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| "<s>[INST] Question What is Financial Planning? [/INST] Answer is 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. </s>" | |
| "<s>[INST] Question Example of Financial Planning [/INST] Answer is 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 familys 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. </s>" | |
| "<s>[INST] Question Understand the need for financial planning [/INST] Answer is 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. </s>" | |
| "<s>[INST] Question Role of the Financial Planner [/INST] Answer is 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 investors financial | |
| goals, monitoring the current and expected performance of asset classes and modifying the | |
| weights to each asset in the investors 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. </s>" | |
| "<s>[INST] Question How is financial planning different from a typical financial advisory services? [/INST] Answer is 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 clients | |
| 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. </s>" | |
| "<s>[INST] Question Personal financial analysis: [/INST] Answer is 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 childrens 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. </s>" | |
| "<s>[INST] Question Cash flow management and budgeting [/INST] Answer is 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. </s>" | |
| "<s>[INST] Question Insurance Planning [/INST] Answer is 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. </s>" | |
| "<s>[INST] Question Debt management and counselling [/INST] Answer is 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 tomorrows 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. </s>" | |
| "<s>[INST] Question Investment Planning and Asset Allocation [/INST] Answer is 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 advisers 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. </s>" | |