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ICICI Securities Page 1 of 194 JCP on Managing Personal Finances

JOINT CERTIFICATION PROGRAM (JCP) ON

MANAGING PERSONAL FINANCES

CURRICULUM

Session 1: Introduction and Steps of Financial Planning

Session 2: Insurance Planning

Session 3: Retirement Planning

Session 4: Investment Planning

Session 5: Tax Planning AND Estate Planning

Session 6: Asset Classes & Product Suitability AND Goal Planning

Session 7: Summary AND Important Calculations by Our Team

Session 8: Assessment Test

Session 9: Case Study Contest

.


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SESSION 1: INTRODUCTION AND STEPS OF FINANCIAL PLANNING

Planning doesnt come naturally to most of us. In a way it challenges optimism and

compels you to think about uncertainties. Implementing a plan doesnt always

guarantee, but it ensures that the odds of success increase manifold.

As we go through various life stages, we aspire to attain various goals. And to

achieve them it is imperative that we have a sound financial backing. This is where

the concept of financial planning comes in, which helps you achieve your goals.

What is financial planning?

Financial planning is the process of managing ones finances with the objective of

achieving life goals. These goals could vary from buying a house to going on a

dream vacation to more serious goals like retirement planning or child education

planning. A good financial plan requires analyzing the financial status, outlining the

goals and understanding the means for achieving these goals.

Setting realistic time horizons to achieve goals and achieving them with discipline

and planning is what a good financial plan helps in accomplishing. The ability to

mitigate risks when investing is another important facet that financial planning

addresses.

Why financial planning?

Financial Planning provides direction and meaning to your financial decisions. One

feels more secure and more adaptable to life changes, once they measure that they

are moving closer to realization to their goals. Implementing a financial plan offers an

unrivalled peace of mind. It removes components of fear and uncertainty from your

day-to-day life.


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It is better to co-relate with an example.Let's assume you go for an overnight 12-

hour train journey. What all things do you plan for? Reserving ticket in advance,

reaching station well on time, taking food, water, bed spreads, i-pod, books, lock and

key, etc. This has become a normal routine for most of us. For a 12-hour journey, we

plan so many things properly.

Life is a similar journey for approximately 75 to 80 years; and there are some

financial requirements in this journey too like buying a home, car, getting children

educated and married, etc. Hence, it is prudent to plan well ahead for all these

requirements like a train journey.

The importance of financial planning cannot be overstated. Among others, two

aspects matter a lot are - inflation and changing lifestyles.

Inflation is a situation wherein too much money chases a limited number of goods.

This leads to a fall in the purchasing power of money. For example, a product that

costs Rs. 100 today would cost Rs. 106 a year later, assuming inflation at 6 percent.

Over 30 years, assuming that inflation continues to rise at 6 percent, the same

product would cost you Rs. 574. Financial planning helps ensure that you are better

prepared to deal with the impact of inflation, especially in retirement when expensescontinue but sources of income dry up.

The second factor is changing lifestyles. With higher disposable incomes, it is

common for individuals to upgrade their standard of living. For example, cars were

considered luxuries not too long ago but are a necessity today. Financial planning

plays a key role in helping individuals and families, both upgrade and maintain their

lifestyle.

Moreover, there are contingencies like medical emergencies or unplanned

expenditures. Sound financial planning helps mitigate such circumstances, without

straining your finances.


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To put it in a nutshell, financial planning is all about investing for your goals and

maintaining a fair amount of liquidity to make use of any opportunity that may

present itself or meet any unforeseen emergencies.

Features of financial planning

A financial plan enables you to analyze your behavior and help optimize your

expenses and savings. Viewing each individual expense as a whole enables you to

understand the impact on your long-term financial plan. For example, investing in a

certain mutual fund might help increase your returns but might not work out too

favorably once its tax implications are considered.

A good financial plan helps in setting realistic time horizons to achieve goals and

assists in achieving them with discipline. The ability to mitigate risks when investing

is another important facet that financial planning addresses.

Understanding the risk-taking ability along with achieving long-term goals can often

be a fine balance in today's volatile markets and the ever changing global economic

factors. Traditional bank deposits do not yield enough returns to beat the soaring

inflation rates. Falling equity markets, resulting in erosion of wealth, have added to

the woes of investors. It is during such times that disciplined investing and focus on

the long-term ensures wealth creation.

Myths about financial planning

Myth 1: I need to have a substantial sum of money/assets before thinking about

financial planning

Fact: This myth primarily prevents people taking the first step towards financial

planning. Financial planning will in fact help build assets and investments. Investing

is only one part of financial planning. Financial plan will help you structure your

goals, chart out a road map and above all make you aware of what you need to do to

get to your final destination.


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Myth 2: I am already saving enough. Why do I need financial planning?

Fact: If you have saved enough you have already taken the first step towards

financial planning. However, saving is just one aspect. A good financial plan will help

you understand how much is enough... It will help channel your savings in the right

direction and make them work harder and better to achieve your goals. A financial

plan will tell you how much of your savings should form part of an emergency fund

and how much should be easily liquid-able. This helps in times of emergencies and

opportunities.

Myth 3: I cannot afford a financial planner or financial plan.

Fact: Like any professional service like doctor, lawyer etc financial planners also

charge for their services. Look at these charges as a proactive investment and not

some reactive expenses like doctors fees. A good financial plan will help you save

and earn far more money than you would have paid in fees or commissions. And

more importantly, beyond the monetary benefits, it will give you peace of mind, time

saving, and a better focus on your financial life.

Myth 4: I am too young to worry about financial planning.

Fact:Wouldnt you like to live longer, but not working longer? The earlier you start

the greater your chances of achieving your life goals. Hit the field running. With age

on your side the amount you need to invest will be low while the risk / return you can

take will be higher - thereby, making your money work hard. Just think about this

A 25 year old invests Rs 50,000 annually at 10% for 25 years end up with Rs 50 lakh.

A 30 year old does the same and ends with just 29 lakh.

Myth 5: I am nearing retirement. Isn't it too late for financial planning?

Fact:While running a marathon you need to start early and break out of the pack, but

you also need to conserve energy to finish. Financial Planning will help you keep


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pace with your finances through life. When nearing retirement it can tell you how

much energy you still have left and what strategy changes you need to finish the

race. A financial plan can help you understand where you stand and forecast how

your retirement years will pan out financially.

Myth 6: My children will take care of me post-retirement. I don't need to think

about planning for retirement.

Fact:In such scenarios, there may not be a need to save extensively for retirement.

But financial independence is always welcome. Moreover, financial planning can help

you with your estate planning. You may want to help your grandchildren get the best

education and it is important to plan for such goals and invest in instruments

accordingly.

Myth 7: I know enough about investing and have good knowledge of markets and

financial products.

Fact: It is good to know about the markets and financial products. However, a

financial plan is not just about financial products or the markets. A good financial

plan considers your risk profile and suggests an asset allocation strategy. It helps youdefine your goals and suggests an investment strategy based on your risk profile.

And importantly, a financial plan if followed will inculcate discipline in your

investments and will help you overcome drastic downturns in the markets by a

diversified asset allocation mix.

Just consider thisYour asset allocation dictates a 70% equity, 20% debt and 10%

cash allocation. If the market moves up your equity allocation goes up which you

need to rebalance to the original. The money you have made by booking profits

moves to a safer investment. If the market falls and presents an opportunity, you are

liquid to invest and not left with un-booked losses.


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Myth 8: Isn't tax planning the same as financial planning?

Fact: Categorizing financial planning as another term for tax planning is another

misconception. Both are distinct but tie-in as well. Tax planning is one component of

financial planning. Financial planning will not only cover the most tax-efficient

investments but will also help you chose the right instruments for tax planning based

on your risk profile. An investor with higher risk profile can look at greater

investments in equity-linked tax-saving instruments while risk-averse investors may

want more of a fixed income component in his tax planning. Financial planning can

help determine this allocation.

Steps of Financial Planning Process

Financial planning requires financial advisors to follow a process that enables

acquiring client data, and working with the client to arrive at appropriate financial

decisions and plans, within the context of the defined relationship between the

planner and the client.

The following is the six-step process that is used in the practice of financial

planning.


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Implement the plan:

Explain how therecommendations need to

be carried out

Establish

relationship:Discuss how we

will worktogether

Gather client data:

Discuss goals and financialinformation

Develop the plan:

Presenting financialplanningrecommendations

Monitor the plan: PeriodicReview and Revision

Analyze and evaluate

financial status:determine what needs tobe done to achieve goals


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1. Establish and define the client-planner relationship: The financial planning

process begins when the client engages a financial planner and describes the

scope of work to be done and the terms on which it would be done.

The terms of engagement between client and a partner are usually spelt out in alegal agreement that is signed by both parties.

The general scope of the work includes:

Explaining services provided, the process of planning, and the required

documentation

Describing how they will be compensated

Identifying the responsibilities of the planner and the client in the relationship

(discretionary vs. non-discretionary)

Deciding on the length of the engagement

Discussing any other matters needed to define or limit the engagement's scope

2. Gather client data, including goals:This step involves asking for information

about clients financial situation. Planner needs to help define clients personal

and financial goals, understand his time frame for results and discuss, if relevant,

how he feels about risk. This step is basically about gathering all the necessary

information before proceeding any further. It includes collection of:

Client's income status

Assets and liabilities status

The extent of risk a person is exposed to

The extent of insurance that a person has, etc.

3. Analyze and evaluate financial status: In this step, the planner evaluates

clients current financial status and analyzes potential scenarios and outcomes.

The planner analyzes the information provided by client to assess his current

situation and determines what he must do to meet his goals. This could include

analyzing his assets, liabilities and cash flow, current insurance coverage,

investments or tax strategies.


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Some examples include:

Identifying short-term goals like buying a house, buying a car, taking a vacation,

etc.

Identifying long-term goals like childrens education, childrens marriage,retirement, etc.

Attributing a financial value to each of these goals

Separating realistic and unrealistic goals

4. Develop and present financial planning recommendations:The planner makes

an assessment of what is already there, and what is needed in the future and

recommends a plan of action. This may include augmenting income, controlling

expenses, reallocating assets, managing liabilities and following a saving and

investment plan for the future. It involves:

Filling the savings gap

Restructuring existing assets into productive/growth assets

Making an investment plan, both lump-sum and regular

Building a defense mechanism into the plan through insurance

5. Implement the financial planning recommendations:This involves executing

the plan and completing the necessary procedure and paperwork for

implementing the decisions taken with the client.

Filling the savings gap by inducing the client to save more through systematic

investment plan (SIPs), endowments, etc.

Restructuring existing assets into productive/growth assets. Get the client into

equity products where goals are aggressive.

Making an investment plan, both lump-sum and regular. Match them to cash

flows. How much of monthly earnings can the client save? How much of his

lump-sum receipts can he set aside?

Building a defense mechanism into the client's plan through insurance. This is a

broader concept. He needs term insurance to cover the risk of dying early but

endowment for the risk of living too long the two facets of retirement planning.


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Liabilities and assets need to be insured through sufficient term insurance so

that they do not become a burden on the plan

Surrendering legacy insurance and consolidating them

Making the client's plan tax efficient

6. Monitor the financial planning recommendations:The financial situation of a

client can change over time and the performance of the chosen investments may

require review. A planner monitors the plan to ensure it remains aligned to the

goals and is working as planned and makes revisions as may be required.

Reviewing where insurance coverage has gone out of sync with the plan

Reviewing where portfolio mix has gone out of sync with the plan

Reviewing where the themes mix has gone out of sync with the plan

Reviewing where major macro changes have affected some of the client's plan

assumptions


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SESSION 2: INSURANCE PLANNING

An individual undergoes various life stages, each characterized with specific

goals. When you are single, usually up to 25 years of age, you start laying the

foundation for the financial security of your future. Once you get married andhave children, your priority is asset accumulation and wealth generation. And

then your pre-retirement and finally the retirement phase are characterized by

wealth utilization and distribution.

A proper financial planning at each stage of life leads to a secure financial future.

But, we have to consider the time value of money as well. The present value of

the money will not be the same in future. For example, your monthly expenses of

Rs. 30,000 today will be Rs. 38,288 after five years, assuming inflation at 5%.

All these show that life is constantly changing. Your life stages change and so do

goals and priorities. The financial position and the cost of living also changes with

time.

In order to have a secure financial future, you have to plan according to these

changing situations. But one factor that you are always exposed to at all times is

risk.

We live in an uncertain world. Risk is a possibility of any harm, injury, loss, danger

or destruction of an individual or their belongings.

There are accidents, mishaps, illnesses, natural disasters happening every day. A

person who is happy, healthy and alive today cannot be sure of what will happen

tomorrow, as he/she is always exposed to this uncertainty called risk.

From your current age to the age of your retirement, you have some specific

goals like buying a new house, getting married, child's education, retirement

planning, etc. You always plan your finances to turn your goals into reality. But

you are exposed to some possible uncertainties like death, accident, illness, loss

of job, etc.


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insurance cover ensures that you achieve your goal, even in case of an

eventuality. Your family and dependents will not be affected financially if you

have an insurance cover.

Now, let us see what an insurance company does.

An insurance company brings together people who share the same risk. The risk

can be to their life, or their belongings like house, vehicle, etc.

It collects the contribution called the premium from the group of people and pays

a compensation or claim to the one who suffers a loss.

Thus by forming a fund pool it spreads the risk of one among a group.

What are the types of insurance?

Insurance is mainly of two types - life insurance and general insurance. General

insurance covers a wide range of products like vehicles, fire insurance, house,

travel, health, marine, etc.

Now let us see life insurance in detail.

Life insurance

Life insurance is a contract in which the insurer agrees to pay the assured sum of

money to the insured in case of his/her death. Life insurance covers the risk

associated with the life of an individual.

The assured sum which the insurer pays is in consideration of a certain amount

called the premium. The premium is either paid in lump sum or as periodical

payments.

Need for life insurance

Every earning individual needs to support his/her dependents financially for

spending their daily expenses, repaying liabilities and achieving all the goals,

during his/her lifetime. The regular income earned by the individual is the source


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for achieving all these. Hence, it's very important to protect the family against the

loss of the income due to the death of the breadwinner, so that the family's quality

of life does not undergo any drastic change.

Individuals have two ways of protecting loss of income due to one's death one,by accumulating sufficient assets, another by taking life insurance, or by a mix of

both. Most of the individuals in their early stages of working life might not have

accumulated enough assets and hence, it's prudent to have sufficient life cover in

place.

How much life insurance should one buy?

Life insurance is meant to provide with the enough money to your dependents to

replace your income in case you die. Ideally, your life cover must take care of the

following things:

a) Family expenses till lifetime;

b) Liabilities outstanding and

c) Family and children goals.

This worksheet will help you determine how much coverage you will need:

1. Providing for family expenses till lifetime

Annual expenses required for dependents Rs.2,40,000

Number of years for which you wish to provide above

expenses

25 years

A: Corpus required for funding family expenses Rs.60,00,000

2. Liabilities Outstanding

Home loan Rs.15,00,000

B: Corpus required for repaying liabilities Rs.15,00,000

3. Family Goals

Child education (todays cost) Rs.8,00,000

Child marriage (todays cost) Rs.10,00,000

C: Corpus required for fulfilling goals Rs.18,00,000

A + B + C = The estimated amount of life insurance you

will need

Rs.93,00,000

(From this estimated cover, you can deduct existing life cover, if any, and assets that you have

accumulated - excluding the ones for your familys use)


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If you are unable to cover all the above three, then cover can be taken at least for

some of them, based on the below order of priority:

a) Unsecured liabilities;

b) Family expenses till lifetime;

c) Secured liabilities;d) Children goals; and

e) Family goals.

Thumb rule to calculate life cover

As a thumb rule, every earning individual has to have a life cover of 10 to 20 times

of annual income depending on their age. For people aged from 25 to 40, a life

cover equal to 20 times of annual income and for people above the age of 40, a

life cover equal to 10 times of annual income would be the thumb rule.

Insurance coverage given by life insurance companies

The life insurance companies provide life cover to individuals based on two main

factors Age and Income. Since life cover replaces an individual's income for the

family, income is the main factor. As age increases, the risk of natural death

increases and hence, age too plays a role in determining how much of life cover

can be provided to an individual. Apart from these two factors, there are a lot of

other factors like personal health, family's medical history, usage of tobacco, etc.

The below is an indicative table which provides the maximum life cover which

can be offered based on age. The slabs might vary from one company to another.

Age group Maximum life cover offered

18 35 20 times of annual gross income




Consequences of not having sufficient life cover

Let us see this with an example.

Anil, aged 32, is working in an IT firm and has a family of 3 people Soni, aged

30, house wife; and 2 children Kunal, aged 4 years and Kapil, aged 1 year.

Annual income Rs.7 lakh

Family's annual expenses Rs.5 lakh


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Home loan outstanding taken by Anil Rs.25 lakh

Existing life insurance cover for Anil Rs.10 lakh

On sudden death of Anil due to an accident, the family gets Rs.10 lakh (sum

assured) from the life insurance company, which is not sufficient to meet thefamily's annual expenses and repay the home loan outstanding. The home has to

be sold to repay the home loan outstanding amount. Rs.10 lakh will be put in a

fixed deposit which will yield around Rs.1 lakh p.a. as interest for meeting daily

expenses. The family's lifestyle drastically changes with less amount available for

regular expenses. Therefore, it is important to have sufficient life cover.

Which Life Cover to choose?

There are several variants of life insurance, ranging from pure protection plans to

savings and investment-linked plans. Lets take a look:

Term plans

Term insurance is a pure risk cover. It has no element of savings or investment. In

the event of death or total and permanent disability, the insureds family gets the

sum assured. If the insured survives the policy term, he or she gets nothing.

Term plan, as the name indicates, is for a specific term, and offers the greatest

amount of coverage at the lowest premium. This is because the insurer does not

provide anything if insured outlives the policy term, i.e. there is no maturity value.

Lets understand this with an example: Suppose Kumar takes a term plan when

he is 35 years old for a sum assured of Rs. 50 lakh and a term of 10 years. His

annual premium is, say, Rs. 7,000. If he dies within the 10-year term, his family

will receive Rs. 50 lakh. If he survives the policy term, he would get nothing.

One can select the length of the term for which he or she wants the coverage,

right from 5 years up to 30 years. Some companies also offer 40-year term plans.


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Term plans come in different variants. Heres a quick sheet to understand them.

RETURN OF

PREMIUM

INCREASING

PLAN

DECREASING

PLAN

SINGLE

PREMIUM

CONVERTIBLE

TERM PLAN

- You get the

return ofpremium at

the end of the

term, but if

you die mid-

way, your

family gets

the sum

assured.

- Slightly

more

expensive

than a pure

term plan as

they promise

return of

premium.

- The sum

assured(cover) in this

plan increases

every year as

a person

advances in

age, while the

premium

remains

constant.

- The core

objective of

this plan is to

beat the rising

inflation

- The

premium is

generally high

for this plan

- The cover

decreases at apredetermined

rate over the

period while the

premium

remains

constant.

- The main idea

of this plan is

that a person's

needs for high

life cover

decreases with

age as his

liabilities (like

home or car

loan) decrease

or no longer

exist.

- The premium

is normally low

for this plan

- Ideal for

those whohave a large

amount to

spare at the

time but are

unsure of

cash flows in

the future.

- This plan

lowers the

risk of lapse

of policy as

a result of

missed

premiums.

- Here you can

switch from aninitial basic

term plan to

insurance-

cum-

investment

plan, at a later

date.

- Premium

may change at

the time of

conversion.

Endowment plans

Endowment plans are a combination of a risk-cover with financial savings. On

death or disability during policy term, sum assured plus bonus or guaranteed

additions is paid to the beneficiaries. Sum assured is paid even if policyholder

survives the policy term. Premiums are generally high for these plans.

Endowment plans are quite popular for their survival benefits.


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Money-back or cash-back plans

Under this plan, certain per cent of the sum assured is returned to the insured

person periodically as survival benefit. On the expiry of the term, the balance

amount is paid as maturity value. The life risk may be covered for the full sumassured during the term of the policy irrespective of the survival benefits paid.

Whole-life plans

Whole-life plans provide life insurance cover for the entire life of the insured

person or up to a specified age. Premium paid is fixed through the entire period.

This plan pays out a death benefit so you can be assured that your family is

protected against financial loss that can happen after your death. It is also an ideal

way of creating an estate for your heirs as an inheritance.

Unit Linked Insurance Plans (ULIP)

ULIP is basically a combination of insurance cover and mutual funds. In ULIPs, a

certain part of the premium is invested in various equity and debt instruments

and the balance is used to provide cover for life.

ULIPs allow policyholders to earn market-linked returns by investing a portion of

the premium money in various options. The returns on ULIPs are linked to the

performances of the markets and underlying asset classes.

Typically, ULIPs provide with a choice of funds in which you may invest. One also

has the flexibility to switch between different funds during the life of the policy.

In the event of death or permanent disability, the sum assured (to the extent one

is covered) is given to the policyholder to assure that his family is protected from

sudden financial loss. A ULIP has varying degrees of risk and rewards. There are

various charges applicable for ULIPs and the balance amount out of the premium

is only invested.

Pension Plans

Pension plans are basically retirement plans to which individuals make

contributions till retirement or for a specified period with an aim to get regular


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income post-retirement. One-third of the corpus accumulated can be withdrawn

as a lump-sum and the remaining can be used to buy annuity that will make

monthly payments to the holder. An annuity is a contract with an insurance

company under which one receives fixed payment on an investment for a lifetime

or for a specified number of years.

Annuity Types

Annuities can be divided into two types deferred and immediate.

In deferred annuity, you save in a systematic manner to build up sufficient funds

for retirement. The withdrawals commence after the retirement of the investor.

In the immediate annuity plan, you invest a lump sum amount as the premium

and the insurance company starts paying back annuity immediately. These are

suitable for investors who have retired or are nearing retirement, and need steady

income from the accumulated retirement corpus.

Annuity Payout Options

There are various annuity payment options that you can opt for. You should

select the options that suit your specific needs the best. Some of the popular

options are:

Life annuity: This option pays you for life. The payment stops when you die.

Hence, this option is suitable for someone who does not have any financial

dependents.

Life annuity with return of purchase price:This option pays you annuity for life

and on death, the initial purchase price (premium paid in the beginning) is

returned back to the nominee.

Life annuity for fixed-period guarantees: This option pays an annuity for a

guaranteed period of 5, 10 or 15 years (as chosen by you) and thereafter as long

as you are alive. This option is ideal for someone who needs money for a fixed

period after which dependency on pension money will come down.


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Joint life and last survivor annuity:This option pays annuity throughout your life

and on death, continues the annuity during the lifetime of the named spouse. It

thus takes care of expenses of both the partners.

Life annuity increasing at a fixed rate: In this option, the annuity amount

increases every year at a simple rate, starting at 3 per cent p.a. This options works

well for those who have not factored in inflation and need an increasing annuity

with each passing year. This option needs a bigger corpus to sustain over the

long term.

Riders

Riders are additional benefits attached to the basic life insurance policy. They

allow you to enhance your insurance cover and help customize your policy to suit

your specific needs.

The most common types of riders available are:

Critical illness:This rider provides additional cover to you in the event of a critical

illness. Cancer, coronary artery bypass, heart attack, kidney failure, major organ

transplant and paralytic strokes are the generally covered illnesses.

Accidental death benefit: It provides an additional sum assured if the policy

holder dies due to an accident.

Partial and permanent disability rider: In this rider, a portion of sum assured is

paid, in case you are disabled permanently or temporarily, due to an accident.

Most policies pay a certain percentage of sum-assured periodically for next 5-10

years.

Waiver of premium rider:This rider waives off future premiums in case you are

not able to pay the premiums due to disability or income loss. Put simply, it

exempts you from paying premiums until you are ready to work again. This helps

protect your policy from getting expired.


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Dos and Donts for buying Life insurance

Dos

When you buy a life insurance policy you should: Think through why you are buying insurance and what core requirements and

expectations

Seek and receive advice and options patiently

Be open-minded but cautious about the advice and information you gather. Ask

lots of questions about the policy options to see what fits your needs. Find out

policy details like: Whether it is a Single Premium or Regular Premium policy.

Which is the best premium payment frequency that suits you e.g.: Annual,

quarterly etc. Whether there is an ECS (Electronic Clearing Service) payment

option to make your premium payment safe and easy.

Fill the proposal form very carefully and personally

Fill it completely and truthfully, remember you are responsible for its contents.

Make sure that the information you give cannot be disputed during a claim.

Ensure you fill Nomination details. If the form is in one language and you are

answering the questions in a different language, ensure the questions are

explained correctly to you and that you have understood them completely.

Remember you have to give a declaration to this effect in the proposal form.

Keep a copy of the completed proposal form you sign and any declarations and

terms agreed upon mutually for your records.

If you are buying Unit Linked Insurance Policies (ULIPs) ask specific questions

about: Various charges, Fund options, Switching of funds; Benefits if you

discontinue the policy, Surrender the policy or Make a partial withdrawal of funds.

Don'ts:

Do not leave any column blank in the proposal form

Do not let anyone else fill it up

Do not conceal or misstate any facts as this could lead to disputes at the time of

a claim

Do not miss or delay your premium payment

(Source: www.policyholder.gov.in)


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Non-Life / General Insurance

We saw life insurance that takes care of the insureds near and dear ones in case

of his/her demise. Insurance, other than life insurance, falls under the category of

general insurance. General insurance products include policies for health, motor,home and travel among others. Lets take a closer look at some of these areas.

Health insurance

Every human being is exposed to various health hazards. Medical emergency can

strike anyone without pre-warning. Lifestyle and critical diseases are catching up

with people at an early age. Health insurance helps to protect against a future

outlay that may be considerably high and unbudgeted for. Hence, the need for an

effective health insurance plans. Healthcare today is an expensive affair, making it

extremely important to invest in health insurance to protect ones family and

finances from the huge dent that a medical emergency can cause. The need for

health insurance is gaining prominence among individuals who consider it as a

means of obviating health risks that can make inroads into their savings. Even

people who strictly follow return on investment policy for their investments are

eying health insurance as a hedge against financial shocks due to medical

emergencies.

There is a myth associated with health insurance that goes this way: If you are

young and looking healthy you dont require health insurance. This is far from the

truth. This is the myth that has gripped majority of people. What happens if one

suddenly meets with an accident? People feel that if they are young and healthy,

they do not require any health insurance. One should always be prepared to deal

with such untoward incidents and availing a health insurance policy is the best

way.

There are two kinds of health insurance policies available in India:

1. Indemnity: This covers hospitalization expenses incurred on re-imbursement

or cashless basis.

2. Benefit:This includes critical illness policies which include the payment of a

lump sum amount on the diagnosis of any of the named critical illnesses.


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Benefits of health insurance

A good health plan ensures that medical expenses incurred on hospitalization for

more than 24 hours are covered by the insurance company. This may include

room charges as well as the money spent towards the surgeon, nursing,medicines and other tests.

One can also avail the benefit of a cashless claim, where the hospitalization

expenses are directly settled between the hospital and the insurance company.

A health insurance policy also takes care of pre-hospitalization and post-

hospitalization expenses. Daily cash allowance and payments for treatment

received prior to hospitalization and during the recovery period is extremely

beneficial as the insured might not have an alternate source of income during

those trying times.

An advantageous policy offers floater plans where the entire family is covered

under one policy and allows the coverage of the medical insurance policy to be

shared among the family members.

Health insurance offers undeniable benefits which extend beyond conventional

hospitalization. Health insurance policies offer a number of benefits such as

income tax deduction, long-term discounts, family discounts and no claims

bonus. Health insurance premiums offer a tax benefit under Section 80D and

there are now products available that are optimized for tax saving. This means

that while the insured is safeguarded from medical contingencies, he or she is

also reducing tax outgo and saving money on a portion of income.

Types of health insurance policies

Insurance companies offer a wide range of health insurance products with

varying coverage and cost. There are options available between a conventional

hospitalization policy and a benefit policy which pays lump sum amount in case

of a pre-specified event or illness. One can also opt for a health insurance policy

that offers cashless claims settlement. Such features help cut down out-of-pocket

medical expenditures, thus reducing the need for cash during hospitalisation or


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medical emergencies. An individual can select the policy that suits his /her health

and budget.

Buying health insurance

It is always better to enroll in a health insurance cover as early as possible. Health

insurance premium tends to increase with age more the age, higher the

premium. A health insurance policy provides a continuous and adequate lifelong

cover against any eventuality, and the premium payable is also very competitive.

Any adult above 18 years of age and up to 60 years can buy a health insurance

policy, which stands renewable up to 70 years of age. An individual can avail a

policy for self along with dependent parents, spouse and kids.

Approaches to buying

Sole bread winner of a household should explore options of taking a personalaccident or critical illness cover. Such covers ensure lump sum payment in

case of a life threatening disease or accident.

3 months and above- Infants above three months till 18 years of age can beenrolled in a Floater Cover under their parents policy.

Married person with kids:A family comprising of children and elderly shouldopt for a cover that offers more than just a normal mediclaim. A cover that

takes care of Outpatient Department expenses like vaccination for kids,

maternity expenses to regular check ups of elderly members of the family.

An individual keen to cover himself and the family against maximum riskexposure should go for a top-up mediclaim cover, which provides higher

hospitalization cover sum insured.

Health insurance plans available today are quite user-friendly. You can buy a

policy online, renew it online and get details of your claim status. You can also

find the list of cashless hospitals pan-India. Also, there is a cashless facility

available under the health policy which eases the requirement of cash when you

are hospitalized.


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Dos and Donts for buying Health insurance

Dos

When you buy a health insurance policy you should:

Know that there are restrictions on coverage

Pay special attention to terms and conditions in the policy like:The clause excluding pre-existing diseases

Waiting period before certain diseases can be covered

Restrictions or limits on various expenses relating to hospitalization

Co-payment, which means you have to share a part of the claim

Pre-conditions for renewal

Upper limits for age at entry and for renewal

Disclose details of all pre-existing health problems including:

Major ailments

Conditions like high blood pressure or diabetes

The company may want medical test reports depending on age at entry; you

should comply with all procedures and documentation requirements

Check where and how the medical tests will be carried out

Check who should bear the cost for the tests

Pay the premium only after the insurer accepts your proposal

Renew the policy meticulously for the rest of your life

Donts

Conceal facts or you could face a dispute at the time of a claim

Allow a gap of even one day in your policy renewal or your cover may be

insufficient or useless

Overseas Health Policy: Dos and Donts

Dos

Insure well ahead of your travel dates ensuring you have time for medical tests

if required by the company

Ensure you cover your entire period of stay abroad and all the countries you

will be visiting

Be aware of what your policy covers and does not cover. These policies cover

not only hospitalization but could also cover travel related risks like:

Loss of passport

Loss of cash

Loss of baggage and


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Repatriation expenses

Disclose details of all pre-existing health problems including

Major ailments

Conditions like high blood pressure or diabetes

Comply with all procedures and documentation requirements the company maywant including medical test reports depending on age at entry.

Check where and how the medical tests will be carried out

Check who should bear the cost for the tests

Pay the premium only after the insurer accepts your proposal

Donts

Conceal facts or you could face a dispute at the time of a claim


Motor insurance

Motor insurance is the fastest growing general insurance segment in India and

worldwide. Motor vehicles are divided into three classes for the purpose of

insurance: Private cars, Motor cycles, and Commercial vehicles.

Motor insurance policies are normally taken for a period of one year. However,

according to the requirements of the vehicle owner, a policy for a shorter term

can be issued. Situations do arise when a person plans to sell off his vehicle

within a couple of months and does not intend to renew his policy for another

year. In such circumstances, he may go for a shorter period of cover. Short

period insurance attracts short period scale for calculating premium and

obviously works out costlier than the pro-rata for the said period.

Third party insurance and comprehensive insurance policy are the two types of

motor insurance policies available.

Third party insurance: This covers the insured's liability to third parties for

death and bodily injury caused by an accident involving the motor vehicle. This

refers to the minimum risks that are to be covered under the Motor Vehicles Act.

Comprehensive insurance policy:This insurance cover is wider in scope and

covers not only accidental damage to the insured's own vehicle but also the loss

or damage to the vehicle itself by way of accident, theft and other specified perils.


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Dos and Donts for buying Motor insurance

Dos

When you buy a motor insurance policy you should:

Know that you can buy this policy through anyone and there is no compulsionto buy it through your vehicle dealer

Fill the proposal form yourself even if the vehicle dealer is arranging for the

insurance

Fill the proposal form carefully and factually and thoroughly

Keep a copy of the completed proposal for your records

Read the policy brochure/ prospectus carefully to know what is covered and

what is not

Ask for information about add-on covers that may be available and choose what

suits you

Give documents such as RC Book, Permit and Driving Licence to the insurance

company for verification

Ensure that you keep these documents updated from the authorities concerned

Donts

Dont let anyone else fill your proposal form

Dont leave any column blank

Dont forget to renew your policy without any break

Dont forget to ask for the correct procedure when you buy a used car that

already has insurance.

Dont make false declarations about the actual use of the vehicle you are

insuring


Home / property insurance

A home is usually the largest asset an average person owns during his lifetime.

Therefore, it is imperative to secure your home from natural and man-made

catastrophe. A home insurance plan ensures you peace of mind by protecting the

structure and the contents of your home. Banks generally offer home insurance

at the time of taking a home loan. You can purchase a policy from an insurance

agent or it can be purchased online. You can also purchase it through


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Travel insurance

In the present scenario domestic as well as overseas travel could pose a risk and

the need for insurance is being realized.

For students who wish to pursue studies abroad, taking a travel insurance policyis a necessity. It is better to buy the policy from India as it is more cost effective. It

helps the student to seek a waiver from the compulsory university insurance,

which in turn will certainly help the student save substantially. Student medical

insurance in India costs one-third the amount they have to pay in the US. The

waiver form can be downloaded from the university website and sent to the

appropriate person indicated.

Dos and Don'ts for buying Travel Insurance

Dos

Plan for your Travel Insurance ahead of time just as you plan for your visa and

so on.

Take care to fill in the proposal form completely and truthfully after getting the

necessary medical tests done and obtaining the medical report as required

Plan for the travel period ahead of time and ensure that your insurance covers

the entire period

If you have to extend the period of cover, plan for it before the cover expires and

provide the required documents to the insurer

Make sure you have gone through the policy document completely and make a

note of the contact details of the agency servicing the claims so that it is handy in

the event of an emergency

If you are cutting short your travel period, check your policy to see if you are

entitled for a refund

Donts

Dont postpone taking your travel insurance till the last minute

Dont get pushed into taking a cover only as recommended by your travel agent

Get as much information as possible and exercise your choice

Dont get tempted to opt for the cheapest cover as it might not meet your needs


For Further Reading on Insurance, you may refer:

http://www.policyholder.gov.in/

http://www.irda.gov.in/


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SESSION 3: RETIREMENT PLANNING

As one grows older, retirement is an inevitable stage of life. Therefore, it is

essential to create a plan that will fulfil ones needs right through ripe old age.

Planning for retirement is about ensuring that one has adequate income to meetthe expenses post retirement. It is about anticipating ones future requirements

and taking the correct steps to enjoy current lifestyle well beyond ones working

years.

There are three stages in our life learning, earning and accumulation. In the

learning phase we go through our education and complete it. In the next stage i.e.

the earning phase, we earn our livelihood, say, from the age of 25 up to 60. So

this is a very important phase to accumulate the earned money. In the

accumulation phase, we start using up the accrued money, which we have been

amassed during the earning stage. Hence, it becomes necessary for us to plan for

retirement even while we are in our second stage i.e. the earning phase.

Everybody desires to retire peacefully and lead a fairy tale retired life. But in

actuality, the happily ever after or to retire peacefully is a very vague term. Most

importantly, you should decide when you want to retire. One may want to retire

at the age of 55 or even earlier, or one may want to continue working till 65. It is

vital to think about the expenses or needs after retirement. You should know how

much amount you will require annually after retirement.

Generally everybody wants to continue the same lifestyle even after retirement.

To continue with the same lifestyle a person needs to plan well for retirement.

Factors that necessitate planning for retirement

In the past, larger job opportunities with the government (therefore assured

pension) and dependence on joint family ensured that planning for retirement

was not the top priority. Today, the changing socio-economic landscape,

including the rising rate of inflation and longer life expectancy necessitate

planning well for retirement.


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Retirement planning is the key challenge for all of us. It is the key challenge even

for developed nations. The population is aging around the world. Employers are

encouraging people to work longer - by increasing the retirement age and

curtailing the benefits, such as pensions. In the United States (US), for example,

retirement age is gradually increasing to 67 from historic 65. Further, only 15 percent of the private sector jobs today provide pensions, in 1979 that figure was 38

per cent.

Following are a few key reasons that call for prudent retirement planning:

1. Social changes:The social structure is continuously changing wherein a large

number of young working professionals are moving out of their traditional joint

families to lead a nuclear family structure. Hence this creates a situation wherein

the older members in the family will have to fend for themselves after retirement.

2. Increasing life expectancy: The average life expectancy of an individual has

gone up due to advancements in medical sciences and technology. By 2050, life

expectancy is projected to reach to 74 years from the current 65 years. This

increases the number of years that an individual lives post-retirement. Increased

longevity would mean planning for 15 to 20 years of retired life may be, even

more.

3. No benefits from employers: Earlier, there were guaranteed pension and

medical benefits available from employers. These days, more and more

corporates and even governments are moving towards defined contribution

system from defined benefit systems. This means, our retirement could be very

different from those earlier days or from what our parents experienced. We would

need to manage on our own to take care of our needs post retirement.

4. Rising medical expenses:In old age, the need for medical expenses rises. Even

simple tests and procedures now cost hundreds of rupees. In the years to come,

it would cost even more. Medical inflation is a matter of great concern. The

healthcare costs in India are rising steadily at the rate of 18 to 20% every year.

This is higher than the overall inflation rate of 6 to 7% as seen in the past few

years. This needs to be, and can be managed with the help of retirement

planning.


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5. Increased standard of living:There has been a rise in the standard of living of

people in the country. Let us look at examples of increased standard of living:

1. Till a few years ago, cars were considered luxury, but today it is a necessity.

2. Eating out and going to a movie were experiences that people did not enjoy

much a few years ago. Now it has become common, and easily cost hundreds of

rupees in a day. To maintain this standard of living, it is essential to plan for

retirement.

6. Rising inflation:Generalinflation is another great concern that necessitates the

need for retirement planning. For the uninitiated, inflation is the fall in purchasing

power of money. Simply put, an increase in the general price level for a

considerable period of time is called as inflation. Even a 2 per cent inflation rate

will reduce the purchasing power of your money over time.

Let us understand this with an example:About 60 years ago, an average middle

class person earned Rs. 600 and was able to support his family comfortably. Now

compare the salary with that of a typical middle class family earning today, about

Rs. 30,000. So what was Rs. 600 six decades ago is equivalent to Rs. 30,000 now,

a 50 times increase. This is inflation. It is essentially a real-life value of money

which keeps on reducing.

This kind of price rise will have a deep impact on our finances over a period of

time. For example, what will be the cost of 1 litre of milk, which costs Rs. 30 a litre

today, after 30 years? Well, assuming inflation to be 5 per cent the price will be

Rs. 129.66. Like wise, there will be a continuous price rise over a long period. If

you plan to maintain your current lifestyle even after you retire, you will need to

build in inflation protection. That may mean saving more for investment purposes

or adjusting your current investment strategy to generate a higher return over the

long term.


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If your monthly expenses today is Rs. 30,000

Years Toretirement

Actual amount

required

consideringinflation (Rs.)

Corpus required

at retirement(Rs.)

Monthly savings (Rs.) required at

8% 10% 12%

10 53,725 10,749,791 59,298 53,360 47,982

15 71,897 14,385,646 42,338 35,819 30,226

20 96,214 19,251,239 33,617 26,591 20,929

25 128,756 25,762,500 28,161 20,723 15,135

30 172,305 34,476,037 24,320 16,581 11,190

35 230,583 46,136,714 21,396 13,467 8,372

(Note: Inflation taken at 6 percent and post-retirement return at 8 percent)

To offset the effects of inflation, it is necessary to create regular income channels

that will provide ample funds to maintain your life style even after retirement. To

create such channels, planning your finances in a systematic manner takes

precedence. This brings us to the objective of retirement planning.

There may be other reasons as well that may cause some financial hitch during

life after retirement. Thus to overcome those hindrances, it is necessary that one

makes regular savings and investments.

Where to start? Steps to retirement planning

Before you start planning for retirement there are some aspects that you should

be mindful of. Analyzing your current situation and creating a plan accordingly

will have great positives. Identifying your current life stage is the first step

towards creating your retirement plan. Every life stage has its priorities and so

you should examine them. Life stages are mainly segregated as: Single, Married,

Married and with kids, and Post-retirement. Each life stage brings with it the

challenges and to overcome them proper planning is needed. Especially in the

early years of your life, in addition to meeting your current financial needs, you

have to plan for your future as well.


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Step 1. Identify your life stage

Single: If you are single then your life stage priority must be to lay the foundation

for financial security. This is generally the time when you are just entering theworkforce and getting adjusted into a professional life. At this stage, chances are

that your liabilities will be minimal. This gives you an impetus to save more.

Starting to save early on in life helps you build up a sizeable retirement corpus

because of the power of compounding that comes into play.

Married and have kids: When you are married and in the subsequent life stage

when kids are born, your priority may be to accumulate assets and generate

wealth for the future life goals like buying a new house, children's education,

children's marriage, among others. Generating wealth is in part related to saving

up for your retirement. This process needs to be conducted in a systematic

manner such that your life goals are not compromised and at the same time your

retirement kitty grows.

Post-retirement: And if you are retired, and no longer working, then you must be

utilizing the wealth that you accumulated during your pre-retirement phase. With

the advancement in medical care, the average life expectancy is trending higher.

To make the wealth that you saved sustainable for your long life, you should look

for channels that will keep your resources flush.

After identifying your life stage, the next step is to find out how much you will

need to fund your retired life.

Step 2. Estimate the cost of retirement / estimate the required retirement

corpus

One size does not fit all and it is very difficult to find out actually the amount you

will need to save up to be used after retirement. Retirement Planning helps in

determining how much money you need to live a comfortable life even after your

earning years have stopped, besides ensuring a corpus for that phase of life.


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There are few simple steps that you can follow to compute an approximate figure

that you will need:

Arrive at the age at which you wish to retire. (Eg: Current age 30;

Retirement age 55)

Calculate your current monthly expenses. Eg: Rs. 30,000 p.m. Factor in the inflation rate (Eg: 6% p.a.) and then calculate the monthly

expenses that you will need after retirement. (Eg: 128,756 p.m.)

Assume a rate of return to be generated from your retirement corpus, i.e.

annuity rate. (Eg: 8% p.a.)

Now, arrive at the real rate of return from your retirement corpus post-

retirement, after negating the effect of inflation. (Eg: [(1+8%)/(1+6%)] 1 =

1.89%)

Divide the annual expenses required post-retirement by the real rate of

return to arrive at your retirement corpus. (Eg: 128,756 / [1.89%/12] = Rs. 8.17

crore.)

This will be the total corpus required. You also need to factor in the

investments including provident fund, which you have already made, to arrive at

the net corpus required.

Retirement planning worksheet


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EXPENSES TYPE

Household Expenses

Home Loan Annual EMI

Personal Loan EMI's (Annual)Vehicle Loan EMI's (Annual)

Education Expenses

Entertainment Expenses

Medical Expenses

Vehicle Maintenance Expenses

Holidays Expenses

Insurance Premiums

Traveling Expenses

Systematic Investment Plan (Annual)

Other Expenses

Total Expenses

Planned Retirement Age

No of years retirement corpus to be used

Existing PF / PPF / Other investments made towards retirement

CurrentAnnualExpenses

Post-RetirementAnnualExpense (intoday's cost)

Step 3. Assess how you are prepared for it

Once you have an idea of the required retirement corpus, the next step is to asses

how prepared you are currently to meet the retirement needs. Put simply, what

sources of retirement income are currently available to you? These could be your

Employee Provident Fund (EPF), Public Provident Fund (PPF), gratuity, or pension

schemes offered by insurance companies. The amount of income you receive

from these sources will depend on the amount you invest, the rate of investment

return, and other factors. Finally, if you plan to work during retirement, your job

earnings will be another source of income.

Step 4. Calculate the gap

Once you have taken the stock of your current pool of assets, the step is to

calculate the gap. Gap/shortfall is calculated as: The required retirement corpus

(step 2) minus The available investments (step 3).


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If there is a short fall, you will need to bridge that up from additional personal

retirement savings.

Step 5. Build your retirement fund

When you know roughly how much money youll need, your next goal is to save

that amount and build your retirement fund. First, youll have to map out an

investment plan that works for you.

Investing should take into consideration your risk profile and the life stage. If you

have a long time for your retirement, then it is suggested that you invest a major

portion of your portfolio into equity or equity-related products. It has been

observed that equity products have given superior returns in comparison to most

other investments. Hence, by investing in equity products you will be able to

generate a greater corpus till your retirement. However, if you are close to your

retirement, it is advisable to invest in debt products because of the certainty of

the maturity value.

Illustration: Suppose, a person needs a corpus of 1 crore in his retirement kitty at

the age of 60. If he plans at the age of 25, considering returns of 8 percent, he has

to save Rs 58,033 per year. If he starts planning at the age of 35 he has to save Rs

1,36,788 every year. And if he starts planning late at the age of 45 he has to save

Rs 3,68,295 to reach his goal of Rs 1 crore.

Age/Returns Amount to be invested every year to accumulate Rs 1 crore

8% 10% 12%

25 58,033 36,897 23,166

35 1,36,788 1,01,681 75,000

45 3,68,295 3,14,738 2,68,242

A person in the age group of 25 to 35 can take maximum exposure to equity so as

to get better than 8 percent returns. In this age group a person can save more as

there are fewer liabilities. A person in the age group 35 to 45 has to take moderate

exposure or say 50 percent in equity. And a person above 45 has to take

minimum exposure to equity and when he reaches 55 he has to cut down the


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equity exposure gradually. But suppose, if one has started planning for retirement

at a late age then to satisfy his goal he has to take equity exposure accordingly,

irrespective of his age.

A. Some of the investment options are:

1. Employee provident fund (EPF)

Most companies have EPF for the benefit of employees. An employee can

contribute 12 per cent of the salary towards EPF. The employer also contributes

12 per cent of salary. The current rate of interest on EPF is 8.5 per cent. This is a

good tool to build a retirement corpus.

2. Public provident fund (PPF)

PPF is another tool to build the retirement corpus. The minimum contribution is

Rs. 500 and the maximum is restricted to Rs. 1 lakh per annum. The current rate

of interest is 8.7 per cent. The contributions as well as the interest earned are tax

free. Its tenure is 15 years and can be renewed by 5 years each time. Moreover,

withdrawal facility is also available after 6 years. This is a good tool to fund your

retirement if you are not covered by EPF. Even those covered under EPF can also

contribute to PPF, for a larger retirement corpus.

3. Pension products from insurance companies

One of the most common investment options for retirement is through pension

plans, which come in the form of either endowment plans or ULIPs. In

endowment plans, the premiums are being invested into primarily debt

instruments only. ULIPs are a combination of mutual funds and insurance cover.

4. New Pension System (NPS)

The New Pension System (NPS) is a new voluntary contributory pension scheme

introduced by the Central Government. Under NPS, individuals can open a

personal retirement account and can accumulate a pension corpus during their


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a. Deferred annuities: In this type of annuity, the investor saves in a systematic

manner to build up sufficient funds for retirement. The withdrawals commence

after the retirement of the investor. They are best suitable for a long period and

not suitable for short term wealth generation.

b. Immediate annuities: The holder of immediate annuity makes one-time lump

sum payment, and begins receiving payments immediately. Immediate annuities

provide guaranteed flow of income for the rest of life and for a period defined by

the investor. It is wise to invest in immediate annuities if you are close to

retirement.

On the basis of nature of the investment, annuities can be fixed or variable.

a. Fixed annuities:As the name suggests, holders of fixed annuities receive an

assured rate of interest for a certain period. In this case, both interest and

principal are guaranteed and the payout amount remains constant throughout the

term.

b. Variable annuities:Holders of variable annuities receive varying payouts. This

is to take into account the inflation.

Both deferred and immediate annuities can be fixed or variable.

There are various payment options that annuity holders can opt for. You should

selection the options that suit your specific needs the best.

Annuity payout options

USP Pros Cons

Life annuity Income for life You dont risk

outliving your

corpus

Payment stops on

death, even if early

Life annuity with

return of corpus

Income for life and

principal given to

nominee after

Nominee gets the

money after

investors death

Low payout

because only

income is given out


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death

Fixed term annuity Guaranteed income

for a fixed period

Provides income

for fixed period as

specified by

investor

Investor is at risk of

outliving the

chosen term

Joint annuity for

life

After investor dies,

partner gets

income for life

Takes care of

expenses of both

partners

Low payout

because term is

longer

Joint annuity for

life with return of

corpus

After investor dies,

partner gets

income for life

Nominee gets the

money after

investors death

Very low payout

Increasing annuity Increased payouts

every year

Takes inflation into

account

Needs a bigger

corpus to sustainover long term

2. Fixed deposits (FD)

FDs as the name suggests provide a fixed return. This is a low risk instrument by

banks and so the returns are also low (7-9 percent). The stability of the returns is

what makes this instrument a very attractive one for conservative investors,

including retired persons. Besides banks, FDs are now provided by Non-banking

Financial Institutions (NBFCs). In comparison, FDs from NBFCs offer higher

interest rates. While investing in these FDs it is essential to look at their credit

rating. The FDs with a high credit rating will offer you stable and higher returns

whereas a low credit score can be slightly risky.

3. Post Office Monthly Income Scheme (PO MIS)

PO MIS currently provides an interest rate of 8.4% percent per annum which is

paid monthly. The minimum amount to be invested is Rs. 1,500 and the

maximum is Rs. 4.5 lakh. PO MIS has a maturity period of 5 years.


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4. Senior Citizens Savings Scheme

As the name indicates, this scheme is available for senior citizens. The scheme is

available to - 1. Who has attained age of 60 years or above on the date of opening

of the account. 2. Who has attained the age 55 years or more but less than 60

years and has retired under a Voluntary Retirement Scheme or a SpecialVoluntary Retirement Scheme on the date of opening of the account within three

months from the date of retirement. 3. No age limit for the retired personnel of

Defence services provided they fulfill other specified conditions. Investments can

be made in any post-office by opening an account. Only one deposit can be made

in each account; the deposit amount shall be a multiple of Rs.1,000 and should

not exceed Rs. 15 lakh. The scheme has tenure of 5 years. The account can be

extended for a 3 year period by making an application. The current interest rate is

9.20% per annum. Premature closure of account is permitted 1. After one year

but before 2 years on deduction of one and a half per cent of the deposit. 2. After

2 years but before date of maturity on deduction of 1 per cent of the deposit.

Premature closure is allowed after three years. In case of death of the depositor

before maturity, the account is closed and deposit is refunded without any

deduction along with interest.

5. Monthly Income Plan (MIP)

MIP of mutual fund is a debt-oriented scheme that aims to provide reasonable

returns on a monthly basis through investment in debt (75-80 percent of its

corpus) as well as a small portion in equities. MIPs aim to provide investors with

regular pay-outs (through dividends). They invest predominantly in interest

yielding debt instruments (commercial paper, certificate of deposits, government

securities and treasury bills). The debt investments ensure stability and

consistency while the equity instruments in the portfolio boost the returns.

Beside the regular investment avenues, there may be other resources that can be

tapped to generate income after retirement. This will mainly be an outcome of the

investments that you make along your way to fulfil your financial goals. Some of

the income sources are:

6. House rentals


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This can be useful to generate steady returns against your earlier property

investment. If you have a second house and if it is rented out, then it is a good

source of income during your retired life.

7. Reverse mortgage

A reverse mortgage provides income that people can tap into for their retirement.

It is a type of mortgage in which a homeowner can borrow money against the

value of his or her home. No repayment of the mortgage (principal or interest) is

required until the borrower dies or the home is sold. The transaction is structured

so that the loan amount will not exceed the value of the home over the life of the

loan. A senior citizen who holds a house or property, but lacks a regular source of

income can mortgage his property with a bank or housing finance company (HFC)

and the bank or HFC pays the person a regular payment. The advantage is that

the person who has mortgaged his property in this manner can continue staying

in the house for his life and at the same time receiving the much needed regular

payments. So, effectively the property now pays for the owner.

Quick Look Retirement Planning Products

Product

Return

indicative

Capital

risk Tenor

Investment

horizon

Minimum

investment

Taxation/

Tax

benefits

Direct

equity 12 15% High No lock-in

> 5 years

(with active

monitoring

>3years) -

No tax on

long-term

gains;

Short-term

gains is

15%

Mutual

funds -

Equity 12 15% High

No lock-in;

can be

redeemed

any time 5 years

Can be

started at

Rs. 500 SIP

No tax on

long-term

gains;

Short-term

gains is

15%


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PMS 12 15% High No lock-in > 3 years Rs. 25 lakh

No tax on

long-term

gains;

Short-term

gains is15%

ULPP /

ULIP 6 10% Medium 5 years > 5 years

> Rs.

10,000 per

annum

Investments

under

Section 80C

are tax

exempt

ELSS 8 15% Medium 5 years > 3 years

Rs. 5,000

lump sum

Tax

benefits

available

under

Section 80C

Structured

Products 8 15% Medium 3-5 years > 3 years > Rs.5 lakh

Mutual

funds -

Debt 7 10% Low No lock-in 1-5 years Rs. 500 SIP

Short term -

as per slab;

Long term

with

indexation -

20% /

without

indexation -

10%

Deposits/

NCD/

Bonds 7 - 9% Low

15 days -

10 years 1-5 years Rs.1,000 As per slab

NPS 8 - 9% Low

Till the

individual

is 60 years

old > 15 years

Rs. 500 per

month or

Rs.6,000

annually

Tax

benefits

available

under


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Myths about Retirement

Myths are faulty beliefs with no scientific back up. Given below is the list of

common myths about retirement and how you can tackle them:

Section

80C;

Maturity

benefits are

taxable

Senior

Citizen

Saving

Scheme 9.20% Nil

5 years

(extendable

for

additional 3

years) 5 years Rs.1,000

No; Interest

is fully

taxable

EPF 8.50% Nil

Up to an

individual's

retirement > 15 years

12% of the

basic

salary

Yes; up to

Rs.1 lakh

PPF 8.70% Nil 15 years > 15 years Rs. 500

Yes; up to

Rs.1 lakh

under

Section 80C

PO MIS 8.40% Nil 5 years 5 years Rs. 1,500

No tax

benefit

under

Section 80C

5-year

NSC 8.50% Nil 5 years 5 years Rs. 100

Yes; up to

Rs.1 lakh

under

Section 80C

10-year

NSC 8.80% Nil 10 years 10 years Rs. 100

Yes; up to

Rs. 1 lakh

under

Section 80C


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Fact: Our traditional joint family system is breaking down to nuclear family

system due to changing life styles and due to mobility and relocation for better

career prospects. In fact, it will be considered as unfair for the children if you are

dependant on them during the times of high cost of living.

Everybody will be more happy to be financially secure and independent rather

than depend on your children. Adequate savings will preserve your financial

freedom. If children take care of you consider it as a bonus.

Myth 5: I don't earn enough to save for retirement

Fact: Just as every drop of water makes a mighty ocean, small amounts if

invested regularly, will help you build your retirement nest. If a person aged 35

invests Rs 1000p.m., he will retire with a corpus of Rs 10,00,000 at age 60,

assuming returns at the rate of 10% p.a.

Myth 6: I will plan for retirement once I have paid off my auto loan

Fact:One may assume that he will have more money at his disposal, once he has

paid off the loans. However, in reality your expenses always outpace your

income.

Once you have paid off your one loan, you will probably want to take another

loan for some other thing, and the cycle goes on. And, thus retirement planning

will get further pushed off, as it does not seem as an immediate need.

Myth 7: I have saved enough money for retirement

Fact:While planning for retirement expenses, one must account for inflation as it

will reduce the purchasing power of money over a period of time. For e.g. If a

person aged 35 requires Rs 25,000 p.m. to meet his household expenses, he will

require Rs 95,000 p.m. to meet the same expenses when he retires at the age of


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58 and will require Rs 1,92,000 p.m. to maintain the same standard of living by the

time he reaches age 70. This is assuming an inflation rate of 6%.

Thus while planning for retirement one should not only aim for an income which

will take care of his immediate expenses, but also aim for an income which willkeep in pace with inflation.

Case Study of a Pre-Retiree

T.K. Pai, 59, is approaching retirement. After having worked for almost 30 years in

a public sector, he is about to retire in next 6 months. He is happy, but worried

too. Though he would be getting pension and other lump sum retirement

accumulations as provident fund and gratuity, he is not sure whether the pension

would be sufficient. He is also unsure as in how to best utilize his retirement

benefits.

Fortunately, he met a financial planner, who has provided him a clear picture of

his finances and ways to lead a peaceful retired life.

Pais key financial assets:

Public provident fund (PPF): Rs 12 lakh

Bank deposits: Rs 10 lakh

Equity: Rs 5 lakh

On retirement:

Employer provident fund (EPF): Rs 20 lakh

Gratuity: Rs 10 lakh

Cash: Rs 1 lakh

Pension p.a: Rs 2.4 lakh

Pais key financial liabilities include earmarking approximately Rs 10 lakh for

daughters marriage in next 2 years and to upgrade his existing 1-BHK apartment

to 2-BHK apartment, which would entail an additional lump sum amount of Rs 20

lakh. His wife is dependent on him and he needs to support his daughter for at

least next 5 years.


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Pais financial position (excluding cash) on retirement would be:

PPF: Rs 12 lakh

Bank FD: Rs 10 lakh

EPF: Rs 20 lakhGratuity: Rs 10 lakh

Equity Rs 5 lakh

Total: Rs 57 lakh

Considering the life facts that he is on the verge of retirement and has still two

goals left to achieve, viz; funding his daughters marriage and upgrading the

apartment, it would be better to play conservative than being aggressive on

investments.

Contingency fund: It is suggested increasing the cash holding by Rs 2 lakh to

bring it up to Rs 3 lakh to ensure that the contingent expenditures are met. The

cash holding has to be periodically reviewed and it is suggested that it should be

increased gradually to cushion the unforeseen expenditures on account of

medical expenditures, etc.

Daughters marriage and apartment up-gradation: Pai needs to earmark an

amount equal to Rs 30 lakh for his daughters marriage and apartment up-

gradation; to be parked in debt instruments either in bank fixed deposits (FDs) or

debt mutual funds with floating interest rates to keep the value of the investments

intact.

Total expenditure on retirement:

Cash holding: Rs 2 lakh

Daughter's marriage: Rs 10 lakh

Apartment up-gradation: Rs 20 lakh

With this, the financial allocation on retirement would appear as:

Expenditure: Rs 32 lakh

Retirement investments: Rs 25 lakh


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The suggested debt-to-equity ratio at this age is: 4:1 i.e. 80% of invest-able

amount in debt and balance in equity, which he should further re-balance to more

conservative ratio of 9:1 i.e. 90% in debt and balance in equity. The re-balancing

to move funds in debt is required for capital protection, which, post retirement is

more important than wealth creation.

Accordingly, as suggested, asset allocation on retirement will be:

Equity: Rs 5 lakh

Debt: Rs 20 lakh

Total : Rs 25 lakh

Pai is advised to invest Rs 5 lakh in diversified equity mutual funds with good

track record. For debt investments, his investment strategy needs to take care of

capital protection, regular periodic income and liquidity.

SESSION 4: INVESTMENT PLANNING

We all work for money. It is equally important to ensure that money works for us.

There are two main ways to make money. 1. We make money by working. 2.

Money makes money that is, by way of investments. Investment refers to a

commitment of funds to one or more assets as per the goals and risk profile of an

individual.

In order to achieve our goals, it is important that we have a sound investment

plan in place. Investment plan is nothing but the process of making investments

based on our needs.

Why invest?


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Investi

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