Personal Finance class - Term 3

09 November 2021 08:59 AM

Professor: Neha Singh

Session 1: 9th November 2021

Book recommendation

(Available in Libgen - http://library.lol/main/DAB7053E11BBD26754700506E2889442)

Designing our Dream Life

Where to go (Goal Setting) --> know where you are (Financial Health) --> plan for protection (Risk Planning) --> Drive to reach our destination (Investment
planning) --> Revise and Review (Do you need to change track)

Vision board

What will your life look like in 2024?

1. RKM (Roti, kapda, makaan)

a. What kind of place are you living in? - living in an apartment - 2bhk by myself - own space - any metro city - working for an MNC
b. What kind of lifestyle do you have? (Car, travel etc.) - gadgets - have a simple automatic hatchback car - have a Mac PC set up
2. Relationships
a. What kind of relationships are you surrounded with (parents, silence, spouse, kids) - start of planning a wedding, be in a city close to my parents
3. Work
a. Where do you work? - Hyderabad, have a part time, think of own business idea. Dream company - Cipla, Nestle, HUL
b. What kind of work do you do? - Managerial - not sure of the field
4. Passions
a. What kind of hobbies do you pursue for fulfilment? - marathon finish a few, Continue painting
b. Do you follow any passions/causes

Create a visual vision board

- Use quotes
- Pictures
- Inspirational items
- Put it in front of you every single day

Why vision board - purpose, path, keeps you motivated, manage conflicting demands.

Convert Life Goals into Financial Goals

- What do you specifically want? e.g., to buy a big house --> buy a 3bhk flat in Gurgaon
- Note down its' money value today - to buy a big house --> to buy a 3 bhk flat in Gurgaon worth Rs. 1 cr
- Give board timeline - short term (1-3 years)/ Medium (3-5 years)/ Long term (above 5 years) - to buy a big house --> to buy a 3bhk in Gurgaon by 2025
- How important is it? (Priority-wise)
- Do not plan for more than 3 goals at a time - to buy a big house--> Buying the house is my top priority. I can delay buying a car & travel

Create a sample goal sheet

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 - Make this in excel and structure it
○ Highlight the high priority goals

Why should I plan today?

- We need to plan today because there is a silent killer called 'inflation'

- Inflation: Increase in prices of goods and services over a period of time
- Money loses purchasing power
- Historical inflation rate (India) ~6%
- Investments should match the inflation rate

Always adjust goals for inflation

Don’t plan for goals at the current price --> plan for future prices (add inflation)

Money value of goal today (PV = house worth rs. 1 crore) --> Inflation (assumed) (i=6%) --> Value of the goal in the Future (

Personal Finance (In class practice)

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 Personal Finance (In class practice)

Book Recommendation: Warren Buffett Invests Like a Girl: And Why You Should Too by LouAnn Lofton

Our Personal Financial Statement

Monthly budget template

- Write down different expenses

- Categorization - fixed expense vs variable
 regardless of no income, you still have to play
 Variable - paid out of happiness of my heart
- Savings : Total income - Total expense
 Monthly savings rate (thumb rule) - more than 10 %
 Ideal above 50-60%
- Current investments
 Remove epfs etc
 Surplus available

- Frequency - every month, before the month (last month before the weekend starts)

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Starting from net worth
Asset and Liabilities

Asset - what I own

- Invest assets
- Use assets (usually deprecating in value)
- Liquid assets (any cash in account or locker or pockets)
Liabilities - What I owe
- Good debt - home loan? (appreciate in value) education loan? (will allow you to grow)
- Bad debt - buying luxury items on loan, personal loans for weddings

Net Worth Tracker

- Goal sheet
- Budget tracker
- Monthly

Session 2 - 11/11/2021

Building foundation

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Building foundation

Starting an emergency fund

- How much amount?

○ Fixed expense (what I need to pay even if there is no job)
○ Variant expense (what I control based on income like travel, shopping etc.)
- Formula

Where to put you’re your Emergency fund

Emergency fund returns = inflation rate should be good.

For bigger emergencies we need INSURANCE

Insurance - transferring my risk to another company - based on that you pay a premium
- Insured(taking cover)
- Insurer (providing cover)

- Insurance regulatory and development authority of India (IRDAI)

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Insurance
- Life insurance
○ Protection against loss of income for dependents due to death
- General Insurance
○ Protection against loss of income/financial loss due to unforeseen events
 Health
 Vehicle
 House

Health Insurance

Take a base plan and add the top-up plan

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Higher claim settlement ratio - the better it is
Check the waiting period - the period which is not covered
No claim bonus - every year you don’t claim company gives rewards - check for No Claim Bonus of companies

LIFE INSURANCE

Till when ? Till you have dependents !

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50 % market share LIC, rest are the 3

Types of Life insurance

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Marriage woman's property (MWP ACT)

Calculate emergency FUND

Session 3 13/11/2021
Starting with investments

Understanding Asset Classes

4 major asset class differ based on risk and return

What
- Equity: Represents ownership interest
- Fixed Income/Debt: represents borrowing with an assured return at a certain time period
- Gold: Represent world's most precious safety asset
- Real Estate: represents investment in land and buildings (physical asset)

Risk

- Equity : High
- Fixed income : Moderate to low
- Gold: Moderate to Low
- Real estate: High

Return

Equity : Comfortable beats inflation (~11-15 %)

Fixed income: Close to inflation (~5-9%)
Gold: Close to inflation (~6-8%)
Real Estate: Comfortable beats inflation (~11-12%)

Liquidity

Equity: High (easy to enter and exit)

Fixed income: Moderate
Gold: Moderate (low or medium lock-in entry with reasonable amount
Real Estate: Low (Long term lock in entry with large amount)

Introduction to Equity
- What is Stock Market

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Trading account - Stock Broker - Buying and selling
Demat - is the locker provider - Nsdl and cdsls - storage
Link Bank to trading and account

SEBI - is the regulatory authority

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Introduction to Debt
Check notebook

PPF - slide - missed

Introduction to Gold

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Session 4 16/11/2021
Intro duction to mutual funds

-hand over the money to fund manager part of the AMC (asset manager). The fund manager - purpose is decided - 'investment objective'
- Fund manager choses different assets
○ Stocks
○ Bonds
○ Gold
○ International
- This is regulated by SEBI

Why MF?

- Low entry price (even 100 per month)

- Convenience - simple KYC
- Professional Management - fund managers with expertise take care of the risk
- Diversification - lowering risk
- Regulated

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 - Regulated

How do mutual funds work?

- Fund house launches a new fund offer (NFO) with a pre-defined investment objective
- There is a pre-set unit, NAV. Investor gets units as per amount invested
- Total collected amount (AUM) is invested as per the objective
- Depending on the performance of the scheme investor can exit at prevailing NAV

All about NAV

- Net asset value (NAV) is the price at which we can buy or sell one unit of a mutual fund
- How is it calculated (NAV = MV of investment - Expense)
○ How well the portfolio does
○ Expenses
 Salary for employees
 Rent for the fund house
 Commissions for promotion
○ When
 At the end of each business day (cut-off timing)
○ High/Low
 Quality trumps price ALWAYS

Types of Fund

Open vs. close-ended

- Open
○ Available to buy and sell anytime
- Close
○ Have a fixed entry and exit day
- Exit load
○ Penalty for exiting the scheme before a specified time period

Active vs Passive
- Active funds
○ Active investments decisions by fund manager based on their expertise to deliver high returns
- Passive Funds
○ Invest in a pre-designed basket (index) with no decision-making required by fund manager

Index funds are funds which copy the stock portfolio of a specific index
- replication same stocks in index, in the same proportion
- Low charges (less than 0.5%) compared to active funds
- Ideal for beginners with low risk appetite

MF for Investment objective

- Equity
○ Capital appreciation
○ 11 sub-categories defined by SEBI
○ High risk-high return
○ Suitable for LONG-TERM goals above 5 years
- Debt
○ Capital preservation & liquidity management
○ 16-sub categories designed by SEBI
○ Low risk - low return
○ Suitable for SHORT & MEDIUM term goals between 1-5 years
- Balanced
○ Capital appreciation with protection
○ 6-sub categories
○ Medium risk
- Solution oriented
○ Goal based funds with balanced investment style
○ 2 categories retirement funds, children's funds
○ Suitable for long-term goals
- Others
○ Index funds (passive investing)
○ Fund of Funds (International funds, gold funds)
- ELSS - Equity linked Saving scheme
○ 3-year lock-in from date of investment
○ Amount invested up to 1.5 lakhs per year qualifies for deduction (80C)
○ 80% investment in stock - generally large caps

How to choose funds?

Return vs risk chart

- Saving to travel next year --> least risk -- liquid funds/cash funds
- Retirement --> equity funds

- How much time I have for the goal

○ Short: liquid
○ Long: balanced/equity
(all dependent on risk appetite)

- Keep 1 to 2 fund per category

How to judge
- AUM - size of the fund - larger the better
- Expense ratio - lower the better
- Performance against peers - higher the better
- Performance against benchmark - higher the better

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 - Performance against benchmark - higher the better

Regular vs Direct

- Regular plan - when we buy through an agent (commission)

- Direct Plan - buy the fund directly through the mutual fund company

Growth vs. Dividend

- Growth
Profits of the scheme are reinvested, hence NAV keeps increasing
- IDCW (Dividend) pay out profits are paid out to the investor as dividend, NAC reduces by the same amount
- IDCW (Dividend) Reinvestment instead of paying dividend, same amount is reinvested to purchase additional units.

AMFI - asset management companies came together.

How to get started

- SIP (systematic investment plan)

- Invest small and regularly to benefit without timing the market

SWP
- Systematic withdrawal plan
- Create a passive income by withdrawing a fixed amount every month

STP
- Systematic transfer plan
- Move between liquid to equity fund for managing certain large gains.

SIP vs LUMPSUMP - Rupee cost averaging

18/11/2021 - Session 5
Designing a portfolio

- What is a portfolio? : collection of all your investment products

○ Investment portfolio: combination of different asset classes
○ Mix of investment products within an asset class - e.g., Stock portfolio, bond portfolio
○ Goal based portfolio - design a separate portfolio for each goal
- Annualized returns of different asset classes over the last 10 years
- How to decide the portfolio mix
○ Time to goals
 Short term goals
 Medium term goals
 Long-term goals
○ Risk Appetite
 Inversely proportionate to age
 Directly proportionate to financial stability
 Directly proportionate to Experience & Knowledge
- Model Portfolios (pre-designed, directional mixes) - slide dekho

Every time you enhance or have high exposure to equity, then balance it out with gold.

Go for the lowest goal - achieve fastest.

23/11/2021 - Last class

Day 6 - putting it all together

Basics of Taxes

What comes under INCOME?

-from her job, she earns rs. 50000/ month

- She gets a rent of rs.10000 from one of her properties
- She earned a freelance income of rs.25000 this year
- She sold her mutual funds and gained rs.20000
- She earned rs.5000 In interest on FDs

Gross Total Income

 Income from salary

 Income from house property
 Profit & gain from business or profession
 Capital gain
 Income from other sources

Deductions available under chapter VI-A (or section 80)

Section 80C
- Limit of 1.5L
- Investments
- Insurance
- Home loan payment
- Additional 50K for NPS

Section 80D

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Section 80D
- Health insurance
- 25000 for individual
- 50000 for senior citizens above 60 years

Section 80E
- Interest on education loan
- Up to 8 years

Section 80G
- Donations to qualifying charities
- Amount of deduction depends on the charity

Tax- saving options under sec 80C

NPS - government sponsored scheme - additional 50k - 60% is returned after 60 then 40% is provided as a pension plan

Taxations of investments under capital gains

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