1. Whose Money Is It Anyway?

2. Introduction to Personal Finance Tax-saving; Email from F/A! Circumstances Employee Chit-chat Call from relationship Manager Friendly neighbourhood insurance agent When does the typical, average, salaried individual start thinking about money, investing, personal finance?

3. Personal Finance Approaches Tax-savings first Buy products or make investments in haste at the end of each FY Product-first Seek out a product for a need without understanding/analyzing the need Returns-first Maniacal obsession over returns without paying heed to long-term and short-term risks

4. Personal Finance Approaches Needs first Thorough evaluation of needs … and wants! Product-last We do not search for products. We narrow down a type of product and then select one from that type Tax-planning incidental Select a product from the chosen category that saves tax.

5. Personal Finance Approaches Tax-savings first Product-first Returns-first Needs first Products-last Tax-planning incidental Goal-based investing

6. Goal-based investing List all known ‘needs’ and ‘wants’ Classify them in order of importance Classify them as per duration Analyze each need/want. Determine how much we need to invest Determine how much we can invest(!) Decide on an approach Find suitable investments Invest Monitor; Manage – A life long exercise!

7. First, we need to build a moat! Caerlaverock Castle, Scotland. Source: Wikipedia Wikipedia Random Ramblings

8. 1. Protection against …. Death of breadwinner(s) 1.Inflation-proof income to manage monthly expenses at least until kids go to a job 2.School fees 3.College fees 4.Marriage expenses 5.Other liabilities Solution: Life Insurance Product: Pure Term Life Insurance until retirement

9. 2. Protection against …. Hospitalization of family members 1.History of illness 2.Age of dependents 3.College fees 4.Typical room rents in neighboring hospitals Solution: Medical Insurance Note: Enhance premium annually

10. 3. Protection against …. Emergency expenditures 1. Monthly expenses x 12 2. Medical emergencies 3.Liabilities Solution: Rainy day fund Products: SB account; Online FDs, Liquid funds. No credit cards! Key: Returns are irrelevant; Taxation is secondary; Ability to replenish

11. 4. Protection against …. Disability 1.Must if job is not permanent 2.Must for professionals and businessmen Solution: Accident Insurance Products: Get from general insurer not from bank! Key: Read policy document before buying

12. 5. Protection against …. Critical illness? 1.Complex products 2.Better off starting a corpus for medical expenses – treat as a long term goal Solution: CI insurance

13. Cash Flow Analysis: Creating a Zero-based budget Zero-based budget: “One in which every dollar is assigned a role” – Dave Ramsey No money left at the end of the month! Live ‘hand to mouth’ because of investing! No lump sums allowed!

14. Zero-based budget Step 1: List all sources of income Step 2: List all monthly expenses Step 3: List all annual/recurring expenses Step 4: List present and future liabilities Step 5: List present investments (incl EPF) Step 6: Determine amount available for investment (incl EPF)

15. Recurring Expenses Insurance premium, school fee, AMC fee etc. Returns: irrelevant Taxation: Irrelevant Instruments: SB acct; RDs; Liquid funds; Arbitrage fund(?) …

16. Future Expenses: aka financial goals! List all expected expenses in future Expenses before income stops Expenses after regular income stops aka ‘Retirement’

17. Dividing the goal timeline ~ 5 years Save Invest

18. Power of non-compounding Power of compounding does not matter for ~ 5Y or less

19. Saving vs. Investing ~ 5 years Saving Investing Choose not to Worry Inflation Returns Choose not to worry Importance of beating Inflation, grows with duration Importance grows With duration Taxation Choose not to worry Importance grows With duration

20. Short-term Goals: determining how much to invest What is the current Cost ?  Take all expenses into account  As accurately as possible Use an inflation of 8-10% (more for a safety margin) Return = post-tax interest rate of FD or RD

21. Short-term Goals: selecting instruments Focus on nature of taxation: 1)Tax upon maturity/redemption (mutual funds) 2)Tax each financial year (RD/FD) 3)As per slab; with indexation; flat rate; Prefer: Tax upon redemption with indexation (debt mutual funds)

22. Note on indexation benefit Capital gains = Sale Price – Purchase price If the purchase was made 3Y ago, Inflate purchase price using cost inflation index (Sale Price – Inflated Purchase Price) Can be negative long-term capital losses can be set off against long-term capital gains

23. Short term capital loss (both in equity or debt fund) short term capital gain (equity or debt funds) long term capital gain (debt funds) long term capital loss (debt funds) long term capital gains (debt) long term capital gains in equity mutual funds are tax exempt … for now! Source: CafeMutualCafeMutual Offset against

24. Why not have some equity exposure? Is not 5 years long-term?! A primer on volatility Year 1Year 2Year 3Year 4Year 5 10% Annual Returns

25. Compounded Annual Growth Rate Year 1Year 2Year 3Year 4Year 5 10% Geometric Average

26. Compounded Annual Growth Rate Year 1Year 2Year 3Year 4Year 5 10% Geometric Average

27. 4.178.5410.8611.54-9.448.534.142.6711.254.57 2004200520062007200820092010201120122013 XYZ Monthly Income Plan Fund Equity Exposure: 11.5% to 15.1% Cash Exposure: 41% to 85% Rest Bonds

28. 5 year CAGR Year 1Year 2Year 3Year 4Year 5 8.53%4.14%2.67%11.25%4.57% 6.2% Assuming no fluctuation from debt component!

29. Monthly Income Plan Funds 5 year returns: 5.6% to 13.6%