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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.
-Undestand the Concept of Financial Planning with example?	"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 of 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 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	"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
-compounding.
-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."
-Tax Planning	"Income is subject to tax and the amount an individual can save, the return they earn on their
-investment and therefore the corpus they are able to build for their future goals, are all
-impacted by the tax regime they fall under. An investment adviser should be able to assess
-the impact of taxes on the finances of the individual and advice appropriate saving and
-investment options. The post-tax return of financial products will have to be considered while
-choosing products and estimating holding periods. The taxability of various types of
-investment income such as dividends, rents and interest differ. The treatment of return if
-accumulated, rather than paid out periodically, varies. The taxability of gains differs based on
-the holding period. An investment adviser should bring in these aspects while constructing a
-plan for the household."
-Retirement Planning	"Providing for retirement is one of the primary financial goals that all people have to plan for.
-Given its complexity and nature of well-being in the future, many people tend to ignore it
-until it may be too late thereby compromising the quality of their retirement. To be able to
-plan for retirement it is important to understand the concept of time value of money and
-inflation and how it would impact the cost of meeting expenses in the future. Saving and
-investing for retirement requires understanding of how compounding benefits investors
-saving for long-term goals. It is important to select the right financial products that are best
-suited to the long-term nature of the retirement goal as well as to the ability of the individual
-to take risks. In the pre-retirement stage, rebalancing the portfolio to less volatile assets is an
-important activity. As retirement approaches, the process of planning should shift focus to
-the expenses in retirement, the adequacy of the income from investments and pension
-benefits to meet these expenses and strategies to meet the shortfall, if any. While investing
-the retirement corpus for income, the taxability of different sources should be considered.
-The retirement portfolio has to be monitored and rebalanced through the term of retirement
-too since the needs do not remain the same. Investment Advisers bring the skills required to
-design and execute a retirement plan."
-Estate Planning	"Wealth is passed on across generations. This process of inter-generational transfer not only
-involves legal aspects with respect to entitlements under personal law, but also
-documentation and processes that will enable a smooth transition of wealth in a tax-efficient
-way. Estate planning refers to all those activities that are focused on transfer of wealth to
-heirs, charity, and other identified beneficiaries. There are several tools and structures to
-choose from, in estate planning. Some choices such as gifts can be exercised during one?s
-lifetime, while choices such as wills come into play after death. Investment Advisers help
-households make these choices after considering all the implications, and help them
-complete the legal and documentation processes efficiently."