Personal Financial Planning : Personal Financial Planning 1
training@simplus.co.in : training@simplus.co.in 2
Introduction: The concept of Financial Responsibility : Introduction : The concept of Financial Responsibility 3
Frank L Netti : Frank L Netti By law you have the right, by nature you have a duty, and to your family you have an obligation, to be a good steward of all your assets. 4
Personal Financial Planning : Personal Financial Planning Personal Financial Planning is like preventive medicine. There are a few critical areas of your financial life, about which you must be aware, and where you must take a few necessary steps. This will ensure that you are insulated from shocks on the financial front. 5
The ultimate objective of PFP : The ultimate objective of PFP Financial Freedom 6
Why bother about Personal Investment? : Why bother about Personal Investment? 7
The first reason why you should bother about personal investment: Because it is not hard to master the basics : The first reason why you should bother about personal investment: Because it is not hard to master the basics 8
PowerPoint Presentation : “Investing is simple, but not easy.” - Warren Buffett 9
Albert Einstein : Albert Einstein “Everything should be made as simple as possible.” 10
Burton G Malkiel : Burton G Malkiel The rules for achieving financial security through savings and investment are extraordinarily simple . A small degree of self-sacrifice may be required. Discipline and persistence are definitely required, but obtaining well above average investment results is strikingly easy . 11
The second reason why you should bother about personal investment: Because it is critically important : The second reason why you should bother about personal investment: Because it is critically important 12
Burton Malkiel : Burton Malkiel “We must undertake investment strategies that maintain our real purchasing power; otherwise, we are doomed to an ever-decreasing standard of living.” 13
The third reason why you must bother about personal investment: To protect yourself from ‘financial advisers’ and the financial media! : The third reason why you must bother about personal investment: To protect yourself from ‘financial advisers’ and the financial media! 14
Some Fundamental Concepts : Some Fundamental Concepts Never expect an investment advisor to take greater interest in your money, than you yourself have a duty to take. 15
Burton G Malkiel : Burton G Malkiel The primary interest of financial advisers is not yours, but theirs. They are very good at making money for themselves. 16
Warren Buffett : Warren Buffett There seems to be some perverse human characteristic that likes to make easy things difficult. 17
Some Fundamental Concepts : Some Fundamental Concepts When a person with experience meets a person with money, the person with experience gets the money. And the person with money gets the experience! 18
Personal Financial Planning : Personal Financial Planning 19
Personal Financial Planning : Personal Financial Planning Personal Financial Planning is the conceptualisation and implementation of a comprehensive plan, for the achievement of a person’s total financial objectives. 20
Great coaches agree that to succeed in athletics, you must : Great coaches agree that to succeed in athletics, you must Plan your play, and play your plan. 21
Alan Lakein, expert on time management : Alan Lakein, expert on time management Planning is bringing the future into the present, so that you can do something about it now. 22
Personal Financial Planning : Personal Financial Planning “If you fail to plan, you plan to fail.” 23
A normal individual should address these financial areas of concern : A normal individual should address these financial areas of concern Insurance Emergency Funding Retirement Planning Housing Debt Extinguishment Investment Other Objectives 24
1. Insurance : 1. Insurance 25
Types of Insurance : Types of Insurance Depending upon individual circumstances, a person needs: Health cover Life cover Property cover 26
Health Insurance : Health Insurance 27
Insurance : Insurance Health insurance is advised for all individuals. The entire family must have at least a basic health cover. This is the only insurance which would be ‘compulsory.’ Life and property insurance should be purchased only if required, and to the extent required. 28
Health Insurance : Health Insurance Choose floater policies. Floater health policies generally cover up to 4 members of a family . 29
Health Insurance : Health Insurance Basic Health Cover Personal Accident Cover Critical Illness Cover Personal Accident & Critical Illness covers may be taken as riders to a life insurance policy or as stand alone policies themselves. Taking stand-alone policies is preferable. 30
Universal Health Insurance Scheme : Universal Health Insurance Scheme 31
Frank L Netti, author of Retire Sooner, Retire Richer : Frank L Netti , author of Retire Sooner, Retire Richer If you think good health is everything, then health insurance is next to everything. 32
Life Insurance : Life Insurance 33
A N Shanbhag on life insurance : A N Shanbhag on life insurance 34
A N Shanbhag on Life Insurance : A N Shanbhag on Life Insurance There is no substitute for life insurance. Life insurance is not an investment. It is a social and commercial instrument to provide financial security in the event of death of the insured. If dependents can look after themselves comfortably without the amount insured, life insurance is not needed. 35
Shanbhag on Life Insurance (contd.) : Shanbhag on Life Insurance (contd.) Life Insurance is like a life saving drug. If you need it, you must have it, irrespective of the cost. If you do not need it and you take it, it can have very bad side effects on your financial health. 36
A N Shanbhag : A N Shanbhag 37
Life Insurance – Three Critical Questions : Life Insurance – Three Critical Questions 1. Do you need life insurance ? Only if you have financial dependents 38
Life Insurance – Three Critical Questions : Life Insurance – Three Critical Questions 2. How much life insurance do you need ? Enough to keep your financial dependents in the lifestyle they are used to, ensure that they are debt-free, and provide for their reasonably foreseeable future needs . In other words, enough to compensate your dependents for the adverse financial situation caused by your absence. Example….. 39
Life Insurance – Three Critical Questions : Life Insurance – Three Critical Questions 3. What kind of life insurance should you purchase ? The only life insurance worth considering is term insurance . Pure term insurance is good for you . Most other types of life insurance are good for the insurance companies and insurance agents! 40
Upton Sinclair, author : Upton Sinclair, author It is difficult to get a man to understand something, when his salary depends upon not understanding it. 41
Woody Allen : Woody Allen There are worse things in life than death. Have you ever spent an evening with an insurance salesman? 42
Evan Esar, American humourist : Evan Esar , American humourist Insurance is the business of protecting you against everything, except the insurance agent. 43
Life Insurance need not be for life! : Life Insurance need not be for life! Life insurance should be taken when there is a need for it, and discontinued when the need for it disappears. 44
Property Insurance : Property Insurance Householder’s insurance Insurance of structure and vital equipment in the case of apartments 45
Important – Obtain Quotations : Important – Obtain Quotations Insurance has been privatised. This means increased competition and greater choice. So, never forget to obtain quotations from all insurance companies for your health, life and property insurance requirements. Quotations can be obtained from insurance brokers. The best and most economical option is to obtain insurance quotations online from the individual insurance companies or insurance portals. 46
One good insurance web portal : One good insurance web portal www.policybazaar.com 47
If you do not know how to obtain insurance quotations….. : If you do not know how to obtain insurance quotations….. Contact Mr Sanjay Shanbhag on 94483 71877 Or send an email to : lifetrack_india@yahoo.co.in Mention names of insured and their dates of birth, when seeking quotations. 48
The most important type of insurance – SELF-INSURANCE : The most important type of insurance – SELF-INSURANCE Although bad things happen to everyone, you can reduce the odds of them happening to you, by following a few simple rules: Don’t smoke or indulge in substance abuse. Exercise regularly. Don’t consume alcohol. If you must, enforce strict moderation. Wear seat belts and don’t drive under the influence of alcohol. 49
Self-Insurance : Self-Insurance Eat the right foods, and maintain your proper weight. Get enough rest. Get regular medical, dental and vision checkups. Keep a positive attitude, smile and laugh a lot. Following these rules doesn’t mean you won’t need insurance, but it is virtually certain you will lead a better life. 50
2. Emergency Funding : 2. Emergency Funding 51
Emergency Funding : Emergency Funding Have some contingency money in a savings bank / flexi-deposit account or money market account. In other words, have a minimum cash buffer. 52
Emergency Funding : Emergency Funding Build towards at least 12 months of normal living expenses, depending upon your needs, existing levels of insurance, number of earners in the family, etc. All emergency funds should be placed in highly liquid investments. 53
Emergency Funding : Emergency Funding If proper insurance is in place, you may not need to go beyond one year’s normal living expenses for an emergency fund. If both husband and wife have reasonably stable jobs or other independent income, the quantum of family emergency funding need not exceed 12 months’ normal expenses. 54
Emergency Funds can be placed in: : Emergency Funds can be placed in: Flexi-deposit accounts Liquid mutual funds Short-term floating rate mutual funds Longer term bank fixed deposits, provided there is no loss in case of premature redemption 55
Important ….. : Important ….. Emergency funds must preferably be placed in joint names, under the “anyone or survivor” mode of holding. 56
Important….. : Important….. Liquidity and safety are important when deploying emergency funds, not returns. 57
An excellent strategy for deploying emergency funds : An excellent strategy for deploying emergency funds Place the funds in liquid, short-term floating rate or short-term funds. Transfer the capital appreciation to a low-cost index fund. Your capital remains intact and is available in an emergency. Overall, your emergency fund can give excellent returns and grow quite satisfactorily, in a 5 to 10 year time-frame. 58
3. Retirement Planning : 3. Retirement Planning 59
Benjamin Franklin (1706 – 1790) : Benjamin Franklin (1706 – 1790) For Age and Want, save while you may; No Morning Sun lasts a whole Day. 60
Retirement Planning : Retirement Planning Most employees have retirement benefits such as Statutory PF, Recognised PF, Unrecognised PF, Gratuity, Superannuation Fund, Pension, Retrenchment Compensation or VRS Settlements. For the self-employed, as well as for others, there is the PPF. 61
Retirement Planning : Retirement Planning However, it would be very foolish to depend only on these retirement benefits to fund retirement. There is also a wrong notion, that planning for retirement should only start when a person approaches retirement. Nothing could be more dangerous . 62
Retirement Planning : Retirement Planning A retirement fund should be started the moment a person starts work . You are responsible for your comfortable retirement, not the government or your employer. 63
Retirement Planning : Retirement Planning With increased life spans, increased attention should be given to retirement planning. A person can easily live even more than 30 years after retirement . 64
Carl Richards, www.behaviorgap.com : Carl Richards, www.behaviorgap.com
Retirement Planning : Retirement Planning You have a responsibility to accumulate enough to take care of yourself and your spouse for the remainder of your days. One of the greatest gifts you can give your children is to be financially independent in your old age, thus ensuring that you don’t become a financial burden to them. 66
Retirement Planning : Retirement Planning ‘Retirement management’ will become increasingly important. What do you want to do in retirement? Live a life of leisure? Do volunteer work? Embark upon a second career? Continue education? 67
Retirement Planning : Retirement Planning In retirement, uncertainties are greater than certainties. Proper retirement planning and a sufficiently large retirement corpus help in dealing effectively with uncertainties. 68
Retirement Planning : Retirement Planning The best private retirement plan would be sustained systematic investment into well diversified equity linked savings scheme (ELSS) mutual funds. Long-term returns on equity in emerging markets such as India: 14 -15% CAGR. Long-term returns on equity in developed countries: 9 - 10% CAGR. 69
Retirement Planning : Retirement Planning So long as interest on Public Provident Fund (PPF) is tax-free, this would also be an excellent retirement avenue for the conservative investor. Present returns on Public Provident Fund: 8% CAGR 70
Retirement Planning : Retirement Planning From the financial year 2005-06 onwards, Section 80C of the Income-tax Act, 1961, provides a marvellous opportunity to build a tax-advantaged retirement fund of up to Rs 1 lakh per annum, using, among other things, PPF & ELSS. However, watch out for possible changes that may be brought about if the Direct Taxes Code is implemented in the Financial Year 2012-13. 71
Retirement Planning : Retirement Planning While the income-tax exemption under ELSS may be a sweetener, it should be borne in mind that a retirement fund is of vital importance in its own right, and must be started, whether or not there is a tax benefit attached to it. 72
Retirement Planning : Retirement Planning Investments into a retirement corpus are for the very long term. A time horizon of 10 years would be considered short in a retirement plan. Just as an emergency fund must be utilised only in an emergency, a retirement fund must be encashed only upon retirement . 73
‘Sacred’ areas of a Financial Plan : ‘Sacred’ areas of a Financial Plan Insurance – health, life, property Emergency Funding Retirement Funds One residential house Unless a life and death situation arises, and emergency funds and insurance are insufficient, the accumulated corpus of a retirement plan should never be touched, until actual retirement . 74
Retirement Planning : Retirement Planning For successful retirement planning, it is not necessary that large amounts be invested. Small amounts are fine, provided they are invested at regular intervals, for a long time. 75
The power of sustained systematic investment (data as on 31 Oct. 2011) : The power of sustained systematic investment (data as on 31 Oct. 2011) Fund: Franklin India Prima SIP of Rs 1,000/- per month Period: 17 years and 11 months Amount invested: Rs 2,15,000/- Current value: Rs 21,08,411/- ! 76
Warren Buffett : Warren Buffett “It is not necessary to do extraordinary things, to get extraordinary results.” 77
Benjamin Franklin : Benjamin Franklin Human felicity is produced not so much by great pieces of good fortune that seldom happen, as by little advantages that occur every day. 78
Dr William J Bernstein : Dr William J Bernstein Probably the most relevant definition of risk is the likelihood of running out of money . 79
Burton G Malkiel : Burton G Malkiel The risk in old age is not of premature death. The risk is that you will live too long and outlive your assets. 80
Retirement Planning : Retirement Planning Starting early is best, but if you have not started early, start NOW. 81
Old English saying…… : 82 Old English saying…… ‘One of these days,’ is none of these days.
Carl Richards, www.behaviorgap.com : Carl Richards, www.behaviorgap.com
PPF – Rs 70,000/- per year for 40 years. Assumed return 8% CAGR. : PPF – Rs 70,000/- per year for 40 years. Assumed return 8% CAGR. Rs 1.96 crores
PPF Rs 35,000/- p.a. and Equity Rs 35,000/- p.a. for 40 years. Assumed returns: PPF 8% p.a. Equity 15% p.a. Average portfolio return 11.5% CAGR. : PPF Rs 35,000/- p.a. and Equity Rs 35,000/- p.a. for 40 years. Assumed returns: PPF 8% p.a. Equity 15% p.a. Average portfolio return 11.5% CAGR. Rs 5.21 crores
Equity Rs 70,000/- p.a. for 40 years. Assumed return 15% CAGR. : Equity Rs 70,000/- p.a. for 40 years. Assumed return 15% CAGR. Rs 14.32 crores
Burton G Malkiel : Burton G Malkiel Persistent saving in regular amounts, no matter how small, pays off.
Robin Sharma : Robin Sharma The price of discipline is always less than the pain of regret. 88
A recommended change of equation : A recommended change of equation Change from : Income – Expenditure = Savings To : Income – Savings = Expenditure 89
How much should you save for retirement out of your monthly income? : How much should you save for retirement out of your monthly income? A good thumb rule would be to save 10% of your take-home pay or net income for retirement.
Withdrawal strategy from a retirement fund : Withdrawal strategy from a retirement fund A good withdrawal strategy after retirement, is 5% of the fund value per annum or 1.25% of the fund value every quarter. Register quarterly Systematic Withdrawal Plans (SWPs) for 5 years at a time. This will automatically lead to higher withdrawals, as the fund value increases over time.
Understanding a vitally important difference… : Understanding a vitally important difference… Retirement Fund versus General Investment Fund A retirement fund is to take care of the financial needs of the individual and his/her spouse from retirement till end of life. A general investment fund is to meet all non-emergency, non-normal and non-retirement financial needs, until retirement. 92
Do not underestimate the impact of even a one percentage point difference in return, over the long run : Do not underestimate the impact of even a one percentage point difference in return, over the long run Rs 100,000/- invested at 10% CAGR for 40 years will grow to Rs 45.20 lakhs . Rs 100,000/- invested at 11% CAGR for 40 years will grow to Rs 65 lakhs . Rs 100,000/- invested at 12% CAGR for 40 years will grow to Rs 93 lakhs . 93
4. Extinguishing Debt : 4. Extinguishing Debt 94
Extinguishing Debt : Extinguishing Debt “Neither a borrower, nor a lender be.” - William Shakespeare 95
Extinguishing debt : Extinguishing debt Extinguishing debt means getting rid of debt or not getting into debt in the first place. Learn to distinguish between acceptable and unacceptable debt, productive and unproductive debt. Any debt which is designed to automatically extinguish itself is better than open-ended debt. 96
Debt Extinguishment : Debt Extinguishment Viewed from this angle, term loans like housing and educational loans are much better than credit card loans, personal loans, overdrafts, etc. The worst type of debt is credit card debt. 97
PowerPoint Presentation : 98
Debt Extinguishment : Debt Extinguishment Never create a situation where you head for a debt trap. 99
Benjamin Franklin, Poor Richard’s Almanack : Benjamin Franklin, Poor Richard’s Almanack But, ah, think what you do when you run in debt; You give to another power over your liberty. If you cannot pay at the time, you will be ashamed to see your creditor; You will be in fear when you speak to him; You will make poor pitiful sneaking excuses, and by degrees come to lose your veracity, and sink into base downright lying; For, as Poor Richard says, the second vice is lying, the first is running in debt.
Benjamin Franklin : Benjamin Franklin
Thumb rule to estimate how much debt you can take on… : Thumb rule to estimate how much debt you can take on… First, ensure that all loans taken are term loans, and for productive purposes. Second, ensure that monthly repayment of all loans put together, does not exceed 25% of ‘take-home’ family income.
5. Housing : 5. Housing 103
Housing : Housing Everybody should aim to acquire his / her own dwelling place. Given the current tax benefits and housing loan interest rates, this is probably the only instance where we would not object to taking a loan. It should be remembered that acquiring a house is important in its own right, regardless of any tax benefits attached. 104
Housing : Housing A house or apartment is essential for a person who has not already acquired a residence, or is not fortunate enough to inherit one. The right time to start thinking seriously about acquiring residential accommodation is about five years after starting work. 105
6. Investment : 6. Investment 106
Frank L Netti : Frank L Netti Sound investment will decrease the time during which you work for money and increase the time during which money will work for you. 107
Understand the Investment Tripod : Understand t he Investment Tripod 108
The Investment Tripod : The Investment Tripod Investment can be for : Parking funds Earning regular returns Growth 109
Parking Funds : Parking Funds 110
Pure Parking & Emergency Funding : Pure Parking & Emergency Funding Savings bank accounts ‘Flexi’ accounts in banks Liquid, short-term, short-term floating rate mutual funds Long-term bank FDs with no prepayment penalty. The same investments can be used for keeping emergency funds. 111
Investing for regular returns : Investing for regular returns 112
Investment for regular returns : Investment for regular returns 8% Post Office Monthly Income Scheme 8% Taxable Government of India Savings Bonds 9% Senior Citizens Savings Scheme (for persons of 60 years and above) Post office time deposits Bank fixed deposits Short and long-term floating rate mutual funds and Fixed Maturity Plans Regular withdrawals from your PPF account. 113
A vitally important point about “regular returns” investments : A vitally important point about “regular returns” investments Regular returns investments are advised only when you need regular returns. When you don’t need regular returns, follow a balanced asset allocation plan, with a considerable focus on growth investments. 114
Investing for Growth : Investing for Growth 115
Investment for Growth : Investment for Growth Equity (stock market investment) and Real Estate are the only two avenues of investment that have consistently beaten inflation and increased the wealth of investors in the long run (10-year plus time horizons). 116
A word about Bullion….. : A word about Bullion….. “The great strength of gold throughout history has not been that you make money by holding it, but rather that you do not lose.” - Timothy Green Understand that ‘investing’ in gold via the ornament route is a fool’s game. 117
Real Estate : Real Estate 118
Investment in Real Estate : Investment in Real Estate Real estate is an excellent long-term, wealth-enhancing avenue of investment. However, real estate suffers from some drawbacks, such as : Poor liquidity Difficulties in verification of title Requirement of large amounts of capital for even a single purchase 119
Drawbacks of Real Estate Investment : Drawbacks of Real Estate Investment Requirement of large amounts to make additional purchases even if prices are lower Presence of black money in transactions High stamp duties on real estate purchases Cumbersome purchase and sale formalities Administrative difficulties, e.g., absentee landlordism, land mafia 120
Real Estate Investment Options for the Common Investor : Real Estate Investment Options for the Common Investor An apartment A plot of vacant urban land An independent house on a plot of land Commercial space – showrooms, shops, offices, warehouses Agricultural land Real estate mutual funds 121
Investment in Real Estate : Investment in Real Estate If you have a special talent for real estate investment, by all means invest in it, bearing in mind that the time horizon for real estate is ten years. If not, most good Indian real estate consultants advise that you invest in real estate only to the extent that you have a use for it . 122
Equity : Equity 123
Know why you must invest in equity : Know why you must invest in equity 124
Warren Buffett : Warren Buffett "The best protection against inflation is your own earning power. If you are the best teacher, you will command earning power and get your share of the national economic pie, regardless of the value of the currency. The second best investment is in a good company ." 125
PowerPoint Presentation : 126
Equity – Reliable Truth No.1 : Equity – Reliable Truth No.1 In the long-run, the market always goes up. 127
PowerPoint Presentation : 128
Warren Buffett : Warren Buffett In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497. 129
Equity – Reliable Truth No.2 : Equity – Reliable Truth No.2 The rate of growth of equity investments comfortably exceeds the rate of inflation. 130
Performance from 1981 to 2011 (Source: Central Statistical Organisation website and Handbook of Statistics on the Indian Economy) : Performance from 1981 to 2011 (Source: Central Statistical Organisation website and Handbook of Statistics on the Indian Economy) CPI Inflation : 8.30% Standard Gold : 8.79% Silver : 10.19% Bank Fixed Deposits : 9.17% Public Provident Fund : 10.72% Equity (BSE Sensex) : 16.75%
PowerPoint Presentation : 132
BSE Sensitive Index : BSE Sensitive Index 01 April 1979 : 100 15 Nov 2011 : 16,883 CAGR : 17.02% 133 Gold 1950 : 100 2011 : 28,893 CAGR : 9.74%
Know the dangers in equity investment : Know the dangers in equity investment 134
PowerPoint Presentation : “A stock broker is someone who invests other people’s money, until it is all gone.” - Woody Allen 135
Burton G Malkiel : Burton G Malkiel “While everyone recognises that brokers make their living by charging commissions, Wall Street still manages to conceal one very nasty secret: The financial ‘experts’ know precious little more than you know. 136
Burton G Malkiel : Burton G Malkiel “In fact, I will go out on a limb and tell you that the experts have no idea what stocks you should buy to provide superior future returns. A blindfolded chimpanzee throwing darts at the stock pages can select individual stocks as well as the ‘experts’.” From: ‘The Random Walk Guide to Investing: Ten Rules for Financial Success’ 137
PowerPoint Presentation : Burton Gordon Malkiel 138
Burton Malkiel : Burton Malkiel The stockbroker’s real job is not to make money for you, but to make money from you. 139
Benjamin Graham : Benjamin Graham If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market. 140
Benjamin Graham : Benjamin Graham 141
Warren Buffett : Warren Buffett “We’ve long felt that the only value of stock forecasters is to make fortune tellers look good.” 142
Burton G Malkiel : Burton G Malkiel There are only three kinds of financial prognosticators: Those who don’t know Those who don’t know they don’t know, and Those who know they don’t know, but get paid big bucks to pretend they know. 143
PowerPoint Presentation : Burton Gordon Malkiel 144
Benjamin Graham (1894 - 1976) : Benjamin Graham (1894 - 1976) Wall Street people learn nothing, and forget everything. 145
A brutal truth about equity investment : A brutal truth about equity investment In a rising market, you do not need the advice of experts to make money. Any trash you buy, will appreciate. In a falling market, the advice of the best experts will not prevent you from losing money. 146
Sign in a fund manager’s office : Sign in a fund manager’s office “Do not confuse brains, with a bull market.” 147
The Greater Fool Theory : 148 The Greater Fool Theory “Stupidity, well packaged, can sound like wisdom.” - Jeremy Siegel 148
Warren Buffett : Warren Buffett To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects.
Warren Buffett : Warren Buffett In our view though, investment students need only two well-taught courses – How to Value a Business, and How to Think About Market Prices.
Warren Buffett : Warren Buffett
Know HOW you must invest in Equity : Know HOW you must invest in Equity 152
The stock market as an avenue of investment : The stock market as an avenue of investment The world’s best writers on equity investment will always urge you to “buy the market.” That is another way of saying, “buy the economy” or “invest in the economy.” In this era of globalization, the time will not be far away, when equity investment means investing in the global economy through the medium of equity. 153
Therefore……… : Therefore……… Investing in the stock market is investing in the economy of the country. No one can call himself/herself a stock market investor, unless he/she invests in the economy of the country. Anyone doing anything else, is a mere punter . 154
Refer to the paper A GUIDE TO EQUITY INVESTMENT : Refer to the paper A GUIDE TO EQUITY INVESTMENT 155
Equity Investment Myth: : Equity Investment Myth: You need to actively monitor your portfolio and constantly buy, sell and churn. 156
Let your life be active and your investments be passive! : Let your life be active and your investments be passive! 157
John Bogle : John Bogle 158 “Buy right and hold tight.”
Warren Buffett : Warren Buffett “Inactivity strikes us as intelligent behavior.” 159
Warren E Buffett : Warren E Buffett “Lethargy, bordering on sloth, remains the cornerstone of our investing strategy.” ( Sloth: indolence; extreme laziness; habitual disinclination to exertion. 160
Equity investments are for the long-term. The time horizon of equity investments is at least 5 years. : Equity investments are for the long-term. The time horizon of equity investments is at least 5 years. 161
Rakesh Jhunjhunwala : Rakesh Jhunjhunwala “Be greedy, but be long-term greedy.” 162
Warren Buffett : Warren Buffett “Always invest for the long term.” “Our time horizons are forever.” 163
Warren Buffett : Warren Buffett “If you are not willing to own a share for ten years, then don’t own it for ten minutes.” 164
Time horizon – Jason Zweig : Time horizon – Jason Zweig If, after checking the value of your stock portfolio at 1.24 p.m., you feel compelled to check it all over again at 1.37 p.m., ask yourself these questions: Did I call a real estate agent to check the market price of my house at 1.24 p.m.? Did I call back at 1.37 p.m.? If I had, would the price have changed? If it did, would I have rushed to sell my house? By not checking, or even knowing the market price of my house from minute to minute, do I prevent its value from rising over time? 165
Warren Buffett : Warren Buffett “The stock market is a mechanism by which, money is transferred from the impatient to the patient.” 166
Four equity investment strategies : Four equity investment strategies Invest in a well diversified portfolio of blue chip stocks Invest in well diversified equity mutual funds, index funds and ELSS funds Use systematic investment plans (SIPs) to invest in diversified equity funds, index funds and ELSS funds. Use systematic transfer plans (STPs) to transfer funds from safe debt funds to diversified equity and ELSS funds. 167
John Bogle : John Bogle Successful investing is about owning businesses and reaping the huge rewards provided by the dividends and earnings growth of our nation’s - and, for that matter, the world’s - corporations. 168
PowerPoint Presentation : 169 John C Bogle
Reference papers: : Reference papers: 1. A Guide to Equity Investment 2. Good Investment Options in the Indian Debt and Equity Markets 170
Systematic investment is good for you : Systematic investment is good for you 171
Anthony M Gallea, Senior portfolio manager, Smith Barney : Anthony M Gallea, Senior portfolio manager, Smith Barney Investing is a strange business. It’s the only one we know of, where the more expensive the products get, the more customers want to buy them. 172
Systematic Investment : Systematic Investment 173
Systematic Investment : Systematic Investment Systematic investment automatically enables right pricing. Systematic investment makes investment a habit. “If you work on an investment, It will work for you.” 174
Systematic Investment : Systematic Investment The ultimate objective of good investing, is to obtain above average returns at below average risk. 175
Systematic Investment : Systematic Investment “A winner is not one who never fails, but one who never quits.” 176
You can control Risk : You can control Risk 177
Warren Buffett : Warren Buffett Risk comes from not knowing what you are doing. 178
The “Zero Risk” Systematic Transfer Plan : The “Zero Risk” Systematic Transfer Plan Invest Rs 1 lakh in a liquid, short-term floating rate or short-term mutual fund. From here, transfer Rs 1,000/- per month to a diversified equity fund or an index fund tracking the NSE-50 index. There will be no risk to capital at any point of time, regardless of stock market conditions. The STP can be doubled/quadrupled when the market falls by more than 25% / 50% from its previous peak. You can expect excellent returns in a period of five to ten years. 179
Warren Edward Buffett : Warren Edward Buffett “The first rule of investment is, do not lose. And the second rule is, do not forget the first rule. And that’s all the rules there are.” 180
Lump sum investments in equity & equity mutual funds must preferably be made with a margin of safety : Lump sum investments in equity & equity mutual funds must preferably be made with a margin of safety 181
‘Timing the Market!’ : ‘Timing the Market!’ 182
Sir John Templeton (1912 -2008) : Sir John Templeton (1912 -2008) “The time to invest in stocks, is when you have the money. History shows that time, and not timing, is the key to investment success.” 183
Return ranges for rolling periods on any day from 3rd April 1979 to 28th February 2007 (Sensex) : Return ranges for rolling periods on any day from 3 rd April 1979 to 28 th February 2007 (Sensex) Period Min. Return Max. Return 1 year - 54% + 268% 2 years - 26% + 143% 7 years - 08% + 43% 12 years + 02% + 34% 15 years + 11% + 28% 20 years + 13% + 21% 25 years + 15% + 18% 184
Benjamin Graham’s “The Margin of Safety” Approach : Benjamin Graham’s “The Margin of Safety” Approach 185
Benjamin Graham & David Dodd, Security Analysis, 1934 : Benjamin Graham & David Dodd, Security Analysis , 1934 Margin of safety is the difference between the intrinsic value of a stock and its market price. Accurate calculation of intrinsic value and margin of safety can be quite laborious. The end results may not be accurate, and such undertakings may be well beyond the capability of the common investor. 186
Benjamin Graham & David Dodd, Security Analysis, 1934 : Benjamin Graham & David Dodd, Security Analysis , 1934 A simple interpretation of Benjamin Graham’s margin of safety would be: Ensure that you do not pay too high a price for stocks. How can you do this? 187
Margin of Safety - Step 1 : Margin of Safety - Step 1 Be aware of the PE ratio ranges of the market. Historically, the PE Ratios of the popular indices like the BSE Sensex and the NSE-50 (Nifty) have ranged between 10 on the lower side and 30 on the higher side. 188
Margin of Safety - Step 2 : Margin of Safety - Step 2 Be aware of the market highs and lows, and percentages of high to low falls. 189
BSE Sensex worst falls – Aftermath of the Harshad Mehta Scam of April 1992 : BSE Sensex worst falls – Aftermath of the Harshad Mehta Scam of April 1992 22 April 1992 : 4,467 26 April 1993 : 2,037 Change : - 54.40% 190
BSE Sensex worst falls –aftermath of the Tech Bubble (February 2000), the Ketan Parekh Scam (March 2001) and the 9/11 Terrorist Attacks (September 2001) : BSE Sensex worst falls –aftermath of the Tech Bubble (February 2000), the Ketan Parekh Scam (March 2001) and the 9/11 Terrorist Attacks (September 2001) 11 February 2000 : 5,934 21 Sept. 2001 : 2,600 Change : - 56.18% 191
BSE Sensex worst falls – aftermath of The Global Financial Crisis, 2008….. : BSE Sensex worst falls – aftermath of The Global Financial Crisis, 2008….. 08 January 2008 : 20,873 09 March 2009 : 8,160 Change : - 60.91% 192
What modern stock market history teaches us : What modern stock market history teaches us Historically, falls in the market have not exceeded the 50% mark by much, except during the Great Depression, 1929-32. 193
Worst fall of the DJIA – aftermath of The Great Depression 1929-1932 : Worst fall of the DJIA – aftermath of The Great Depression 1929-1932 03 Sep 1929 : 381 08 July 1932 : 41 Change : - 89% 194
Step 3 – Thumb rule for determining the Margin of Safety : Step 3 – Thumb rule for determining the Margin of Safety PE ratios of the popular indices must be 20 or less; and The popular indices must be at least 25% below their last peak. 195
Step 4 – Applying the Margin of Safety on 11 October 2011 : Step 4 – Applying the Margin of Safety on 11 October 2011 PE ratio of the Sensex: 18.17 PE ratio of the Nifty: 18.01 Present Sensex versus last peak in percentage: - 21.28% Present Nifty versus last peak in percentage: - 20.90% 196
Applying the margin of safety : Applying the margin of safety If a margin of safety exists, lump sum investments into index or well diversified funds or a mix of these, should be fine. If not, go for five-year STPs or ten-year STPs. If a margin of safety does not exist, lump sum investments can also be considered in good asset allocation plans such as the FT India Dynamic PE Ratio FoF. 197
An important exception to the margin of safety : An important exception to the margin of safety Any investor who has a long-term systematic investment plan in equity or an equity mutual fund, need not follow the margin of safety, provided the investment is continued uninterrupted for at least 5 years . 198
A Strategy for All Seasons – Another exception to the Margin of Safety : A Strategy for All Seasons – Another exception to the Margin of Safety Whether a margin of safety exists or not, the “Zero Risk Systematic Transfer Plan” is a strategy that can be used by anyone at any time for fearless investing.
J P Morgan : J P Morgan “Bear markets are when stocks are restored to their rightful owners.” 200
7. Other Objectives : 7. Other Objectives 201
The setting up of a GENERAL INVESTMENT FUND : The setting up of a GENERAL INVESTMENT FUND What is a General Investment Fund? It is a fund to take care of all non-normal non-emergency, and non-retirement expenses. 202
Examples of non-normal, nonemergency and non-retirement expenses : Examples of non-normal, nonemergency and non-retirement expenses Children’s education Buying a vehicle Down payment on a house Renovation of a house Children’s marriage Other family functions Family vacations Charity Selective financial intervention & support 203
Other Objectives : Other Objectives A general investment account takes care of these non-normal, non-emergency and non-retirement financial needs. Constitution of a general investment account – the right mix of debt, equity and perhaps, real estate. When in doubt, a debt : equity mix of 50:50 should be quite all right. Try to allow three to five years to pass between initial contributions to a GIF and first withdrawals from it. 204
Strategy for a General Investment Fund : Strategy for a General Investment Fund Asset allocation funds or a fund of funds that meets your asset allocation requirement can be used for a general investment fund. Examples: FT India Dynamic PE Ratio Fund of Funds, FT Life Stage Fund of Funds – The 30s Plan. Try to invest at least 15% of your monthly take-home income to build a general investment fund, if there are housing loan repayments. If there are no loan EMIs, contribution to a general investment fund can be higher.
Other Objectives : Other Objectives Estate and succession planning HUFs, Private Family Trusts Housekeeping 206
Other Objectives - Housekeeping : Other Objectives - Housekeeping Filing tax returns correctly and on time. Ensuring that all investments are in joint names or with nominations registered. Educating spouse and children about finance and investment. Reviewing investments regularly. Making minimal changes only if required. Difference between reviewing and churning. 207
Other Objectives - Housekeeping : Other Objectives - Housekeeping Ensure that every member of the family obtains (subject to age eligibility): a passport a driver’s licence an election identity card an income-tax PAN card the UID (‘Aadhar’) card. 208
Other Objectives - Housekeeping : Other Objectives - Housekeeping Examine whether family members need to : Complete KYC formalities for mutual fund investment; Open a client account with a member of the BSE/NSE; and Open a demat account with a depository participant . 209
Conclusion : Conclusion 210
Jack Welch, former chairman, General Electric : Jack Welch, former chairman, General Electric Control your destiny, or someone else will. 211
How much wealth should you build? : How much wealth should you build? Unsatisfactory financial position at retirement : No debts A residential apartment / house Financial assets, income from which just takes care of normal living expenses. 212
PowerPoint Presentation : Carl Richards , www.behaviorgap.com
How much wealth should you build? : How much wealth should you build? Satisfactory financial position at retirement : Health insurance Emergency fund No debts A residential apartment / house Financial assets, income from which takes care of normal living expenses; and Additional equal amount of financial assets reserved for growth. 214
How much wealth should you build? : How much wealth should you build? Good financial position at retirement : Health insurance Emergency fund No debts A residential apartment / house Financial assets, income from which just takes care of normal living expenses; and Additional amount of financial assets reserved for growth equal to twice the amount of principal deployed for regular returns. 215
Financial Planning – A Plan of Action : Financial Planning – A Plan of Action 216
Financial Planning - Plan of Action : Financial Planning - Plan of Action 1. Take health insurance for the entire family. 217
Financial Planning - Plan of Action : Financial Planning - Plan of Action 2. Take life insurance if required, and to the extent required. 218
Financial Planning - Plan of Action : Financial Planning - Plan of Action 3. Take property insurance if required, and to the extent required. 219
Financial Planning - Plan of Action : Financial Planning - Plan of Action 4. Establish a family emergency fund equal to at least one year’s normal living expenses. 220
Financial Planning - Plan of Action : Financial Planning - Plan of Action 5. Plan for retirement, NOW . Max out on your EPF contributions , if you are employed and eligible for EPF. Open PPF accounts for all members of the family. Start ELSS investments via the systematic investment route, if this has not already been done. Sustained long-term investment into a mix of EPF/PPF and ELSS plans of mutual funds are the best options for retirement funding. 221
Financial Planning - Plan of Action : Financial Planning - Plan of Action 6. Acquire a house , especially if you have not done so already, and are not likely to inherit one. 222
Financial Planning - Plan of Action : Financial Planning - Plan of Action 7. Get rid of debt , especially unproductive and open-ended debt. 223
Financial Planning - Plan of Action : Financial Planning - Plan of Action 8. Build a general investment fund across different types of asset classes. Always diversify . 224
Financial Planning - Plan of Action : Financial Planning - Plan of Action 9. Have a good idea of your other financial objectives, and build a general investment account, to achieve them . 225
Financial Planning - Plan of Action : Financial Planning - Plan of Action 10. Learn to differentiate between short-term and long-term monetary needs and invest accordingly. 226
Financial Planning - Plan of Action : Financial Planning - Plan of Action 11. Guard against hype , excitement and costs in investment and insurance. 227
Financial Planning - Plan of Action : Financial Planning - Plan of Action 12. Keep your documents in order & review your finances and financial papers at least once a quarter . 228
Financial Planning - Plan of Action : Financial Planning - Plan of Ac tion 13. Don’t neglect estate and succession planning . Make a will. 229
Financial Planning - Plan of Action : Financial Planning - Plan of Action 14. Ensure that all investments are in joint names or with nominations registered. 230
Financial Planning - Plan of Action : Financial Planning - Plan of Action 15. Don’t neglect tax work. Be tax-efficient, wherever possible. 231
Financial Planning - Plan of Action : Financial Planning - Plan of Action 16. Ensure that every adult family member has a passport, an IT PAN card, an election identity card, a driving licence, and a UID (Aadhar) card . 232
Financial Planning - Plan of Action : Financial Planning - Plan of Action 17. Examine whether family members need to : Complete KYC formalities for mutual fund investment; Open a client account with a member of the BSE/NSE; and Open a demat account with a depository participant. 233
Winning! : Winning! Winning doesn’t always mean being first. Winning means constantly doing better than you have done before. Financial Planning enables everyone who implements it, to emerge a winner. 234
PowerPoint Presentation : “Someone’s sitting in the shade today, because someone planted a tree many years ago.” - Warren Buffett 235
Financial Planning for Young People just starting work : Financial Planning for Young People just starting work 1. Take out health insurance even if your company provides you with a health cover. Choose a floater. 2. Take life and property insurance only if required. 3. Start an emergency fund equal to one year’s normal living expenses. 236
Financial Planning for Young People just starting work : Financial Planning for Young People just starting work 4. Open a PPF account and start a minimum contribution to it. 5. Start an SIP into an ELSS. 6. Plan for a house about five years after you start work. 7. Do not get into unnecessary and dangerous debt like credit card debt, personal loans and personal overdrafts. 237
Warren Buffett : Warren Buffett “It is not necessary to do extraordinary things, to get extraordinary results.” 238
training@simplus.co.in : training@simplus.co.in 239
Thank you! : Thank you! 240