financial planning and mathematics
TRANSCRIPT
-
8/7/2019 Financial Planning and Mathematics
1/63
Financial Planning and Mutual Funds1
Financial Planning
-
8/7/2019 Financial Planning and Mathematics
2/63
Financial Planning and Mutual Funds2
FinancialPlanning
Definition
Plan to Financethe Needs=
-
8/7/2019 Financial Planning and Mathematics
3/63
Financial Planning and Mutual Funds3
What are those needs?
Birth & Education Earning Years Retirement
38 yrs22 yrs Over 25 - 30 yrs
Housing
Childs Education
Childs Marriage
Phase I Phase IIIPhase II
Age
Marriage
Children
22 yrs 60 yrsAge
-
8/7/2019 Financial Planning and Mathematics
4/63
Financial Planning and Mutual Funds4
MoreModern Needs
-- Longer Retirement Life
- Higher Medical Costs
- Improved Standard of Living
- Vacations Abroad
- Visit Abroad to meet the studying child
- Club Membership
- Second Car
And more.
-
8/7/2019 Financial Planning and Mathematics
5/63
Financial Planning and Mutual Funds5
One needs to estimate time horizon
and amount required for these needsand then adjust for inflation
-
8/7/2019 Financial Planning and Mathematics
6/63
Financial Planning and Mutual Funds6
INFLATION ROBSYOUR PURCHASING POWER
10 yrs 20 yrs 30 yrs 40 yrs
(Assuming inflation @ 8% p.a.)
Rs. 25,000 today
53,973
116,525
251,568
543,113
-
8/7/2019 Financial Planning and Mathematics
7/63
Financial Planning and Mutual Funds7
COSTOF LIVING
Item 1987(Rs.)
1997(Rs.)
2017(Rs.)
Colgate Toothpaste(100 gms. Tube)
8.05 18.90(8.91%)
104.00
Ham am Soap 3.05 7.85
(9.92%)
52.00
M asala Do sa 3.50 14.00(14.87%)
224.00
Petrol 7.99 25.48(12.30%)
259.12
LPG Cylinder 56.15 137.85(9.40%) 830.85
Zodiac M ens' Shirt 225.00 510.00(8.53%)
2620.27
-
8/7/2019 Financial Planning and Mathematics
8/63
Financial Planning and Mutual Funds8
Estimating Future Needs
Rs.3 lakhs today:Rs.3 lakhs today:--
Rs. 20 lakhs today:Rs. 20 lakhs today:--
Rs. 100 lakhs today:Rs. 100 lakhs today:--
-
8/7/2019 Financial Planning and Mathematics
9/63
Financial Planning and Mutual Funds9
Estimating Future Needs
The jobbecomes moredifficultbecauseofchanging
needs and aspiration levels. Theincome levels ofpeople
arechanging rapidly.
Thereis a needtoreviewthe needs and amount
required.
-
8/7/2019 Financial Planning and Mathematics
10/63
Financial Planning and Mutual Funds10
Estimating and paying for future
needs covers the cash outflowsaspect
-
8/7/2019 Financial Planning and Mathematics
11/63
Financial Planning and Mutual Funds11
But Financial Planning is aboutfinancing the needs
-
8/7/2019 Financial Planning and Mathematics
12/63
Financial Planning and Mutual Funds12
Hence the need for savings to
accumulate money to finance those
needs
It covers the cash inflows aspect
-
8/7/2019 Financial Planning and Mathematics
13/63
Financial Planning and Mutual Funds13
Can We then say
Financial Planning is
Cash Flow Management with clear estimation
about cash inflows and cash outflows after
adjusting for increase in income and savings,
inflation and taxation
-
8/7/2019 Financial Planning and Mathematics
14/63
Financial Planning and Mutual Funds14
Amount requiredto be savedmonthly:-
ForRs.25 lakhs :ForRs.25 lakhs :--
Rs. 100 lakhs :Rs. 100 lakhs :--
Rs. 250 lakhs :Rs. 250 lakhs :--
-
8/7/2019 Financial Planning and Mathematics
15/63
Financial Planning and Mutual Funds15
How to accumulate wealth to financethe needs?
-
8/7/2019 Financial Planning and Mathematics
16/63
Financial Planning and Mutual Funds16
Important Lessons
Start Early
Invest Regularly
Think Long Term
Manage Risk
Save andInvest
-
8/7/2019 Financial Planning and Mathematics
17/63
Financial Planning and Mutual Funds17
1.StartEarly
You
Age : 25 years
Start : Today Invest : 5 years
Amount : Rs 10,000p.a.
Redemption on
retirement (age 60)
YourTwin
Age : 25 years
Start : at age 30
Invest : 30 years
Amount : Rs 10,000
p.a. Redemption on
retirement (age 60)
-
8/7/2019 Financial Planning and Mathematics
18/63
Financial Planning and Mutual Funds18
Who has more ?
3
13
51
2
12
50
0.780.1 0.10
25 30 40 50 60
Age (in yrs)
ValueofInvestm
ents
(Rs.inLacs)
You Your win
You Start
Investing
You Stop Investing,
Your twin starts
-
8/7/2019 Financial Planning and Mathematics
19/63
Financial Planning and Mutual Funds19
2.Invest Regularly
Small investments
No substantial outflow at any point of time
Rupee Cost Averaging Continuous buying at different prices reduces the average
cost.
-
8/7/2019 Financial Planning and Mathematics
20/63
Financial Planning and Mutual Funds20
Rupee cost Averaging
When you invest a fixed sum every month, you buy
more units when the price is down while you buy lesser
units when it is up.
You will observe that by investing regularly your returns
are always better than average returns as you can
avail of the advantages of rupee cost averaging.
-
8/7/2019 Financial Planning and Mathematics
21/63
Financial Planning and Mutual Funds21
Arithmetic ofRupee Cost Averaging
M o n t o u n t I n v s t( s . )
S l P r ic( s . )
N o . o f U n i t sP u r c s
1 1 1 .
1 1 6 6 . 6 6 7
1 9 1 1 1 . 1 1 1
4 1 1 .
T T L 4 4 4 4 . 4 4 4
Average Sales Price of Units : Rs. 12 ( i.e. Rs. 48/4 months)
Average Purchase Cost of Units : Rs 11.61 ( i.e. Rs. 4000/344.444 units)
-
8/7/2019 Financial Planning and Mathematics
22/63
Financial Planning and Mutual Funds22
Arithmetic ofValue Averaging
1 12 1000 83.33 83.33 1000
2 15 2000 133.33 50.00 7503 9 3000 333.33 200.00 1800
4 12 4000 333.33 0.00 0
TOTAL 48 3550
Month Amount Invested
(Rs.)
SalePrice
(Rs.)
TotalValue
Units to own Units tobuy
Average Sales Price of Units : Rs. 12 ( i.e. Rs. 48/4 months)
Average Purchase Cost of Units : Rs 10.65 ( i.e. Rs. 3550/333.33 units)
-
8/7/2019 Financial Planning and Mathematics
23/63
Financial Planning and Mutual Funds23
3. Think Long Term
Power of Compounding
Invest in instruments with matchingtenure
-
8/7/2019 Financial Planning and Mathematics
24/63
Financial Planning and Mutual Funds24
THEEIGHTWONDEROF THEWORLD...
The Power ofCompounding
350,000
2,533,529
330,000
2,099,636
300,000
1,572,834
Savings Returns *
Saves from age
25 to 60
Saves from age
27 to 60
Saves from age
30 to 60Assuming an annual savings of Rs. 10,000 in an instrument providing return of 9.5%
p.a.
-
8/7/2019 Financial Planning and Mathematics
25/63
Financial Planning and Mutual Funds25
STARTEARLY; SAVEREGULARLY
Every % difference in return counts
Peri
(in rs.)
Your
sa ings
Rs.
Grows @
4. % .a.
to Rs.
Grows @
6. % .a.
to Rs.
Grows @
. % .a.
to Rs.
5 60,000 67, 70,706 76, 6
0 120,000 151,028 167,579 196,198
15 180,000 255, 7 00, 05 85,080
20 240,000 85,572 482,150 682,424
25 300,000 547,730 731,293 1,150,514
30 360
,000
749
,809
1
,072
,641
1
,887
,401
* Assuming an investment of Rs. 1,000/- per month
In the short run, a 1% differential in the rate of return may not
matter as much - but in the long run, it can be significant!!!!!!!
-
8/7/2019 Financial Planning and Mathematics
26/63
Financial Planning and Mutual Funds26
4.Manage Risk
Diversify
Keep focused on your goals
Seek professional advice
-
8/7/2019 Financial Planning and Mathematics
27/63
Financial Planning and Mutual Funds27
What is the relation between risk andreturn
When an investment carries higher risks it should give
higher returns.
The importance of asset allocation lies in the fact that bymixing assets having different risk characteristics it
attempts to reduce risks and increase returns or It attempts to generate a higher return for a given levelof risk
Or it attempts to reduce the risk for a given level ofreturn
-
8/7/2019 Financial Planning and Mathematics
28/63
Financial Planning and Mutual Funds28
FV = PV(1 + r)n
Applications aside, what do you think this
equation really signifies?
Theessenceofhowtocreatewealth!
-
8/7/2019 Financial Planning and Mathematics
29/63
Financial Planning and Mutual Funds29
Enhancing FutureValue
Wealth creation is nothing butenhancementoffuturevalue
FV = PV (1 + r)n
The moreThe more
you save,you save,
makes amakes a
differencedifference
PV
The moreThe more
you earn,you earn,
makes amakes a
differencedifference
r
The soonerThe sooner
you start,you start,
makes amakes a
differencedifference
n
-
8/7/2019 Financial Planning and Mathematics
30/63
Financial Planning and Mutual Funds30
The more you save, makes a difference
Growth rate of 7% p.a.
Amount saved per month
5,000 1,500,000 4,073,986
3,000 900,000 2,444,391
1,500 450,000 1,222,196
1,000 300,000 814,797
Total Amount
Saved
Value after
25 years
-
8/7/2019 Financial Planning and Mathematics
31/63
Financial Planning and Mutual Funds31
The sooner you start, makes a difference
Rs. 1000 invested p.m. @7% p.a. till the age of 60
Starting Age
25 420,000 1,811,561
30 360,000 1,227,087
35 300,000 814,797
40 240,000 523,965
Total Amount
Saved
Value at the
age of 60
-
8/7/2019 Financial Planning and Mathematics
32/63
Financial Planning and Mutual Funds32
The more youearn, makes a difference
Rs. 1000 invested p.m.
Growth Rate
6% 164,699 696,459
8% 184,166 957,367
10% 206,552 1,337,890
12% 232,339 1,897,635
Value after 10
years
Value after
25 years
-
8/7/2019 Financial Planning and Mathematics
33/63
Financial Planning and Mutual Funds33
Mathematics of Investing
-
8/7/2019 Financial Planning and Mathematics
34/63
Financial Planning and Mutual Funds34
The Future Value Equation
-
8/7/2019 Financial Planning and Mathematics
35/63
Financial Planning and Mutual Funds35
FV = PV(1 + r)n
FV = Future Value
PV = Present Value
r = Rate of Return/ Coupon Rate
n = No. of compounding periods
-
8/7/2019 Financial Planning and Mathematics
36/63
Financial Planning and Mutual Funds36
Illustration
Mr A Bachchan plans to buy a house after 5 years.
The current cost of such a house is estimated to be Rs.
35 lakhs.
Assuming property prices rise 3% p.a., how
much will the housebeexpectedtocost 5 yearsdown the line?
FV = PV (1 + r)n
FV = 35 (1 + 3%)5
FV = 40.57 lakhs
-
8/7/2019 Financial Planning and Mathematics
37/63
Financial Planning and Mutual Funds37
Illustration
Ms M Dixit invested Rs. 10 lakh in a no-load mutualfund scheme in their IPO, four years ago.
According to the latest fact sheet, the scheme has
shown a CAGR since inception of 10% p.a.
Howmuch is Ms Dixit's investmentworth today?
FV = PV (1 + r)n
FV = 10 (1 + 10%)4
FV = 14.64 lakhs
-
8/7/2019 Financial Planning and Mathematics
38/63
Financial Planning and Mutual Funds38
Illustration
Mr A Devgan has a dream to take his wife on a luxury
cruise in the Caribbean, after 4 years.
The cruise is expected to cost Rs.3 lakhs at that time.
Assuming therisk freerateofreturn tobe 7% p.a.,
howmuch should heinvesttoday, torealisethis
dream, withouttaking any risk?
FV = PV (1 + r)n
PV = FV/ (1 + r)n
PV = 3/ (1 + 7%)4
PV = 2.29 lakhs
-
8/7/2019 Financial Planning and Mathematics
39/63
Financial Planning and Mutual Funds39
Illustration
Mr J Shroff dreams of sending his daughter to Harvardafter 4 years, for which he is ready to invest 35 lakhs
today.
The education is expected to cost Rs.50 lakhs at that time.
Howmuch should his money earn forhimtorealise his dream?
FV = PV (1 + r)n
r = (FV/ PV) 1/n -1
r = (50/ 35) 1/4 -1
r = 9.33% p.a.
-
8/7/2019 Financial Planning and Mathematics
40/63
Financial Planning and Mutual Funds40
Financial Planning Process
Need Analysis
Evaluate Person Specific Situation
Define Objectives
Analyse Earnings
Determine Time Frame
Risk Profiling
Portfolio Construction
Asset Allocation
Choice of Products
Profit Booking
Taxation Issues
Regular Review
-
8/7/2019 Financial Planning and Mathematics
41/63
Financial Planning and Mutual Funds41
INVESTORs RISKPROFILING
Profile the customer on following parameters :-
- Goals
- Background Information
- Risk Tolerance
- Past Experience
-
8/7/2019 Financial Planning and Mathematics
42/63
Financial Planning and Mutual Funds42
Examples ofGoalSetting
- Ask for the Time Horizon of the investments
- What percentage of the investments does he plan to
redeem within the next 3 years
- What is his primary investment goal viz. income
generation with cash flows; income generation without
cash flows; growth of money with little money in incomegenerating instruments; for long term growth only.
-
8/7/2019 Financial Planning and Mathematics
43/63
Financial Planning and Mutual Funds43
Examples ofBackgroundInformation
- Age of the investor
- How many more years before he retires ?
How stable or secure is his employment situation
currently?
if not an employee, will he rely on this investment for
current income?
Understand his current financial situation. Consider
regular expenses and ability to repay outstanding loans
as well as savings for emergencies and retirement.
Understand his current investment situation
-
8/7/2019 Financial Planning and Mathematics
44/63
Financial Planning and Mutual Funds44
Examples ofRisk Tolerance
Can he tolerate a temporary decline in the value of hisinvestments ? If yes, upto what percentage is ok with him
?
Does he have an existing investment philosophy viz. Notcomfortable with taking risks; aggressive investment
approach, willing to take risk with 50% of his investments
etc.
Is he comfortable with volatility ?
-
8/7/2019 Financial Planning and Mathematics
45/63
Financial Planning and Mutual Funds45
INVESTOR PROFILE
Mona, Joydeep ( Age 28 years )Financial oalsFinancial oals
Planning to purchase a
house in the next 5 - 8 years
Planning for family in 2
years time.
Creating long-term wealth
for retirement
Investment StrategyInvestment Strategy
Stocks
75%
Short-term
10%
Aggressive Growth Portfolio
Bonds
15%
-
8/7/2019 Financial Planning and Mathematics
46/63
Financial Planning and Mutual Funds46
INVESTOR PROFILE
Sheela, Shekhar ( Age 37 years ) and two kids
Financial oalsFinancial oals
Has a housing loan
Providing for children
education (7-10 years)
Planning for childs wedding(15 - 20 years)
Take care of old parents
Planning for retirement
Investment StrategyInvestment StrategyBalanced Portfolio
Stocks
60%
Short-term
15%
Bonds
25%
INVESTOR PROFILE
-
8/7/2019 Financial Planning and Mathematics
47/63
Financial Planning and Mutual Funds47
INVESTOR PROFILE
Meera & Akash Chaudary
Financial oalsFinancial oals
RetiredRegular Income
Medical Costs
Investment StrategyInvestment StrategyConservative Portfolio
Stocks
15%
Bank
Deposits
40%
Bonds
45%
-
8/7/2019 Financial Planning and Mathematics
48/63
Financial Planning and Mutual Funds48
Mutual Funds
-
8/7/2019 Financial Planning and Mathematics
49/63
Financial Planning and Mutual Funds49
Theflow chart belowdescribes broadly the working ofa mutualfund
O i ti Of M t l F d
-
8/7/2019 Financial Planning and Mathematics
50/63
Financial Planning and Mutual Funds50
Organisation Ofa Mutual Fund
Ad t Of M t l F d
-
8/7/2019 Financial Planning and Mathematics
51/63
Financial Planning and Mutual Funds51
Advantages OfMutual Funds
Professional Management
Diversification Convenient Administration
Return Potential
Low Costs
Liquidity Transparency
Flexibility
Choice of schemes
Tax benefits
Well regulated
-
8/7/2019 Financial Planning and Mathematics
52/63
Financial Planning and Mutual Funds52
DEBT FUNDS
-
8/7/2019 Financial Planning and Mathematics
53/63
Financial Planning and Mutual Funds53
DEBT FUNDS
Objective:
Income generation through investment in a
variety of debt and money market instrumentsacross maturities with a view to maintain a
balance of safety, returns and liquidity.
F t d B fit
-
8/7/2019 Financial Planning and Mathematics
54/63
Financial Planning and Mutual Funds54
Features andBenefits
Ideal for investors looking to earn steady returns with arelatively low risk appetite and a medium to long terminvestment horizon.
Invests in debt and money market securities like Call, T-bills, CDs, CPs, Corporate Debt, PSU Bonds andGovernment Securities across a range of maturities andrisk profiles.
A t P fil
-
8/7/2019 Financial Planning and Mathematics
55/63
Financial Planning and Mutual Funds55
Asset Profile
Instruments issued by Government of India, Banks,
FIs, corporates, PSUs, PFIs etc. with medium to long-term maturities.
AAA rating denotes highest level of safety.
Gilts are instruments issued by the GOI and the StateGovts., also known as G-secs.
Sovereign holding component balances out theinherent credit risk and liquidity risk inherent in a DebtFund.
Q lit ti P t
-
8/7/2019 Financial Planning and Mathematics
56/63
Financial Planning and Mutual Funds56
Qualitative Parameters
Selecting the right investment plan based oninvestment profiles, a basket of securities acrosscredit profiles across tenures.
Active duration management.
Track record of the fund manager.
Expectations of interest rate movements.
Change in Economic
Outlook Shift in StrategyIn tune with Market
Reality
Credit Quality
-
8/7/2019 Financial Planning and Mathematics
57/63
Financial Planning and Mutual Funds57
CreditQuality
Credit Quality of a Debt Funds portfolio is veryimportant. It also enhances liquidity and enablesappropriate valuation.
Hence, most funds rate corporate paper in-house,
apart from the accepted market rating by agencieslike CRISIL, CARE, ICRA etc.
Credit quality is directly proportional to the risk-returnratio of a debt fund.
Quantitative Parameters
-
8/7/2019 Financial Planning and Mathematics
58/63
Financial Planning and Mutual Funds58
Quantitative Parameters
Asset Class (Gilts, Corporate, Bank Bonds)
Liquidity
Volatility
Assets under Management of the scheme as well as
the Fund House
Average portfolio maturity
Entry/Exit Load
Minimum Investment
Expense Ratios
EQUITY FUNDS
-
8/7/2019 Financial Planning and Mathematics
59/63
Financial Planning and Mutual Funds59
EQUITY FUNDS
Objective:
Capital appreciation through investment in a
diversified/focused portfolio of carefully
researched and selected equity shares.
EQUITY FUNDS
-
8/7/2019 Financial Planning and Mathematics
60/63
Financial Planning and Mutual Funds60
EQUITY FUNDS
TypeofEquity Funds
Diversified:Invests in diversified portfolio of stocks.
Sectoral: Invests in stocks of specific industry/sector
of the economy
Index: Invests in the stocks in a benchmark index like
NIFTY or SENSEX in the same proportion as the
individual stocks appear on the index
EQUITY FUNDS
-
8/7/2019 Financial Planning and Mathematics
61/63
Financial Planning and Mutual Funds61
EQUITY FUNDS
Equity Fund Management Styles
Active Management:The fund manager tries to
outperform a benchmark index by investing in stocks
that are likely to outperform the broad market indexes.These portfolios are characterized by very high
portfolio turnover.
Passive Management: The fund managers strategy is
to track a broad market index like NSE-50 or
SENSEX. These portfolios are characterized by very
low portfolio turnover
EQUITY FUNDS
-
8/7/2019 Financial Planning and Mathematics
62/63
Financial Planning and Mutual Funds62
EQUITY FUNDS
TypeofEquity Stocks
Value Stocks:These stocks are of fundamentallystrong companies, but may be undervalued due to
economic, political or market related conditions.T
hefund manager attempts to buy them cheap and sellthem in a market uptrend.
Growth Stocks: These stocks are of companieswhich are in rapidly growing industries and are
increasing their sales, profits and market sharesrapidly. The fund manager invests in these stocks,rides the up-trend and offloads it before the growthrates come down.
-
8/7/2019 Financial Planning and Mathematics
63/63
63
Thank You