What is Financial Planning

Posted by Mehul Kothari | Published on 01 Jan 2019
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What is Financial Planning

When it comes to financial planning and wealth management, most of you believe that creating savings is all that you require for fulfilling your financial plan. It is a misconception. What is personal financial planning? A personal financial planning process encompasses a wide range of activities which you need to carry out in order to achieve financial independence. It does not stop at savings. Do you know what these activities are?

Many of you, sadly, don’t! As it is essential, let’s understand financial planning and what it involves –

What is financial planning?

Financial planning is a process wherein you make financial decisions to meet the different financial goals of your life by managing your finances. Thus, financial planning involves making sensible and practical decisions about your money for future goals, not just creating savings.

What does financial planning involve?

Financial planning is a six-step process wherein you can plan for your finances and achieve financial independence. Let’s look at what are the six steps in the financial planning process–

1. You should estimate your current net worth – you should analyse and find out your assets and liabilities to arrive at your net worth. Your assets are your investments and other owned belongings which give you an income. Liabilities, on the other hand, are the debts which you have to pay off. Your liabilities should be deducted from your assets to find out your current financial standing. This is called your net worth which you should know.

2. You should chalk out your goals – goals are important as they dictate how much to save and for how long. A strategic financial planning process involves planning around some common goals such as marriage, child education, asset creation, buying a home, wealth maximization and retirement. Chalk out your goals based on your life stage. If your children are independent, your goal might be to create wealth and plan for retirement. On the contrary, if you have just started a family, planning for your child’s future might be an important goal. So, list out your goals to understand your financial requirements.

3. Find out your financial requirement – your goals help you find out the amount of money you need in life. Segregate your goals into short, medium and long-term to find out your investment horizon. Then choose investments whose tenure matches the horizon of your goals. . With goal planning, you can see when you need the money and invest accordingly. Don’t forget to factor in inflation. It has a direct bearing on the amount of money required to fulfil your medium and long-term goals.

4. Create a budget and stick to it – The next step is finding out your disposable income. Until and unless you know the income you can direct towards savings, you cannot create a portfolio. For maximum savings, create a budget. When spending, stick to your budget to avoid overspending. Budgeting helps you save more and meet your goals successfully.

5. Understand your risk appetite to know your investments – different investments have a different risk profile. Understanding of your risk appetite is important to find out in which assets you can invest. To understand your risk-taking ability, factor in your dependents, age, income, existing investments, etc. Once you know your risk profile you can choose equities if you are a risk taking investor or debt investments if you are risk-averse. Once you know your investment horizon and risk appetite you should pick the investment avenues. Some common and popular investment avenues include equity, debt, fixed-income, real estate, gold, etc. when picking assets, don’t stick to one asset class. Diversify. Diversification would help you spread your risk over different investments and minimize it. The returns, however, would be better.

6. Monitor and review your portfolio – financial planning is not a one-time affair. You need to monitor and review your portfolio from time to time. With time your financial requirements change. Your financial plan should be changed to factor in the change of your requirements.

Conclusion
Financial planning is a broad concept, an ongoing process and confusing it with only one factor of savings is wrong. Understand the entire financial planning process, follow it and achieve financial freedom.

Disclaimer
Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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Insurance and PPF are not the only tax-saving options

Posted by Mehul Kothari | Published on 01 Jan 2019

Traditional wisdom tells everyone to maximize tax-saving investments. After all, it has a two-fold benefit of tax-saving as well as building wealth for the future. So, all possible tax-saving options should be optimized, especially the investment ones. And while Public Provident Fund (PPF) and Life Insurance are the most popular income tax saving options, you may want to consider the other, myriad options available too, especially under Section 80C of the Income Tax Act. To remind you, you can invest up to Rs 1.5 lakh every year for a tax deduction under this section as one of the tax saving investment options. Let’s look at the multiple 80C investments available in detail: Investment Options U/S 80C:   Other available tax-saving deductions under Section 80C: You can also use these tax saving options in India or tax-saving deductions to reduce your net taxable income. • Children tuition fees: The fees paid towards your children for school tuition is eligible for tax-saving deductions U/S 80C• Repayment of home loans:   o The repayment of the principal amount of your Home Loans can be considered as tax deductions U/S 80C. This is subject to      a limit of Rs 1.5 lakh per annum  o The interest can be used for an additional tax deduction of Rs 2 lakh U/S 24  o An additional amount of Rs 50,000 can be deduction U/S 80EE by first-time home buyers. This is only valid if the property      has a value of less than Rs 50 lakh or the loan amount is lower than Rs 35 lakh. Other Investment Options 1. RGESS: If your income is less than Rs 12 lakh a year and you have never invested in equity before, then you can invest Rs 50,000 in Rajiv Gandhi Equity Saving Scheme or RGESS. This gets you an additional deduction of Rs 25,000. This can be done by investing in RGESS Mutual Funds or buying some specified stock options. 2. Health Insurance:     a. The premium paid towards your health insurance plan for self, spouse and dependent children is eligible for a tax         deduction of Rs 25,000 per annum U/S 80D and     b. An additional amount of Rs 25,000 per annum for premium payment towards health insurance premium for dependent         parents    c. The amounts are Rs 30,000 per annum if either you or your parents are senior citizens    d. So, the maximum amount you can deduct under this section is Rs 60,000 per annum. 3. Donations: Any donation made to any tax-saving trust or listed charitable organization qualify for a deduction U/S 80G. This is applicable only if the receipt is submitted. However, the amount of tax deduction you get on your donations varies—not all give you a 100% deduction. Donations towards some trusts like Jawaharlal Nehru Memorial Fund, National Children’s Fund, Prime Minister’s Drought Relief Fund, etc. qualify for a 50% tax deduction. 4. Savings Account: The interest accumulation in your savings account is tax free till Rs 10,000 per annum U/S 80TTA. 5. Medical costs: The amount you spend while taking care your differently-abled dependents can get you a tax deduction of up to Rs 1.25 lakh U/S 80(U). Medical treatments for such dependents can also help you lower your taxable income by Rs 1.25 lakh U/S 80DD. Conclusion: Insurance and PPF are definitely two lucrative options but they are not the only ones. There are multiple options available for tax saving. All you need to do is choose the most appropriate one according to your risk appetite and asset allocation. Disclaimer:Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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Tax Planning & Management FAQs

Posted by Mehul Kothari | Published on 01 Jan 2019

1) Tax filing is not part of tax planning and management. True or false? a) True b) False Correct Answer: False. Tax filing is an important aspect of tax planning. This also helps you audit your finances for tax. 2) It’s better to plan taxes after investing a) True b) False Correct Answer: False. Always plan your taxes before you plan to invest. There are various methods of tax planning you can use. One of the things tax planning does is identifying the tax bracket you fall in. This can help you choose investments that are tax-efficient as per your IT slab rate. 3) The concept of tax planning involves deduction and exemption. What is the difference between tax deduction and exemption? a) Tax deduction is when you get tax-free income; tax exemption is when an expense helps you lower your taxable income. b) Tax deduction helps lower your taxable income; Tax exemption is when an income is tax-free and thus, not a part of your taxable income. Correct Answer: B. Tax deduction is when you make an investment or an expense that lowers your taxable income. An exemption—as the name suggests—is when something is not taxable to begin with. 4) Various types of tax planning and tax-saving investments help you… a) Build your retirement kitty b) Buy a house in the next 2 years Correct Answer: Tax-saving investments have lock-in periods of 3-15 years. This helps them compound returns and thus grow money in time for retirement. It may not help a short-term goal. 5) Tax planning in India means investing in options that get you a tax deduction of up to Rs 2 lakh a) True b) False Correct Answer: False. Tax planning also includes other aspects like reducing your taxable income, looking for tax-efficient investments, etc. 6) Which of the two Equity-based investments get you only tax exemptions, not deductions? a) National Pension Scheme b) Equity Funds Correct Answer: NPS. All Equity Funds don’t get you a tax deduction. Only ELSS—a type of Equity Fund avails tax deductions under Section 80C. NPS, meanwhile, helps you lower your taxable income. 7) Those in the lower income tax slabs feel dividends are more tax-efficient. a) True b) False Correct Answer: False. The DDT is over 28%. Such investors may find income sources that are taxed at their income tax slab rate of 5-20% or lower to be more tax efficient. 8) Members can receive a salary from the HUF. But this is taxable. a) True b) False Correct Answer: False. You can receive a salary as a member, but it is tax-free. 9) Can expenses get you an income tax exemption? a) Yes b) No Correct Answer: No. Income tax is generally levied on income—either through service, business or investments. You can only get tax deductions on expenses, not exemptions. 10) Which of the two is more tax-efficient at the final payout stage? a) Life insurance b) National Pension Scheme Correct Answer: Life insurance payouts are tax-free. Meanwhile, withdrawals from NPS funds are taxable as per your IT slab rate. FINAL SCORE: How did you score? 0-3: You may want to read through and understand the chapter on Tax Planning once again. Or, speak to one of our experts for better understanding. 3-6: You’ve half-way there on your goal towards minimal taxes. But continue the efforts to be great at tax planning. 6-9: Very good. Go back to the few wrong choices and read those chapters better. 10: Congratulations! You are ready to make a tax plan of your own. Run it past one of our Tax planners for better chances of success.Disclaimer:Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing

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  • Financial Markets - Overview, Structure, and Types
    Posted by Rushabh H. Mehta | Published on 06 Mar 2020

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The capital market is further sub-divided into different types of financial markets. Let's understand –   Let’s understand each type of financial market in details – Money market The money market is a marketplace for short-term borrowing and lending. Securities that have a maturity period of less than a year are traded on money markets. The assets traded in money markets are usually risk-free and are very liquid. Since the maturity period is low, the risk of volatility is low, and the returns are also low. Money market instruments are debt oriented instruments with fixed returns. Some common examples of money market instruments include Treasury Bills, Certificates of Deposits, Commercial Papers, etc. Capital market Contrary to the money market is the capital market, which deals in long-term securities. Securities whose maturity period is more than a year are traded on the capital market. Capital market trades in both debt and equity-oriented securities. 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It is the central bank of India entrusted with the formulation of monetary policies, credit policies, and foreign exchange policies, among others. Banks and financial institutions have to abide by RBI's rules and regulations to work in the financial market. Securities and Exchange Board of India SEBI is the primary regulator of the capital market, which consists of both the primary as well as the secondary capital market. Trading done in the capital market is governed under SEBI's rules and laws. Insurance Regulatory and Development Authority IRDA governs the rules and regulations which are to be followed by insurance companies and their intermediaries. Thus, IRDA is a regulator of the insurance market, both life, and general insurance market. Financial markets today have evolved and have become quite competitive with the participation of multiple players. They directly play a part in the growth of India's economy and allows investors and borrowers to trade in financial products and services in an easy and smooth manner. To take advantage of the Financial markets and varied investing opportunities, consider the team at IndiaNivesh, which is well-versed with types of markets and regulatory bodies.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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  • SIP – Different Types of Systematic Investment Plans in India
    Posted by Mehul Kothari | Published on 15 Jan 2020

    Mutual funds now are a household name and building a mutual fund portfolio is synonymous with wealth creation. As the mutual fund industry continues to grow leaps and bounds, SIPs are considered one of the key growth drivers for this industry. SIPs help the investors to invest in a systematic and disciplined manners. Online SIP investments starting with Rs 500 per month (for few schemes min SIP amount is as low as Rs. 100 per month); digital distribution and hassle-free onboarding of investors, all have resulted in making an investment for SIPs most favoured investment option. To stay relevant with times and improvise their offerings, AMCs now offer many different types of SIP so that investors can choose the most suitable type of SIP for investment best suited to their individual needs and profile. Here are the different types of SIP investment available for investors- 1. Regular SIP One of the simplest and easiest forms of SIP investment is a regular SIP, wherein you invest a fixed amount at regular intervals. The time interval can be monthly, bi-monthly, quarterly or semi-annually. You can also choose daily or weekly SIPs, though it is not recommended in most cases. When you make your first SIP payment, you are required to choose your desired time interval, amount of the SIP and the tenure of the SIP. In a regular SIP, you cannot change the amount during the tenure of the investment. If you are a salaried employee, choosing a monthly SIP, usually in the first ten days of the month, once your salary is credited to your bank account is highly recommended. 2. Step-up SIP Without a doubt, SIPs help brings about financial discipline in your life. Over time, as your earnings increase, it is important to increase your investments as well so as to keep them aligned with your income level and financial goals. A step-up SIP, also termed as a top-up SIP, is an automated solution to increase your SIP contribution either by a fixed amount or a fixed percentage after a specific time. Using Step-up SIPs will help you reach achieve your goals faster and also help in long-term wealth creation. 3. Flexible SIP For investors with irregular income, even after being well aware of the benefits of SIPs, the biggest reason for not starting a SIP is not being able to keep up with the fixed periodic investments. A flexible SIP is a perfect solution for such investors as it gives the flexibility to start, pause, decrease or increase your SIP. Depending on your flow of funds, you can change the SIP amount seven days before the SIP date. In case, there is no intimation of change, then the default amount entered is deducted for the SIP. 4. Perpetual SIP Normally, when you choose a regular SIP, it has a fixed tenure, with a starting date and an end date. But, if you are unsure about how long you want to continue the SIP, you can opt for a perpetual SIP. In case of a perpetual SIP, you leave the end date column blank and you can redeem your SIP once you have reached your financial goal. If you opt for a perpetual SIP, then it is important that you monitor the returns of your investment, to keep a track of the fund’s performance over time. 5. Trigger SIP A trigger SIP is for seasoned investors, who have sound knowledge of the financial markets and are accustomed to tracking the market performance daily. Using a trigger SIP, an investor can choose an index level, a particular event or NAV to start the SIP. An investor can set trigger points for upside and downside conditions and can redeem the amount on achieving the pre-specified target. Investors can oscillate their investments between debt and equity schemes within the same fund house. A trigger SIP is recommended only for investors who have a thorough understanding of financial markets. 6. SIP with Insurance Insurance is an important part of financial planning. In order to make mutual fund offerings more lucrative, certain fund houses offer free insurance cover if you opt for SIPs with a longer duration. The initial cover is usually ten times the first SIP and gradually increases over time. This feature is only for equity mutual fund schemes. The term insurance offered is just an add-on feature and does not impact the performance of the fund. 7. Multi SIP The multi-SIP enables starting SIP investment in multiple schemes of a fund house through a single instrument. This facility can help investors to build a diversified portfolio. Investors can start SIP in various schemes using a single form and payment instruction, thereby reducing the paperwork involved.   CONCLUSION Over the last few years, SIP returns have earned investor confidence and are the most preferred investment option of retail investors. If you are unsure on how to choose the right SIP for you and want correct guidance, then consult our expert financial advisors at IndiaNivesh for best-suited SIPs for investments.

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  • Know What is Pre-Market Trading & How it Works in Share Market
    Posted by Mehul Kothari | Published on 21 Nov 2019

    Most of us are aware that trading takes place on the stock exchange between 9.15am and 3.30pm. But what if we told you that it is only partially correct. Some trading (though low in volume) also takes place during the extended trading hour periods. Read on to know about more about this additional trading window and its significance. What is Pre-Market Trading Pre-market Trading is a global phenomenon and refers to trading that takes place before the usual trading hours. The usual trading hours for Indian stock markets is 9:15 am to 3:30 pm. Pre-open market stock trading is a special trading window of 15 minutes prior to the start of the working hours for the stock markets. Hence, the time frame between 9:00 am and 9:15 am is considered as the pre-open market session. This feature was first introduced by NSE and BSE in October 2010. The objective behind a pre-market trading It was observed that there was tremendous volatility in the first couple of minutes of trading hours. The core objective behind having a pre-market trading session is to stabilise the market especially when heavy volatility is expected due to some overnight major events or corporate announcements. These could be election results, reforms or new economic policies, declaration of mergers and acquisitions, delisting of shares, open offers, change (especially downgrading) in credit ratings, debt-restructuring, market rumours etc. The additional 15 minutes allows the stock markets to arrive at the right premarket stock price and not get carried away by external events or announcements. In India, premarket future or options trading is not permitted. Pre-market Trading Session – Breakdown of the 15 minutes The premarket trading period can be further bifurcated into three slots:Order Entry or CollectionThe Order Entry session starts at 9:00 am and lasts for eight minutes. The following activities are undertaken during this timeframe Placing of orders for purchase or selling of stocks Changes or modification in orders Cancellation of orders After 9:08am (i.e. completion of order entry session), orders are not accepted by the stock markets Order MatchThe Order Matching session starts at 9:08am and continues for the next four minutes. The following activities are undertaken during this timeframe Confirmation of orders placed during the Order Entry session Order Matching Calculation of stock opening price for the regular session that starts at 9:15am During the Order Match session, one cannot buy, modify, cancel or sell their orders. Limit orders (i.e. order quantity and price is specified) are given priority over the market orders (order quantity and price are not specified) during the execution time. Buffer TimeThe last three minutes of the premarket trading session (i.e. 9:12 am to 9:15 am) is considered as buffer time. This period is used to ensure a seamless transition to regular trading hours. Any abnormalities from the previous two slots are addressed during this time.   Calculation of Opening price during the pre-market stock trading session The opening price of the stock during this session is determined during the second phase i.e. Order Match session. It is done with the help of a specific methodology. This calculation method is referred to as the call auction methodology or the equilibrium price. The stock price which corresponds to the maximum quantity of tradable shares is known as the equilibrium price. It is a factor of demand and supply. The orders placed during the first eight minutes are matched at the equilibrium price and then traded accordingly. Some scenarios: If the highest tradable quantity corresponds to two different stock prices, then the stock price with the lower unmatched orders is taken as the equilibrium price. For example:   Stock Price Order (Buy) Order (Sell) Demand Supply Max Tradable Quantity Size Unmatched Orders (Demand minus supply) 105 1275 1160 25000 20000 20000 5000 99 2000 8000 20000 30000 20000 -10000   Though the maximum tradable quantity is same in both the cases, the equilibrium price will be considered as 105 as it has a minimum unmatched order size If the values of the highest tradable quantity and unmatched orders are same or equidistant, but they correspond to two different stock price, then the above methodology cannot be applied. In this case, the equilibrium price is taken as the stock price which is closer in value to the closing price of the previous day. For example, Stock Price Order (Buy) Order (Sell) Demand Supply Max Tradable Quantity Size Unmatched Orders (Demand minus supply) 105 1275 1160 25000 20000 20000 5000 99 2000 8000 20000 25000 20000 -5000 Assuming the closing price on the previous day was Rs. 110, then the equilibrium price in the above example will be Rs. 105.   What about orders that remain unmatched or are not traded in the pre-open session? Orders that are not traded or remain unmatched are carried forward to the general trading session. The opening price of these orders is determined in the following manner: Limit Orders i.e. orders wherein the price and quantity are already specified are carried forward at the same mentioned price Market Orders i.e. orders wherein the price and quantity are not specified are carried forward at: If the opening price was ascertained during the pre-open trading session but order not traded, then at the determined price If the opening price was not discovered, then they are carried forward at the previous day’s closing price   Stock Markets tend to be overwhelming for many investors. The concept of premarket trading can further compound the complexity level. However, as an investor, you should always remember that help is just around the corner. Professional experts like IndiaNivesh can help to simplify and demystify the entire process. The team at IndiaNivesh keeps a close eye on this Pre-market session to comprehend the mood and strength of the stock market. They track the pre-market stock prices and take the best decisions for your portfolio basis the market sentiments. Moreover, since they offer a wide range of services (broking, mutual funds, institutional equities, private equity, strategic investments, corporate advisory, etc.) they have a holistic view of the market and the economy. Their expert opinion can help you to amp up your investment game. You can read more about their offerings, vision and accomplishments on their website https://www.indianivesh.in/Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."

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