A

MAJOR RESEARCH PROJECT

ON

“Financial planning for individual”

At

Anand Rathi Shares and Stock Brokers Ltd.

Submitted in partial fulfillment for the award of

degree of
MASTER OF BUSINESS ADMINISTRATION
(2022 – 2024)

AT
FACULTY OF MANAGEMENT STUDIES
MOHANLAL SUKHADIA UNIVERSITY, UDAIPUR

UNDER THE GUIDANCE OF: SUBMITTED By:

PROF. HANUMAN PRASAD. NAKSHATRA KUMAWAT
FACULTY OF MANAGEMENT STUDIES MBA
 CERTIFICATE

This document serves to certify that Mr. NAKSHATRA KUMAWAT, a student of the Master of
Business Administration (MBA) CMAT, has successfully completed his Major Research Project.
The project’s title is “FINANCIAL PLANNING FOR INDIVIDUAL.”
Under my supervision, Mr. Kumawat conducted the research as part of the fourth semester
curriculum. The project was completed to a satisfactory standard.

PROF. HANUMAN PRASAD

Place: Udaipur

Project Guide

Date:-

i
 DECLARATION

I hereby certify that the project report entitled “Financial Planning for Individuals” meets the criteria
necessary to be awarded a Master of Business Administration degree from the Faculty of Management
Studies, Udaipur. This report stands as a unique and original contribution, having not been presented to
any other organization or university in pursuit of academic honors or recognition.

NAKSHATRA KUMAWAT

ii
 ACKNOWLEDGEMENT

It is my good fortune to have the chance to convey my sincere gratitude to everyone who provided

me with advice and support—without which the project would not have been feasible. First and

foremost, I want to sincerely thank and show my respect to my parents, who have always been an

enormous source of support and motivation for me.

I express my gratitude to Mr. Amar Prakash Sir, our regional branch manager, for dedicating the

valuable time, constant support, and direction to ensure the achievement of the project. He has had

productive and goal-oriented discussions, contributing positively and contributing actively to the

work at work.

I would like to express my gratitude to Prof. Meera Mathur, Director and Dean of the Faculty of

Management Studies at MLSU, Udaipur, for her unwavering support and encouragement during my

study.

Also, I would like to express my sincere gratitude to our course director, Prof, Hanuman Prasad sir,

for providing due guidance which allowed me to complete this project report.

I would like to extend my heartfelt gratitude to the entire Faculty of Management Studies fraternity

for providing me with the chance to work at Sundram Investment. My heartfelt gratitude also goes

out to the entire Anand Rathi team. And to my friends for their encouragement and moral support.

Nakshatra Kumawat

iii
 EXECUTIVE SUMMARY

Financial planning is the process of assessing financial goals of individual, taking an inventory of
the money and other assets which, the person has, determine life goals and then take necessary
steps to achieve goals in the stipulated period. It is a method of quantifying a person’s requirement
in terms of money.

Financial services refer to services provided by the finance industry. The finance industry
encompasses a broad range of organizations that deal with the management of money. Among
these organizations are banks, credit card companies, insurance companies, consumer finance
companies, stock brokerages, investment funds and some government sponsored enterprises.
Financial Planning is one such advisory service, which is yet to get recognition from investors.
Although financial planning is not a new concept, it just needs to be conducted in organized
manner. Today we avail this service from Insurance agent, Mutual fund agents, Tax consultant,
Equity Brokers, Chartered Accountants, etc. Different agents provide different services and
product oriented. Financial Planner on other hand is a service provider which enables an
individual to select proper product mix for achieving their goals.

The major things to be considered in financial planning are time horizon to achieve life goals,
identify risk tolerance of client, their liquidity need, the inflation which would eat up living and
decrease standard of living and the need for growth or income. Keeping all this in mind financial
planning is done with six step process. This are self assessment of client, identify personal goals
and financial goals and objective, identify financial problems and opportunities, determining
recommendations and alternative solutions, implementation of appropriate strategy to achieve
goals and review and update plan periodically.

A good financial plan includes Contingency planning, Risk Planning (insurance), Tax Planning,
Retirement Planning and Investment and Saving option.

Contingency planning is the basic of financial planning and also the most ignored. Contingency
planning is to be prepared for major unforeseen event if it occurs. These events can be
illness, injury in family, loss of regular pay due to loss of job. Such events are not certain but
may have financial hardship if they occur. Thus a person should have enough money in liquid

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form to cover this risk.
Risk Coverage is done through insurance. Risk can be classified into life risk, health risk and
property risk. Today we have different insurance which covers different risk. Everyone is exposed
to life risk but the degree of risk varies. Life insurance provides an economical support to the
family and dependents. Apart from life risk we are also exposed to health risk. Health insurance
covers health risk by funding medical expenses and hospital charges. Also we have property
insurance to cover risk attached to house property like theft, fire, damage, etc. and various auto
insurance.

Tax planning is what every income earner does without fail and this is what financial planning is
all to them. A good plan is one which takes the maximum advantage of various incentives offered
by the income tax laws of the country. However, do understand that the tax incentives are just
that, only incentives. Financial planning objective should be getting maximum advantage of
various avenues. It is to be remembered that tax planning is a part and not financial planning
itself. There are many investments which do not offer tax shelter that does not mean they are
not good investments. The prudent investment decision made and the returns that accrue will
more than offset the tax outgo. In any case the primary objective of a good financial plan
is to maximize the wealth, not to beat the taxmen. However, many investments provide great
returns which can offset the tax on it. A detailed study of various investment which provides
deduction and exemption is given in report.

Retirement Planning is also an important aspect of financial planning. To a greater extend most
earning people do retirement planning. There are various schemes in market through which a
person can do his retirement planning. To list a few are Annuity Insurance Plan, PPF and EPF.

In market there are different instruments which can be adapted to fulfill the need of various
planning objective. These instruments are different from each other in terms of returns, risk,
fund allocation, charges, investment term, tax incentives, etc. A detail description of instruments
like Life insurance, Equity, Mutual Funds, PPF, Investment in Gold, Investment in Real Estate,
Deposits with Banks and Post Office, etc. are covered in this report. This will help the investor to
make their investment decisions.

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 TABLE OF CONTENTS

PARTICULARS PAGE NO
Certificate ……………………………. i
Declaration ……………………………. ii
Acknowledgement ……………………………. iiii
Executive summary iv

Chapter 1: Introduction of the Project

1.1: Introduction to Financial Planning ……………………………. 1
1.2: Study of various factors ……………………………. 1
1.3: Six step process of Financial Planning ……………………………. 2
1.4: Constitute of Financial Planning ……………………………. 4

1.4.1: Contingency planning ……………………………. 4

1.4.2: Risk Coverage ……………………………. 4
1.4.3: Tax Planning ……………………………. 6
1.4.4: Retirement Planning ……………………………. 10
1.5: Concept & Significance of the Study ……………………………. 12
1.6: Scope ……………………………. 12
1.7: Objective of the Study ……………………………. 13
1.8: Literature Review ……………………………. 13

Chapter 2: Introduction to the Industry ……………………………. 14

Chapter 3: Introduction to the Company

3.1: Profile of Company ……………………………. 15

Chapter 4: Investment Avenues

4.1: Life Insurance ……………………………. 26

4.2: Equity ……………………………. 33
4.3: Mutual Fund ……………………………. 34
4.4: Certificate of Deposits ……………………………. 45
4.5: PPF ……………………………. 45
4.6: Real Estate ……………………………. 46
4.7: Gold ……………………………. 47
4.8: Investment in Banks ……………………………. 48
4.9: Investment through Post Office ……………………………. 50

Chapter 5: Research Methodology

5.1: Research Design ……………………………. 55

5.2: Data Collection Techniques and Tools ……………………………. 56
5.3: Sample Design ……………………………. 56
5.4: Limitations ……………………………. 57

Chapter 6: Data Analysis and Interpretation .................................................................. 58

Chapter 7: Conclusions, Limitations and Suggestions

7.1 Conclusions ……………………………. 69

7.2 Limitations ……………………………. 73
7.3 Suggestions ……………………………. 75

Bibliography
 Chapter 1: Introduction to Financial Planning
1.1 : Introduction to Financial Planning
1.2 : Study of various factors
1.3 : Six step process of Financial Planning
1.4 : Constitute of Financial Planning

1.4.1 : Contingency planning

1.4.2 : Risk Coverage
1.4.3 : Tax Planning
1.4.4 : Retirement Planning

1.5 : Concept & Significance of the Study

1.6 : Scope
1.7 : Objective of the Study
 Study of Individual Financial Planning

1.1 Introduction to Financial Planning

Financial Planning is the process of meeting life goals through the proper management of finances.
Financial planning is a process that a person goes through to find out where they are now
(financially), determine where they want to be in the future, and what they are going to do
to get there. Financial Planning provides direction and meaning to persons financial decisions. It
allows understanding of how each financial decision a person makes affects other areas of their
finances. For example, buying a particular investment product might help to pay off mortgage
faster or it might delay the retirement significantly. By viewing each financial decision as part of
the whole, one can consider its short and long- term effects on their life goals. Person can also
adapt more easily to life changes and feel more secure that their goals are on track.

In simple Financial Planning is what a person does with their money. Individuals have been
practicing financial planning for centuries. Every individual who received money had to make a
decision about the best way to use it. Typically, the decision was either spends it now or save it to
spend later. Everyone have to make the same decision every time they receive money. Does it
need should be spend now or to save it to spend it later?

Today in India financial planning means only investing money in the tax saving instruments.
Thanks to the plethora of tax exemptions and incentives available under various sections and
subsections of the Income Tax Act. This has led to a situation where people invest money without
really understanding the logic or the rationale behind the investments made. Further the guiding
force in investment seems to be the ‘rebate’ they receive from the individual agents and advisors.
The more the rebate an agent gives, the more smug person are in the belief that they have made
an intelligent decision of choosing the right agent who has offered them more rebate. In the
process what is not being realized is the fact that the financial future is getting compromised.

1.2. Study of various factors

Things to consider while doing financial planning are:

Time Horizon and Goals: It is important to understand what individual’s goals are, and over
what time period they want to achieve their goals. Some goals are short term goals those that
people want to achieve within the year. For such goals it is important to be conservative in one’s
approach and not take on too much risk. For long term goals, however, one can afford to take
on more risk and use time to one’s advantage.

Risk Tolerance: Every individual should know what their capacity to take risk is. Some
investments can be more risky than others. These will not be suitable for someone of a low risk
profile, or for goals that require being conservative. Crucially, one’s risk profile will change across
life’s stages. As a young person with no dependants or financial liabilities, one might be able
to take on lots of risk. However, if this young person gets married and

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 Study of Individual Financial Planning

has a child, person will have dependants and higher fiscal responsibilities. So persons approach to
risk and finances cannot be the same as it was when they were single.

Liquidity Needs: When does money is needed to meet the goal and how quickly one can access
this money. If investment is made in an asset and expects to sell the asset to supply funds to meet
a goal, then it needs to be understood how easily one can sell the asset. Usually, money market
and stock market related assets are easy to liquidate. On the other hand, something like real estate
might take a long time to sell.

Inflation: Inflation is a fact of the economic life in India. The bottle of cold drink that is brought
today is almost double the price of what would be paid for ten years ago. At inflation or slightly
above 4% per annum, a packet of biscuits that costs Rs 20 today will cost Rs. 30 in ten years
time. Just imagine what the cost of buying a car or buying a home might be in ten years
time! The purchasing power of money is going down every year. Therefore, the cost of
achieving goals needs to be seen in what the inflated price will be in the future.

Need for Growth or Income: As person make investments think about what is required, whether
capital appreciation or income. Not all investments satisfy both requirements. Many people
are buying apartments, but are not renting them out even after they take possession. So, this asset
is generating no income for them and they are probably expecting only capital appreciation from
this. A young person should usually consider investing for capital appreciation to take advantage
of their young age. An older person however might be more interested in generating income for
themselves.

1.3. Six step process of Financial Planning

1. Self-assessment:
Clarify present situation, this is a preliminary step someone has to complete prior to planning
their finance. Doing a self-assessment enable a person to understand their present wealth status
and responsibilities. Self-assessment should contain following
• Prospective retirement age
• Main source of income
• Dependents in family
• Expenses and monthly savings
• Current investment status
One should identify their wealth status prior to move with financial planning.

2. Identify financial, personal goals and objectives

Each individual aspires to lead a better and a happier life. To lead such a life there are some
needs and some wishes that need to be fulfilled. Money is a medium through which such needs
and wishes are fulfilled. Some of the common needs that most individuals

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 Study of Individual Financial Planning

would have are: creating enough financial resources to lead a comfortable retired life, providing
for a child's education and marriage, buying a dream home, providing for medical emergencies,
etc.
Once the needs/ objectives have been identified, they need to be converted into financial goals.
Two components go into converting the needs into financial goals. First is to evaluate and
find out when it is needed to make withdrawals from investments for each of the needs/ objectives.
Then person should estimate the amount of money needed in current value to meet the objective/
need today. Then by using a suitable inflation factor one can project what would be the amount of
money needed to meet the objective/ need in future. Similarly one need to estimate the amount of
money needed to meet all such objectives/ needs. Once person have all the values they need to
plot it against a timeline.

3. Identify financial problems or opportunities:

Once goals and current situation are identified, the short fall to achieve the goal can be assessed.
This short fall need to be covered over a period of time to full fill various need at different life
stages. Since future cannot be predict, all the contingencies should be considered will doing
financial planning. a good financial plan should hedge from various risk. A flexible approach
should be taken to cater to changing needs and should be ready to reorganize our financial plan
from time to time.

4. Determine recommendations and alternative solutions:

Now review various investment options such as stocks, mutual funds, debt instruments such
as PPF, bonds, fixed deposits, gilt funds, etc. and identify which instrument(s) or a combination
thereof best suits the need. The time frame for investment must correspond with the time
period for goals.

5. Implement the appropriate strategies to achieve goals:

Until person put things into action everything is waste. Necessary steps needs to be taken to
achieve financial goals this may include gathering necessary documents, open necessary bank,
demat, trading account, liaise with brokers and get started. In simple terms, start investing and
stick to the plan.

6. Review and update plan periodically.

Financial planning is not a one-time activity. A successful plan needs serious commitment and
periodical review (once in six months, or at a major event such as birth, death, inheritance). Person
should be prepared to make minor or major revisions to their current financial situation, goals and
investment time frame based on a review of the performance of investments.

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 Study of Individual Financial Planning

1.4 Constitute of Financial Planning

A good financial plan should include the following things
• Contingency planning
• Risk Planning (insurance)
• Retirement Planning
• Tax Planning
• Investment and Savings Option

1.4.1 Contingency planning

Contingency means any unforeseen event which may or may not occur in future.
Contingency planning is the basic and the very first step to financial planning. It was found that
a large number of people have invested in financial planning instrument but have ignored
their contingency planning. Why it is more important to have a contingency plan? May will
have planned for their future that’s a great thing, this would definitely help in long run.
But there is always a million dollar question to be asked, What about today, is there a plan
in place? Everyone would think that they have a secure present with regular salary, but what
if suddenly something happens and it is not possible to draw that monthly income. There are
many possibilities that due to illness, injury or to care of family member a huge amount of
money is required. Moreover in this era of pink slip and job hopping its not assured that the
next job will be available at the earliest. This are temporary situation and for a short phase
but cannot be ignored.

If person is not planned for contingencies he will use his long term investment to fund such crises.
It is possible that long term investment may not give enough returns if withdrawn early there is
also a possibility of capital erosion. In such situation all the financial plans made are of waste.
With long term planning person also need to take care of present situation in order to truly
achieve financial goals. It is a thumb rule that one should have three times money of monthly
salary in liquid form to support contingency.

1.4.2. Risk Coverage

Every individual is exposed to certain type of risk whether it is due to loss or damage of personal
property, loss of pay due to illness or disability; or even due to death. Such risk cannot be
determined but on occurrence there may be a financial loss to the individual or their family. Proper
personal financial planning should definitely include insurance. One main area of the role of
personal financial planning is to make sure that one has the ability to carry on living in case of
some unforeseen and unfortunate event. Basically, insurance provides a safety net to provide the
necessary funds when one meets with events like accidents, disabilities or illnesses. One main
contribution of insurance is that it helps provides peace of mind, knowing that enough funds
are at hand in the event when things

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 Study of Individual Financial Planning

do not go the way it should be. This peace of mind leaves one with the energy and confidence to
move forward.
1.4.2.1. Life Risk
Every individual is prone to risk of losing life it’s a naked truth but what is not certain is the
time of death. In this sense everyone is prone to life risk, but the degree of risk may vary. In
terms of financial planning, covering life risk means insuring the life of the person through proper
life insurance plan. Life insurance, simply put, is the cover for the risks that person run during
their lives. Insurance enables us to live our lives to the fullest, without worrying about the
financial impact of events that could hamper it. In other words, insurance protects us from
the contingencies that could affect us. Life insurance provides an economical support to the
family and dependents. It is extremely important that every person, especially the breadwinner,
covers the risks to his life, so that his family's quality of life does not undergo any drastic change
in case of an unfortunate eventuality. There are various plans insurance plan offered by insurance
companies that can suite various needs of individual.

1.4.2.2. Health Risk

Lifespan of Indian is known to have increased nowadays, and senior citizens strive to stay healthy
and active as they age. However, the older person gets the more extensive health care is needed.
Though staying forever young remains a dream unattainable, living a long and safe quality life
at peace is quite an achievable goal. Health insurance is an insurance Policy that insures
against any medical expenses. Insured medical expenses will be taken care of by the insurance
company provided person pays their premium regularly. Cover extends to pre-hospitalisation and
post-hospitalisation for periods of 30 days and 60 days respectively. Domiciliary hospitalisation
is also covered. There are various type of health insurance. Disability insurance can protect
against the loss of a person's ability to earn a living. Critical illness insurance can afford some
protection from expending reserved financial resources due to an unforeseen major illness.

1.4.2.3. Property Coverage

Property Coverage insures personal property from damage, destroy or stolen. Dwelling coverage
also known as Homeowners Insurance offers protection against direct physical damage caused to
the dwelling, including rooms, fireplaces, carpeting, tile floors and elements of decor. Structures,
which are attached to the insured dwelling on the same foundation, such as a garage, are also liable
to coverage under this section of Homeowners Insurance. Besides, this section of policy covers
materials and supplies necessary to rebuild or repair home.

Person Property Coverage can insure the contents of home, i.e. the items person regularly use
which are not a permanent part of their house's or apartment's structure, such as furniture,
television sets, bikes, clothing, appliances, utensils and tools. Personal Property Coverage can be
used in appliance to valuable information saved in a hard-copy form or as

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 Study of Individual Financial Planning

electronic data. Auto insurance is compulsory in most states, and the insurance has different
types of benefits or coverage.
1.4.3. Tax Planning
A good plan is one which takes the maximum advantage of various incentives offered by the
income tax laws of the country. However, do understand that the tax incentives are just that, only
incentives. Financial planning objective should be getting maximum advantage of various
avenues. It is to be remembered that tax planning is a part and not financial planning itself. There
are many investments which do not offer tax shelter that does not mean they are not good
investments. The prudent investment decision made and the returns that accrue will more than
offset the tax outgo. In any case the primary objective of a good financial plan is to maximize
the wealth, not to beat the taxmen. However many investment provides great returns which can
offset the tax on it.

But with the knowledge of the Income Tax (IT) Act one can reduce income tax liability. It also
helps to decide, where to invest and to claim deductions under various sections. The income earned
is subject to income tax by the government. The rate of income tax is different for different income
levels, and thus, the income tax payable depends on the total earnings in a given year.

India income tax slabs for the financial year 2009-2010 as per budget 2009 are as below:
Income tax slab for Men (in Rs.) Tax

0 to 1,60,000 No tax

1,60,001 to 3,00,000 10%

3,00,001 to 5,00,000 20%

Above 5,00,000 30%

Income tax slab for Women (in Rs.) Tax

0 to 1,90,000 No tax

1,90,001 to 3,00,000 10%

3,00,001 to 5,00,000 20%

Above 5,00,000 30%

Income tax slab for Senior Citizen (in Rs.) Tax

0 to 2,40,000 No tax

2,40,001 to 3,00,000 10%

3,00,001 to 5,00,000 20%

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 Study of Individual Financial Planning

Above 5,00,000 30%

The surcharge on the tax for income above Rs 10 lakh is removed.
1.4.3.1. Section 80C
The government encourages certain types of savings – mostly, long term savings for retirement –
and therefore, offers tax breaks on such savings.
Sec 80C of the Income Tax Act is the section that deals with these tax breaks. It states that
qualifying investments, up to a maximum of Rs. 1 Lakh, are deductible from income. This means
that income gets reduced by this investment amount (up to Rs. 1 Lakh).

Qualified investment under Section 80C are:

Provident Fund (PF): The payment that is made to PF is counted towards Sec 80C investments.
For most persons who are salaried, this amount gets automatically deducted from their salary
every month. Thus, it’s not just compulsory savings for future, but also immediate tax savings.

Voluntary Provident Fund (VPF): If person increase PF contribution over and above the
statutory limit (as deducted compulsorily by employer), even this amount qualifies for deduction
under section 80C.

Public Provident Fund (PPF): If person have a PPF account, and invest in it, that amount can be
included in Sec 80C deduction. The minimum and maximum allowed investments in PPF are
Rs. 500 and Rs. 70,000 per year respectively.

Life Insurance Premiums: Any amount that person pay towards life insurance premium for
self, spouse or children can also be included in Section 80C deduction. Please note that life
insurance premium paid by person for their parents (father / mother / both) or in-laws is not
eligible for deduction under section 80C. If premium are paid for more than one insurance policy,
all the premiums can be included. It is not necessary to have the insurance policy from Life
Insurance Corporation (LIC) – even insurance bought from private players can be considered here.

Equity Linked Savings Scheme (ELSS): There are some mutual fund (MF) schemes specially
created for offering tax savings, and these are called Equity Linked Savings Scheme, or ELSS.
The investments that are made in ELSS are eligible for deduction under Sec 80C.

Home Loan Principal Repayment: The Equated Monthly Installment (EMI) that is paid every
month to repay home loan consists of two components – Principal and Interest. The principal
component of the EMI qualifies for deduction under Sec 80C. Even the interest component can
save significant income tax – but that would be under Section 24 of the Income Tax Act.

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 Study of Individual Financial Planning

Stamp Duty and Registration Charges for a home: The amount paid as stamp duty while
buying a house and the amount paid for the registration of the documents of the house can
be claimed as deduction under section 80C in the year of purchase of the house.

National Savings Certificate (NSC): The amount that is invested in National Savings Certificate
(NSC) can be included in Sec 80C deductions.

Infrastructure Bonds: These are also popularly called Infra Bonds. These are issued by
infrastructure companies, and not the government. The amount invested in these bonds can also
be included in Sec 80C deductions.
Pension Funds – Section 80CCC: This section – Sec 80CCC – stipulates that an investment
in pension funds is eligible for deduction from income. Section 80CCC investment limit is
clubbed with the limit of Section 80C - it maeans that the total deduction available for 80CCC
and 80C is Rs. 1 Lakh. This also means that investment in pension funds upto Rs. 1 Lakh can be
claimed as deduction u/s 80CCC. However, as mentioned earlier, the total deduction u/s 80C and
80CCC cannot exceed Rs. 1 Lakh.

Bank Fixed Deposits: This is a newly introduced investment class under Section 80C. Bank
fixed deposits (also called term deposits) having a maturity of 5 years or more can be included in
Sec 80C investment.

Others: Apart form the major avenues listed above, there are some other things, like children’s
education expense (for which receipts are need), that can be claimed as deductions under Sec
80C.

1.4.3.2. Mediclaim (Sec 80D)

Individual and Hindu Unified Families (HUF) are eligible for deduction under Section 80D for
mediclaim premium paid. Deduction can be claimed on premium paid for assessee, spouse,
dependent children and dependent parents. The criteria of dependency isn’t applicable in case
of a spouse (i.e. she/he may even be independent, but the assessee can still pay the premium
on his/her life to get tax benefits for the same).
Deduction
For non-senior citizens: The amount of mediclaim insurance premium paid or Rs. 15000,
whichever is less
For senior citizens: The amount of mediclaim insurance premium paid or Rs. 20000,
whichever is less.

1.4.3.3. Interest and Dividend Received (sec 80L)

Deduction upto a maximum of Rs. 15,000 (out of which Rs. 3,000 is specially dedicated to
government securities) is allowed from the taxable income in respect of aggregate earnings from
some specified sources. The schemes are :
Deposits with Banking Company, Co-operative Banks & Co-operative Societies.

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 Study of Individual Financial Planning

Approved financial corporations or public companies to provide long-term finance for industrial
or agricultural development or for construction of purchase of residential houses; it may be noted
that the 'Home Loan Account Scheme' of National Housing Bank is not covered by Sec. 80L but
it enjoys the benefit of tax rebate u/s 88.

• Housing Boards
• Small Savings Schemes
• National Savings Certificates
• Post Office Time and Recurring Deposits
• National Savings Scheme, 1992
• Post Office Monthly Income Scheme
• Notified debentures of co-operative societies or institutions or public sector companies
• Government Securities

Tax planning with section 80C - An age wise strategy

Typically, most people invest a large part of the money in Public Provident Fund (PPF) and
the rest is taken care of by life insurance premiums and so on. However, investing this amount
blindly is not the best way to go about it. Here’s some help on how to go about allocating this 80C
limit depending upon age.

Age 21-30: In the initial phase of six-seven years of this age bracket, most people are single
and little or no dependents. If there are no dependents, it’s not necessary to have a large life
insurance. Instead focus on returns. Considering the state of the equity markets today, a substantial
portion – around 70 per cent to 80 per cent of the 80C contribution can be made in ELSS, which
invests primarily in stocks. This will ensure that the process of investing for the long term has been
started. Also, since there is a lock-in of three years for these schemes, it will lead to a forced
savings. When choosing an ELSS investment, look at consistency rather than a one-off
performance. Go for fund houses that have a good track record over a long time period. The
balance can go into GPF or EPF

Age 31-45: By this time, person is expected to be married with small children. Also, there could
be additional liabilities like buying a house or car. The first step that must be taken is to get
adequate life insurance, for dependents and liabilities. Make sure to cover all the liabilities so that
dependents are not under any financial pressure, in case of an unfortunate mishap. Use a term plan
to get the highest possible cover at a low cost.
Children college fees can be included as a part of the 80C benefits. The home loan principal
payout can form the second leg of the contribution for this age group. So, besides EPF contribution,
life Insurance premiums and home loan principal should be sufficient to take care of the entire Rs
1 lakh requirement. If there is still any shortfall, look at ELSS investments and Provident Fund.

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 Study of Individual Financial Planning

Age 46-60: Person is probably at the peak of the career or moving towards it. This is most likely
the final phase of earning a regular income. There is a good chance that loans have been paid-off
by now and children are in the stage of becoming independent. The last few years of this phase is
when a lot of families plan and should retire their loans. It is also an age where life insurance is
of extreme importance. Re-evaluate need for life cover at this point of time. If life cover is needed
more, increase it substantially. Health insurance need to be included due to various diseases and
illness taking toll with growing age. Hence, risk management is of extreme importance here.
Once again after person is well-insured, they must contribute as much as they can towards
Provident Fund. This is because it has maximum liquidity and could withdraw these tax-free
funds (as would have completed the mandated 5 years). One can also go for PPF first and then
invest the balance in ELSS.

Senior citizens: In this age group, capital protection and need for regular income are two most
important needs. One must first opt for a Senior Citizens’ Savings Scheme that will give tax
benefit. Since SCSS is generally parked in a lump sum, look at fixed deposits only if they are
giving high interest rates. If interest rates are low, then person should opt for PPF, if person
is in the highest tax bracket as liquidity is still the best (account should have completed 15 years a
long time ago) and can withdraw tax-free amounts comfortably.
A minor portion, around 10-15 per cent, of investments can go into ELSS, as it has the ability to
beat inflation and give growth in funds. However, do this only after income needs are secured.

1.4.4. Retirement Planning

A retirement plan is an assurance that person will continue to earn a satisfying income and enjoy
a comfortable lifestyle, even when they are no longer working. Due to the improved living
conditions and access to better medical facilities, the life expectancy of people is increasing. This
has led to a situation where people will be spending approximately the same number of years
in retirement what they have spent in their active working life. Thus it has become imperative
to ensure that the golden years of the life are not spent worrying about financial hardships. A
proper retirement planning, to a very large extent, will ensure this.

Planning ahead will let enjoy the retirement that is deserve. The retirement strategies decide
upon now makes a fundamental difference to the degree of financial freedom one will
experience when they do decide to take their pension.

Planning for retirement and choosing a pension strategy to safeguard financial security can be a
minefield. In the last few years, there have been many changes; the volatility of the stock market,
reduction of final-salary pension schemes, the rise of buy-to-let property portfolios and changes
in taxation and pension legislation. These changes underline the importance of both setting a
retirement plan in place and of keeping it up-to-date.

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Reasons for doing Retirement planning can be understood with the following:

Life expectancy
With advancement in technology life expectancy is likely to increase. Which means a person
would be spending a large amount of time in his post retirement period. Thus one
needs to have a regular income to sustain living which is only possible if prepared for
it when earning.
Medical emergencies
With age come health problems. With health problems, come medical expenditure which may
make a huge dent in post retirement income. Failure here could lead to liquidate (sell) assets in
order to meet such expenses. Remember mediclaims do not always suffice.

Nuclear families
Independence is the new way of life, gone are the days when people use to have an entire cricket
team making a family. Today's youth prefer not more than two children. With westernisation
coming in, the culture of joint family is changing. Most prefer independence and stay away from
their family. Hence people have to develop a corpus to last them through their retirement without
any help from family.

No government sponsored pension plan

Unlike the US and UK where they have IRA and state pension respectively as social security
benefit during retirement, the government of India does not provide such benefits. So, persons are
responsible for themselves now.

Job hopping
With youngsters hopping jobs regularly they do not get benefit of plans like super annuity and
gratuity. Both these require certain number of working years spent in the service of a particular
employer.

Inflation
One needs to take into account inflation while calculating retirement corpus as well as returns.
With the rising inflation it would only the raise the cost of living and it would also eat the return
on the investment. The CAGR (compounded annual growth rate) of inflation over the past 10 years
is 5.5 per cent. Assuming an individual at the age of 30, requires Rs 25,000 a month to lead a
comfortable life, for the same standard of living after 30 years, he may require Rs 1.25 lakh a
month, given the inflation factor.

In India persons employed in the organised sector have some form of social security such as
Employees Provident Fund (EPF), Employees Pension Scheme (EPS) and gratuity. Those who
are employed in government and its related arms also enjoy the benefit of pension along with
GPF and gratuity. But these two sections account for only seven per cent of the working
population. The remaining 93 per cent of the people have no form of

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mechanism to take care of their retirement. Over 80 per cent of Indian employees have done
no retirement planning independent of any mandatory government plans.
Those who plan for retirement have the option of investing in Public Provident Fund (PPF),
pension plans and retirement plans offered by the insurance companies. Currently, the insurance
sector accounts for 4.1 per cent of the GDP and out of this pension accounts for 1.6 per cent.
These numbers reconfirm that Indians are not well prepared to meet their life post-retirement.
Hence, one needs to plan for retirement in the early part of one’s working life along with other
goals. Retirement planning consists of two parts: one is accumulation of savings and the other is
earning an annuity from the savings. During the accumulation phase, one has to plan for a required
amount at the start of retirement and based on individual risk appetites one can plan to achieve
this through various asset classes. But post-retirement one has to earn interest on the savings
without taking too much of risk. At the same time have to try to outpace the inflation rate to ensure
that person can sustain with the savings for rest of the life.

During the accumulation phase one has to look out for the tax efficient way of savings. For
example, PPF, pension plans offered by the insurance companies and the retirement plans offered
by the mutual funds are very tax efficient. The maturity proceeds of all these plans are tax free. In
selecting a pension plan, one has to keep a watch on the recurring expenses. As the investment is
for the long term, recurring expenses can have the effect of reducing returns over the long term.

1.5 Concept & Significance of the Study

Financial Planning is an integral part of any individual life, especially in this modern world where
value of everything is expressed in terms of money. The active working span of human life is
short as compared to the life span. This means people will be spending approximately the same
number of years in after retirement what they have spent in their active working life. Thus it
becomes important to save and invest while working so that person will continue to earn a
satisfying income and enjoy a comfortable lifestyle.

Financial Planning enables a person to identify their goals, assess the current position and takes
necessary steps to achieve the goals. It helps us to understand how financial decisions made effect
our life. Financial Planning is not just about investment planning but it is about life time planning.
Thus through proper financial planning a person can have a easy and secured financial life.

1.6 Scope

The scope of study is getting familiar with various investment avenues available in market. To
study the life stages of an individual and to identify their risk tolerance, income flow, life
goals and current investment. Study should cover all areas of the individuals financial needs and
should result in the achievement of each of the individuals goals.

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The scope of planning will include the following:

• Risk Management and Insurance Planning

• Investment Planning
• Retirement Planning
• Tax Planning

1.7 Objective of Study

• To identify investment habit of people.
• To understand financial planning done in India.
• To analyse the characteristics of different asset class.
• To study changes in financial planning with change in age.
• To identify various avenues for investment.
• To spread awareness of financial planning.
• To examine factors influencing the investment decision.

1.8 Literature Review

Book : Investment Analysis and Portfolio Management

Author : Prasanna Chandra
Publication : TATA McGRAW HILL

This book gives insight of various investment alternatives and attribute related to it. It also explains
various strategies to be followed by investment practitioners. It has provided me valuable inputs
and better understanding while undertaking this project. Some major points are:
• Different investment avenues and their characteristics
• Relation between risk and return
• Importance of asset allocation

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Chapter 2: Introduction to the Industry
Study of Individual Financial Planning

2. Introduction to Financial Planning Industry

Financial services refer to services provided by the finance industry. The finance industry
encompasses a broad range of organizations that deal with the management of money. Among
these organizations are banks, credit card companies, insurance companies, consumer finance
companies, stock brokerages, investment funds and some government sponsored enterprises.

The Indian financial services industry has undergone significant changes over the years,
particularly in the last decade, and continues to evolve today. Financial Planning - a distinct
element within the spectrum of financial services industry - is still relatively a young
discipline. But personal finance products & services are increasingly becoming an important part
of this industry as the Indian consumers seek to maximize and optimize the potential earnings and
fruits of their hard-earned money.
Currently, there are distinct divisions within the financial services industry. A person goes to a
bank to save his money or to get a loan. He buys stocks and bonds from a broker. He purchases
insurance from an insurance agent and mutual funds from a mutual fund distributor. The regulation
of the industry reflects the division of these transaction-based services.
Category Products for sales and advice

Insurance agent Insurance Policies

Mutual Fund distributor Mutual Funds

Equity share broker/sub-broker Share trading, IPOs

Income tax consultant Tax Planning, Employee Benefits

Distributor/Advisor of multiple financial products MFs, Insurance, Post Office schemes, share
& services trading, tax etc

Indians have been making investment through such agents which was restricted to a particular
product. Apart from the above agent friends and professionals like Chartered Accountant played
an important role in investment decisions. This is how for few decades investors have been doing
their Financial Planning.

However, financial services, especially on the retail side, have undergone a major transformation
and financial consumers are demanding a holistic & comprehensive approach to their personal
finance. Various factors have catalyzed this change like privatisation of insurance and mutual fund
sectors has increased product options for the investor. Second, fluctuating interest rates and the
end of ‘guaranteed return’ products have prompted investors to look for alternative modes of
investment. And also with a number of mis-selling instances taking place in the financial markets,
investors’ confidence in ‘advisors’ has been shaken and the investors are asking for a ‘trusted
financial advisor’.

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 Chapter 4: Investment Avenues

4.1 : Life Insurance

4.2 : Equity
4.3 : Mutual Fund
4.4 : Certificate of Deposits
4.5 : PPF
4.6 : Real Estate
4.7 : Gold
4.8 : Investment in Banks
4.9 : Investment through Post Office
 Study of Individual Financial Planning

4.1. Life Insurance

Life Insurance is a policy provided by an insurance company, according to which in exchange for
premium payments, the insurer is obliged to pay a certain sum (a lump sum or portions of
smaller sums) to the beneficiary in the event of insured death. Life Insurance is literally a matter
of life and death, since purchasing Life Insurance is basically planning for after the death. When
healthy and well, people from all walks of life prefer not to think that one day they would pass
away. However planning for after the death may be as important as planning other significant
actions in life. By paying a very small sum of money a person can safeguard himself and
his family financially from an unfortunate event. Life insurance provides economic support to
the dependent in family and in some cases can even create an estate for heirs.

Factor to be considered before buying an Life Insurance Policy

Before buying a Life Insurance Policy it is always important to find out why do I want to buy
Insurance and for what purpose. How much Life Insurance Cover do I need, comes second. Few
factors which need to be considered are:
• Age and number of dependents.
• Annual Income and Annual Expenses.
• Outstanding Liabilities like Home Loan, Car Loan etc. Investments and Savings.
• Life Style Expenses. Money require in Future.

As a rule of thumb when buying first Life Insurance Policy it is suggested that person should
have Insurance Cover of at least 5 to 10 times of their annual income.

There are many different scientific methods available to access the total Life Insurance Cover.
The need for Insurance changes and increases with age depending on the combination of factors
stated above. It is advised that one should review his Insurance needs every 3 years. Every
individual is different and his needs are different and one set of rules for Insurance cannot be
applied to all. Life Insurance is a very important and integral part of Financial Planning for the
Future.

A wide range of insurance products are available in the market. Each insurance product is different
from the others having some unique attributes which are devised to meet specific needs of different
individuals. However, with such a wide range of products available, it becomes very difficult for
an individual to choose an insurance plan that is best suited to meet his requirements. Based on
the financial plans and needs and one's affordability to pay premium, an individual can choose
any of the plans available in the market. Some of those plans are listed in the table below:

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4.1.1. Term Insurance

Term Insurance, as the name implies, is for a specific period, and has the lowest possible premium
among all insurance plans. Person can select the length of the term for which they would like
coverage, up to 35 years. Payments are fixed and do not increase during the term period. In
case of an untimely death, dependents will receive the benefit amount specified in the term life
insurance agreement. Term policies, cover only the risk during the selected term period. If the
policyholder survives the term, the risk cover comes to an end. Person can renew most Term
Insurance policies for one or more terms even if their health condition has changed. Each time
the policy is renewed for a new term, premiums may climb higher. When a policy holder survives
the policy term person is not entitled to any payment; the insurance company keeps the entire
premium paid during the policy period. So, there is no element of savings or investment in such
a policy. It is a 100 percent risk cover. It simply means that a person pays a certain premium
to protect his family against his sudden death. He forfeits the amount if he outlives the period
of the policy. This explains why the Term Insurance Policy comes at the lowest cost.

No surrender, loan or paid-up values are granted under term life policies because reserves are not
accumulated. If the premium is not paid within the grace period, the policy lapses without
acquiring any paid-up value. A lapsed policy can be revived during the lifetime of the life assured
but before the expiry of the period of two years from the due date of the first unpaid premium
on the usual terms. Accident and / or Disability benefits are not granted on policies under the
Term plan.

4.1.2. Endowment Insurance

Combining risk cover with financial savings, endowment policies is the most popular policies in
the world of life insurance. Endowment insurance are policies that cover the risk for a specified
period and at the end the sum assured is paid back to the policyholder along with all the bonus
accumulated during the term of the policy. The Endowment insurance policies work in two ways,
one they provide life insurance cover and on the other hand as a vehicle for saving. If the insured
dies during the tenure of the policy, the insurance firm has to pay the sum assured just as any other
pure risk cover. A pure endowment policy is also a form of financial saving, whereby if the
person covered remains alive beyond the tenure of the policy, he gets back the sum assured
with some other investment benefits. In addition to the basic policy, insurers offer various
benefits such as double endowment and marriage/ education endowment plans. The cost of such a
policy is slightly higher but worth its value. They are more expensive than Term policies and
Whole life policies. Normally the bonus in calculated on the sum insured but the only draw back
is that the bonuses are not compounded. Endowment insurance plans are best for people who
do not have a saving and an investing habit on a regular basis. Endowment Insurance Plans can
be bought for a shorter duration period. Endowment Insurance is ideal if person has a short
career path, and hope to enjoy the benefits of the plan (the original sum and the accumulated
bonus) during life time. Endowment plans are especially useful

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when person retire; by buying an annuity policy with the sum received, it generates a monthly
pension for the rest of the life.

4.1.3. Whole Life Insurance

Whole Life Policies have no fixed end date for the policy; only the death benefit exists and is
paid to the named beneficiary. In whole life insurance plan the risk is covered for the entire life
of the policyholder, irrespective of when it happens that is the reason they are called whole life
policies. The policy holder is not entitled to any money during his or her own lifetime, i.e., there
is no survival benefit. This plan is ideal in the case of leaving behind an estate. Primary
advantages of Whole Life Insurance are guaranteed death benefits, guaranteed cash values, and
fixed and known annual premiums.
This policy, however, fails to address the additional needs of the insured during his post- retirement
years. It doesn't take into account a person's increasing needs either. While the insured buys the
policy at a young age, his requirements increase over time. By the time he dies, the value of the
sum assured is too low to meet his family's needs. As a result of these drawbacks, insurance firms
now offer either a modified Whole Life Policy or combine in with another type of policy.

4.1.4. Money-Back Plan

Money back policies are quite similar to endowment insurance plans where the survival benefits
are payable only at the end of the term period, plus the added benefit of money back policies
is that they provide for periodic payments of partial survival benefits during the term of the policy
so long as the policy holder is alive. An additional and important feature of money back policies
is that in the event of death at any time during the term of the policy, the death claim comprises
full sum assured without deducting any of the survival benefit amounts. The insurance premium
of Money Back Policies is higher than Term Insurance Policy because in Term Insurance there
is no survival benefit after the expiry of the insurance period. Money Back Policies are good
for people who want to insure their life and also want to some return from their investment's at
a later date.
These policies are structured to provide sums required as anticipated expenses (marriage,
education, etc) over a stipulated period of time. With inflation becoming a big issue, companies
have realized that sometimes the money value of the policy is eroded. That is why with-profit
policies are also being introduced to offset some of the losses incurred on account of inflation.

Money-Back plans are ideal for those who are looking for a product that provides both - insurance
cover and savings. It creates a long-term savings opportunity with a reasonable rate of return,
especially since the payout is considered exempt from tax except under specified situations.

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4.1.5. ULIP
Unit linked insurance plan (ULIP) is life insurance solution that provides for the benefits of risk
protection and flexibility in investment. The investment is denoted as units and is represented by
the value that it has attained called as Net Asset Value (NAV). The policy value at any time varies
according to the value of the underlying assets at the time.
In a ULIP, the invested amount of the premiums after deducting for all the charges and premium
for risk cover under all policies in a particular fund as chosen by the policy holders are
pooled together to form a Unit fund. A Unit is the component of the Fund in a Unit Linked
Insurance Policy

The returns in a ULIP depend upon the performance of the fund in the capital market. ULIP
investors have the option of investing across various schemes, i.e, diversified equity funds,
balanced funds, debt funds etc. It is important to remember that in a ULIP, the investment risk is
generally borne by the investor.

In a ULIP, investors have the choice of investing in a lump sum (single premium) or making
premium payments on an annual, half-yearly, quarterly or monthly basis. Investors also have the
flexibility to alter the premium amounts during the policy's tenure. For example, if an individual
has surplus funds, he can enhance the contribution in ULIP. Conversely an individual faced with
a liquidity crunch has the option of paying a lower amount (the difference being adjusted in the
accumulated value of his ULIP). ULIP investors can shift their investments across various
plans/asset classes (diversified equity funds, balanced funds, debt funds) either at a nominal or no
cost.

Expenses Charged in a ULIP

Premium Allocation Charge: A percentage of the premium is appropriated towards charges

initial and renewal expenses apart from commission expenses before allocating the units under the
policy.

Mortality Charges: These are charges for the cost of insurance coverage and depend on number
of factors such as age, amount of coverage, state of health etc.

Fund Management Fees: Fees levied for management of the fund and is deducted before arriving
at the NAV.

Administration Charges: This is the charge for administration of the plan and is levied by
cancellation of units.

Surrender Charges: Deducted for premature partial or full encashment of units.

Fund Switching Charge: Usually a limited number of fund switches are allowed each year
without charge, with subsequent switches, subject to a charge.

Service Tax Deductions: Service tax is deducted from the risk portion of the premium.

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4.1.6. Annuities and Pension

Insurance companies offer two kinds of pension plans - endowment and unit linked. Endowment
plans invest in fixed income products, so the rates of return are very low.
A pension plan or an annuity is an investment that is made either in a single lump sum payment or
through instalments paid over a certain number of years, in return for a specific sum that is
received every year, every half-year or every month, either for life or for a fixed number of
years. Annuities differ from all the other forms of life insurance in that an annuity does not provide
any life insurance cover but, instead, offers a guaranteed income either for life or a certain period.
Typically annuities are bought to generate income during one's retired life, which is why they are
also called pension plans. By buying an annuity or a pension plan the annuitant receives
guaranteed income throughout his life. He also receives lump sum benefits for the annuitant's
estate in addition to the payments during the annuitant's lifetime. Pension plans are perfect
investment instrument for a person who after retiring from service has received a large sum as
superannuation benefit. He can invest the proceeds in a pension plan as it is safest way of secured
income for the rest of his life. One can pay for a pension plan either through an annuity or through
instalments that are annual in most cases.

Types of Annuities / Pension Plans

Life Annuity: Guarantees a specified amount of income for lifetime. After death, the amount
invested is refunded to nominee.

Guaranteed Period Annuity: Provides specified income for lifetime and guarantees that nominee
will receive payments for a certain minimum number of years, even if person should die earlier.
In case person lives longer than the specified minimum number of years, they are entitled to
receive annuity payments for lifetime.

Annuity Certain: Under this plan, the stipulated annuity is paid for a fixed number of years.
The annuity payments stop at the end of that period, irrespective of how much longer person
may live.
Deferred Annuities: The premiums paid into such plans may be deducted from one’s taxable
income at the time of payment. In addition, the interest earned on the annuities is not taxed
immediately. But the proceeds of the annuity will be taxable when they are paid to person.

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4.1.7 Life Stage in Life Insurance

Peak earning age range.

High asset creation &
build up of liabilities.
Critical stage for
Introduction of Asset base build up
dependents. Start of & liabilities reduced/
financial planning – taken care of. Need
balance between asset for retirement
planning more than
protection.

No dependents/ Need for protection

liabilities therefore low. Greater need
need for insurance for regular income
is less

25-30 45 yrs and

Marrid
couples
• 30-45 years above
Couples with
18-25 with no children Matured
kids Retired
(Unmarried) couple

Endowment /

At each stage , requirements, responsibilities and Financial Needs differ

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4.1.8. Need Analysis in life Stages

Need / Purpose Recommended Insurance Best Suited for

Plan

• Savings & capital ULIP • Moderate to high

appreciation income
• Protection (Risk cover) • Have dependents

• Security to dependents Term policy • Young individuals

• Risk cover • Low income
• Have dependents

• Child's future studies Children plans • Couples having small kids

• Child's marriage

• Retirement Benefits Pension plans • Persons aged above 40

• Risk cover • Persons not having a
pension provision from their
employer

• Risk cover Money back policy • Persons having

• Periodic payments recurring
financial requirements
• Low to moderate
income

• Risk cover Endowment Plans • Requirement of fixed sum

• Savings after lapse of certain
period

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4.2. Equities
Equities are a type of security that represents the ownership in a company. Equities are traded
(bought and sold) in stock markets. Alternatively, they can be purchased via the Initial Public
Offering (IPO) route, i.e. directly from the company. Investing in equities is a good long-term
investment option as the returns on equities over a long time horizon are generally higher than
most other investment avenues. However, along with the possibility of greater returns comes
greater risk.

Share Price Determination

At any given moment, equity’s price is strictly a result of supply and demand. The supply is
the number of shares offered for sale at any one moment. The demand is the number of shares
investors wish to buy at exactly that same time. The price of the stock moves in order to
achieve and maintain equilibrium.

When prospective buyers outnumber sellers, the price rises. Eventually, sellers attracted to the
high selling price enter the market and/or buyers leave, achieving equilibrium between buyers and
sellers. When sellers outnumber buyers, the price falls. Eventually buyers enter and/or sellers
leave, again achieving equilibrium.

Thus, the value of a share of a company at any given moment is determined by all investors
voting with their money. If more investors want a stock and are willing to pay more, the price will
go up. If more investors are selling a stock and there aren't enough buyers, the price will go down.

Of course, that does not explain how people decide the maximum price at which they are willing
to buy or the minimum at which they are willing to sell. In professional investment circles the
efficient market hypothesis (EMH) continues to be popular, although this theory is widely
discredited in academic and professional circles. Briefly, EMH says that investing is overall
(weighted by a Stdev) rational; that the price of a stock at any given moment represents a rational
evaluation of the known information that might bear on the future value of the company; and that
share prices of equities are priced efficiently, which is to say that they represent accurately the
expected value of the stock, as best it can be known at a given moment. In other words, prices are
the result of discounting expected future cash flows.

Another theory of share price determination comes from the field of Behavioural Finance.
According to Behavioural Finance, humans often make irrational decisions—particularly, related
to the buying and selling of securities—based upon fears and misperceptions of outcomes. The
irrational trading of securities can often create securities prices which vary from rational,
fundamental price valuations.

Stock market investments= Economics + Mathematics/Statistics + Psychology

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Economics Deals with fundamentals of company. Statistics deals with study of companies’
financial statement and it past performance in stock market. Psychology deals with market
sentiments (Herd mentality) which are most crucial as it can lead in wrong direction.

Invest in Blue Chip Stocks

Stock of a well-established and financially sound company that has demonstrated its ability to
pay dividends in both good and bad times and is a leading player in its. These stocks are usually
less risky than other stocks.

Features of Blue Chip Stocks

There are no specific criteria for blue chip stocks. The most common characteristics of such
stocks include:

1. Revenues: Companies with revenues higher than that generated by industry peers.
2. Earnings: Companies that have been generating healthy earnings on a consistent basis.
3. Dividends: Companies that pay regular dividends to common stockholders, even if their
performance has been unsatisfactory in a particular period. Moreover, the dividend payout is
raised at regular intervals.
4. Balance Sheet: The balance sheets are robust and their debt liabilities are not extensive.
5. Credit Rating: Their credit ratings in the bond and unsecured debt markets are high.
6. Size: The market capitalization of these companies is higher than that of other
companies in the same industry.
7. Product Portfolio: They have extensive and diversified product lines. They also have a
wide global presence.
8. Competition: They are cost efficient, with high distribution control and excellent
franchise value, all of which contribute towards their competitive advantage.

4.3. Mutual Funds

A Mutual Fund allows a group of people to pool their money together and have it professionally
managed, in keeping with a predetermined investment objective. This investment avenue is
popular because of its cost-efficiency, risk-diversification, professional management and sound
regulation. Person can invest as little as Rs. 1,000 per month in a Mutual Fund. There are various
general and thematic Mutual Funds to choose from and the risk and return possibilities vary
accordingly.

A Mutual Fund is a trust that pools the savings of a number of investors who share a common
financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through these
investments and the capital appreciation realised are shared by its unit

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holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most
suitable investment for the common man as it offers an opportunity to invest in a diversified,
professionally managed basket of securities at a relatively low cost. The flow chart below describes
broadly the working of a mutual fund:

Types of Mutual Funds Scheme in India

Wide variety of Mutual Fund Schemes exist to cater to
the needs such as financial position, risk tolerance and return expectations etc. The table below
gives an overview into the existing types of schemes in the Industry.
• By Structure
o Open - Ended Schemes
o Close - Ended Schemes
• By Investment Objective
o Growth Schemes
o Income Schemes
o Balanced Schemes

o Money Market Schemes

• Other Schemes
o Tax Saving Schemes
o Special Schemes
o Index Schemes
o Sector Specfic Schemes

Structural Description of Mutual Fund

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Most mutual funds are open-end. The reason why these funds are called "open-end" is because
there is no limit to the number of new shares that they can issue. New and existing shareholders
may add as much money to the fund as they want and the fund will simply issue new shares to
them. Open-end funds also redeem, or buy back, shares from shareholders. In order to determine
the value of a share in an open-end fund at any time, a number called the Net Asset Value is
used. Investor can purchase shares in open-end mutual funds from the mutual fund itself
or one of its agents; they are not traded on exchanges.
Closed-end funds behave more like stock than open-end funds; that is to say, closed-end funds
issue a fixed number of shares to the public in an initial public offering, after which time shares in
the fund are bought and sold on a stock exchange. Unlike open-end funds, closed-end funds are
not obligated to issue new shares or redeem outstanding shares. The price of a share in a
closed-end fund is determined entirely by market demand, so shares can either trade below their
net asset value ("at a discount") or above it ("at a premium"). Since one must take into
consideration not only the fund's net asset value but also the discount or premium at which the
fund is trading, closed-end funds are considered to be more suitable for experienced investors.
Investor can purchase shares in a closed-end fund through a broker, just as one would purchase a
share of stock.

BROAD MUTUAL FUND TYPES

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4.3.1. Equity Funds

Equity funds are considered to be the more risky funds as compared to other fund types, but
they also provide higher returns than other funds. It is advisable that an investor looking to
invest in an equity fund should invest for long term i.e. for 3 years or more. There are
different types of equity funds each falling into different risk bracket. In the order of
decreasing risk level, there are following types of equity funds:
Aggressive Growth Funds - In Aggressive Growth Funds, fund managers aspire for maximum
capital appreciation and invest in less researched shares of speculative nature. Because of these
speculative investments Aggressive Growth Funds become more volatile and thus, are prone to
higher risk than other equity funds.

Growth Funds - Growth Funds also invest for capital appreciation (with time horizon of 3 to 5
years) but they are different from Aggressive Growth Funds in the sense that they invest in
companies that are expected to outperform the market in the future. Without entirely adopting
speculative strategies, Growth Funds invest in those companies that are expected to post above
average earnings in the future.

Speciality Funds - Speciality Funds have stated criteria for investments and their portfolio
comprises of only those companies that meet their criteria. Criteria for some speciality funds
could be to invest/not to invest in particular regions/companies. Speciality funds are concentrated
and thus, are comparatively riskier than diversified funds.. There are following types of
speciality funds:

Sector Funds: Equity funds that invest in a particular sector/industry of the market are known as
Sector Funds. The exposure of these funds is limited to a particular sector (say Information
Technology, Auto, Banking, Pharmaceuticals or Fast Moving Consumer Goods) which is why
they are more risky than equity funds that invest in multiple sectors.

Foreign Securities Funds: Foreign Securities Equity Funds have the option to invest in one
or more foreign companies. Foreign securities funds achieve international diversification and
hence they are less risky than sector funds. However, foreign securities funds are exposed
toforeign exchange rate risk and country risk.

Mid-Cap or Small-Cap Funds: Funds that invest in companies having lower market
capitalization than large capitalization companies are called Mid-Cap or Small-Cap Funds. Market
capitalization of Mid-Cap companies is less than that of big, blue chip companies (less than Rs.
2500 crores but more than Rs. 500 crores) and Small-Cap companies have market capitalization
of less than Rs. 500 crores. Market Capitalization of a company can be calculated by
multiplying the market price of the company's share by the total number of its outstanding
shares in the market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of
Large-Cap Companies which gives rise to volatility in share prices of these companies and
consequently, investment gets risky.

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Option Income Funds*: While not yet available in India, Option Income Funds write options on
a large fraction of their portfolio. Proper use of options can help to reduce volatility, which is
otherwise considered as a risky instrument. These funds invest in big, high dividend yielding
companies, and then sell options against their stock positions, which generate stable income
for investors.

Diversified Equity Funds - Except for a small portion of investment in liquid money market,
diversified equity funds invest mainly in equities without any concentration on a particular
sector(s). These funds are well diversified and reduce sector-specific or company-specific risk.
However, like all other funds diversified equity funds too are exposed to equity market risk. One
prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As
per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times.
ELSS investors are eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time
of filing the income tax return. ELSS usually has a lock-in period and in case of any redemption
by the investor before the expiry of the lock-in period makes him liable to pay income tax on
such income(s) for which he may have received any tax exemption(s) in the past.

Equity Index Funds - Equity Index Funds have the objective to match the performance of a
specific stock market index. The portfolio of these funds comprises of the same companies
that form the index and is constituted in the same proportion as the index. Equity index funds
that follow broad indices (like S&P CNX Nifty, Sensex) are less risky than equity index funds that
follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are
less diversified and therefore, are more risky.

Value Funds - Value Funds invest in those companies that have sound fundamentals and whose
share prices are currently under-valued. The portfolio of these funds comprises of shares that are
trading at a low Price to Earning Ratio (Market Price per Share / Earning per Share) and a low
Market to Book Value (Fundamental Value) Ratio. Value Funds may select companies from
diversified sectors and are exposed to lower risk level as compared to growth funds or speciality
funds. Value stocks are generally from cyclical industries (such as cement, steel, sugar etc.)
which make them volatile in the short-term. Therefore, it is advisable to invest in Value funds
with a long-term time horizon as risk in the long term, to a large extent, is reduced.

Equity Income or Dividend Yield Funds - The objective of Equity Income or Dividend Yield
Equity Funds is to generate high recurring income and steady capital appreciation for investors by
investing in those companies which issue high dividends (such as Power or Utility companies
whose share prices fluctuate comparatively lesser than other companies' share prices). Equity
Income or Dividend Yield Equity Funds are generally exposed to the lowest risk level as compared
to other equity funds.

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4.3.2. Debt / Income Funds

Funds that invest in medium to long-term debt instruments issued by private companies, banks,
financial institutions, governments and other entities belonging to various sectors (like
infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile
funds that seek to generate fixed current income (and not capital appreciation) to investors. In
order to ensure regular income to investors, debt (or income) funds distribute large fraction
of their surplus to investors. Although debt securities are generally less risky than equities, they
are subject to credit risk (risk of default) by the issuer at the time of interest or principal payment.
To minimize the risk of default, debt funds usually invest in securities from issuers who are rated
by credit rating agencies and are considered to be of "Investment Grade". Debt funds that target
high returns are more risky. Based on different investment objectives, there can be following types
of debt funds:
Diversified Debt Funds - Debt funds that invest in all securities issued by entities belonging
to all sectors of the market are known as diversified debt funds. The best feature of diversified
debt funds is that investments are properly diversified into all sectors which results in risk
reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors
which further reduces risk for an individual investor.

Focused Debt Funds* - Unlike diversified debt funds, focused debt funds are narrow focus
funds that are confined to investments in selective debt securities, issued by companies of a
specific sector or industry or origin. Some examples of focused debt funds are sector, specialized
and offshore debt funds, funds that invest only in Tax Free Infrastructure or Municipal Bonds.
Because of their narrow orientation, focused debt funds are more risky as compared to diversified
debt funds. Although not yet available in India, these funds are conceivable and may be offered to
investors very soon.

High Yield Debt funds - As we now understand that risk of default is present in all debt funds,
and therefore, debt funds generally try to minimize the risk of default by investing in securities
issued by only those borrowers who are considered to be of "investment grade". But, High
Yield Debt Funds adopt a different strategy and prefer securities issued by those issuers who
are considered to be of "below investment grade". The motive behind adopting this sort of risky
strategy is to earn higher interest returns from these issuers. These funds are more volatile and
bear higher default risk, although they may earn at times higher returns for investors.

Assured Return Funds - Although it is not necessary that a fund will meet its objectives or
provide assured returns to investors, but there can be funds that come with a lock-in period and
offer assurance of annual returns to investors during the lock-in period. Any shortfall in returns is
suffered by the sponsors or the Asset Management Companies (AMCs). These funds are
generally debt funds and provide investors with a low-risk investment opportunity. However, the
security of investments depends upon the net worth of the guarantor (whose name is specified
in advance on the offer document). To safeguard the interests of investors, SEBI permits only
those funds to offer assured return schemes

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whose sponsors have adequate net-worth to guarantee returns in the future. In the past, UTI had
offered assured return schemes (i.e. Monthly Income Plans of UTI) that assured specified returns
to investors in the future. UTI was not able to fulfill its promises and faced large shortfalls
in returns. Eventually, government had to intervene and took over UTI's payment obligations on
itself. Currently, no AMC in India offers assured return schemes to investors, though possible.

Fixed Term Plan Series - Fixed Term Plan Series usually are closed-end schemes having short
term maturity period (of less than one year) that offer a series of plans and issue units to investors
at regular intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges.
Fixed term plan series usually invest in debt / income schemes and target short-term investors. The
objective of fixed term plan schemes is to gratify investors by generating some expected returns
in a short period.

4.3. 3. Gilt Funds

Also known as Government Securities in India, Gilt Funds invest in government papers (named
dated securities) having medium to long term maturity period. Issued by the Government of India,
these investments have little credit risk (risk of default) and provide safety of principal to the
investors. However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest
rates and prices of debt securities are inversely related and any change in the interest rates results
in a change in the NAV of debt/gilt funds in an opposite direction.

4.3.4. Money Market / Liquid Funds

Money market / liquid funds invest in short-term (maturing within one year) interest bearing
debt instruments. These securities are highly liquid and provide safety of investment, thus
making money market / liquid funds the safest investment option when compared with other
mutual fund types. However, even money market / liquid funds are exposed to the interest rate
risk. The typical investment options for liquid funds include Treasury Bills (issued by
governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by
banks).

4.3.5. Hybrid Funds

As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities,
debts and money market securities. Hybrid funds have an equal proportion of debt and equity in
their portfolio. There are following types of hybrid funds in India:
Balanced Funds - The portfolio of balanced funds include assets like debt securities, convertible
securities, and equity and preference shares held in a relatively equal proportion. The objectives
of balanced funds are to reward investors with a regular income, moderate capital appreciation
and at the same time minimizing the risk of capital erosion.

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Balanced funds are appropriate for conservative investors having a long term investment horizon.

Growth-and-Income Funds - Funds that combine features of growth funds and income funds are
known as Growth-and-Income Funds. These funds invest in companies having potential for capital
appreciation and those known for issuing high dividends. The level of risks involved in these
funds is lower than growth funds and higher than income funds.

Asset Allocation Funds - Mutual funds may invest in financial assets like equity, debt, money
market or non-financial (physical) assets like real estate, commodities etc.. Asset allocation funds
adopt a variable asset allocation strategy that allows fund managers to switch over from one asset
class to another at any time depending upon their outlook for specific markets. In other words,
fund managers may switch over to equity if they expect equity market to provide good returns and
switch over to debt if they expect debt market to provide better returns. It should be noted that
switching over from one asset class to another is a decision taken by the fund manager on the
basis of his own judgment and understanding of specific markets, and therefore, the success of
these funds depends upon the skill of a fund manager in anticipating market trends.

4.3.6. Commodity Funds

Those funds that focus on investing in different commodities (like metals, food grains, crude
oil etc.) or commodity companies or commodity futures contracts are termed as Commodity
Funds. A commodity fund that invests in a single commodity or a group of commodities is a
specialized commodity fund and a commodity fund that invests in all available commodities is a
diversified commodity fund and bears less risk than a specialized commodity fund. "Precious
Metals Fund" and Gold Funds (that invest in gold, gold futures or shares of gold mines) are
common examples of commodity funds.

4.3.7. Real Estate Funds

Funds that invest directly in real estate or lend to real estate developers or invest in
shares/securitized assets of housing finance companies, are known as Specialized Real Estate
Funds. The objective of these funds may be to generate regular income for investors or capital
appreciation.

4.3.8. Exchange Traded Funds (ETF)

Exchange Traded Funds provide investors with combined benefits of a closed-end and an open-
end mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock
exchanges like a single stock at index linked prices. The biggest advantage offered by these
funds is that they offer diversification, flexibility of holding a single share (tradable at index linked
prices) at the same time. Recently introduced in India, these funds are quite popular abroad.

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4.3.9. Fund of Funds

Mutual funds that do not invest in financial or physical assets, but do invest in other mutual fund
schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a
portfolio comprising of units of other mutual fund schemes, just like conventional mutual
funds maintain a portfolio comprising of equity/debt/money market instruments or non financial
assets. Fund of Funds provide investors with an added advantage of diversifying into different
mutual fund schemes with even a small amount of investment, which further helps in
diversification of risks. However, the expenses of Fund of Funds are quite high on account of
compounding expenses of investments into different mutual fund schemes.

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Risk Heirarchy of Different Mutual Funds

Different mutual fund schemes are exposed to different levels of risk and investors should know
the level of risks associated with these schemes before investing. The graphical representation
hereunder provides a clearer picture of the relationship between mutual funds and levels of
risk associated with these funds:

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Advantages of Mutual Funds

The advantages of investing in a Mutual Fund are:

• Diversification: The best mutual funds design their portfolios so
individual investments will react differently to the same economic conditions. For example,
economic conditions like a rise in interest rates may cause certain securities in a diversified
portfolio to decrease in value. Other securities in the portfolio will respond to the same
economic conditions by increasing in value. When a portfolio is balanced in this way, the value of
the overall portfolio should gradually increase over time, even if some securities lose value.

• Professional Management: Most mutual funds pay topflight professionals to manage

their investments. These managers decide what securities the fund will buy and sell.

• Regulatory oversight: Mutual funds are subject to many government regulations that protect
investors from fraud.

• Liquidity: It's easy to get money out of a mutual fund. Write a check, make a call, and
get the cash.

• Convenience: Person can usually buy mutual fund shares by mail, phone, or over the Internet.

• Low cost: Mutual fund expenses are often no more than 1.5 percent of investment. Expenses
for Index Funds are less than that, because index funds are not actively managed. Instead, they
automatically buy stock in companies that are listed on a specific index

• Transparency

• Flexibility

• Choice of schemes

• Tax benefits

• Well regulated

Drawbacks of Mutual Funds

Mutual funds have their drawbacks and may not be for everyone:

• No Guarantees: No investment is risk free. If the entire stockmarket declines in value,

the value of mutual fund shares will go down as well, no matter how balanced the portfolio.
Investors encounter fewer risks when they invest in mutual funds than when they

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buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the
risk of losing money.

• Fees and commissions: All funds charge administrative fees to cover their day-to-day
expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial
consultants, or financial planners. Even if people don’t use a broker or other financial adviser,
person will pay a sales commission if they buy shares in a Load Fund.

• Management risk: When persons invest in a mutual fund, they depend on the fund's manager
to make the right decisions regarding the fund's portfolio. If the manager does not perform as well
as person had hoped, one might not make as much money on investment as was expected. Of
course, if money invested in Index Funds, person foregoes management risk, because these
funds do not employ managers.

4.4. Certificate of Deposits

Certificate of deposit was introduced in India in 1991. It is a scheme of raising funds by
commercial banks, except rural banks and is a negotiable receipt of funds. Due to their negotiable
nature, they are also called Negotiable Certificate of Deposit (NCD). It may be in a registered
form or a bearer form. The later is more popular as it can be transacted more readily in secondary
markets. Unlike Treasury bills, this carries an explicit rate of interest. Subscribers to the
Certificate of Deposits are Individuals, Corporations, Companies, Trusts, Funds and
Associations etc.
The conventional deposits though have a fixed maturity, the depositors can withdraw them
prematurely, where as in case of Certificate of Deposits the investors have to wait till they mature.
Though interest on certificate of deposits is taxed, it is still a popular form of short- term
investments for companies due to following reasons:
o These certificates are fairly liquid.
o They are generally risk free.
o They offer a higher yield as compared to conventional deposits.

4.5. Public Provident Fund (PPF)

PPF is considered safe investment avenue. The current interest rate on PPF is 8% per annum.
Again like EPF the rate of interest is not fixed. The government modifies the same from time to
time. The best part of PPF is that the interest thereon is exempt from tax under section 10(11)
of the Income Tax Act. Tax deduction can be claimed on contribution made by an individual into
his own PPF account or into the PPF account of his spouse or children.

PPF account can be opened in a nationalized bank or a post office. It is a 15-year account. The
entire amount including accumulated interest can be withdrawn after 15 years.

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Partial withdrawals (which are also tax free) are allowed from the 7th year. The minimum
investment amount is Rs 500 per financial year and the maximum is Rs 70,000 per financial
year. The amount of investment one can make may vary every year giving person a lot of
flexibility in planning their investments.

Many may not like to invest in PPF due to its very long tenure (15 years). However, one may
open an account and contribute only small sums initially; after all minimum annual contribution
is just Rs 500. In later years, contributions can be increased.

4.6. Real Estate Investment

Real Estate Investment is now treated as a major case of capital budgeting by using state- of-
the-art investment analysis which incorporates the future stream of income it may generate and
the associated risk adjustments. It has been the highlight of the investment literature since the
1970’s when investment theorists extended techniques such as probability, time value of money
and utility into its analysis.

Real estate is basically defined as immovable property such as land and everything permanently
attached to it like buildings. Real property as opposed to personal or movable property is
characterized by the right to transfer the title to the land whereas title to personal property
can be retained. The investment in real estate essentially depends on the risks associated with it,
that is to say, even if the venture succeeds when the future stream of income will accrue to
the investor and the alternative investment opportunities. Real estate investment can be
attractive if viewed as a business opportunity; it can generate rental income, using it as
collateral to secure a loan for a business venture, to offset otherwise taxable income through cash
savings on tax-deductible interest rate losses, or simply from the profits garnered from its resale.
Notable, in this context is the gains reaped by real estate speculators who trade in real estate
futures (by buying and selling purchase options).

Common examples of real estate investment are individuals owning multiple pieces of real
estate’s one of which is his primary residence and others are occupied by tenants from where
the rental income accrues. Real estate investment is also associated with
appreciation in the value of property thereby having the potential for capital gains. Tax
implications differ for real estate investment and residential real estates. Real estate
investment is long term in nature and investment professionals routinely maintain that
one’s investment portfolio should have at least 5%-20% invested in real estate

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4.7. Gold

The love for gold in India is legendary. There has always been a good demand for gold in India
making it the largest consumer of gold in the world. The consumption of gold is mostly in
form of jewellery. But as investment an investors generally buy gold as a hedge or safe haven
against any economic, political, social or currency-based crises. These crises include investment
market declines, inflation, war and social unrest.

Gold can be bought in various forms, one can either buy it in the form of physical gold -- bars,
biscuits and or coins or even in a dematerialised form. Gold jewellery is not a good investment as
it is not as liquid as bars or gold fund. The disadvantage is that a huge amount is to be paid
as making charges or design charges which is discounted while selling it. The second disadvantage
is most jewellers do not give cash in lieu of gold. Instead they allow to exchange it for gold
jewellery or in a bar or coin form.

Gold Exchange-Traded Fund or Gold ETF is the new investment option of recent origin. This
open-ended mutual fund collects money from the investors to invest in standard gold bullion.
Instead of physical holding the gold, the investors will be assigned units of the gold ETF.
Gold ETF are listed in the stock exchanges of their respective countries. Gold ETFs give the same
advantages of holding gold in the physical form without the hassles associated with keeping gold
in physical form. With gold ETFs, person need not worry about the safe storage, liquidity and
purity of physical gold. The fund house that issues the gold ETF takes over the responsibility of
storage and insurance of this gold.

Since gold ETFs are registered with stock exchanges, they confirm with the norms and regulations
of the regulating authorities. The transparency of operation of these funds ensures that the quality
of gold that the fund is investing in confirms to global standards of purity. There is complete
transparency in the Net Asset Value or NAV of the funds and the market prices at which they
are traded. The ease of investing in small denominations in Gold ETFs makes it easy for retail
investors to participate in the schemes. By investing in gold ETFs, one can accumulate a sizeable
amount of gold over a long period of time. Retail investors could invest even in one unit of the
fund, which is equivalent to one or ½ gram of gold, every month.

Gold ETFs are also tax efficient unlike physical gold. While physical gold is considered a long-
term investment, only if it is hold for three years, gold ETFs acquire this status after one year. In
short, selling gold within three years of purchase will attract capital gains tax. Moreover , holding
large quantities of physical gold can attract wealth tax, while gold in demat form does not. This
apart, the spread between the buy and sell prices pertaining to gold ETFs is less than that of
physical gold.

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Gold Price is determined by demand and supply equilibrium. It has an effect of global demand on
its pricing. The demand for gold has been steadily rising, while the supply has remained relatively
inelastic, leading to a rise in the prices. Gold prices are also inversely related to dollar price.
Though

Gold is a safe asset. Especially during recessionary economic situations, when equity prices
plummet, price of gold remains stable even in an unstable economic environment. Gold is
always a good hedge against inflation and is therefore a safe investment option. Including gold
in investment portfolio provides the proper diversification of assets. A good portfolio is one
where prices of all assets do not move up and down at the same time and at the same rate.
Although, the long-term return from gold might not be as huge as return from the equity
market, but nonetheless, they are the safest custodian of hard-earned money.

4.8. Investment in Bank

Bank investment can be said as the most common or primary investment avenues. Not many
people recognize this sector as an investment avenue. Banks are the most common and many
a times people first investment experience. Few investments in bank can be in following form:

4.8.1. Fixed Deposit

A fixed deposit is meant for those investors who want to deposit a lump sum of money for a
fixed period; say for a minimum period of 15 days to five years and above, thereby earning
a higher rate of interest in return. Investor gets a lump sum (principal + interest) at the maturity of
the deposit.

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Bank fixed deposits are one of the most common savings scheme open to an average investor.
Fixed deposits also give a higher rate of interest than a savings bank account. The facilities
vary from bank to bank. Some of the facilities offered by banks are overdraft (loan) facility on
the amount deposited, premature withdrawal before maturity period (which involves a loss of
interest) etc. Bank deposits are fairly safer because banks are subject to control of the Reserve
Bank of India.

The banks are free to offer varying interests in fixed deposits of different maturities. Interest
is compounded once a quarter, leading to a somewhat higher effective rate.

The minimum deposit amount varies with each bank. It can range from as low as Rs. 100 to
an unlimited amount with some banks. Deposits can be made in multiples of Rs. 100/-.

The thing to consider before investing in an FD is the rate of interest and the inflation rate. A
high inflation rate can simply chip away real returns. The rate of interest for Bank Fixed Deposits
varies between 4 and 11 per cent, depending on the maturity period (duration) of the FD and the
amount invested. Interest rate also varies between each bank. A Bank FD does not provide regular
interest income, but a lump-sum amount on its maturity. Some banks have facility to pay interest
every quarter or every month, but the interest paid may be at a discounted rate in case of monthly
interest.

With effect from A.Y. 1998-99, investment on bank deposits, along with other specified incomes,
is exempt from income tax up to a limit of Rs.12, 000/- under Section 80L. Also, from A.Y.
1993-94, bank deposits are totally exempt from wealth tax. The 1995 Finance Bill
Proposals introduced tax deduction at source (TDS) on fixed deposits on interest incomes of
Rs.5000/- and above per annum.

4.8.2. Recurring Deposit

The Recurring deposit in Bank is meant for someone who wants to invest a specific sum of money
on a monthly basis for a fixed rate of return. At the end, person will get the principal sum
as well as the interest earned during that period. The scheme, a systematic way for long term
savings, is one of the best investment option for the low income groups.

The minimum investment of Recurring Deposit varies from bank to bank but usually it begins
from Rs 100/-. There is no upper limit in investing. The rate of interest varies between 7 and 11
percent depending on the maturity period and amount invested. The interest is calculated quarterly
or as specified by the bank. The period of maturity ranging from 6 months to 10 years.

The deposit shall be paid as monthly installments and each subsequent monthly installment shall
be made before the end of the calendar month and shall be equal to the first deposit.

Since a recurring deposit offers a fixed rate of return, it cannot guard against inflation if it is
more than the rate of return offered by the bank. Worse, lower the gap between the

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interest rate on a recurring deposit and inflation, lower real rate of return. Premature withdrawal
is also possible but it demands a loss of interest.

The rate of interest varies between 7 and 11 percent depending on the maturity period and amount
invested. The interest is calculated quarterly or as specified by the bank. Some Nationalised banks
are giving more facilities to their customer, State Bank of India give Free Roaming Recurring
Deposit facility to their customers. They can transfer their account to any branch of SBI free.
Tax benefit on the interest earned on Recurring Deposit up to Rs 12000 Tax Deductible at source
if the interest paid on deposit exceeds Rs 5000/- per customer, per year, per branch.

4.8.3. Savings Bank Account

A Saving Bank account (SB account) is meant to promote the habit of saving among the people.
It also facilitates safekeeping of money. In this scheme fund is allowed to be withdrawn whenever
required, without any condition. Hence a savings account is a safe, convenient and affordable way
to save money. Bank deposits are fairly safe because banks are subject to control of the Reserve
Bank of India with regard to several policy and operational parameters. Bank also pays a minimal
interest for keeping money with them.

The interest rate of savings bank account in India varies between 2.5% and 4%. In Savings Bank
account, bank follows the simple interest method. The rate of interest may change from time
to time according to the rules of Reserve Bank of India.

It's much safer to keep money at a bank than to keep a large amount of cash in home. Bank deposits
are fairly safe because banks are subject to control of the Reserve Bank of India with regard to
several policy and operational parameters. The federal Government insures deposited money.
Saving Bank account does not have any fixed period for deposit. The depositor can take money
from his account by writing a cheque to somebody else or submitting a cheque directly. Now most
of the banks offer various facilities such as ATM card, credit card etc. Through debit/ATM card
one can take money from any of the ATM centres of the particular bank which will be open 24
hours a day. Through credit card one can avail shopping facilities from any shop which accept the
credit card. And many of the banks also give internet banking facility through with one do the
transactions like withdrawals, deposits, statement of account etc.

4.9. Investment through Post Office

Share of Post office investment has also a major part in Indian Household investment, which
is mostly due to its all India presence of service network. Various avenues for post office
investment are as follows:

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4.9.1. Post office Recurring Deposit Account (RDA)

A Post-Office Recurring Deposit Account (RDA) is a banking service offered by Department of
post, Government of India at all post office counters in the country. The scheme is meant for
investors who want to deposit a fixed amount every month, in order to get a lump sum after five
years. The scheme, a systematic way for long term savings, is one of the best investment option
for the low income groups.

The minimum investment in a post-office RDA is Rs 10 and then in multiples of Rs. 5/- for a
period of 5 years. There is no prescribed upper limit on investment.
The deposit shall be paid as monthly installments and each subsequent monthly installment shall
be made before the end of the calendar month and shall be equal to the first deposit.
One withdrawal is allowed after one year of opening a post-office RDA on meeting certain
conditions. Person can withdraw up to half the balance lying to their credit at an interest charged
at 15%. The withdrawal or the loan may be repaid in one lump or in equal monthly installments.

Premature closure is allowed on completion of three years from the date of opening and in such
case, interest is payable as per the rate applicable for the Post Office Savings Bank Account.

After maturity of the account, it can be continued for a further period of 5 years with or without
further deposits. During this extended period, the account can be closed at any time.
The post-office recurring deposit offers a fixed rate of interest, currently at 7.5 per cent per annum
compounded quarterly. The post office offers a fixed rate of interest unlike banks which constantly
change their recurring deposit interest rates depending on their demand supply position. As the
post office is a department of the government of India, it is a safe investment. The principal amount
in the Recurring Deposit Account is assured. Moreover Interest earned on this account is
exempted from tax as per Section 80L of Income Tax Act.

4.9.2. Time Deposit

A Post-Office Time Deposit Account is a banking service similar to a Bank Fixed Deposit offered
by Department of post, Government of India at all post office counters in the country. The scheme
is meant for those investors who want to deposit a lump sum of money for a fixed period;
say for a minimum period of one year to two years, three years and a maximum period of five
years. Investor gets a lump sum (principal + interest) at the maturity of the deposit. Time
Deposits scheme return a lower, but safer, growth in investment.

Time Deposits can be made for the periods of 1 year, 2 years, 3 years and 5 years. The minimum
investment in a post-office Time deposit is Rs 200 and then its multiples and there is no
prescribed upper limit on investment.

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 Study of Individual Financial Planning

The account can be closed after 6 months but before one year of opening the account. On such
closure the amount invested is returned without interest. 2 year, three year and five year accounts
can be closed after one year at a discount. They involve a loss in the interest accrued for the time
the account has been in operation.

Interest is payable annually but is calculated on a quarterly basis at the prescribed rates. Post
maturity interest will be paid for a maximum period of 24 months at the rate applicable to
individual savings account. One can take a loan against a time deposit with the balance in
account pledged as security for the loan.

This investment option pays annual interest rates between 6.25 and 7.5 per cent, compounded
quarterly. Time deposit for 1 year offers a coupon rate of 6.25%, 2-year deposit offers an
interest of 6.5%, 3 years is 7.25% while a 5-year Time Deposit offers 7.5% return.

In this scheme investment grows at a pre- determined rate with no risk involved. With a
Government of India-backing, principal as well as the interest accrued is assured under the scheme.

The rate of interest is relatively high compared to the 4.5% annual interest rates provided by
banks. Although the amount invested in this scheme is not exempted as per section 88 of
Income Tax, the amount of interest earned is tax free under Section 80-L of Income Tax Act.

4.9.3. National Savings Certificates

National Savings Certificates (NSC) are certificates issued by Department of post, Government of
India and are available at all post office counters in the country. It is a long term safe savings
option for the investor. The scheme combines growth in money with reductions in tax liability as
per the provisions of the Income Tax Act, 1961. The duration of a NSC scheme is 6 years.

NSCs are issued in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs.10,000 for
a maturity period of 6 years. There is no prescribed upper limit on investment.

One can take a loan against the NSC by pledging it to the RBI or a scheduled bank or a co-
operative society, a corporation or a government company, a housing finance company approved
by the National Housing Bank etc with the permission of the concerned post master.

Though premature encashment is not possible under normal course, under sub-rule (1) of rule 16
it is possible after the expiry of three years from the date of purchase of certificate.

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 Study of Individual Financial Planning

It is having a high interest rate at 8% compounded half yearly. Tax benefits are available on
amounts invested in NSC under section 88, and exemption can be claimed under section 80L for
interest accrued on the NSC. Interest accrued for any year can be treated as fresh investment in
NSC for that year and tax benefits can be claimed under section 88. NSCs can be transferred
from one person to another through the post office on the payment of a prescribed fee. They can
also be transferred from one post office to another. The scheme has the backing of the
Government of India so there are no risks associated with investment. One can take a loan
against the NSC by pledging it to the RBI or a scheduled bank or a co-operative society, a
corporation or a government company, a housing finance company approved by the National
Housing Bank etc with the permission of the concerned post master.

4.9.4. Post Office Kisan Vikas Patras

Kisan Vikas Patras is a safe and long term investment option backed by the Government of
India which provides interest income similar to bonds. The title of the scheme makes some
misconception that it is only meant for farmers. But anyone can go for Kisan Vikas Patra. KVP is
beneficial for those looking for a safe avenue of investment without the pressing need for a
regular source of income. Money doubles at the end of specified period.

The minimum investment in KVP is Rs 100. Certificates are available in denominations of Rs

100, Rs 500, Rs 1,000, Rs 5,000, Rs 10,000 and Rs 50,000. The denomination of Rs 50,000 is sold
through head post offices only. There is no limit on holding of these certificates. Any number of
certificates can be purchased. A KVP is sold at face value; the maturity value is printed on the
Certificate.
The post-office Kisan Vikas Patras (KVPs) offers a fixed rate of interest, currently at 8.41 (2009)
per cent per annum compounded half yearly which are subject to vary. The maturity period is 8
years and 7 months and Money doubles on maturity. Encashment is possible from two and half
years. There is facility to reinvest the amount on maturity.

No income tax benefit is available under the Kisan Vikas Patra scheme. Interest income is taxable,
however, the deposits are exempt from Tax Deduction at Source (TDS) at the time of withdrawal.
KVP deposits are exempt from Wealth tax.

KVPs can be pledged as a security against a loan. It can be transferable to any post offices in
India. KVPs can be transferable to one person to other before maturity. Nomination Facility is also
available.

4.9.5. Post Office Monthly Income Scheme

The post-office monthly income scheme (MIS) provides for monthly payment of interest income
to investors. It is meant for investors who want to invest a sum amount initially and earn interest
on a monthly basis for their livelihood. The MIS is not suitable for capital

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appreciation. It is meant to provide a source of regular income on a long term basis. The scheme
is, therefore, more beneficial for retired persons.

Only one deposit is available in an account. Only individuals can open the account; either single
or joint.( two or three). Interest rounded off to nearest rupee i.e, 50 paise and above will be
rounded off to next rupee. The minimum investment in a Post-Office MIS is Rs 1,500 for both
single and joint accounts. The maximum investment for a single account is Rs 4.5 lakh and Rs
9 lakh for a joint account. The duration of MIS is six years.

The post-office MIS gives a return of 8% interest on maturity. The minimum investment in a
Post-Office MIS is Rs 1,500 for both single and joint accounts.

Premature closure of the account is permitted any time after the expiry of a period of one year of
opening the account. Deduction of an amount equal to 5 per cent of the deposit is to be made
when the account is prematurely closed. Investors can withdraw money before three years, but
a discount of 5%. Closing of account after three years will not have any deductions. Post maturity
Interest at the rate applicable from time to time (at present 3.5%). Monthly interest can be
automatically credited to savings account provided both the accounts standing at the same post
office. Deposit in Monthly Income Scheme and invest interest in Recurring Deposit to get 10.5%
(approx) interest. The interest income accruing from a post-office MIS is exempt from tax
under Section 80L of the Income Tax Act, 1961. Moreover, no TDS is deductible on the interest
income. The balance is exempt from Wealth Tax.

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 Chapter 5: Research Methodology

5.1 : Research Design

5.2 : Data Collection Techniques and Tools
5.3 : Sample Design
5.4 : Limitations
 Study of Individual Financial Planning

5.1. Research Design

The study is about to find various avenues available for an individual to invest and ways to achieve
long term and short term financial goals through financial planning. It intend to study the pattern
in which individual allocates his savings in various asset class. It describes the awareness of
investor about various alternatives available to them. It also aims at creating awareness of
financial planning.

The data required for the study would be acquired through personal interview and questioner
and it was collected by means of cold calling (Cold calling is the process of approaching
prospective customers or clients, who were not expecting such an interaction),and the research
period was spread out in twenty days. For this purpose researcher choose Udaipur, Rajasthan area,
where researcher could find enough educated office going people, which will help us getting better
understanding of how financial planning is done.

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5.2. Data collection techniques and tools

For the purpose of data collection researcher took help of both primary data and secondary data
collection method.

Primary data are those, which are collected afresh and for the first time, and thus happen to
be original in character. This method was used by means of Personal Interview, wherein researcher
had face-to-face contact with the persons. The reason behind choosing this method was to have
detailed information on the subject. It also provided opportunity for selecting the sample for
interview. The interview conducted were a mixture of structured and unstructured interviews.
Scope was kept open for detailed discussion at the discretion of the interviewee. Where there
was a time crunch a structured procedure was followed wherein predetermined questions were put
forward.

The other method was adopted in primary data collection was Questionnaires. This was used
to assist a more structured form of information. The information thus obtained was standard and
in a more unbiased form. It assisted to collect data from a large sample size. The pattern adopted
was a general form of questionnaire. Questions are in dichotomous (yes or no answers),
multiple choice and open ended question. Open ended questions are restricted due to the difficulty
faced in analyzing. The questioner was kept short and to the point.

Secondary data means data that are already available i.e., the data which is already collected
and analyzed by other. To get a better understanding and to have a larger exposure on the
subject this method was used. Methods use was data available on world wide web, articles in
newspapers, financial industry reports, Financial Planning board of India reports and article,
reports published by Government of India, etc. Support was also provided by the project guide by
giving inputs from his years of experience.

5.3. Sample Design

Sample design was based on principles of sample survey. Sample was decided on socio
demographic factors such as income and age group. The number of respondent were restricted to
50 due to lack of time. Sampling unit was geographical unit where the research was carried
in Nariman Point, Mumbai. Source list for respondents was not predetermined it was on random
basis. The various parameters on which the research was to be conducted are:
• Awareness of financial Planning
• Alignment of life goals and financial goals
• Investment distribution in various asset classes
• Decision influencing investment

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5.4. Limitations
Lack of response from sample: It is also said as access to resource of information. As the method
adopted was cold calling the respondent were not easily available for discussion.

Unwilling to reveal financial position: In technical term it can be said as access to information.
Many of are not comfortable to disclose our financial affairs openly. In such a situation researcher
had to convince the respondent a lot more times. Also many a times only general discussion
would take place.

Time: Due to lack of time availability of respondent and the period which can be used to collect
data was short the research could not be conducted on a large sample size.

Using organization (company) name: Many a time to get access to respondent researcher had to
revel the organization identity. People thought that it was for the purpose of sales of promotional
activity, which lead to negative response from many people.

Lack of expertise: On the side of the researcher the there was lack of in-depth information on the
topic.

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Chapter 6: Data Analysis and Interpretation
 Study of Individual Financial Planning

6.1. Age distribution of the respondent

Age group of respondent No. of Percentag

Respondent e
21-30 17 34%
30-45 18 36%
45-60 11 22%
above 60 4 8%
Total 50 100%

No. of Respondent
Number of respondent

21-30 30-45 45-60 above 60

Almost 70% of respondent was from age group 21yrs to 45yrs this is considered to be most active
age group. During this age, life of an individual changes very drastically. The career is in
growing stage in starting few years and there are hardly any responsibilities, at this time there
is a lot of funds available for disposal. It is this age where maximum risk can be taken and a greater
period can be given to grow the amount invested. As a person enter into their 30’s they have
increased family responsibility and gradually the risk taking ability reduces with the age. With a
greater portion of such population included in data collection a greater degree of understanding
can be gained how financial planning is done by young India.

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6.2. Income distribution of respondent

Income Responde Percenta

nt ge
upto 2,00,000 18 36
2,00,000 - 3,00,000 13 26
3,00,000 - 4,00,000 9 18
4,00,000 - 5,00,000 6 12
above 6,00,000 4 8
Total 50 100

Financial planning is about assessing our present cash flows; estimating the required cash flow
after a certain period of time and to determine the steps required to achieve this over a period.
The amount of disposable income at hand determines various investment decisions. It also helps
in making tax plans so that maxim benefit can be gained through various tax exemptions. So it is
necessary to know the income inflow of an individual. The above graph shows that a major portion
of respondent are in income slab of upto Rs.2,00,000 p.a.; this indicates that the persons may be
in the beginning stage of career. With increasing income slab the no of respondent are reduced.

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6.3. Person willingness to take risk according to age

Age group Willingness to take risk Total

Hig Moderate Low
h
21-30 8 8 1 17
31-45 7 9 2 18
46-60 2 4 5 11
above 60 1 1 2 4
Total 50

The investment decisions are more based on the willingness to take the risk rather than the ability
to take risk. The above graph describes the willingness to take risk at various life stages. At the
younger age people are more willing to take risk which reduces over the years as responsibility
increase. Although different individual may have different preferences which could contradict
their age. Many a time investment is a function of willingness rather than ability which is clearly
described by above graph.

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6.4. Investment made by the respondent in various avenues

Avenue Respondent Percentage

Life Insurance 50 100
Fixed Deposit 31 62
Mutual Fund 29 58
Equity Market 14 28
Gold 6 12
PPF 41 82
Post Office Deposit 24 48

Mutual
Market

A fair idea of asset allocation of individuals in various asset class can be observed through this. It
was observed that the all respondent had a life cover policy. This shows that the basics of financial
planning were achieved. The next major portion was Provided Fund due to it being more secure
investment and also tax exemption offered. Major investments were also made in Bank Fixed
Deposits and Post Office Deposits. Equity was not a preferred investment among many due to
its volatile nature but many used it as a long term investment by investing in large companies.
Investment in gold was more in form of jewelry which is not a good option as investment. Very
few invested in gold coins/bars and Gold ETFs.

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6.5. Satisfaction of investors on their previous investment

Satisfaction Respondent Percentag

s e
Yes 15 30
No 28 56
Neutral 7 14
Total 50 100

A major portion of respondent was unsatisfied with the returns they got on their investment.
This reflects that investment decision was not taken properly. Few common reasons cited were:
• Inadequate knowledge about the instrument in which investment was made
• Misguided by the agent of financial company
• Charges applicable were not disclosed initially
• Unplanned investment

Also a major portion of investment was in assets which has a low risk – low returns category.
This also was a major reason of respondent unsatisfied with current returns.

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6.6. Various sources of information/reference for investor which influence investment

decision.

Source of information Responde

nt
News paper, Publications
& 31
Media
Professionals 22
Agents/Broker 39
Friends, Peer group, etc. 16
90
80
70
60 Agents& Friends,
Percentage

NewsPapers, Professionals Broker Peer group, etc.

50
40 Publication
30 & Media
20
10
0
High Low
Moderate

Degree of organised data

Respondent

There are sources of information which are vital in making investment decision. The graph
shows the source of information which is plotted according to its authentication. On the X axis
the extreme right indicates highest authentication and it get reduce as we move to right. The
authentication of information plays a important role in right investment decision. We find that
major respondent have taken investment decision on the bases of information provided by Agents
& Broker of different financial company. The next major information source is News papers,
publication and media which are considered to be highly authenticated data. Help of
professionals in investment decision is taken not by many, due the fees charged by various
professional for their service. There is less number of respondent taking their investment decision
on information provided by friends. Mostly the information provide by such people is based on
their experience which may not be true for others. That is the reason, such source of information
is considered less organized and reliable.

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6.7. Investment Objectives of Individuals

Investment Objective Responde

nt
Principle Safety 9
Maintain Standard of 17
living
Meet future expenses 18
Safegaurd against
contingencies 6
Total 50

Investment objective to a greater extend determine the investment tenure and the avenue. Different
investment objectives have different investment avenues to meet them. By determining the
objective we can easily determine the investment vehicle for individuals. The persons looking
for principal safety can investment in Post office schemes, government securities, banks and
PPF. Investment in Equity and Mutual funds can give greater returns which can beat high inflation
rate. Term deposits are useful when money is needed after a fixed period of time.

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6.8. Respondent frequency of investment

Preferred Frequency of Responde Percenta
Investment nt ge
Monthly 21 42
Quarterly 4 8
Half Yearly 5 10
Annually 11 22
Single/One time 9 18
Total 50 100

A good number of investors prefer to invest regularly on monthly basis, thanks to Systematic
Investment Plan. Monthly investment helps to invest in small denominations with benefits of
Rupee cost averaging. Monthly investment was largely found in Mutual Funds. To a surprise
many prefer to invest in single or one time installment without knowing the risk attached to
it. One time investment are a good option only for physical assets life real estate and gold.

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6.9. Investment in mutual funds

Mutual Fund Investment Responde
nt
Money Market Funds 8
Gilt Funds 4
Debt Funds 2
Balanced Funds 20
Index Funds 10
Diversified Equity Funds 24
Sector Specific Funds 14

It was observed that a large number of mutual fund investors have invested in Diversified Equity
Funds which are high on risk but also gives a high return. The other major portion went to
Balanced Funds which provides with a regular income, moderate capital appreciation and at the
same time minimizing the risk of capital erosion. Also large portion of investors have invested
in Sector Specific Funds which are high on risk but also provides high returns when economy
favors such sectors. All this funds provide a greater opportunity for capital appreciation with
trying to minimize the effect of risk on fluctuations in equity market.
A small portion of respondent has invested in fixed return funds like Debt funds, Gilt funds and
Money Market Funds. This investment have low risk – low return characteristics with little capital
appreciation.

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6.10. Financial Literacy of respondent

Financial Literacy Responde
nt
Very Good 17
Good 12
Average 15
Poor 6
Total 50

The purpose behind knowing the financial literacy is to get to know how better the respondent can
take investment decision individually. A large portion of respondent stated they have a good
knowledge of investment avenues but their investment portfolio contradicted. Thus it states that
many are not ready to acknowledge that they do not possess the required knowledge. This
keeps them into darkness and may lead to wrong investment decisions, which are hard to correct.

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6.11. Do respondent have enough time to manage their investment affairs

Time Available
Respondent Percentag
s e
Yes 18 36
No 32 64

It reflects that not many have time to do financial planning. In such cases it is mostly
observed that the investment decision was influenced by people around.

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Chapter 7: Conclusions, Limitations and Suggestions

7.1 : Conclusions
7.2 : Limitations
7.3 : Suggestions
 Study of Individual Financial Planning

7.1. Conclusion
The Saving behaviour has been changed considerably over the last couple of years. The
savings rate in India is comparatively higher than various other countries. Earlier the trend of
saving was in terms of physical assets but it has started to shift now to financial instruments. This
trend partially reflects the relentless expansion of the various branch networks of the financial
institutions into the county's rural areas and partially holds the increasing trend of the easy
accessibility of the alternative investment opportunities. Today corporate securities has become
a part of household savings wherein retail individuals prefer to invest his saving in security
market. The reason sited for this are the growth seen in the stock market and a low interest rate
and return offered by traditional instruments. Also the growing income of working class has also
contributed largely to the changing pattern of saving in India.

The household savings in India can be broadly categorized into the following types:
• Savings in physical properties
• Savings in financial instruments or financial household savings

Financial household savings in India usually include the following:

• Savings deposits with banks

• Life insurance policies
• Provident funds
• Pension funds
• Liquid cash of households
• Deposits with non-banking financial institutions
• Unit Trust of India Investment Schemes

The major portion of financial saving goes into pension funds and life insurance.
It has been found recently that the traditional instruments of savings like special tax incentives or
higher interest rates are not able to increase the rate of private saving rate in the long run. It
is also found that the response of saving for the interest rate changes in India was amongst
the lowest in the developing countries.

Over past 30 years, the prime two instruments for household long term saving like pension saving
and life insurance have come to an idle state. On the other hand, the mutual funds started to
become more successful in the early years of 1990s. Considering these two factors, we can
conclude two weaknesses of the saving market in India. First, public sector dominates the markets.
Second, the allocation of portfolio is under control that makes the low returns from the market
developments.

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7.1.1. Financial Planning – Age Approach

Need Analysis-Stage I - Young Professional Life

Stage Analysis

• Age of 20yrs and 30yrs – young group.

• Started with new job or profession.

• May or may not have a Spouse.
• Ambitious and Career Focused.
• Probably do not have any dependents.
• Might not have made any Investment.
• Likes to Spend.

Financial Needs Analysis

• Might have a financial support from parents.
• No habit of Investments and likes to spend.
• May be thinking of Buying a Home or Car.
• Planning to get married.
• May be thinking of Higher Education.
• Can take high risk

Financial Planning

• Understanding the importance of savings and benefits of compound growth returns.

• Save more and invest more, its only possible during this stage of life, where responsibilities are
less.
• Life Insurance Needs are almost negligible, but should be included in investment as it will not
only provide life cover but also would create a habit of Saving. ULIP would be better option in
this stage.
• Equity and equity related instrument can occupy a greater portion of portfolio.
• Need for liquidity is less but still keeping in mind the era of pink slip contingency plan
should be in place.
• Should think for building real estate.
• Very long term investment

Life Insurance Need Analysis-Stage II- Newly Married Life

Stage Analysis
• Age of 31yrs to 45yrs.

• Married and have Dependents, Kids.

• Income on rise.
• Might have taken some Loan i.e Home Loan, Car Loan etc.
• Have a high Expenditure.

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 Study of Individual Financial Planning

• Effective tax planning is needed.

• Might have started some Investments in Equity or Mutual Funds.
• Risk appetite is Moderate
Financial Needs Analysis
• Have a high Debt Repayment through Installments i.e EMIs
• May want to save for Children’s education.
• Persons need to financially protect their Family and Dependents from unfortunate events.
• Elderly parents also need financial support.
• Start saving for retirement

Financial Planning
• Need a more stable portfolio, with moderate risk.
• Should concentrate on less volatile investment
• Insurance is a must, include child plan and retirement plans under this.
• Should concentrate on reducing debts
• Relatively long term investment

Life Insurance Need Analysis- Stage III-Proud Parents (Pre-Retirement) Life

Stage Analysis

• Age of 45-60 years.

• Major expenses goes towards Child higher education and marriage.
• Reduced Loan Burden
• Have a good Income.
• Retirement on mind.
• Low risk taking appetite.

Financial Needs Analysis

• Saving for retirement.
• Childs Higher Education Expenses or Marriage.
• Previous Investments giving Good dividends and Returns.

Financial Planning
• Should invest in instruments which provide regular return, such as fixed income products.
• Major portion of investment should be diverted towards retirement plan.
• Health insurance should be included.
• Investment should be highly liquid

Life Insurance Need Analysis- Stage IV- Post-Retirement Life

Stage Analysis

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 Study of Individual Financial Planning

• Age 60 years or above.

• Retired from employment.
• Might have taken some assignment as consultant.
• Planning to pursue long cherished hobbies.
• Children are financially independent and married.
• Reduced monthly income.
• Might have small or no Loan outstanding liabilities.
• Marginal or zero risk appetite.

Financial Needs Analysis

• Need regular income to maintain current life style.

• Need to protect investments from market risk.

• Need to save for spouse.
• Require enough cash balance for any emergency medical expenditure for both self and spouse.

Financial Planning
• Single Premium Immediate Annuities
• Health Insurance is a must
• Regular income products
• Should do estate planning

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7.2. Limitations
Reasons cited for not undertaking financial planning are:

Will start financial planning later – No one knows when the later would come. We need to
change this psychology and need to understand that financial planning is needed at every stage of
life and earlier we start is better.

Waiting to have money to do financial planning – We should realize that we need a plan to
have money and not money to have a plan.

Lack of knowledge – there are plenty of books and websites that can help to gain the knowledge
of financial planning. A person can even engage a certified financial planner for this purpose.

Misguide earlier under name of financial planning - We need to understand that financial
planning is not restricted to a particular asset class or product.

Believing financial planning is only for rich - It is a fact that financial planning is even more
important for the person with an average income than it is for someone who earns a very high
income.

Reasons for failure of financial plan

No financial education – This is probably be the number one reason why we mess up our financial
lives, because no one has taught us how to manage finances. Investing simply without knowing
what we are doing is financial suicide. More over not many are willing to learn it on their own.
With lack of knowledge we are bound to have a wrong way. We need to understand that almost
everything today is related to money in one way or another.

Leaving planning options and choices to others – We are never responsible to ourselves in
life, but the truth is that personal finances are persons own responsibility. Mostly believe that
government or employer would take care of their financial well being in future. Person should
understand that the best government or employer can do is guide and provide opportunities.

Relying on lousy advisors – There are many financial agents which claim to have all the
knowhow of financial planning. With lack of awareness we believe the agents and put all our
hard earned money on their recommendations which may not be right all the time. Such
advices are mostly related to a product category and do not cover financial principal of
diversification.

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 Study of Individual Financial Planning

Expensive free advice – In India advice come free from every corner, and every other person
loves to do that. Advices can come from family members, friends, and professionals. We
should know from whom to take advice.

Greed – Everyone ones to get rich over a night, when greed enters the mind it blocks
logical thinking. In the process of getting more we often loss more. We should understand that
there is risk attach to every investment which may not suite our risk appetite.

Give no priority to personal finance management – We all know financial planning is important
but when it comes to implementing its not the same. Any investment objective should be preceded
by a proper financial plan. Investment without objective can lead us nowhere.

No clear or specified financial goals – Many of us are not clear about our financial goal, we
just want to earn money. Making lots and lots of money is not a proper goal. We fail to understand
the various need which would come with our growing age.

Following the crowd mentality - Some call it the “herd” mentality, too. When people blindly
follow the advice of other its bound to meet disaster.

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7.3. Suggestion
After all this it can be stated that the fundamental corner stone’s of successful investing
are:
• Save regularly, Invest regularly
• Start Early
• Diversify
• Use tax shelter
• Keep a regular check on investment and modify plans as and when needed

People need to be educated and informed about Financial Planning and this provides a greater
opportunity to financial product distributer like Reliance Money to educate people. Companies
can arrange for seminars and sessions through which they can provide information to people and
in return can get prospective clients from the audience. In this way both the audience and the
company can also be benefited.

Financial planning is not a onetime activity; the initiative should be taken by financial planner to
put this forward to their client. Regular meetings should be conducted between the financial
planner and client to review the investment portfolio. Alteration should be made in portfolio
as per need and requirement of the client. This will ensure that the investment objectives are
achieved. It will create goodwill for the financial planner and his company. This is one area where
many planners are lacking today. Follow-up, follow-up, follow-up is need of hour and it should
be understood by financial service provider.

Goal should be properly divided into short term, medium term and long term. Proper allocation
should be done in various instruments according to the time period of goal. There are various
instruments available which can site different time period needs. If investment are giving regular
return or are going to get matured should be reinvested properly.

If an investor is seeking help from advisor then he should collect enough information of product
from different sources. It will help to take proper investment decision and choose a right advisor.
It is also necessary that advisor should have enough experience. Thus the ultimate responsibility
is on the investor when it comes to taking investment decision.

Always keep investment a simple affair. Diversification is must but not to a greater extend.
Investor should know exactly what he is investing in. If they do not have adequate information,
question should be asked to financial advisor. It is better to invest in instruments which we can
understand rather than being dependent on someone else advice.

All the documentations should be complete and need to be preserved. At time of maturity it is
necessary to produce the investment documents which act as a proof. But many times investors
do not have proper documents which dishonours the claim at maturity. It is also

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recommended that all the disclosure documents also be preserved as it would help in case of
any dispute in settlement.

Investment through SIP should be encouraged. A little amount regularly invested for long period
can create a greater wealth. SIP helps in Rupee cost averaging, develop habit of saving and it
provides convenience of investment.

Buy and hold. Investment should be done fairly for a longer period of time only then capital
appreciations is possible.

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