What is financial planning?

Financial planning takes a wholesome view of a person's financial health. This will entail looking at the age, dependents, income, expenses, loans being serviced, goals for which the person is saving and whether the individual is adequately insured. It will also look at the broad areas of investing. Given all the above criteria, how much of the individual's money must be invested in equity (shares and equity mutual funds) and debt (fixed return investments and mutual funds that invest in them).

For instance, let's say you plan to get married next year and want to put your financial house in order and approach a financial planner.

We will ask you what your major savings goals are. You list four.

1. Saving for a home
2. Saving for retirement
3. Saving for your child's education
4. Saving for your marriage.

The first thing the financial planner will do is prioritise your goals and, taking your age in to account, give a time frame for each.

So, now, your goals will be put in this order.

1. Saving for your marriage
2. Saving for a home
3. Saving for retirement
4. Saving for your child's education

We will also look at your earnings, whether or not you have to support your parents and if your spouse would be employed. Depending on the time frame for each and how much of a risk you are willing to take, we will suggest a broad investment framework. This will include: How much you should invest in equity and how much in debt. What sort of investment instruments you should opt for. For instance, should you opt for a five year recurring deposit or a Fixed Maturity Plan?

We will also look at estate planning (Who have you nominated for your investments? Have you drawn a will? Should your house be jointly owned?) and insurance (Are you well insured? If not, what kind of plan is best suited? If yes, is it the right plan or should you opt out of it?).

If you are steeped in debt, We will help you prioritise your loans and tell you which ones to pay off first (high interest, no tax benefits) and which can be paid back over time (lower interest, tax benefits).

In a nutshell, a financial advisor will tell you how to get your finances in shape.

Financial Planning says, "An essential part of my task is to put the cash flows in perspective and crystallise them." In other words, we will look at where your money is coming from and where it is going and how you can best utilise it to meet your goals.

Role of a financial planner

The aim of the financial planner is to ensure her/his clients reach their financial goals. It is about optimising client's financial resources judiciously and not maximising them.

If a client has Rs 5 lakhs today and needs Rs 10 lakhs after 10 years for her/his daughter's marriage, s/he needs to generate 7.18 per cent returns per annum. Investing simply in Public Provident Fund (PPF) or National Saving Certificate (NSC) or few other debt instruments can generate this. There is no need to invest the corpus in equity where risks are higher.

Make a list of your financial goals
Most of us do not have a clear idea about our financial goals. Check out how many of us have written down our financial goals � those responsibilities and dreams in life for which we are saving money today.
It is not good enough to have them at the back of one's mind. It is important to have them written down. If we do not have our list, then we are wandering in the dark. If we don't know where we want to go, then how is our financial planner going to help us reach our destination.
Another shortcoming of not having "OUR" financial goals' list is that in the absence of it, we try to imitate others. I know of an individual who used to invest in only those mutual fund schemes where his boss invested. Later he found that his boss was saving money for his daughter's marriage, while this individual was not even married!
Financial planning is all about channelising 'OUR' financial resources towards 'OUR' financial goals. It is about making optimum use of our financial resources. In the race between the tortoise and hare, tortoise wins not by maximising speed but by optimising it. If we want to reach our financial goals then we � your financial planner and you - should optimise our resources and not unnecessarily attempt at maximising them.Maximisation comes with additional � and at times undue � risks.

Why financial planning is a must for you

Most people, when they think of financial planning, think investments. Some also feel it has to do with mutual funds and insurance. Honestly neither of it is true. Financial planning is all about channelizing "your" financial resources (income and wealth) towards "your" financial goals.

You all have financial goals. If individuals/families have no goals in life than there is no need to save.Financial goals are those responsibilities and dreams in life for which you want to save. All of us have responsibilities in life.

Typical Indian families share the responsibility of saving for the house, children's education and marriage, parental and siblings' responsibilities and retirement. Of course these are a few common ones and may vary from family to family. Dreams of all families are varied. Some want a home theatre, a luxury car or a foreign vacation. There could be some who dream of latest interiors and there are others who want to save for gizmos.

Financial planning is to divert your financial resources towards your financial goals.

create a contingency reserve
While structuring any kind of financial plan, ensure you first create wealth protection strategies � to protect your wealth from perils. You must set aside funds towards creating contingency reserve and purchase of health, disability and life insurances.
Also, you have to protect your assets like house, car, jewellery and other household things. Wealth protection has to be the base of any financial planning activity. If your base is weak the entire building of wealth can collapse anytime.

Focus on wealth accumulation
After protecting your wealth, you must focus on wealth accumulation. This means saving and investing for your responsibilities and dreams in life.
Depending on your financial goals � like buying a house, children's education and marriage, retirement � choose various asset classes like debt, equity and property. You may also choose an investment vehicle that suits your requirement, like a mutual fund, portfolio management services etc.
If you start accumulating wealth without protecting it, than your wealth will be susceptible to a variety of risks and you may have to erode your capital/wealth if any untoward incidence takes place.

Wealth distribution is important too
Lastly, develop wealth distribution strategies. During your retirement, you will be surviving on the corpus created by you. You will partly live on returns from the corpus and partly on capital. This is the distribution phase of retirement.
Also, upon your death your wealth needs to be distributed to your near and dear ones. Always remember the flow of financial planning � first wealth protection, next wealth accumulation and, lastly, wealth distribution.

Financial planning is just not about savings and investment
Many of us misunderstand financial planning as investment planning and directly jump to savings and investment. Suppose if you do not have a good health protection strategy and if there is major illness or job loss than you will have to bank on all the wealth that you have accumulated till then.
Similarly, imagine you have good wealth protection strategy. You have contingency reserves. However, you did not concentrate on savings/investing. This means you straightaway moved from wealth protection to wealth distribution.
Since you did not follow the flow and did not accumulate wealth, when you reach retirement, there may not be anything to distribute. You may have to depend on your near and dear ones.
Now imagine a situation where you distributed all your wealth to your children during your lifetime and suddenly, after your retirement, and then you suffer from a major illness.
You have not made provisions for a contingency reserve; neither does your health insurance cover the disease. You will have to go to your children and solicit help. This is what happens when you distribute wealth without proper wealth protection.
Any which way you consider it, if you want to create and preserve wealth, then the only way to follow is wealth protection-accumulation-distribution.

Budget: What's friendly, what's not

Finance Minister P Chidambaram presented a mixed bag of proposals for the capital markets on Wednesday.

Positives:

1) PAN to be made sole identification number for all participants in securities market with an alpha-numeric prefix or suffix to distinguish a particular kind of account;

2) Idea of Self Regulating Organisations (SRO) to be taken forward for different market participants under regulations to be made by Sebi;

3) Mutual funds to be permitted to launch and operate dedicated infrastructure funds;

4) Individuals to be permitted to invest in overseas securities through Indian mutual funds;

5) Short-selling settled by delivery, and securities lending and borrowing to facilitate delivery, by institutions to be allowed;

6) Enabling mechanism to be put in place to permit Indian companies to unlock a part of their holdings in group companies for meeting their financing requirements by issue of exchangeable bonds.

Negatives

1) Rate of dividend distribution tax to be raised from 12.5 per cent to 15 per cent on dividends distributed by companies...

2) ..and to 25% on dividends paid by money market mutual funds and liquid mutual funds to all investors.

Highlights of Budget 2007-2008

• Deduction in respect of medical insurance under Section 80 (D) increased to Rs 15,000 and Rs 20,000 for senior citizens
• 2 lakh people to benefit out of service tax exemption. Govt to lose Rs 800 crore as a result
• Service tax on Residents Welfare Associations whose members contribute more than Rs 3,000
• Excise duty for plywood reduced from 16 per cent to 8 per cent
• Water purification devices, small and big, fully exempted from excise
• Customs duty on polyester to be reduced from 10 per cent to 7.5 per cent
• Duty on sunflower oil to be reduced by 15 per cent
• Import duty of 15 specified machinery to be reduced from 7.5 per cent to 5 per cent
• Duties on seconds and defective reduced from 20 to 10 per cent
• An autonomous Debt Management Office in government to be set up
• An Expert Committee to be set up to study the impact of climate change in India
• Rs 50 crore to be provided for the Commonwealth Youth Games in Pune.
• Rs 100 crore for recognising excellence in the field of agricultural research
• Any requirement for security of the nation to be provided
• Backward Regions Grant Fund to be raised to Rs 5800 crore
• 1,396 Indian Technical Institutes to be upgraded to achieve technical excellence
• Rs 50 crore provided to begin work on vocational education mission for which Task Force in Planning Commission is chalking out a strategy
• CST rate to be reduced
• Reverse mortgage scheme for senior citizens
• Special Purpose Tea Fund to rejuvenate tea production
• Gross budgetary support in 2007-08 raised to Rs 2,05,100 crore from 1,72,728 crore in 2006-07. Of this, budgetary support to the Central plan will go up to 1,54,939 crore against 1,72,728 crore.
• Two lakh more teachers to be employed and five lakh more classrooms to be constructed
• Minimum Alternate Tax extended to I-T companies
• Extend service tax to development of telecom advertising
• No change in STT, capital gains tax
• Customs duty on plastics reduced to 7.5%
• Cash withdrawal tax limit hiked to withdrawals over Rs 50,000
• Dividend distribution tax raised to 15% from 12.5%
• Tax benefit on R&D extended by 5 years
• Fiscal deficit target at Rs 1,50,94 cr
• 1% education cess on all taxes
• ESOPs under FBT
• Capital gains tax on art works
• 1% additional cess on all taxes to fund secondary education
• Duty cuts from 5-3% to help domestic trade
• Effective corporate tax rate at 19.2%
• No excise on instant food mixes
• Advalorem duty on petrol, diesel cut to 6%
• Corporate tax surcharge scrapped for small companies
• No change in CENVAT rates
• No change in corporate income tax
• Tax exemption for Senior Citizens upto Rs 1.9 lakh
• Differential excise duty on cement
• Rs 1.2 lakh crore for States
• Goods and services tax from April 1
• Income tax exemption for women raised to Rs 1.45 lakh
• Income tax exemption hiked by Rs 10,000
• Import duty cut on medical equipment to 7.5%
• Income-tax code to be introduced
• Duty on food processing machines cut to 5%
• Irrigation and food processing tariffs cut to 5%
• Pet food duty cut to 20%
• Lower duty on edible oils
• Customs duty on polished gems cut
• Excise duty on cigarettes up by 5%
• Ad valorem duty on petrol, diesel down
• Customs duty on man-made yarn & poly fibre cut to 7.5%
• Watch, Umbrella duties cut to 5%
• Reduction in excise duty on umbrella parts, bio-diesel and water pipes
• Peak customs duty on non-agro products cut to 10%
• No change in service tax rate
• Hike in exise on cigarettes
• Coking coal exempted from customs duty
• Duties on PTA, MEG and DMT cut to 7.5%
• Rs 350 cr for Delhi for Common wealth games
• Government to encourage banks to lend to SMEs
• Central PSUs to invest Rs 1.6 lakh cr
• Separate schools for class 9-12
• PAN mandatory for security transactions
• Handlooms covered under TUF scheme
• Allocation for National Highways programme increased to Rs 10,667 cr
• 100% subsidy to small farmers, 50% subsidy for other farmers
• Mortgage guarantee companies to be set up
• To create 1 lakh jobs for physically challenged people
• Rs 750 cr allocated for setting up ITIs
• Rs 321 cr allocated for handloom sector
• Private companies invited to submit plans for certified seeds
• Mumbai to be converted into world-class financial city
• E-Governance expenditure hiked to Rs 179 cr
• Part of forex reserves for infrastructure projects
• Defence allocation up at Rs 96,000 crore
• Overseas investment to be allowed by individuals via MFs
• Golden quadrilateral project near completion
• RRBs asked to undertake branch expansion
• Allocation for tourist infrastructure up at Rs 520 cr
• Health insurance allocation for weavers hiked to Rs 321 cr
• Coir industry modernisation provision at Rs 22.5 cr
• Credit rating must for SMEs
• Soc Sec scheme for unorganised workers
• Weather-based crop insurance schemes
• Rs 14,365 crore for North-East
• Overseas investment exceeds portfolio investment
• Road-Rail projects in Bihar, Assam to be National Projects
• Allocation for textile parks up from Rs 189 cr to Rs 425 cr
• 330 districts under job guarantee scheme
• Rural landless households covered under AABY
• Focus on mega power projects
• Rs 3983 cr allotted for rural electrification
• UMPPs under review 2 to be approved by July
• FDI in April-Jan at $12.5 b
• Rs 22,452-crore subsidy to fertiliser
• Rs 1800 crore allocation for NABARD
• Tax exemption for Rs 5,000-cr NABARD bonds
• NABARD's rural bonds to get tax exemptions
• Govt to start weather-based crop insurance scheme
• Special funds for coffee, spices, rubber
• Education: Scholarship launched to arrest drop outs
• Rs 100 cr for new rainfed area development programme
• Rs 11000 cr outlay for irrigation projects
• Farm credit growth doubled in 2 years
• Rs 3794 cr allocated for primary education
• Rs 153 cr for high-yield milch animal scheme
• New scholarship for class VIII students
• School education up by 35%
• Rs 8795 cr for women-oriented schemes
• Scholarship for standard 9-12 students
• SC/ST allocation hiked to Rs 3271 cr
• NREGS to be expanded to 330 districts
• Education spend up 44.2% to Rs 32,352 cr
• Rs 750 cr for national scholarship scheme
• Bharat Nirman cornerstone of Govt policy
• Desired agriculture growth 4%
• Bank growth at 29.6% till Feb
• PDS system to be fully computerised
• Initial allocation for NREGS at Rs 12,000 cr
• Rs 15,291 crore earmarked for health
• Allocation for anti-AIDS programme at Rs 969 cr
• Agri investment to go up by 2% of GDP
• Allocation for NRHM hiked to Rs 9,947 cr
• Drinking water schemes allocation hiked to Rs 5,850 cr vs Rs 4,680 cr
• To substantially increase budgetary support for 11th plan
• Agri focus to benefit rural income & FMCG companies
• 31.6% increase in allocation for Bharat Nirman programme
• Panel set up to probe future trade in food items
• No new forward contract in wheat, rice futures
• Per capita income for FY06 up 7.6%
• Economy at a stronger position than before
• Confident of moderating inflation
• Higher tech education spend
• 10th plan target of 8% nearly achieved
• Higher outlay for roads
• Hike in allocation for health
• Rs 4,000 cr more earmarked for RIDF in FY07
• 24 lakh irrigated hectares to be created in FY08
• Panel set up to probe future trade in food items
• No new forward contract in wheat, rice futures
• 7.83 lakh rural houses built upto Dec 2006
• Education spending up 44.2 per cent at Rs 32352 cr
• High rate growth can be continued in the current year too
• Until Feb 2007, forex reserves stood at $180 b
• Farm supply imbalances can disrupt growth
• Manufacturing has grown from 8.7% to 11.3%
• Average inflation for FY-7 estimated at 5.2-5.4%
• Government concerned about inflation
• Savings rate estimated at 32.4%
• Global commodity prices have exerted pressure on local prices
• Revenues are buoyant for the third year in succession
• Government committed to fiscal prudence
• High growth rate can be continued in the current year too
• Agri must top the agenda of policy makers
• Average agri growth during 10th plan to 2.3%, below desired level
• Have noticed sharp ups & downs in agriculture
• Savings rate at 32.4%
• GDP growth average at 8.5%
• Growth rate of GDP has improved to 9.2%
• Average growth rate during UPA years at 8.6%
• Finance Minister to begin Budget presentation at 11 a.m.

Do your tax planning

If you are liable to pay tax, tie up your tax planning exercise. As a law-abiding citizen paying taxes is most important so investing promptly in the right avenues to save tax assumes to save tax assumes importance. An individual can save tax up to Rs 100,000(Rs 1 lac)by investing in tax-saving investment avenues. These avenues range from the traditional Public Provident Fund(PPF), National Saving Certificate(NSC) and life insurance to the more dynamic(read market-linked) tax saving mutual funds(Equity Linked Saving Schemes-(ELLS)). These avenues not only help in tax planning but if selected well can also help individuals achieve their long term financial goals.

Post your queries about tax planning