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Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
Financial plan construction
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Financial plan construction

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Financial plan construction

Financial plan construction

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    • 1. Financial Plan Construction Module 5
    • 2. Module OverviewIntroduction to Financial Planning
    • 3. Introduction to Financial Planning Financial planning process Component of financial plan Ethical and professional considerations Cash flow planning Personal use asset management Personal Financial Statement Analysis Financial Mathematics Economic environment and indicators Forms of business ownership/ entity relationships
    • 4. The Financial Planning process Establishing and Defining the client- Planner relationship Monitoring the Gathering Client Data &recommendations GoalsImplementing the Analyzing and Financial plan Evaluating Financialrecommendations Status Developing and Presenting Financial Planning Recommendations/ Alternatives
    • 5. Components of Financial Plan1. Covering letter 10. Retirement Planning2. Cover page 11. Tax Planning3. Summary of the plan 12. Asset Allocation – Portfolio Rebalancing4. Client profile 13. Disclosures5. Goals of the client 14. Disclaimers6. Financial statements 15. Risks7. Assumptions 16. Cash Flow Projections8. Risk Management & Insurance needs 17. Recommendations9. Goal Funding 18. Action Plan
    • 6. Ethical and professional considerations INTEGRITY No misleading advertising: size, scope or areas of competence Promotional activities: no material false or misleading communications Representation: no misrepresentation of FPSB, India. Identify personal opinions Custody of clients documents – extra care to be exercised OBJECTIVITY  Act in the interest of the client  Limitation in the capacity to advise = disclose upfront  Statement of compensation  Conflict of interests to be disclosed
    • 7. Code of ethics COMPETENCE Be informed of the developments in FP Offer advice only in areas of competence Representatives to be reasonably appointed FAIRNESS Compensation should be fair Identity of the company and representative should be distinctly known Provide clients or employers about outside affiliations Inform about revenue arrangements other than remuneration
    • 8. Code of ethics CONFIDENTIALITY  Do not reveal for own benefit –clients data, without his consent, except when allowed  Member, exposed to information about FPSB not to reveal the same  To maintain same standards with employers too PROFESSIONALISM Show respect to other professionals Maintain professional indemnity insurance Not to misrepresent status of their membership Not to practice any other profession, unless qualified to do so
    • 9. Code of ethics DILIGENCE Sufficient information to be collected Have access to research for clients needs Develop a proper strategy for the client Recommendations to be made in writing Implementation in a timely manner Changes in investments to be explained COMPLIANCE Comply with rules of FPSB, Govt. Co-operate with FPSB for any inquiries Comply with all post certification requirements Maintain effective system of supervision of representative’s activities, performance
    • 10. Motives for holding cash  Transaction motive: This is the motive of day-to-day routine transactions to meet daily requirements. You need cash to buy groceries, meet travel daily expenses etc.  Precautionary motive: This is to take precaution against unforeseen events like natural calamities, riots, strike or any other emergencies.  Speculative motive: This is to take part in investment needs like investing in securities - shares, bonds, debentures etc when the right time arises.  Compensation motive: A minimum balance is needed to avail of bank accounts, credit cards, ATM cards, personal loans etc.An efficient management of cash flows is aimed at generating surplus income bybudgeting or controlling the client’s income and expenditure.Personal financial planning consists of three general activities:  Controlling day-to-day financial affairs  Choosing and following a course toward medium and long term financial goals  Building a financial safety net to prevent financial disasters
    • 11. Personal use asset managementHome LoanLease
    • 12. Lease Financing Lease financing enables the renting or leasing of assets rather than buying the assets. Items like cars, consumer durables, computers or a house may be leased. Generally leases are of two types:  Operating Lease: A short-term lease. The possession of asset returns to the owner or the lessor at the end of the lease term.  Finance Lease: Here the lessee has an option to buy the asset at the end of the lease tenure. Generally for a longer period.
    • 13. Personal Financial Statement Analysis Financial Ratio LIQUIDITY RATIOS Basic Liquidity Ratio = Liquid Assets/ Monthly expenses Expanded Liquidity Ratio = (Liquid Assets + Other Financial Assets)/ monthly Expenses SOLVENCY RATIOS  Liquid Asset Coverage Ratio = Liquid Assets/ Total Debt  Solvency Ratio = Liquid + Other Financial Assets/ Total Debt  Current Ratio = Liquid Assets/ Current Liabilities NET WORTH RATIOS  Net worth Growth Ratio = Net Increase in Net worth/ Net worth at the beginning of the year
    • 14. Financial Ratios RISK RATIOS Life Insurance Coverage Ratio = Net Worth + Death Benefits/ Salary TAX RATIOSEffective Income tax ratio = Income tax/ total realized increases in net worth INFLATION PROTECTION RATIOSInflation Hedge Ratio = Equity, personal and tangible assets / Net Worth
    • 15. Financial Mathematics Time value of money Calculation of annuities Loan repayment schedule Inflation adjusted interest rates Rule of 72
    • 16. Economic Environment and Indicators Inflation Monetary and fiscal policy Key indicators: GDP, Business cycle
    • 17. INFLATION/ DEFLATION A situation of rising prices. The most popular measure of inflation in India is change in the Whole Price Index (WPI) over a period of time. The WPI is an index measure of the wholesale prices of a selected basket of goods and services in the economy. The WPI is expressed as a percentage with reference to some base year, according to a formula WPI= (aggregate price for current year/aggregate price for the base year)* 100 An alternative measure is consumer price Index, which is concerned with the consumer market for goods and services. There is a considerable co-movement between these two indices with the CPI tending to follow the WPI with a lag.
    • 18. Types of Inflation Result of aasteady increase in aggregate demand Result of steady increase in aggregate demandDemand Pull Inflation Demand Pull Inflation for goods and services when the economy for goods and services when the economy is unable to adequately fill this demand. is unable to adequately fill this demand. Result of aahigher cost factor of production Result of higher cost factor of production Cost Push Inflation Cost Push Inflation being passed along to the consumer being passed along to the consumer in the form of higher prices. in the form of higher prices. Producers exerting aastrong influence on Producers exerting strong influence onAdministered Prices Administered Prices the price of the product because the price of the product because of aalack of competition. of lack of competition. Inability to solve the simultaneous problems of Inability to solve the simultaneous problems of Stagflation Stagflation economic stagnation and inflation economic stagnation and inflation through the use of monetary and fiscal policies. through the use of monetary and fiscal policies. This occurs when high rates of inflation This occurs when high rates of inflation and high rates of unemployment happen and high rates of unemployment happen simultaneously. simultaneously.
    • 19. Monetary and fiscal policy Fiscal Policy: controls level of government spending and raises revenue through taxation. Monetary Policy: controls through regulation of interest rates, the money supply and inflation in the domestic economy. The Reserve Bank of India (RBI) controls and influences the economy by means of monetary and credit policy. The Monetary and Credit Policy relate to the attempt to control the money supply and demand-led hence inflation in the economy.
    • 20. Economic factors: GNP & GDPGross National This is the value of output of goods and services This is the value of output of goods and servicesGross National produced by Indian companies, regardless of whetherProduct (GNP) Product (GNP) produced by Indian companies, regardless of whether the production is inside or outside the India the production is inside or outside the IndiaGross Domestic The value of output of goods and services produced The value of output of goods and services producedGross Domestic in the country, regardless of whether businesses areProduct (GDP) Product (GDP) in the country, regardless of whether businesses are owned and operated by Indians or foreigners. owned and operated by Indians or foreigners. - profits on = +Gross National Gross Domestic profits onGross National Gross Domestic foreign owned Indian ownedProduct (GNP) Product (GNP) Product (GDP) Product (GDP) businesses businesses outside India
    • 21. GDPGDP is the measure of total value of final goods and servicesproduced in the domestic economy each year. The followingis often used GDP= GDP= C + II+ G + C+ +G+ (X- M) (X- M) C = personal consumption spending on goods and services C = personal consumption spending on goods and services II= Private sector fixed capital expenditure = Private sector fixed capital expenditure G = Government expenditure G = Government expenditure (X-M)= Net of export receipts (X) and import payments (M) (X-M)= Net of export receipts (X) and import payments (M)The relationship highlights actual rupee expenditure for goods and services produced in theeconomy for measuring GDP.This equation includes all key players involved in the economy – consumers / households,business (private sector) and government.For living standards to rise in India, GDP must grow at a faster rate than the population.This way, there is greater quantity of goods and services per person.
    • 22. BUSINESS CYCLES- Phases The recurrent periods of economic growth and recession are business cycles. They represents a pattern of business expansion and contraction over a number of years. The global integration of Indian economy has increased the importance of business cycle for decision-making. • Expansion/ upswing/ recovery: upturn in business activity • Peak/ Boom: over production and buildup of excessive inventory • Downswing/ recession: characterized by a reduction in output and investment • Trough: recession bottoms and production levels off
    • 23. Forms of business ownership/ entity relationships Sole Proprietorship Partnership Limited Liability Companies Trust Cooperative Societies
    • 24. Forms of Business Ownership Sole Partnership Limited Co-operative Proprietorship Company Societies • Liability of the • Enterprise owned and• Owned by an General Partnership controlled by the individual. • Owned by 2 or more stockholders are people working in it. partners limited to the • Each member has equal• The individual is in amount invested control- 1 man 1 vote. charge of all • Partners are equally by them. • Anyone who fulfills operations. and personally liable qualification criteria for debts. • Enjoys advantages• The personal can join. of perpetual life • Profits can be retained property is • The personal property span. in business or attached. is attached. distributed• Can be a • In a limited proportionately disadvantage if the partnership- Partner’s • Member should primarily benefit from owner is unable to liability is limited to business participation continue the money invested. • Interest on loan/ share business • Limited partner not capital limited in some involved in decision specific way making
    • 25. Forms of Business Ownership Corporations Professional Trade Trusts Associations Associations• Created to hold assets • Corporations are • Formed to protect • An association of for the benefit of interests of individuals or chartered professionals they companies in a certain persons or • Incorporation specific business or represent. entities, managed by a certificate needs to industry organized to • Virtually every trade/ trustee on behalf of the be filed. promote common profession has such an trust interests. • Subject to laws of association.• Founded by persons the state in which • Most of these are • A particular sector or called Thrusters, class of business may they operate registered under The settlers and/ or donors, • face the same Societies Registration Continuous life span problems- to seek who execute a written Act- 1860. solutions for these, declaration of trust – • Total worth divided • There is a registration they may form outlines terms and into shares of stock fee. themselves into a conditions of operation • Each share • The memorandum of trade association. represents unit of society will define the • CII and ownership objects of the ASSOCHAM are association. some examples
    • 26. Risk Management and Insurance Planning
    • 27. Principle of InsuranceRisk: Risk is an uncertain event or condition, which if occurs, would have anundefined or unknown impact on the achievement of objectives.Classification of risk: There are different kinds of risks, some of whichmay be insured, according to the nature and possible consequences of thehazard involved.The following classifications of risk should be noted: Pure and Speculative risks Fundamental and Particular risks Financial & Non-financial Risk
    • 28. Principle of InsuranceBasic Characteristics of Insurance Risk pooling:  Risk transfer from individual to a pool of the insurance company’s policyholders.  The company charges premium for accepting risk  It ‘pools’ premiums from a group of policyholders into a general fund to fund the death benefits under contract. Law of large numbers:  Larger the pool, more predictable the amount of losses in a given period.  Since not all members of the pool are the same age or in the same health condition, we can assume not all of them will be making a claim at the same time.
    • 29. Principle of InsuranceRequirements of Insurable Risks Sufficient number of homogeneous exposure The loss must occur by chance The loss must be definite The loss must be significant The loss rate must be predictable The loss must not be catastrophic to the insurer
    • 30. Steps in Personal Risk Management Identify/Analyse Identify/Analyseloss exposure //risks loss exposure risks Determine the Determine the Determinethe Determine the technique technique technique technique Implement the Implement the Implement the Implement the technique technique technique technique Monitor Decisions Monitor Decisions
    • 31. Legal Principle in InsuranceInsurance is a contractual agreement between the insurer and the insured.Should also meet all the requirements of a valid contract:  Offer and acceptance  Consideration  Legal capacity of parties and  Purpose of contract should be legal and not contrary to public interestInsurance contracts are special type of contracts which havecertain additional distinguishing features associated with it.  Indemnity  Insurable interest  Subrogation  Utmost good faith  Adhesion  Waiver & estoppels  Deductible
    • 32. Life Insurance Term life policy Whole life policy Endowment assurance policy Human life valueThis concept maintains that a person should carry life insurance that is equal to the present value of the capitalized value of his future net earnings.How to Use This Method Estimate the individuals average annual earned income from the persons present age to the age of retirement. Deduct the amount that is not allocated to others. Money spent for income taxes and all other self-maintenance expenses should be deducted in this step. Typically this is a percentage of salary. Using a reasonable rate of interest, determine the present value of the amounts allocated to others for the working period used in first step.
    • 33. Annuities An annuity is any series of payments made or received at regular intervals. Annuity benefits protect against the risk of outliving ones financial resources. Life annuity- Insurance company GUARANTEES that the individual will receive the same payments each year no matter how long they live. Purchased the same way as life insurance. A person can either purchase the annuity with a one-time large payment or with smaller yearly premiums before the annuitys payments begin.
    • 34. Disability insurancePersonal Accident insurance policiesIt covers any accident caused to the insured by any physical ,violent and visible meansresulting into injuries, which may lead to the death of the insured, or results in sometemporary or permanent disablement.It is a benefit policy which pays the insured for an injury from an accidental event. Suchinjuries may lead to death or disablement of the insured.These policies commonly provide for payment of benefits on the following contingenciesoccurring:1.Death2.Permanent disablement3.Permanent total disablement4.Permanent partial disablement5.Temporary total disablement6.Expense for the carriage of the body7.Education fund for dependent children8.Medical expense for treatment of injuries
    • 35. Health Insurance Mediclaim is the most popular health insurance product. The policy is available to individual between 5 and 80 years. Children between the age 3 months and 5 years can be covered provided one or both parents are covered concurrently This policy provides for reimbursement of expense incurred for hospitalisation/domiciliary hospitalisation in India for the treatment of any illness or disease or accidental injury suffered during the policy period. There are other important features associated with the policy.1. Claim free renewal bonus2. Discounted family package cover
    • 36. Domestic insurance The most popular domestic insurance cover available in the Indian market is the Householders Insurance policy. This policy offers a package cover, a kind of an omnibus personal umbrella cover Risks to your clients house and belongings due to fire, lightning, earthquake, burglary, larceny, theft, electrical or mechanical breakdown of domestic appliances etc. are all covered under the household insurance cover. Coinsurance clause: This clause, also known as an average clause, is widely used in all household policies.Coverage: The particular risks covered under each section are:1. Household contents & building (cover for fire and allied perils)2. Household contents (cover for burglary, housebreaking and theft)3. Jewellery and valuables4. Plate glass5. Breakdown of domestic appliances6. TV, VCR7. Pedal Cycle8. Baggage9. Personal accident10. Third party legal liability & workmens compensation
    • 37. Motor vehicles insurance Liability only insurance: This insurance is compulsory as per Motor Vehicles Act, 1988. This policy covers legal liability of driver / owner towards third parties for1. Bodily injury (unlimited amount as mandated by Motor Vehicles Act)2. Death3. Property damage (Up to Rs. 750,000 per accident, in case of private cars and commercial vehicles and Rs. 100,000 in case of two wheelers, although Motor Vehicles Act requires a cover of only Rs. 6,000) The policy also includes cover for legal costs to claimants. The policy has an inbuilt cover for death/ disability of driver / owner caused by accident during the use of the insured motor vehicle up to Rs.200,000 in case of private car and commercial vehicle and Rs. 100,000 in case of two wheelers. Package insurance: A package insurance policy is what is commonly known as comprehensive policy and has two components:1. Liability only coverage which is compulsory: SA as per the Act2. Property damage cover to the vehicle: for the purpose of property damage cover under package policy, the insured is required to choose a sum insured known as insureds declared value (IDV). Under No fault liability’ of the Act, owner/driver and insurer, is liable to pay compensation to third party for death/injury caused by motor accident, regardless of the fact whether the accident occurred due to the fault of the driver or not. The amount of compensation, however, under no fault liability is limited to Rs. 50,000 for death and Rs. 25,000 for-permanent disablement.
    • 38. Travel insurance People who travel abroad whether for business or for a vacation they are exposed to risks. To take care of the risks during foreign travel there are two kinds of policies available1. Overseas Mediclaim cover which is strictly a medical insurance cover2. Overseas Travel Insurance cover which provides various other covers in addition to medical insurance such as baggage cover, loss of passport cover, personal accident cover, personal legal liability cover etc.
    • 39. Personal liability insurance Professional indemnity insurance: Professional Indemnity Insurance is generally granted to professionals such as medical practitioners, surgeons, architects, lawyers, chartered accountants, solicitors etc. This policy is designed for individual professionals only. Policy indemnifies the legal liability of the insured person or his named assistants against claims arising out of the professional service rendered, caused by or alleged to have been caused by error, omission or negligence in their service. The limit of liability can be selected by the insured. Directors and Officers Liability Insurance: Directors and officers liability insurance provides protection to the directors and officers against liability to pay compensation on account of their wrongful act.
    • 40. Retirement Planning And Employee Benefits
    • 41. Types of Benefit Plans1. Defined Benefit Plans: o Usually based on the employees final salary and period of employment. o Employees contribute at a fixed rate and the employer meets the balance costs. o The cost of such a scheme is not known till the benefits have been paid2. Defined Contribution plans: o The contribution rate is a percentage of earnings or may be flat or tiered on some other consideration o The contribution of both the parties is fixed. o The benefits to the employee would depend on the value of the accumulated contributions
    • 42. Defined Benefit Plans Gratuity Leave Salary Retrenchment Compensation Voluntary Retirement Scheme Nature of Defined Benefits & Tax Issues
    • 43. Defined contribution plans Statutory Provident Fund Recognized Provident Fund Unrecognized Provident Fund Employees’ Pension Scheme Employees’ Deposit Linked Insurance Scheme Public Provident Fund
    • 44. Investment Planning
    • 45. ReturnReturn is incentives for doing investment.To part with money, investors require compensation for The time period for which the resources are committed The expected rate of price-rise The uncertainty of the payments in futureType of returns: Holding period return Annualized return (CAGR) Risk free return
    • 46. Measurement of returnHistorical return: Total return, Average returnExpected return: The expected rate of return is the weighed average of allpossible returns multiplied by their respective probabilities. n E(R) = ∑Ri Pi i=1 Where, E(R) = Expected return from the stock Ri = Return form the stock under state i Pi = Probability that the state i occurs n = Number of possible states of the worldPortfolio return: The expected return on a portfolio of securities weightedaverage of expected return for the individual investment in a portfolio.
    • 47. RiskRisk is the volatility of return on the investment.Type of risk: Market Risk Reinvestment Risk Interest Rate Risk Purchasing Power Risk Liquidity Risk Political Risk Exchange Rate risk
    • 48. Measurement of RiskHistorical risk: Variance: It measures the dispersion of returns around the expected return. Largerthe dispersion, more is the risk involved.Standard Deviation: It is a measure of variability of returns of an asset ascompared with its mean or expected value. It measures total risk. Beta: The beta coefficient is a measure of systematic risk and should be used for adiversified portfolio.Expected risk:The variance of a probability distribution is the sum of the squares of the deviations ofactual returns from the expected return, weighted by the associated probabilities. σ 2 = ∑ Pi Ri –E(Ri) 2Where,E(Ri) = Expected return from the stockRi = Return from stock under state iPi = Probability that the event i occursn = Number of possible events
    • 49. Portfolio risk Covariance: It is a measure of the degree to which two variable move together over time. A positive covariance indicates that variables move in the same direction, and a negative covariance indicates that they move in opposite directions Correlation coefficient: Covariance is an absolute number and can be difficult to interpret, it is often converted to correlation coefficient. Coefficient of determination(R2): It is calculated by squaring the correlation coefficient (R). It gives the variation in one variable explained by another. Standard Deviation: The SD of a portfolio is not the average of the standard deviation of individual stock. σ = √ (w12 σ12) + (w2 2σ22) + (2w1w2COV12) Variance: The square of SD is variance.
    • 50. Risk Adjusted Return The Treynor Measure: Relative measure of the risk adjusted performance of a portfoliobased on the market risk (i.e. the systematic risk).Treynors Index (Ti) = (Ri - Rf)/Bi.Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta of the fund.In comparing, if Ti >= 0 ,that is good; if <0 , that is not good. The Sharpe Measure: Relative measure of risk adjusted performance of a portfolio basedon total risk (systematic risk+ nonsystematic risk ) Sharpe Index (Si) = (Ri - Rf)/Si Where, Si is standard deviation of the fund.In comparing ,bigger is better Jenson Model: Alpha,ά, is an absolute measure of performance and measures how well amanaged portfolio performed relative to an unmanaged portfolio of equal risk.It determines how much the realized return differs from the required return. The followingformula is used to find alpha: ά = Rp- Rf+ (R m- Rf) BetaThe alpha value indicates whether a portfolio manager is superior or inferior in market timingand stock selection. A positive alpha indicates a superior fund manager, and negative alphaindicates an inferior fund manager
    • 51. Equity valuationValuation of preference shareValuation of equity share Single Period Valuation Multi period valuation Plough back ratio DerivativeForward contractFuture contractOption: Call & Put
    • 52. Fixed interest instrument Valuations Risk associated with fixed interest instrument Interest rate risk Reinvestment risk Credit riskTypes and features of small saving instruments PPF NSC KVP POMIS POTD SCSS Bank deposits
    • 53. Product knowledge RELIEF BONDS (TAX-FREE) RELIEF BONDS (TAX-FREE)  Individuals & HUF (No NRIs) Issued in March 2003  Min –Rs. 1,000 Tenure –5 years (2008)  I.T & W.T –Exempt Interest @ 6.5% (Half yearly)  Premature encashment at the Interest payments –1stJuly & 1st January end of 3 years Compounding –Half yearly timing at the interest payment dates – Maturity Value –Rs. 1000 becomes Rs.1377 penalty @ half of the interest due for the last 6 months  Discontinued by F.A 2004 RELIEF BONDS (TAXABLE) April 2003 NATIONAL SAVING CERTIFICATES 8% Interest (Taxable) Minimum –Rs. 100 6 years Interest compounded half yearly Interest payments –Half yearly 100 becomes 160.10(1st February & 1st August) Six years –no premature encashment Compounding –Half yearly Premature allowed in case of death Maturity Value –Rs. 1000 becomes Rs. 1601 Encashment Features: Individuals & HUF (No NRIs) Within a year –only face value Min –Rs. 1,000 One year to three years –face value + simple interest I.T & W.T –Taxable More than 3 years –as per schedule No Premature encashment at the end of 3 years
    • 54. Public provident fund15 yearsMin –500, max –70,000Account closure –15 yearsTotal deposits –12 in a yearIn a month may be more than 1Loans: after completion of one year from the end of thefinancial year of opening of the account and before completion of the 5thyearAmount cannot exceed 40% of the amount that stood to credit at the end of fourth yearpreceding the year of withdrawal or at the end of preceding year whichever is lowerPremature withdrawal is permissible every year after completion of 5 years from theend of the year of opening the account.
    • 55. Post office schemes Kisan Vikas Patra Post Office Monthly Income Scheme Post Office Saving Account RD –Rs. 10 becomes Rs. 728.9 (5 years)
    • 56. Mutual fund NAV ComputationThe net assets represent the market value of assets which belong to the investors, on a given date.Net assets are calculated as: Market value of investments Plus(+) current assets and other assets Plus(+) accrued income Less(-) current liabilities and other liabilities Less(-) accrued expenses
    • 57. Load implicationInitial issue expense : Expenses that are incurred in the launch of the fund arecalled as initial issue expenses. The costs of registration and fund formation Legal and advisory expenses Costs of launching the scheme Advertisement and promotion expenses Distribution costs Commissions to selling agentsSEBI imposes a ceiling of 6% on these expenses. Latest changes on Initial Issue ExpensesIIE will be permitted for closed ended schemes only and suchscheme will not charge Entry loadIN CES, IIE shall be amortized on a weekly basis over the period ofscheme.IN OES, the sales, marketing and other expenses of sales should bemet from the entry load and not IIE
    • 58. Wealth cycle for investorsStage Financial needs Investment preferencesAccumulation stage Investing for long term identified Growth options and long term financial goals products.High risk appetiteTransition Stage Near term needs for funds as Liquid and medium term investments. pre-specified needs draw closer Lower risk appetiteReaping Stage Higher liquidity requirements Liquid and medium term investments. Preference for income and debt products Long term investment ofInter Generational Low liquidity needs. inheritance Ability to take risk and invest for the longtransfer termSudden wealth surge Medium to long term Wealth preservation. Preference for low risk products
    • 59. Tax & Estate Planning
    • 60. Heads of Income Salary Income from house property capital gain Profits and gains of business and profession Income from other sources Other Concepts Clubbing of income  Agriculture Income Set off & Carry Forward  Securities transaction tax Assessment of individual  Fringe Benefit tax Trust  Deductions Property documentation
    • 61. SalaryTax treatment of different forms of salary income Leave salary Gratuity Pension Allowance  House rent allowance  Entertainment allowance  Special allowance
    • 62. Perquisites Fringe benefits tax Treatment of medical facilities Rent free accommodation and accommodation provided at concession
    • 63. Income from house property Computation of annual value  Let out house  Self occupied house Deductions admissible Capital Gain Understanding capital gain Capital asset Transfer of capital assets Computation of capital gain Capital gain exempt from tax
    • 64. Income from other sources Dividend Winning from lotteries, crossword puzzles, races including horse race
    • 65. Income by way of interest on securitiesIncome, by way of interest on securities, is chargeable under the head "incomefrom other sources", if such income is not chargeable to income-tax under thehead, "Profits and Gains of Business or Profession""Interest on securities" means:a) Interest on any security of the Central Government or a State Government;b) Interest on debentures or other securities for money issued by, or on behalfof a local authority or a company or a corporation established by Central, Stateor Provincial Act.For income-tax purposes what is to be charged to tax is the gross amount ofinterest. Therefore, if the net-interest is given, it has to be grossed up to arriveat the taxable amount. Net Interest can be grossed up as under:Net interest x 100100 - Rate of TDS The rates of T.D.S. are as under: In case of securities listed on a recognized stock exchange – 10% plus surcharge as applicable plus education cess @2%. Unlisted non-government securities - 20% plus surcharge as applicable.
    • 66. Any sum received on or after April 1, 2006(gift) Following condition should be satisfied:  The recipient is an individual or a HUF;  Any sum of money is received without consideration on or after April, 2007  The aggregate amount of such money received during a financial year from any person/persons exceeds Rs. 50000If aggregate amount of such money received by an individual/HUF during a financialyear form any person/persons is Rs. 50000 or less, nothing would be chargeable to tax. Provision not applicable in the following cases: 1. Money received from a relative 2. Money received on occasion of marriage of individual 3. Money received by way of will/inheritance 4. Money received in contemplation of death of payer 5. Money received form a local authority. 6. Money received form any fund, foundation, university, other educational institution, hospital, medical institution, any trust or institution. 7. Money received form a charitable institute registered
    • 67. Practical Sums Topic Overview
    • 68. Introduction to Financial PlanningCash Flow planningRatio analysisLoan repayment schedule: Detailed sumInflation adjusted interest ratesRule of 72Ethics and professional conduct
    • 69. Risk management and insurance planning Human life value Understanding of insurance plan Indemnity
    • 70. Retirement planning Gratuity EPF corpus computation Retirement corpus
    • 71. Investment planning Securities market line Covariance Standard deviation Sharpe, Treynor, Jensen Ratios Bond valuation Equity valuation: Gordon, problem based on plough back ratio Basic sums on call and put options and futures
    • 72. Tax and estate planning Home loan tax treatment Agriculture Income Assessment of individual Capital gain (comprehensive)

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