This document discusses personal finance planning and management. It provides general rules for investing, such as that money makes money so it's important to start small savings. It then discusses various investment options in India like fixed deposits, stocks, mutual funds, insurance, real estate, and gold. Specific average returns for these options from 1979-2012 are presented. The concepts of risk and return are discussed, showing higher risk investments provide higher potential returns but more uncertainty. Overall guidelines provided include starting early, diversifying investments, reviewing portfolios periodically, and understanding that while money can enable opportunities and security, it does not directly buy happiness.

1. Personal Finance
Is it possible to pre-plan and manage it efficiently ?
RAM KUMAR KAKANI
LBSNAA MUSSOORIE

2. Why are personal finances important?
Absence/ shortage of money can lead to an acute sense of
insecurity
It can be a tremendous distraction from our normal work
Realization normally comes quite late
Thus, Clarity helps
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3. General Rules
Money makes money
When you have got a little, it is often easy to get more.
The great difficulty is to get that little – Adam Smith
from the Wealth of Nations
Therefore, what is important for us?
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4. Savings – The Indian Story
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5. Savings – The Indian Story
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6. A “Rs. 1” Investment in different types of portfolios: 1926-2011
(Year end 1925 = Rs. 1)
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7. Annual Average Returns in India:
1979-2012
Returns on Investment in …
Bank Savings 3%
Insurance 5%
Inflation 8%
Fixed Deposits/Bonds 12%
Shares of Large firms 17%
Shares of Small firms 22%
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8. Annual Average Returns in India:
1979-2012
Shares of Large Companies: 1 145 (33 years, 1979-2012)
Fixed Deposits (of private companies): 1 34 (33 years, 1979-2012)
Fixed Deposits of Banks: 1 17 (33 years, 1979-2012)
But, try looking at the yearly rates of return in each of the cases
The most fluctuating will be stocks i.e., stock returns vary widely over
time.
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9. Ratan Tata, Ram Kakani, Rickshawalla …
Expectedreturn
Risk
Ratan
Ram
Rickshawalla
Please note that
(a)“Risk” here is “Perceived Risk”
(b) “Expected Return” is NOT “Actual Return”
(c) “Investment Decisions” are made based on the “Expected Return”

10. Risk and Return ….
Expectedreturn
Risk
Insurance
PPF, FDs
Lottery Ticket
Please note that
(a) As Risk Increases “Actual Returns” significantly differ from “Expected
Returns”
(b) Thus, it is important to not get carried away by High Risk Instruments
Large Stocks
Inflation
Small Shares

11. Principles of Saving
Have just the right amount in liquid investment + Rest in long term
deposits/ investments
Do not let money be idle
Decide your saving goals and an apt asset allocation:
♦ risk profile (risk averse, balanced, aggressive) ♦ return expectation
♦ investment horizon ♦ financial goals
Avoid Asset-Liability mismatch
Retirement_Planning.xlsx
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12. Marketing by Financial Services Industry
– A Note of Caution
Flattery is praise insincerely given for an interested purpose  HW
Beecher
Example 1: Ponzi Scheme
Example 2: Lottery Ticket
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13. What Multiplies MONEY?
The Power of Compounding
Money attracts money - strong brotherhood
Earn interest & interest on interest
The Early Bird Gets the Worm
Those who save early benefit more from compounding
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14. The Power of Compounding
(1000 Rs, 10% interest)
Simple Interest Compound Interest
Year Starting
Balance
+ Interest = Ending
Balance
Starting
Balance
+ Interest = Ending
Balance
1 1000 + 100 = 1100 1000 + 100 = 1100
5 1400 + 100 = 1500 1464 + 146 = 1610
10 1900 + 100 = 2000 2358 + 236 = 2594
20 2900 + 100 = 3000 6116 + 612 = 6728
50 5900 + 100 = 6000 106,718 + 10672 = 117,390
100 10,900 + 100 = 11000 12,527,829 + 1,252,783 = 13,780,612
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15. Investment Options
Fixed / Term Deposits and PPFs
Equity
Debt
Insurance
Mutual Funds (Equity / Balanced)
Real Estate
Precious Metals – Gold / Silver
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16. Insurance
Avoid investing in ‘investment’ type of insurance schemes …
in other words, prefer – pure risk instruments
Protection for the family
Compulsory regular savings
Tax Benefits
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17. Equity Markets – Getting Started
Start early and invest regularly
Stick to shares matching your risk profile (for example, if you are okay
with taking risk … then go for small/medium sized companies)
Liquidity is the single most important factor especially during volatile
periods
When there are gains, separate out money for taxes
There is no substitute to experience
Whenever you lose money, take stock of the reasons
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18. Equity Markets – Some Thumb Rules
Never invest in businesses you don’t understand
Avoid investments in companies with a shady management record
Understand a company’s financials and corporate characteristics
before investing
Invest when others are exiting / avoiding (bear sentiment)
Exit when others are investing (bull sentiment)
Be patient
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19. Advantages of Equity Investment
Capital appreciation
Annual Dividends
Loans against equity shares
Marketability of equity shares
Long term capital gains abolished
Shareholding in demat form
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20. Investing in Mutual Funds
Mutual Funds are investment conduits which pool the savings of many
individual investors and combine them into a fairly large and well
diversified portfolio of investments. Many types:
Equity
Balanced
Index
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21. Advantages of Mutual Funds
Expertise of professional management
Spread of risk
Freedom from emotional involvement
Automatic re-investment of dividends and capital gains
Liquidity
Freedom from housekeeping
Income tax exempt
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22. Public Provident Fund
Maturity for 15 years, 5 year extensions, up to a maximum of 30
years
Min. Rs. 500 p.a.; max Rs. 100,000 p.a.
8.8% interest rate (compounded annually)
Loan facility
Tax benefits - Maximum
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23. Real Estate
Plan in the next 4 to 9 years to have your own house or apartment
Investments in real estate are not liquid
Facilitates diversification of portfolio besides sense of security; may also
bring in rental income
Do not make investment on the basis of hype… time your entry
correctly
Avail loan from Govt. on easy terms
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24. Gold
The Annual Return (compounded) since 2000 works out to
16%
Has outperformed other asset classes in the last one
decade …
However, past need not reflect the future
Provides an excellent hedge against inflation
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25. Asset Allocation
Age Band (yrs) Risky Instruments (%) Safe Instruments (%)
18-25 85 15
26-35 75 25
36-45 65 35
46-55 55 45
56-65 45 55
>65 35 65
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26. Take homes
Every time you invest, clearly write down the reasons for the same
Cash (and to some extent precious metals) are the best (unwritten)
insurance products
Do not roll over your credit card bills
Never extend your investment portfolio beyond 10-15 products
(including Shares, Mutual Funds, Insurance, Real Estate etc.)
Review your portfolio – every quarter (not every day)
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27. Take homes
Never Put off financial planning
Appreciate the power of compounding
Never Live beyond your own means
Never invest (or blow up money) by borrowing
Do not rely too much on tips i.e., investment advisory services
Do not have unrealistic expectations
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28. Take homes
Never put more than one-fourth of your money in one investment
product
Never invest in avenues where you’re either not sure of the
business model or it’s too complicated
Never be a part of Ponzi Schemes, Pyramid Schemes, Lottery
Tickets etc.
Do you think money can buy you happiness?
My take … impossible
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29. THANK YOU
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