In order to achieve your aim from your Financial Planning engagement, it’s imperative that you are prepared to avoid some of the common mistakes by considering the following advice:

Set measurable goals

A financial plan primary motive is to set specific targets of what you want to achieve and when you want to achieve results. For instance, quantifying the motive like instead of that you want your children to attend ‘good’ schools, you need to quantify what the word ‘good’ means so that you will know when you have reached your goals.

Effect of each Financial Decision

Financial decisions taken by you may affect several other areas of your life. For example, an investment decision may have tax consequences that are harmful to your estate plans. Or a decision about your child’s education may affect when and how you meet your retirement goals.

Periodic re-evaluation of your financial situation

Financial Planning is an ever evolving process, the goals outlined by you under present conditions may change over the years due various factors such as a basic change in your lifestyle, inheritance, marriage, birth etc. Re-analyzing your Financial Plan periodically may help you stay on track with your long-term goals.

Plan Early

Plan Early to Retire Early, the basic motto behind the art of Financial Planning. People, who save or invest small amounts of money early, and often, tend to do better than those who wait until later in life. Following and incorporating simple habits such as saving, budgeting, investing and regularly reviewing your finances early in life, you will be better prepared to meet life changes and handle emergencies.

Realistic Approach

Financial Planning is a common sense disciplined approach to managing your finances to reach life goals. It cannot change your situation overnight; it is a life long process. Remember that events beyond your control such as inflation or changes in the stock market or interest rates will affect your Financial Planning results.

Realize that you are in charge

If you are working with a Financial Planner, be sure you understand the Financial Planning process and what the Planner should be doing. Provide the Planner with all of the relevant information about financial status. Ask questions about the recommendations offered to you and play an active role in decision-making.

Step by step planning towards achieving financial goals forms the very essence of creating an efficient and effective financial plan.

Defining a brief outline for a financial plan requires addressing certain concerns like Achieving flexibility, liquidity and tax minimization.

Achieving Flexibility:

Developing or creating a financial plan requires deep understanding of your personal and financial goals. Financial goals are situation specific and may vary individual to individual. The goals pertaining to an individual may change or vary relative to prevailing situations in your life. For example, events such as births, deaths, illnesses, and marriage can affect your goals profoundly. Other factors like change in employment, inflation, investments and results, and miscellaneous factors will also affect your financial circumstances. Therefore creating or making plans which are unresponsive to change should be avoided. Flexibility thus plays an important role towards creating a plan suitable for changes in your life. This can also be considered as customizing a plan for an individual with respect to several variable factors, these factors in turn define the development of a financial plan.

Liquidity:

Adequate liquidity is another area of concern which requires to be addressed before the process of financial plan development starts. Liquidity is, particularly important for handling situations classified as financial emergencies in particular if we consider the advice of financial advisors who recommend that setting aside funds equivalent for a period of 3 to 6 months of an individual’s expense. Appropriate locations for these funds are savings, and money market accounts or a standby line of credit to accomplish the same level of liquidity.

The important part here is to ensure quick and easy access to money in order to avert or address critical situations.

Liquidity: the characteristic of an asset that can be converted readily to cash without loss of principal.

Tax Minimization:

Finally, it all boils down to addressing an issue of minimizing taxes. Considering that one of the prime objectives of developing a financial plan to save taxes, tax minimization automatically becomes one of the concerns which is to be addressed. However, an effective financial plan will automatically cater your income tax concerns if designed keeping in mind the step by step approach of developing a financial plan.

The first step

There are several ways in which you can proceed.

Financial planning software:

using a financial planning program on your computer is one of the easiest way to develop a financial plan. A software of this sort can streamline the process in the long run, although it requires an effort initially to enter data. Another way which is by far the simplest and the easiest method to date is using the pen and paper mode of developing a financial plan.

Things to consider

One of the most important things is to determine how to meet your goals. Once you have a direction all you need to do now is to simply follow the route through. You should also create a plan for your intermediate- and long-term goals. Here, again, try to stay flexible. If anything, the need for flexibility increases as your time horizon recedes; you’ll have less control over distant events. Remember, too, that the most carefully constructed plan will be worthless unless you actually go ahead and implement it. Keep a record of each action step, including when and how it was accomplished, these are some of the prime characteristics that may help an individual aspiring to be a successful Financial Planner.

Be patient—implementing your plan can be a time-consuming process. Your personal situation will dictate whether you decide to proceed with or without professional help. Most people will benefit from assistance at some point, at least in implementing their plan.

All Investment Banks are not large “Banks” as the term may suggest. Sometimes one or a few individuals who understand “deal making” and have the market relationships and experience start small investment banking companies, typically called “boutique investment banks”. They generally work with smaller deal size (amount of money to be raised or invested).

In India, there are about 12-15 multinational investment banks such as Citi, Deutsche; 15-20 large Indian I-banks e.g. Kotak, ICICI Securities, Tata Capital, SBI Caps, Enam etc.; about 3-400 I-banks that have teams of 5-30 people, and another 500 odd small mom-and-pop i-banks usually with one or two partners running the show.

How is an Investment Bank different from a Commercial Bank?

As we discussed earlier an investment bank’s key role is to help companies get money from investors. An investment bank typically earns fee and commissions in the process. A commercial bank on the other hand accepts deposits i.e. takes money from individuals/companies itself and then on-lends it to those who may be willing to borrow. And it makes a spread e.g. it bank may give you 9% on your deposit and may lend it to others at 12% and keep 3% spread as its own income. So as you see, since a commercial bank accepts money, especially from individual retail customers, it requires a different operating structure in terms of large number of branches, internet banking etc and is also subject to very different set of regulations. Consequently operating costs are also higher given the large operating structure. Investment Bankers on the other hand can even operate from their Ferrari. That may offer you a clue why investment bankers make so much money and why it is such a sought after career.

What are the services provided by an Investment Bank?

An investment bank provides a gamut of services. They can be enlisted as below:

• Merger Acquisition advisory
• Organizing IPO (Initial Public Offer) for companies
• Project Financing
• Brokerage Services & Investment Research

Who works in Investment Bank?

Investment banks want employees with a combination of strong analytical and interpersonal skills. Key Skill Area Requirement:

•         Ability to build strong relationship and networking skills

•         Good negotiating and deal making ability

•         Strong Analytical Ability

•         Spreadsheet Modeling / financial Analysis Skills in the initial stages of career

Beta = Covariance (stock returns with market returns) / Variance (Market returns)

Remember, that the beta calculation involves returns of market and stock. In our calculation we will consider the daily returns and compute the Beta with one year’s price data.

Follow the steps mentioned below to calculate beta for Infosys:

• Get the price data for Infosys and Nifty for the past one year. (You can take the values from www.nseindia.com). Arrange the values as shown in the figure. We have taken data from 14^th May 2010 to 17^th May 2011.

• Calculate the daily returns for both the series, as shown:

• Find Variance of Nifty returns as Nifty is selected as the benchmark. You can make use of the excel formula of  =stdev(nifty returns time series). This will provide you with the standard deviation value. Square it to get the Variance as shown:

• Find covariance of Nifty and Infosys Returns. You can use the =covar(stock returns time series, nifty returns time series) formula of excel. The application of the formula is as shown:

• Beta = Covar (stock returns, market returns) / Variance (Market returns). Calculate beta as shown:

In this way you will be able to find beta for any company in the listed domain.

Points to be noted:

1. When taking the time series data for the Nifty and the Stock , map the dates correctly (i.e. the stock price and Nifty value should be for the same day) to get accurate results.
2. The value from the websites may differ slightly from what we calculate. This may happen as they may take dates or periods different from what we have considered. However the values will not vary much and most of the times the values match as it’s a general practice to calculate Beta based on past 52 week data ( 1 year).

Downloadable Resources

Attached herewith is the Beta_Calc.xlsx which demonstrates the 5 step procedure explained above to calculate beta. The case taken here is of Infosys and the Beta value works out to 0.46.

About the Author:

Sameer, has an extensive experience in the financial services, consulting and training domain. He has extensive knowledge of the financial services industry, where he has analyzed companies in the Business Services, Metals and Mining and Retail Companies, for the North American Markets and Canadian Geographies. In the Indian markets he has worked in Project Finance in the Infrastructure and Power Sectors.

He has authored research papers and trained 1000′s of senior people in the area of financial modeling, quantitative analysis and risk management. He holds a MBA degree from NITIE and is CFA Level III candidate.

Market Risk – If there is a global recession (something that is going to impact the market as a whole) then all the companies will be affected by it. This was witnessed by the world economy in years 2007-09. A recession has a varying degree of impact on different companies. Following Data explains this further.

The data shows annual returns of two companies Tata Steel and Cipla, along with the annual returns of Nifty (NSE – Benchmark Index). Observe the returns for each company in accordance with Nifty. When Nifty goes up, both Tata Steel and Cipla go up. When Nifty comes down, both the stocks come down. However the magnitude of movement of each stock is different. Tata Steel gives higher returns than nifty during the positive phase and higher negative returns than the nifty in the negative phase, vice versa in case of Cipla. Movements of Cipla are less in tandem with the Nifty.

Above illustration shows that the market risk is compensated for by additional returns on risky companies (case in point – Tata Steel).

This market risk will be applicable to all the stocks in the market. Thus there should an indicator which measures this market risk. This indicator is termed as “Beta” in finance.

Definition: The Beta (β) of a stock or portfolio is a number describing the relation of its returns with those of the financial market as a whole.

A stock has a Beta of zero if its returns change independently of changes in the market’s returns. A positive beta means that the asset’s returns generally follow the market’s returns.  A negative beta means that the asset’s returns generally move opposite the market’s returns: one will tend to be above its average when the other is below its average.

Beta measures the non-diversifiable risk or the market risk or systematic risk. Beta can be estimated for individual companies using regression analysis against a stock market index. The statistical formula for calculation of beta is as given below:

Where to get the Beta values?

Beta for public listed companies are available on the select websites like,

• http://in.reuters.com/
• www.bloomberg.com

Click on the link provided to see the beta value of Cipla and Tata Steel

• http://in.reuters.com/finance/stocks/overview?symbol=CIPL.NS
• http://www.bloomberg.com/apps/quote?ticker=TATA:IN

Following are the beta values of the two stocks:

Discussion – Cipla: As expected Cipla has a lower Beta value as it’s business is less correlated with the overall economy. A recession will have low effect on the number of people falling ill or needing health assistance. Thus the healthcare sector is not impacted by market movements and it shows low correlation with the market movements. This is the reason why it has a lower value of beta. It also suggests lower risk and hence lower returns. As a result this sector is regarded as a defensive sector. A good investment bet when market’s start a downward rally.

Discussion – Tata Steel: Steel is a cyclical industry. It is heavily dependent on the movement of the economy. Following flowchart explains the major drivers for the Steel Industry.

As a result the movement of the Tata Steel stock magnifies the market movements. This gets appropriately captured in Beta value. Hence steel is a cyclical sector. As the steel cycle turns positive the fortunes of the steel companies change and they start reporting robust earnings performance and the stocks move up giving higher returns.

Next Reading

Stay tuned for the next post on: Calculating Beta for Indian Companies in Excel

About The Author

Sameer, has an extensive experience in the financial services, consulting and training domain. He has extensive knowledge of the financial services industry, where he has analyzed companies in the Business Services, Metals and Mining and Retail Companies, for the North American Markets and Canadian Geographies. In the Indian markets he has worked in Project Finance in the Infrastructure and Power Sectors.

He has authored research papers and trained 1000′s of senior people in the area of financial modeling, quantitative analysis and risk management. He holds a MBA degree from NITIE and is CFA Level III candidate.

This is an excerpt from Financial Times. To read the entire article click here.

IMS Proschool today is the leading training provider of Financial Planning Education in India today. IMS Proschool has created over 250 CFP’s & 700+ AFP’s in a short span of 3 years. We have also trained over 10000 professionals working at various Financial Services Institution.

We are pleased to inform you that we have upgraded Financial Plannning study material.  The new version we are confident will help all our students perform better in the CFP exams. Sufficient care has been taken to include syllabus which has been added/updated by Financial Planning Standards Board till May 2010.

The New Study Material comprises of over 2000 pages of Printed Reading Material. Please note that this reading material will now have to be used along with Online content, where in we have provided practice questions for each chapter in book, followed by simulated tests to prepare you for FPSB exams.

You can now enhance your prepation with updated question bank.

We would like to inform you that you can now renew your access to your CFP Training program at a nominal fee of Rs. 3,000/- only. The Fee can be provided either online through the link http://proschoolonline.com/wp/renew-access-to-your-cfp-course-material/

or

by sending a Demand Draft/Cheque along with the filled in application form attached here to

CFP Admission coordinator
IMS Proschool
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