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Question,Answer
What is Financial Planning?,"Financial planning aims at ensuring that a household or individual has adequate income or
resources to meet current and future expenses and needs. The regular income for a
household or individual may come from sources such as profession, salary, business or even
investments. The normal activities of a household or individual and the routine expenses are
woven around the regular income and the time when this is received. However, there are
other expenses that may also have to be met out of the available income.
The current income that is received must also provide for a time when there will be no or low
income being generated, such as in the retirement period. There may be unexpected
expenses which are not budgeted, such as a large medical expense, or there may be needs in
the future that require a large sum of money, such as education of children or buying a home,
all of which require adequate funds to be made available at the right time. A portion of the
current income is therefore saved and applied to creating assets that will meet these
requirements. Financial planning refers to the process of streamlining the income, expenses,
assets and liabilities of the household or individual to take care of both current and future
need for funds."
Example of Financial Planning,"Example
Vinod is 40 years old and earns Rs.2 lakhs a month. He is able to save about Rs.40,000 a month
after meeting all the routine expenses of his family, paying the loans for his house, car and
other needs. His investments include those for tax savings, bank deposits, bonds and some
mutual funds. He pays premiums on life insurance for himself and his wife. Vinod is the sole
earning member of his family and he believes he takes care of his finances adequately to take
care of his current and future needs. How would financial planning help him?
The following are a set of indicative issues that financial planning will help Vinod resolve:
LEARNING OBJECTIVES
a) As the sole earning member has he made provisions for taking care of his expenses by
creating an emergency fund if his current income is interrupted for any reason?
b) Does he have adequate insurance cover which will take care of his family’s requirements
in the event of his untimely demise?
c) Does the family have adequate health insurance cover so that any medical emergency
does not use up all the accumulated savings?
d) What are his specific future expenses and how will he fund them?
e) If Vinod has to create a corpus to fund large expenses in the future, what is the size of the
investment corpus he should build?
f) Given his current income and expenses is he saving enough to create the corpus required?
g) Will he have to cut back on his current expense or can he increase his current income so
that his expenses in the present and the savings for the future are met?
h) What is the wealth Vinod has so far built from his savings and how can he best use it to
meet his needs?
i) How should his saving be deployed? What kinds of investments are suitable for Vinod to
build the required corpus?
j) How much of risk is Vinod willing and able to take with his investments? How would those
risks be managed?
k) How should Vinod ensure that his savings and investments are aligned to changes in his
income, expenses, future needs?
A formal treatment of the issues that Vinod faces will require a financial planning process to
assess the current situation; identify the current and future needs; determine the savings
required to meet those needs and put the savings to work so that the required funds are
available to meet each need as planned."
Understand the need for financial planning,"There is a large range of financial products and services that are available for investors today
and these need to be linked to the specific needs and situations of the client. Not every
product may be suitable to every client; nor would a client be able to identify how to choose
and use products and services from the choices that are available in the market. Financial
planning bridges this gap as the Investment Adviser possesses the expertise to understand
the dynamics of the products on the one hand and the needs of the client on the other. This
makes them best suited to use such products and services in the interest of the client."
Role of the Financial Planner,"The Financial Planner has a significant role to play when it comes to advising clients because
the needs of each person is different front that of the other.
a) The financial planner has to recognise the exact needs and goals of an individual and a
household or family and then make efforts to ensure that these needs or goals are achieved.
b) Personal financial management requires time and attention to recognize income and
expense patterns, estimates of future goals, management of assets and liabilities, and review
of the finances.
c) Individuals do not have time to undertake all these detailed financial activities in a busy
world and they need someone like a financial planner to focus on this area and help them in
their efforts.
d) It is not easy to set financial goals and this requires specific expertise and skill which may
not be present with most individuals.
e) Every financial goals requires finding a suitable product and a proper asset allocation to
different asset classes so that this can be achieved, which is where the financial planner steps
in.
f) Selecting the right investment products, choosing the right service providers and managers,
selecting insurance products, evaluating borrowing options and such other financial decisions
may require extensive research. A financial planner has capabilities to compare, evaluate and
analyse various products which enables making efficient choices from competing products.
g) Asset allocation is a technical approach to managing money that requires evaluating asset
classes and products for their risk and return features, aligning them to the investor’s financial
goals, monitoring the current and expected performance of asset classes and modifying the
weights to each asset in the investor’s portfolio periodically to reflect this. Financial planners
with technical expertise enable professional management of assets.
h) Financial planning is a dynamic process that requires attention to the constantly changing
market and product performances and matching these with the dynamic changes in the needs
and status of the client. This kind of attention can be provided by a financial planner."
How is financial planning different from a typical financial advisory services?,"Financial planning requires following of a specific process wherein the client along with their
overall needs and goals are at the core of everything being done. Other financial advisory
services would normally look at meeting just a specific need like advising on stocks or debt
but the relation with other aspects might be missing.The financial planning effort is a comprehensive process as it covers all aspects of a client’s
personal financial requirements including retirement, insurance, investment, estate and
others. A typical financial advisory service is more likely to look at just a small part of the total
financial requirements.
Goal setting becomes the central part of the financial planning process and all efforts are then
directed towards meeting the goals. Overall goals might not be given too much importance
in a normal financial advisory activity, where some specific target is sought to be achieved.
Financial planning looks to ensure that all the financial activities are not at cross purposes
with each other. As against this, a typical financial advisory service might not even realise that
some steps suggested would be working against some other goal or requirement. For
example, financial planning would ensure that the asset allocation for an older individual
meets their risk taking ability and that their equity exposure across asset classes is kept in
check. This might not happen when normal advise is taken just for say equity mutual funds
investment without knowing the equity exposure elsewhere.
Monitoring the situation and then taking action to ensure that things remain on track is a key
part of the financial planning process. It is inbuilt to the entire effort, so this becomes a natural
part of the activity. This might not happen with respect to a normal financial advisory where
the individual might have to take the initiative themselves and see that things are going
according to plan.
Financial planning looks to select what is right for an individual and this would differ from
person to person. This takes into account both the returns as well as the risk which is vital.
This might not happen for a normal financial advise, where the goal might be completely
different like earning higher return and where risk might be ignored.
There has to be continuity in financial planning efforts which sets it apart from other financial
advisory wherein this could be a short one time exercise or even piecemeal efforts at different
periods of time."
Personal financial analysis:,"• Goal setting with prioritizing of goals
The financial planning process starts with the goal setting process. Goals refer to what has to
be achieved. This gives a clear target that has to be reached. There are several features that
are important when the goals are set. There should be some specific detail with respect to
the goal. For example, saying that I want to be rich is a vague term because it can mean
different things to different people. Saying that I want to earn an income of Rs. 50 lakh a year
is specific. The goals have to be measurable, so that a person knows the exact amount that
will help them reach the goal. At the same time the goals have to be realistic. If an individual
is able to save around Rs 20,000 a month, then a goal which requires an investment of Rs
50,000 a month is not realistic. Finally, goals also have to be time bound so the individual has
a clear idea of when they need to be reached. A goal of wanting to retire in 20 years with Rs
5 crore as corpus is clear because there is a time period attached to it which will help in
planning to reach the goal.
Once all these features are considered in the goal setting process there will be a list of goals
that will be available. However, every individual has restrictions in terms of the income earned
and amount saved. This will require that the goals be ranked in order of priority. Important
goals need to be put first. So, things like children’s education and retirement should come in
front of something like spending on a luxury car or other expense that does not create an
asset. It is easy to look at short term needs but this can come at the cost of long term
disruption of the goals. This is why there has to be priority to goals that improve the financial
health of the individual. For example, there might be a large credit card outstanding and some
extra income is earned by the individual. In such a situation, instead of spending the amount,
it should be used to pay off the credit card debt. This might not add to an asset but it still
improves the financial condition of the individual.
• Focus on important goals
Goals such as retirement and education of children are important financial goals for which
adequate provision of funds have to be made. Long-term goals such as retirement often get

lower priority for allocation of savings because it has time on its side. The urgent, shorter-
term goals often get higher claim on the available savings. While this may be acceptable for

shorter-term goals that are also important, such as accumulating funds for down payment on
a home, it may not be right to prioritize consumption goals, such as holidays and large
purchases, over long-term important goals. The delay in saving for such goals will affect the
final corpus, since it loses the longer saving and earning benefits including that of Clients often believe that the provident fund, superannuation and gratuity corpus they will
receive on retirement will be adequate to ensure a comfortable living during the retirement
years. In many cases, it turns out to be inadequate. Therefore, every client needs a retirement
plan.
The Investment Adviser needs to go through the numbers and demonstrate the inadequacy.
The objective is to ensure that the client saves enough during the earning years for a
comfortable retired life.
• Staggering the timing of certain goals
The financial situation of an individual may not allow all the financial goals to be provided for.
Some financial goals may have to be deferred to ensure that the critical financial goals are not
compromised. There are situations when it is not possible to achieve a financial goal in a
specific time period. An example could be a person wanting to buy a house within the next
year, which would require a down payment of Rs 20 lakh plus an Equated Monthly Instalment
(EMI) of Rs 30,000 a month. It could be that the current income situation is not able to support
such a situation. Instead of cancelling the goal there is another route available. This is to push
back the goal by some time, which will enable the individual to get the required finances in
order. Instead of 1 year, if the goal is sought to be achieved after 3 years, then there is a good
chance that the desired financial position will be achieved by then.
For instance, around the time that the family proposes to buy a house, the annual holiday
may need to be reviewed. The holiday may be shorter or planned at a less expensive location.
Some financial goals need to be fulfilled within a specified time frame. For instance, education
of the child has to happen as per the normal age and progression. Prudent use of debt in the
form of loans can be used to tide over any shortage of funds."
Cash flow management and budgeting,"There is a certain income that is earned by an individual along with the expenses made.
Having a plan to ensure that there are savings and these are invested is one part of the
process. It is also vital that there is a cash flow match so that the household or the individual
does not run into any cash flow problems. This happens when the inflows and outflows of
cash do not match. There can be a situation wherein a person spends less than what they
earn but still run into cash flow problems. For example, if there is a large expense made at
the start of a month it can lead to a cash crunch if there is a delay in the receipt of income
unless there is a reserve present. In fact, it could lead to short term borrowings which are
extremely costly in terms of interest rates. This could lead to a part of the amount that is
being finally saved to be directed towards paying off the debt incurred due to the cash flow
mismatch.                                                                                                                                                                    One of the ways to ensure that there is no cash flow problem is to have a budget. A budget is
nothing but a list of the inflows and outflows that an individual will witness along with the
time period when this will take place. A monthly budget will help a person to know whether
they are managing their income properly. A budget has a list of all the items of income and
expenses along with their amounts. This ensures that with a single look it is possible to know
what the exact financial position is and whether there is adequate savings taking place. Every
person should make their own personal budget. A lot of people pay attention to the Union
Budget but fail to do budgeting for their ownselves."
Insurance Planning,"Several unexpected expenses that can cause an imbalance in the income and expenses of a
household can be managed with insurance. Insurance is a risk transfer mechanism where a
small premium payment can result in payments from the insurance company to tide over risks
from unexpected events. The temporary loss of income from disabilities and permanent loss
of income from death can be covered with life insurance products. Health and accident
insurance covers help in dealing with unexpected events that can impair the income of a
household, while increasing its expenses on health care and recuperation. General insurance
can provide covers for loss and damage to property and other valuables from fire, theft and
such events. Insurance planning involves estimating the losses to the household from
unexpected events and choosing the right products and amounts to cover such losses."
Debt management and counselling,"Investment Advisers help households plan their liabilities efficiently. It is common for
households to borrow in order to fund their homes, cars and durables. Several households
also use credit cards extensively. To borrow is to use tomorrow’s income today. A portion of
the future income has to be apportioned to repay the borrowings. This impacts the ability to
save in future and in extreme cases can stress the ability to spend on essentials too. The asset
being funded by borrowing may be an appreciating asset such as property, which is also
capable of generating rental income. Or the loan could be funding a depreciating asset such
as a car, which may require additional expenses on fuel and maintenance, but provide better
lifestyle and commuting conveniences.
Evaluating which assets or expenses can be funded by borrowings is a function Investment
Advisers can perform. They can advise households about how to finance their assets, how
much to borrow, how to provide for repayment, how to ensure that credit scores are not
unfavourably impacted. Sometimes, excessive borrowings may lead a household into a debt
trap. Such borrowers need counselling and handholding to be able to get out of debt.
Sometimes assets may have to be liquidated to pay off debts. Advisers help households to
deal with their borrowings taking into account their need and ability to repay debt."
Investment Planning and Asset Allocation,"A crucial component in financial planning and advisory is the funding of financial goals of a
household. Investment planning involves estimating the ability of the household to save and
choosing the right assets in which such saving should be invested. Investment planning
considers the purpose, or financial goals for which money is being put aside. These goals can
be short-term such as buying a car, taking a holiday, buying a gift, or funding a family
ceremony or can be long-term such as education for the children, retirement for the income
earners, or high-expense goals such as marriage of children. An Investment Adviser helps with
a plan to save for these goals, and suggests an appropriate asset allocation to pursue.
The Investment Adviser does not focus on the selection of stocks or bonds, but instead takes
a top down approach of asset allocation. The focus is on how much money is invested in which
particular asset class in order to deliver the expected return within the risk preference of the
investor. The adviser’s job is to construct a portfolio of asset classes, taking into account the
goals, the savings, the required return, and the risk taking ability of the investor. This is one
of the core functions of the adviser and many specialise in asset allocation and investment
planning."