📘 1.1 Understand the Concept of Financial Planning
📌 Definition:
Financial Planning is the process of managing income, expenses, assets, and liabilities in a structured way to meet both present and future financial needs.
Financial Planning is the process of managing income, expenses, assets, and liabilities in a structured way to meet both present and future financial needs.
Financial planning ensures that a household or individual has adequate funds not just for regular needs like bills and EMIs, but also for long-term goals like retirement, education, or medical emergencies. This involves saving a portion of current income and investing it smartly for future use.
👨👩👧 Vinod’s Case Study:
Vinod, 40 years old, earns ₹2 lakhs/month and saves ₹40,000 after meeting household expenses and loan payments. He invests in mutual funds, FDs, bonds, and insurance.
Financial Planning will help Vinod:
Vinod, 40 years old, earns ₹2 lakhs/month and saves ₹40,000 after meeting household expenses and loan payments. He invests in mutual funds, FDs, bonds, and insurance.
Financial Planning will help Vinod:
- Create an emergency fund for income interruptions
- Ensure adequate health and life insurance cover
- Set up goal-based investments for education or buying a home
- Plan for retirement and manage risk exposure
🎯 After completing this section, you will understand:
- What financial planning is and why it matters
- The role of income and saving in long-term planning
- How financial planning differs from casual investing
- Importance of goal-setting and aligning resources accordingly
🔁 Financial Planning Framework:
- Identify current and future financial needs
- Assess income, expenses, assets, and liabilities
- Define financial goals (short-term, long-term)
- Create a savings and investment strategy
- Monitor, adjust, and review regularly
| Component | Purpose |
|---|---|
| Income | Fuel for current expenses and future savings |
| Expenses | Day-to-day commitments + one-off needs |
| Assets | What you own — used to grow wealth |
| Liabilities | What you owe — managed to reduce financial strain |
📘 1.2 Understand the Need for Financial Planning
📌 Why is Financial Planning Needed?
With a growing range of financial products, investors often struggle to choose what’s right. Financial planning connects these products with the client’s unique financial needs, risks, and goals.
With a growing range of financial products, investors often struggle to choose what’s right. Financial planning connects these products with the client’s unique financial needs, risks, and goals.
Financial planning is not just about buying mutual funds or insurance — it’s about aligning income, expenses, liabilities, and investments to meet goals. It fills the gap between what clients need and what financial products offer by customizing strategies through professional advice.
💼 1.2.1 Role of the Financial Planner
- Identifies client-specific financial goals and creates realistic strategies to achieve them
- Helps manage income, expenses, assets, liabilities, and future planning
- Saves clients time and provides structured financial expertise
- Evaluates and selects the right investment, insurance, and borrowing products
- Designs asset allocation strategies aligned to risk and return preferences
- Provides continuous monitoring and adjustment based on market and life changes
🔍 1.2.2 Financial Planning vs. Financial Advisory Services
| Aspect | Financial Planning | Typical Advisory |
|---|---|---|
| Approach | Holistic, process-driven | Product-specific or goal-specific |
| Focus | Entire financial life (retirement, estate, insurance, etc.) | Stocks, funds, tax saving instruments |
| Goal Setting | Core of the process | Not always considered |
| Monitoring | Ongoing and proactive | Client must follow up |
| Personalization | Custom strategy for each client | One-size-fits-all or generic recommendations |
| Continuity | Continuous process | One-time or episodic |
📌 Summary Insight:
Financial planning ensures that different financial actions (like buying mutual funds, taking loans, or buying insurance) are not working against each other. It balances risk, return, goals, and timelines in a coordinated, reviewed process.
Financial planning ensures that different financial actions (like buying mutual funds, taking loans, or buying insurance) are not working against each other. It balances risk, return, goals, and timelines in a coordinated, reviewed process.
📘 1.3 Scope of Financial Planning
📌 Financial planning includes 8 major components:
Each component plays a critical role in helping individuals build, protect, and transfer wealth efficiently.
Each component plays a critical role in helping individuals build, protect, and transfer wealth efficiently.
🧮 Personal Financial Analysis
- Set realistic, measurable financial goals
- Prioritize short vs long-term objectives
- Evaluate income & affordability for each goal
💸 Cash Flow Management
- Track income vs expenses via budgeting
- Plan timing of expenses to avoid shortfalls
- Ensure regular savings even during lean months
🛡 Insurance Planning
- Protect income and wealth from risk events
- Select optimal life, health & property cover
- Avoid under/over-insurance with proper analysis
🧾 Debt Management
- Plan loans strategically (e.g., home vs credit)
- Avoid debt traps from excessive borrowing
- Counselling during financial stress
📈 Investment Planning
- Match asset class with goals and time horizon
- Maintain ideal asset allocation
- Review and rebalance portfolio regularly
💰 Tax Planning
- Minimize tax liability using legal provisions
- Use exemptions & deductions smartly
- Improve post-tax returns from investments
🏖️ Retirement Planning
- Build corpus for post-retirement years
- Account for inflation & longevity risk
- Use NPS, PPF, mutual funds for steady buildup
🏛️ Estate Planning
- Distribute assets smoothly after death
- Create & update wills, use nominations
- Reduce legal/tax issues for beneficiaries
📘 1.4 Concept of Assets, Liabilities & Net Worth
📌 Key Idea:
The foundation of financial strength lies in understanding what you own (assets), what you owe (liabilities), and what remains (net worth).
The foundation of financial strength lies in understanding what you own (assets), what you owe (liabilities), and what remains (net worth).
An individual’s income is used to meet current needs and save for the future. These savings are invested in assets, which can grow or earn income. However, when loans or borrowings are taken, they create liabilities that reduce future income due to repayments. The net difference between all assets and liabilities is the individual’s net worth.
🏠 Assets
- Things owned by the individual or household
- Can be physical (property, gold) or financial (stocks, FDs)
- Provide income, appreciation or both
- Used to meet future goals
💳 Liabilities
- Loans or debts taken to meet needs or buy assets
- Examples: home loans, credit card dues, personal loans
- Obligation to repay from future income
- High liabilities increase financial risk
🧾 Net Worth
- Net Worth = Total Assets – Total Liabilities
- Represents financial strength
- Should be tracked periodically
- Positive & growing net worth = good health
🧠 Insights:
- Assets acquired using loans must deliver returns higher than cost of borrowing
- Financial planning aims to increase net worth sustainably
- High asset value means little unless it’s not fully financed by debt
| Item | Amount (₹) |
|---|---|
| 🏡 House | 18,12,000 |
| 🚗 Car | 3,25,000 |
| 📈 Mutual Funds | 8,40,000 |
| 💰 PPF | 3,20,000 |
| 📊 Shares | 2,80,000 |
| 🏦 Cash & Bank | 45,000 |
| Total Assets | 36,22,000 |
| 🏠 Housing Loan | 12,02,000 |
| 💳 Credit Card Dues | 5,000 |
| Total Liabilities | 12,07,000 |
| 🧾 Net Worth | 24,15,000 |
📘 1.5 Financial Planning Process
📌 Why is it important?
Financial planning follows a systematic 6-step process that helps Investment Advisers collect client data, assess their needs, and develop a structured strategy to achieve their goals.
Financial planning follows a systematic 6-step process that helps Investment Advisers collect client data, assess their needs, and develop a structured strategy to achieve their goals.
🧑🤝🧑 Step 1: Establish Relationship
- Define scope of work, duration, fees
- Agree on services, expectations & engagement terms
🗂 Step 2: Gather Client Data & Goals
- Identify future needs: how much, when
- Document income, assets, liabilities, goals
- Define risk profile and time horizons
📊 Step 3: Analyse Financial Status
- Evaluate income, expenses, assets, liabilities
- Assess savings ability and debt exposure
- Match current state to future goals
📑 Step 4: Develop Recommendations
- Design saving and investment plan
- Suggest tax-efficient strategies
- Align investments with each goal
🛠 Step 5: Implement the Plan
- Assist in execution, paperwork & transactions
- Coordinate with banks, insurers, fund houses
- Ensure smooth onboarding into financial vehicles
🔁 Step 6: Monitor & Review
- Review progress regularly
- Adapt to market shifts and life changes
- Update portfolio & strategy as needed
💡 Quick Summary:
A financial plan is not static. It evolves as the client’s life, goals, and market environment change. Regular updates and disciplined monitoring ensure success.
A financial plan is not static. It evolves as the client’s life, goals, and market environment change. Regular updates and disciplined monitoring ensure success.
📘 1.6 Financial Advisory and Execution
📌 Key Insight:
Investment Advisers offer services through different models — based on whether they charge fees, earn commissions, or use execution tech platforms. SEBI mandates separation of advisory and distribution to avoid conflicts of interest.
Investment Advisers offer services through different models — based on whether they charge fees, earn commissions, or use execution tech platforms. SEBI mandates separation of advisory and distribution to avoid conflicts of interest.
💼 Fee-Only Financial Advisers
- Earn from client fees only — no product commissions
- Focus on holistic financial planning: goals, assets, insurance, estate, etc.
- Common fee types:
- 📄 One-time financial plan
- 🔁 Ongoing review/retainer fee
- 📊 Asset-based percentage fee
- 🔗 Referral fees (for tax/legal/insurance experts)
- No execution of products to maintain independence
- SEBI: Individuals must choose to be adviser or distributor — not both
🛒 Execution-Only Services
- Focus is on distributing products (MFs, insurance, loans)
- Revenue comes from commissions from product manufacturers
- May or may not offer advice
- Often linked with multiple regulators beyond SEBI
- May operate via aggregator platforms for reach and scale
🧩 Wraps & Platforms
- Tech-driven investment models offering bundled portfolios
- Used by advisers to implement model portfolios with clients
- Standardized execution with dashboard monitoring
- Platform may:
- Charge client a fee and share with adviser
- Provide access to clients for advisers
- Offer portfolio review and analytics tools
- Ideal for scale, automation, and hybrid delivery
💡 Summary:
The financial advisory ecosystem includes a spectrum of service models. SEBI enforces transparency, disclosure, and separation to protect investor interest — ensuring advisers act as true fiduciaries.
The financial advisory ecosystem includes a spectrum of service models. SEBI enforces transparency, disclosure, and separation to protect investor interest — ensuring advisers act as true fiduciaries.
