Personal Financial Planning

Assignments..

1. Ponzi Schemes.
A Ponzi scheme is a fraudulent investment strategy that promises high returns with little or
no risk to investors. Named after Charles Ponzi, this scheme relies on using funds from
new investors to pay returns to earlier investors, creating the illusion of a profitable
venture. Common features include enticingly high returns, a pyramid structure, lack of
genuine investments, and the need for a continuous influx of new funds to sustain the
scheme. Ponzi schemes are illegal, lack transparency, and often collapse, causing financial
losses for participants. Recognizing these characteristics is crucial for investors to avoid
falling victim to such scams. Regulatory authorities, such as the Enforcement Directorate
and SEBI, play a key role in investigating and taking legal action against those involved in
Ponzi schemes to protect investors and maintain financial market integrity.
Some recent Ponzi schemes witnessed in India are-

MPS GREENERY DEVELOPERS LIMITED (WEST BENGAL): (AUGUST 2023)

Directors: Prabir Kumar Chanda and Pranab Kumar Das

Allegations: MPS Greenery Developers Limited stands accused of orchestrating a massive
Ponzi scheme, diverting approximately Rs 1,786 crore of public funds. The company
purportedly raised these funds through a web of "fraudulent" income schemes, including
the issuance of agro, orchard, and teak bonds. It is alleged that these bonds, promising
enticingly high returns, were issued in violation of regulations stipulated by the Reserve
Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).

PERFECT HERBAL CARE PVT LTD (DELHI): (JULY 2023)

Directors: Riazuddin, Pooja Kumari, and Shakeela

Scheme: Operating under the guise of pyramid schemes, Perfect Herbal Care Pvt Ltd
enticed investors with promises of substantial returns. One particular scheme encouraged
investors to actively recruit participants, earning points for each recruit's purchase from
the company's supermarkets. These accrued points were marketed as pathways to
additional benefits and rewards.
Funds Collected: Despite the dubious nature of their operations, the company managed to
attract approximately 7,000 investors, collecting an alarming Rs 200 crore from
unsuspecting individuals.

URAN PONZI SCHEME (NAVI MUMBAI): (AUGUST 2023)

Discovery: In August 2023, authorities uncovered a sprawling Ponzi scheme in Uran, Navi
Mumbai.
Masterminds: Sarish Vishnu Gawan and Supriya Patil were identified as the architects of
this elaborate financial deception.
Promises: The fraudulent scheme promised to double investments within 50 and 30 days,
luring thousands of victims with this unsustainable pledge.
Victims and Investments: Investors, ranging from those who invested Rs 33,000 to those
who invested Rs 1 crore, found themselves ensnared in this deceptive web. The extent of
potential losses is staggering, with estimates reaching Rs 300-400 crore and Rs 150-200
crore for Gawan and Patil's schemes, respectively.
Legal Action: Subsequent to the scheme's discovery in February, investigations are
ongoing, with assets worth Rs 22 crore seized from Gawan. Supriya Patil, operating a
similar scheme, defrauded over 1000 individuals.

In sum, these cases underscore the pervasive threat of Ponzi schemes in India, preying on
unsuspecting investors and necessitating swift action from regulatory bodies such as the
Enforcement Directorate and SEBI. The coordinated efforts of these authorities are
crucial in curbing such financial malpractices and safeguarding the interests of investors.
 2. Financial Goals

Financial goals serve as the roadmap for individuals or households, providing specific
and measurable targets to achieve various financial objectives. These goals are integral
to effective financial planning, helping allocate resources in a way that aligns with both
short-term and long-term aspirations. Below, we explore different types of financial
goals along with investment options tailored to each category.

1) Short-Term Financial Goals (1-3 years):

Short-term financial goals typically span 1 to 3 years and involve immediate needs or
planned expenses. Examples include establishing an Emergency Fund for unexpected
expenses, saving for a Vacation, prioritizing Debt Repayment, setting aside funds for
purchasing Electronics, or budgeting for Home Repairs.

Investment Options for Short-Term Goals:

1. High-Yield Savings Accounts: These accounts offer competitive interest rates,

easy accessibility, and are ideal for short-term goals and emergency funds.
2. Certificates of Deposit (CDs): Providing higher interest rates than regular savings
accounts, CDs have fixed terms and penalties for early withdrawals.
3. Short-Term Government Bonds: These low-risk options, backed by the government,
offer slightly higher returns than savings accounts or CDs.
4. Money Market Funds: Mutual funds investing in low-risk, short-term debt
securities, providing competitive yields and liquidity for short-term goals.

2) Medium-Term Financial Goals (3-5 years):

Medium-term financial goals, spanning 3 to 5 years, involve saving for more significant
expenses. Examples include saving for a Car Purchase, covering Education Expenses,
budgeting for a Wedding, accumulating a down payment for a Home, or planning for
Renovations.

Investment Options for Medium-Term Goals:

1. Balanced Mutual Funds: Combining stocks and bonds, these funds offer flexibility
based on risk tolerance for medium-term goals.
2. Short to Intermediate-Term Corporate Bonds: Offering higher yields than
government bonds, these bonds provide steady income for medium-term objectives.
Fixed Deposits (for 3-5 years): Time-bound savings with predictable returns for
medium- term goals, though one should be cautious about early withdrawal
penalties.

3) Long-Term Financial Goals (5+ years):

Long-term financial goals extend beyond 5 years and involve substantial objectives
like retirement planning, wealth building, or funding major life events. Examples
include building a nest egg for Retirement, saving for Children’s Education,
accumulating a substantial down payment for a Home Purchase, wealth accumulation,
or launching a Business.

Investment Options for Long-Term Goals:

1. Equity Mutual Funds: These funds pool money from investors to invest in a
diversified portfolio of stocks, offering potential significant long-term growth with
market risks.
2. Individual Stocks: Direct ownership in individual companies allows for
capital appreciation, requiring research and portfolio diversification for long-term
investors.
3. Public Provident Fund (PPF): A government-backed savings scheme with
guaranteed returns and tax benefits, suitable for retirement and other long-term needs.
4. National Pension System (NPS): A voluntary retirement savings scheme combining
equity and fixed income investments for long-term retirement planning.
5. Real Estate Investments: Physical property investments can generate rental income
and long-term capital gains, serving as a hedge against inflation and diversification.
6. Exchange-Traded Funds (ETFs): Trading like stocks, ETFs offer diversification,
liquidity, and cost-effectiveness for long-term investors.

Choosing investment options aligns with risk tolerance, time horizon, and the specific
financial goal. Diversification is a prudent strategy to spread risk, and periodic reviews
and adjustments are crucial as goals and financial situations evolve. Collaborating with
a financial advisor can help create a tailored plan to meet specific financial goals.

My Financial Goals

1) Short term (1yr) – Buy hp Chromebook (22,990)

2) Medium-term (4yrs) - Foreign vacation with friends to Greece, 1
week, (2,23,080(tour)+22,400(food)+ 10000(miscellaneous)=
2,55,480)
3) Long term (10yrs) – Wealth building
 3. Taxes :-

Tax Planning:

Tax planning refers to the process of organizing one's financial affairs in a way that
takes advantage of available tax benefits and deductions to minimize the overall tax
liability. The objective of tax planning is to legally optimize one's tax position by using
various strategies, such as taking advantage of tax credits, deductions, exemptions, and
other incentives provided by tax laws. Tax planning involves careful consideration of
financial transactions, investments, and other activities to ensure that they are
structured in a manner that results in the least amount of tax payable.

Tax Management:

Tax management, on the other hand, is a broader term that encompasses a range of
activities aimed at efficiently handling all aspects of taxation. It includes not only tax
planning but also the implementation and execution of tax-related strategies. Tax
management involves the ongoing monitoring and adjustment of financial activities to
ensure compliance with tax laws while maximizing benefits. This may include record-
keeping, timely filing of tax returns, and addressing any tax-related issues that may
arise.

Difference between Tax Avoidance and Tax Evasion:

1. Tax Avoidance:
- Definition: Tax avoidance is the legal practice of arranging one's financial affairs to
minimize tax liability. It involves using legitimate methods, such as taking advantage of
tax credits and deductions, to reduce the amount of taxes owed.
- Legality: Tax avoidance is legal and is considered a responsible and strategic
approach to managing one's tax liability within the bounds of the law.
- Example: Contributing to retirement accounts to benefit from tax deductions is a
common form of tax avoidance.

2. Tax Evasion:
- Definition: Tax evasion is the illegal act of intentionally underreporting income,
inflating deductions, hiding money offshore, or engaging in other fraudulent activities to
evade paying taxes owed.
- Legality: Tax evasion is a criminal offense and is strictly prohibited. It involves
deliberate deception of tax authorities and can lead to severe penalties, including fines
and imprisonment.
 - Example: Falsifying income on a tax return or not reporting income earned from
illegal activities constitutes tax evasion.

In summary, tax planning is the proactive and legal approach of organizing one's
finances to minimize tax liability, while tax management involves the ongoing
administration and compliance with tax regulations. On the other hand, tax avoidance
is the legal practice of reducing taxes through strategic financial planning, while tax
evasion is the illegal act of intentionally evading taxes through fraudulent means. It's
crucial for individuals and businesses to engage in responsible tax planning and
management to ensure compliance with tax laws while optimizing their financial
position.
 4. Exemptions and Deductions

Difference between Exemption and Deduction:

Exemption:

An exemption in the context of income tax implies the complete exclusion of specific
types of income from the total taxable income. Income falling under exempt categories
is not considered taxable at all. These exemptions are often granted to encourage certain
activities or behaviors. Common examples include the exemption of agricultural
income, HRA (House Rent Allowance) for salaried individuals, and the exemption of
income earned by specific organizations, such as charitable institutions. Exemptions are
usually defined under specific sections of the Income Tax Act.

Deduction:

Deductions, on the other hand, are amounts subtracted from the total taxable income,
reducing the individual's overall tax liability. Deductions are associated with eligible
expenses or investments that serve specific purposes, such as promoting savings,
encouraging education, or supporting social causes. When taxpayers claim deductions,
they essentially reduce their taxable income by the amount specified under relevant
sections of the Income Tax Act. Examples of deductions include contributions to
Provident Fund (PF), premiums paid for life insurance, and expenses related to
education and healthcare.

In summary, exemptions exclude specific types of income entirely from taxation, while
deductions reduce the taxable income by subtracting eligible expenses or investments.

Various Types of Deductions under the Income Tax Act:

1. Section 80C:

- Deductions for Investments: This section allows deductions for various investments,
including contributions to Provident Fund (PF), Public Provident Fund (PPF), Equity-
Linked Savings Scheme (ELSS), National Savings Certificates (NSC), and payment of
life insurance premiums.
2. Section 80D:

- Deductions for Health Insurance Premiums: Taxpayers can claim deductions for
premiums paid for health insurance policies covering self, spouse, children, and
parents.
3. Section 80E:

- Deductions for Education Loan Interest: Interest on loans taken for higher
education is eligible for deduction under this section.
4. Section 24:
Deductions on Home Loan Interest: This section a

5. Section 80G:

- Deductions for Charitable Contributions: Donations made to approved

charitable organizations are eligible for deduction under this section.
6. Section 10(14):

- Deductions for House Rent Allowance (HRA): Employees receiving HRA can
claim deductions based on the rent paid and other conditions specified under this
section.
7. Section 80TTA:
- Deductions on Savings Account Interest: Interest earned on savings accounts up
to a specified limit is eligible for deduction.
8. Section 80GG:

- Deductions for House Rent Paid by Individuals not receiving HRA: Individuals
not receiving HRA but paying rent can claim deductions under this section.
9. Section 80U:

- Deductions for Persons with Disabilities: Individuals with disabilities can claim
deductions under this section.
10. Section 80CCD:
- Deductions for National Pension Scheme (NPS) Contributions: Contributions made
to the National Pension Scheme by individuals and employers are eligible for
deductions.
11. Section 10(38):
- Deductions for Long-Term Capital Gains from Equity Mutual Funds and Stocks:
Certain long-term capital gains from equity investments are eligible for exemptions.
 5. Mutual Funds
Mutual funds serve as investment vehicles that pool money from various
investors, allowing them to collectively invest in a diversified portfolio of
stocks, bonds, or other securities. Managed by professional fund managers,
mutual funds offer a range of schemes to cater to different investment
objectives, risk profiles, and time horizons.
Here's an in-depth look at some common types of mutual fund schemes:

1. Equity Funds:

Equity funds focus on long-term capital appreciation by primarily

investing in stocks. This category includes large-cap funds, mid-cap funds,
small-cap funds, and sector funds. The risk level associated with equity
funds is high due to the volatility of stock markets.

2. Debt Funds:

Debt funds invest in fixed-income securities such as government bonds,

corporate bonds, and money market instruments, emphasizing regular
income generation. Examples of debt funds include liquid funds, short-
term funds, gilt funds, and corporate bond funds. While the risk level is
generally lower than equity funds, it varies based on the type of debt
instruments.

3. Hybrid Funds (Balanced Funds):

Hybrid funds provide a balanced approach by investing in a mix of equity

and debt instruments. This category includes aggressive hybrid funds,
conservative hybrid funds, and balanced advantage funds. The risk profile
is moderate, determined by the asset allocation.

4. Index Funds:

Index funds aim to replicate the performance of a specific market index,

such as Nifty 50 or Sensex. These funds have a moderate risk level,
depending on the index being tracked. Examples include Nifty Index Fund
and Sensex Index Fund.

5. Exchange-Traded Funds (ETFs):

Similar to index funds, ETFs track specific indices but trade on stock
exchanges like individual stocks. Nifty 50 ETF and Gold ETF are examples.
The risk level varies from moderate to high, depending on the underlying
assets.

6. Tax-Saving Funds (ELSS):

Equity-linked savings schemes (ELSS) offer tax benefits under Section 80C
of the Income Tax Act. With a high-risk profile, ELSS funds primarily
invest in equities and have a lock-in period of three years.

7. Sector Funds:

Sector funds specialize in investing in stocks of companies within a specific

sector or industry. Banking sector funds and technology sector funds are
examples. The risk level is high, as the fund's performance is linked to the
success of the chosen sector.

8. Thematic Funds:

Thematic funds invest in stocks related to a particular theme or trend,

irrespective of the sector. Examples include infrastructure funds and
consumption-themed funds, with a high-risk profile tied to the success of
the chosen theme.

9. Fixed Maturity Plans (FMPs):

FMPs invest in debt instruments with a fixed maturity date, offering a

predefined maturity period. The risk level is generally low to moderate,
depending on the credit quality of the underlying securities. FMPs have a
lock-in period until maturity, typically three years.

10. Gilt Funds:

Gilt funds invest in government securities (gilts) with varying maturities,

providing relatively low-risk income. Short-term gilt funds and long-term
gilt funds are examples, with a low-risk profile due to investments in
government-backed securities.

Investors should carefully choose mutual fund schemes based on their

financial goals, risk tolerance, and investment horizon. Diversification
across different types of mutual funds can help manage risk within an
investment portfolio. Additionally, considerations such as expense ratios,
fund managers' track records, and historical performance are crucial when
making informed investment decisions. Regular monitoring and periodic
reviews of the portfolio ensure alignment with financial objectives and
market conditions.
 6. Old And New Tax Regime

Introduction:
The juxtaposition of the old and new tax regimes in India has become a
focal point for taxpayers, especially after the introduction of the new tax
regime in Budget 2020 and subsequent modifications in Budget 2023. This
detailed analysis aims to unravel the intricacies of the old tax regime versus
the new tax regime, offering taxpayers a comprehensive understanding of
the benefits and drawbacks associated with each, facilitating an informed
decision in line with their unique financial objectives.

New Tax Regime Overview:

The new tax regime, implemented from Budget 2020 onwards, introduces
six tax slabs with rates ranging from 0% to 30%. Notably, it establishes
lower tax rates for incomes up to 15 lakhs per annum, providing
exemptions for incomes up to 7 lakhs. However, it deviates from the old tax
regime by excluding several benefits and exemptions.

Benefits of New Tax Regime:

The new tax regime brings forth advantages, including the facilitation of
tax-free investments without stringent restrictions and zero tax liability for
incomes up to 7 lakhs. These features render the new regime attractive for
individuals with uncomplicated financial portfolios and fewer deductions.

Limitations of Opting for the New Tax Regime:

An inherent limitation of the new tax regime lies in its lack of exemptions,
potentially leading to an upswing in taxable income. Apart from the
standard deduction of Rs 50,000 (already available in the old regime), no
additional benefits are extended under the new system.
Old Tax Regime Overview:
The old tax regime, preceding the new changes, featured four tax slabs
ranging from 0% to 30%, with a zero-deduction level at 5 lakhs per
annum. Its distinguishing factor rests in the availability of numerous
deductions, contributing to reduced tax liabilities, thanks to additional
sections in the Income Tax Act.

Benefits of Old Tax Regime:

The old tax regime empowers individuals to plan their taxes according to
their savings, providing a strategy that stands the test of time. Deductions
under Section 80C, allowing for
deductions of up to 1.5 lakhs, played a pivotal role in encouraging savings
as part of a holistic tax planning approach.

Limitations of Opting for the Old Tax Regime:

While the old regime offers tax-saving benefits, it carries limitations.
Committed investments for home loans, education, or marriage, coupled
with tax-deductible investments, might impact cash liquidity. Additionally,
navigating the process of obtaining deductions can be intricate.

Income Tax Slab Rates Comparison:

A comprehensive comparison of income tax slab rates between the old and
new regimes elucidates the alterations in taxation for different income
brackets.

Choosing Between Old and New Tax Regime:

The decision-making process involves a meticulous evaluation of individual
circumstances. The new regime may be suitable for those with a taxable
income of up to 15 lakhs who prioritize simplicity over complex
investments. Conversely, the old regime might be more advantageous for
those earning above 15 lakhs with meticulously planned investments for tax
deductions. A detailed comparative assessment of applicable taxes, taking
into account exemptions available in the old regime, is recommended
before committing to either system.

Conclusion:
In conclusion, both tax regimes present their unique advantages and
drawbacks. The old regime fosters tax-saving investments but may
potentially hamper cash liquidity. On the other hand, the new regime offers
simplicity but lacks avenues for tax reduction. The decision between the
two hinges on individual preferences, financial portfolios, and the
inclination towards either a straightforward or a more intricate set of
deductions. A nuanced understanding of these factors will undoubtedly aid
taxpayers in making a judicious choice aligned with their financial
aspirations.
 7. Reverse Mortgage

Reverse Mortgage Explained:

A reverse mortgage is a financial arrangement tailored for homeowners,
typically seniors, aiming to leverage the equity tied up in their homes
without the necessity of selling the property. Primarily designed for those
in retirement, this financial product can provide a stream of income or a
lump sum, offering financial flexibility. Here's a detailed breakdown of its
key aspects:

1. Qualification Criteria:

- To qualify for a reverse mortgage, homeowners generally need to be at least

62 years old.
- The property in question must be the homeowner's primary residence,
and there should be substantial equity in the home.

2. Loan Structure:

- Unlike traditional mortgages where homeowners make monthly

payments to the lender, a reverse mortgage operates in reverse — the
lender makes payments to the homeowner.
- Homeowners can receive funds in various ways: as a lump sum, through
monthly payments, or as a line of credit.

3. Repayment Mechanism:

- Repayment of a reverse mortgage typically occurs when the homeowner

sells the home, moves out, or passes away.
- If the homeowner passes away, their heirs have the option to repay the
loan and keep the home, or the home is sold, and the loan is settled from
the proceeds.
4. Interest and Fees:

- Interest accrues on the loan balance over time, and the total amount
owed, encompassing interest and fees, increases gradually.
- Fees associated with reverse mortgages may include closing costs,
origination fees, mortgage insurance premiums, and servicing fees.
5. Homeownership Status:

- Despite receiving funds from the reverse mortgage, homeowners retain

ownership of the home throughout the loan tenure.
- The repayment of the loan is facilitated through the proceeds when the
home is eventually sold.

Considerations and Cautions:

- While reverse mortgages offer a valuable option for seniors seeking
financial support, it's crucial to consider associated costs carefully.
- Heirs should be aware of the implications, as they may have decisions to
make regarding loan repayment and the fate of the home.
- Counselling is often mandated before obtaining a reverse mortgage
to ensure that homeowners fully comprehend the terms, conditions, and
potential consequences.

In essence, a reverse mortgage provides a means for house-rich but cash-

poor seniors to tap into their home equity without the immediate burden of
repayment, allowing them to address financial needs in their retirement
years. However, due diligence and a comprehensive understanding of the
terms are essential for those considering this financial option.