory provisions and the relevant guidelines.

c) Asset Management Company (amc): A mutual fund is set up as a trust which has asponsor AMC. The AMC must be recognized by SEBI. It manages the funds of the mutual

funds scheme by making investment in various types of securities SEBI Regulations

require that 50% of the directors of the AMC must be independent.

d) CUSTODIAN, etc: Custodian, bankers and registrar and transfer agents are other

constituents of the mutual fund structure. They are appointed by the board of trustees and

provide various types of financial services to the mutual fund. Constituents of a Fidelity

mutual fund are:

NAME : Fidelity mutual fund.Sponsor : Fidelity international investment advisors (liability limited to 1 lakh)

Trustee : Fidelity trustee company (p) ltd.

AMC : Fidelity fund management (p) ltd.

In case of UTI mutual fund, there are 4 sponsors: The SBI, PNB, BOB, LIC (liability of eachsponsor limited to RS 10,000).

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STRUCTURE OF MUTUAL FUND

RETURN FROM A MUTUAL FUND

Return from a mutual fund depends upon the objective of the scheme .In general, the

return from the mutual funds may consist of the following:

1. Periodic dividends in cash(generally annual)

Financial Planning and Its Relevance in Indian Families-heena Di

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