Introduction to Personal Financial Planning for Indians

This article is intended for begginners in financial planning and for those who are started their career but have no idea on how to invest their money. First a disclaimer.

Disclaimer: Information given here is for information purpose only and shall be used at your own risk. It is your responsibility to update any information/taxation/interest/calculation for your use. Author shall not be held liable for any losses occurred due to its usage.

This articles covers following topics:

1. Types of investments
   • Debt based assured return investments - e.g. Bank Fixed Deposit (FD), Post office schemes (PPF, SSA)
   • Equity based Risky investments (e.g. Mutual Funds, etc)
2. Personal Financial Planning Spreadsheet
   • Define Financial Goals (Target Amount required)
   • Define Risk Appetite (Amount to be achieved from Equity v/s Debt)
   • Investvestment plan - when investing on "One time Lump Sum amount" (without monthly additions)
   • Investvestment plan - when investing on "regular monthly basis"
3. Power of compounding effect
   • Benefit of re-investing interest amount with principle amount at the end of each tenure
   • Benefit of re-investing dividend with principle amount (chossing Growth mutual funds)
4. Taxation basics
   • Tax Ready Reckoner
   • Capital gain tax
   • Indexation
5. Buying mutual funds online - Comparison of online mutual fund robo-advisory service providers

1. Types of Investments

The above list is in no way an exhaustive list. It consists of common aspects of financial planning.

1.1 Equity Options (Shares, Mutual Funds)

Equity investments are invested into shares of a company listed on a stock exchange. One can invest into equity by either directly buying Shares of the companies or by investing into mutual funds. Note that investing into equity is a high risk investment.

• Shares / Stocks

When investing directly into share market (Bombay Stock Exchange, National Stock Exchange) using DEMAT account linked with bank account.

• Mutual Funds (Equity oriented)

When investing indirectly into share markets via Mutual Funds. Asset management companies (AMCs) offer various mutual funds.
Each mutual fund has an investment objective and is managed by a fund manager.
Investment objective defines type of mutual fund. E.g. Equity oriented (Large Cap/ Mid Cap/ Small Cap, Diversified), Debt oriented, Hybrid/Balanced, etc.

Generally investing into mutual funds with monthly systematic investment plan (SIP) is suggested. This is to average out value of mutual fund NAV over a period, and thus average out the risk.

1.2. Debt Investment Options

Some of the common debt instruments are listed below.

• Post Office Schemes (Not available for NRIs):                                            

Public provident fund (PPF) account: Interest is tax-free, Lock-in period, invest up to max 1.5 lac per year.  

National savings certificate (NSC): Interest is taxable, Lock-in period. 

Sukanya Samriddhi Accounts (SSA): For girl child up to certain age, tax-free.                                            

• Bank Fixed Deposits (FDs)                                            

Select fixed deposit instruction such that interest earned is reinvested back (and not paid out). This greatly effects interest amount since interest amount is added to principle amount at the end of each term. Stay invested for as long as possible i.e. don't use this money in short term. Interest earned is taxable as per tax slab (up to 30%).

• Non-Linked Insurance / Pension Schemes

Not ULIP, does not take part in Equity i.e. stocks/shares. Note there is a sum assured amount and there are bonus amount declared at end of each year which are not assured sum.

• Debt oriented mutual funds

Conservative type debt funds may focus on government securities, while aggressive type debt funds may focus on corporate/PSU bonds. Does not participate in equity markets. 

• Hybrid Schemes (Debt + Equity)                                            

A third option available is plans which allocate some percentage in debt (government bonds, etc) and remaining percentage in equity (share markets, market index, etc). Equity portions are generally limited to 40-50% of amount invested.     

• National Pension System (NPS) (NRI can also open)

Scheme introduced by Govt. of India where, you can regularly invest in this scheme and get a part in lump-sum at your retirement and fixed monthly income. Investment managed by professional pension fund manager (provided by some AMCs), with choice to allocate in 3 asset class (Debt, Equity & Government Securities) with max 50% in equity.

A dis-advantage of this scheme is that you cannot take your entire amount when attaining 60years age.

• ULIP (Non-participating unit linked insurance plans)                                            

Generally is preferable over mutual funds only if investing for 15+years in order to get higher returns than mutual funds. An advantage of some ULIP schemes is that it provides Premium Waiver Benefit Rider, where policy continues if policy holder dies and is not able to pay balance premiums (however, such ryders are generally not available for NRIs). A dis-advantage is that you are stuck with the performance of one fund management (whereas in Mutual Funds you can remove non-performing funds and switch to others). An advantage is that you can keep switching between % of equity and debt instruments in your policy during the course of the policy.                                            

ULIP is similar as any Balanced/Hybrid Mutual Fund. If one does not want to manage Equity and Debt oriented funds separately then these hybrid options maybe good for him.  

• Balanced & Hybrid Mutual Funds

A portion of investment sum invested in Equity and remaining in Debt e.g. Balanced Mutual Funds, Retirement Plans, etc       

2. Personal Financial Planning Spreadsheet

This section covers following:

• Define Financial Goals (Target Amount required)
• Define Risk Appetite (Amount to be achieved from Equity v/s Debt)
• Investvestment plan - when investing on "One time Lump Sum amount" (without monthly additions)
• Investvestment plan - when investing on "regular monthly basis"

3. Power of compounding effect

It is suggested to re-invest interest earned back into principle amount and get benefit of compounding effect. See an example given below: 

Example of Compounding effect on Bank Fixed Deposits: Rs 10,000 invest every month at Interest Rate of 6.5%

4. Taxation basics

Some of regular taxation terms are listed here:

• Tax Ready Reckoner
• Capital gain tax
• Indexation

5. Buying mutual funds online

Comparison of online/offline mutual fund advisory service providers is given in table below.

I have tried following online mutual funds robo-advisory services:

• FundsIndia
• Invezta
• ScripBox

Data in following table is based on 9-Feb-2017. Contact them for latest information about their service offerings.

Disclaimer: Mutual funds are subject to market risks, read the offer documents before investing.

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