M.B.A. 206 FIN : PERSONAL FINANCIAL PLANNING- (OCT- 2022)

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Final Year M.B.A. 206 FIN : PERSONAL FINANCIAL PLANNING
(OCT- 2022)
Attempt any five questions: [10]
a) Match the pairs:
i) Deduction U/s 80 G a) Interest on Education Loan
ii) Deduction U/s 80 D b) Investment
iii) Deduction U/s 80 C c) Donation
iv) Deduction U/s 80 E d) Medical Insurance
Answer: Matching the pairs:
i) Deduction U/s 80 G -> c) Donation
ii) Deduction U/s 80 D -> d) Medical Insurance
iii) Deduction U/s 80 C -> b) Investment
iv) Deduction U/s 80 E -> a) Interest on Education Loan
b) State if the follow True or False:
i) A will can be altered after the death of testator.
ii) Executor is a person who creates the trust.
Answer:
i) A will can be altered after the death of testator.
 False
 Explanation: A will cannot be altered after the death of the testator. Once the testator passes
away, the will becomes irrevocable, and its contents cannot be changed.
ii) Executor is a person who creates the trust.
 False
 Explanation: An executor is a person appointed by the testator in a will to carry out the
instructions and wishes stated in the will after their death. They are responsible for
administering the estate and ensuring that the assets are distributed according to the terms
of the will. On the other hand, the creator of a trust is typically referred to as the settlor or
grantor, not the executor. The trustee is the person responsible for managing the assets
placed in the trust for the benefit of the beneficiaries.
c) Fill in the blanks:
i) _________ is the minimum age to invest in NPS.
ii) IRDA stands for __________.
Answer:
i) _________ is the minimum age to invest in NPS.
 18 years
 Explanation: The minimum age to invest in the National Pension System (NPS) is 18 years.
ii) IRDA stands for __________.
 Insurance Regulatory and Development Authority
 Explanation: IRDA stands for Insurance Regulatory and Development Authority. It is an
autonomous body responsible for regulating and promoting the insurance industry in India.

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d) Cumulative value of rupee at 10% after 6 years is 1.77, how much would be maturity value of an
investment of Rs. 1,21,500 made today for the period of 6 years.
Answer:
Given:
 Cumulative value of rupee at 10% after 6 years is 1.77.
We can write the equation for compound interest as:
Where:
 P = initial investment
 r = annual interest rate
 n = time period in years
 A = maturity value
Given:
 Initial investment (P) = Rs. 1,21,500
 Annual interest rate (r) = 10%
 Time period (n) = 6 years
We know that the cumulative value after 6 years is 1.77 times the initial investment, therefore:
1.77=(1+10/ 100)6
Let's solve for the maturity value A:
A=1,21,500×1.77
A=2,14,755
So, the maturity value of an investment of Rs. 1,21,500 made today for the period of 6 years would
be Rs. 2,14,755.
e) Describe 'SMART' Goal concept.
Answer: The SMART goal concept is a framework for setting objectives that are Specific,
Measurable, Achievable, Relevant, and Time-bound.
1. Specific: Specific goals provide clarity and direction, reducing ambiguity and confusion.
2. Measurable: Goals should be quantifiable, allowing progress to be tracked and measured
objectively.
3. Achievable: Goals should be realistic and attainable, considering the available resources,
skills, and constraints.
4. Relevant: Goals should be aligned with broader objectives, values, and priorities.
5. Time-bound: Goals should have a defined timeframe or deadline for completion. Time-
bound goals provide a sense of structure and enable individuals or teams to prioritize tasks
effectively.
f) Enlist 'Elements of Financial Planning'.
Answer: Financial planning involves the process of setting goals, assessing resources, and creating
strategies to achieve financial objectives. The elements of financial planning encompass various
aspects of personal or organizational finance.
1. Financial Goal Setting: Establishing clear and achievable short-term and long-term financial
goals is the foundation of financial planning.
2. Budgeting: It involves identifying sources of income, estimating expenses, and managing
cash flow to meet financial objectives.

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3. Income Management: It includes salary negotiation, investment income, rental income,
dividends, and other revenue streams.
4. Investment Planning: It includes asset allocation, portfolio diversification, risk management,
and monitoring investment performance.
5. Risk Management and Insurance: Risk management strategies may include purchasing
insurance (life, health, property, etc.), creating emergency funds, and implementing asset
protection strategies.
6. Retirement Planning: It includes contributions to retirement accounts (e.g., 401(k), IRA),
pension plans, and other retirement savings vehicles.
7. Tax Planning: It involves understanding tax laws, deductions, credits, and incentives to
optimize tax strategies and preserve wealth.
8. Estate Planning: It includes creating wills, trusts, powers of attorney, and establishing strategies
to minimize estate taxes and probate costs.
9. Debt Management: It involves evaluating debt levels, prioritizing debt repayment,
consolidating high-interest debt, and avoiding excessive borrowing.
10. Financial Education and Literacy: Financial education empowers individuals to navigate
complex financial landscapes and make sound financial choices.
g) If Rs. 60,000 amounts to Rs. 68,694 in 2 years then find the rate of interest.
Answer:
Where:
 A is the amount after t years,
 P is the principal amount (initial amount),
 r is the rate of interest per annum, and
 t is the time in years.
Given that P=Rs.60, 000 A=Rs.68,694, and t=2 years, we can rearrange the formula to solve for r:
Q2) Solve any two: [10]
a) Mr. A Invested Rs.11,300 at 2.5% interest compounded monthly, calculate its value after 3.7 years.
To calculate the future value of an investment compounded monthly, we can use the formula for
compound interest:
Where:
 A is the future value of the investment.
 P is the principal amount (the initial investment).

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 r is the annual interest rate (in decimal).
 n is the number of times the interest is compounded per year.
 t is the time the money is invested for, in years.
Given:
 P=Rs.11,300
 r=0.025 (2.5% interest rate converted to decimal)
 n=12 (compounded monthly)
 t=3.7 years
Substitute these values into the formula and calculate:
So, the value of the investment after 3.7 years, compounded monthly, is approximately Rs. 12,503.
b) Mr. X is salaried Person, want to avail Housing Loan for his New Flat. Calculate EMI from the
following information.
i) Loan Amount Rs. 12,00,000
ii) Rate of Interest - 8%
iii) Loan Tenure - 5 years.
Answer:

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So, the Equated Monthly Installment (EMI) for the housing loan is approximately Rs. 24,742.42.
c) What is the difference between systematic risk and unsystematic risk in relation to investment?
Answer:
Systematic Risk Unsystematic Risk
Systematic risk arises on account of the
economy with uncertainties and the
tendency of individual securities to move
together with the change in the market.
Unsystematic risk is that part of risk which arises from
the uncertainties and which are unique to
individual securities and can be diversifiable.
Directly related to the economic system of
a country.
Directly not related to the economic system, rather
it is more about business or company-related.
Systematic risk is known as the non-
diversifiable risk/ not diversifiable/ market
risk/ macroeconomic risk.
Unsystematic risk is known as diversifiable risk, not a
systematic risk.
We cannot reduce this type of risk
individually
This type of risk can be reduced
Negatively correlated investment cannot
eliminate the risk.
It is possible to eliminate the risk by forming a
portfolio of negatively correlated investments.
Beta is a measure of systematic risk.
Unsystematic risk is the function of may
macroeconomic factors related to business.
Basically, investors not try to work with
systematic risk.
Investors always try to reduce this type of risk by
better managing their investment.
Examples: Examples:
Change in market interest rate Increase in business operational cost
Increase in inflation Workers strike in the factory
Change in oil price Employee turnover

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Q3) a) What are various Investment Vehicles? Classify it as per the time.[10]
Answer:
Investment vehicles can be classified based on the time horizon for which an investor holds them.
The classification of investment vehicles based on time are as follows:
1. Short-term Investments:
 These are investments held for a relatively short period, typically less than a year.
 Examples include:
 Cash Equivalents: Such as Treasury bills, money market funds, and certificates
of deposit (CDs).
 Short-term Bonds: Bonds with maturities of one year or less.
 Commercial Paper: Short-term debt issued by corporations.
2. Medium-term Investments:
 These are investments held for a moderate duration, generally between one to five
years.
 Examples include:
 Medium-term Bonds: Bonds with maturities ranging from one to five years.
 Fixed Deposits: Bank deposits with a fixed term, offering higher interest rates
than regular savings accounts.
 Savings Bonds: Government-issued bonds with terms typically ranging from one
to five years.
3. Long-term Investments:
 These are investments held for an extended period, typically more than five years,
with the goal of building wealth over time.
 Examples include:
 Stocks (Equities): Ownership in a company, representing a claim on the
company's assets and earnings.
 Long-term Bonds: Bonds with maturities exceeding five years, offering higher
interest rates than shorter-term bonds.
 Real Estate: Investment in properties, including residential, commercial, and
industrial real estate.
 Retirement Accounts: Such as Individual Retirement Accounts (IRAs) and 401(k)
plans, designed to help individuals save for retirement over the long term.
 Mutual Funds and Exchange-Traded Funds (ETFs): Pooled investment vehicles
that invest in a diversified portfolio of securities, suitable for long-term
investment objectives.
 Alternative Investments: Such as hedge funds, private equity, and venture
capital, which often involve longer investment horizons and higher risk.
OR
b) What are the various types of Consumer Loans? Explain each in brief.
Consumer loans are loans taken by individuals for personal, family, or household purposes. These
loans are typically used to finance purchases such as cars, homes, education, or other expenses.
Various types of consumer loans include:
1. Mortgages:
 Mortgages are loans used to finance the purchase of real estate, typically homes. The
property itself serves as collateral for the loan.

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 Mortgages can have fixed or adjustable interest rates and varying repayment terms,
such as 15, 20, or 30 years.
 They are typically repaid through monthly installments, which include principal and
interest payments.
2. Auto Loans:
 Auto loans are used to finance the purchase of vehicles, including cars, trucks, and
motorcycles.
 These loans can be obtained from banks, credit unions, or car dealerships.
 Auto loans may have fixed or variable interest rates and are typically repaid in
monthly installments over a predetermined term, often ranging from two to seven
years.
3. Personal Loans:
 Personal loans are unsecured loans that can be used for various purposes, such as
debt consolidation, home improvements, medical expenses, or other personal needs.
 They are not backed by collateral, so lenders rely on the borrower's creditworthiness
and income to determine eligibility and interest rates.
 Personal loans often have fixed interest rates and fixed repayment terms, typically
ranging from one to seven years.
4. Student Loans:
 Student loans are used to finance higher education expenses, including tuition, fees,
books, and living expenses.
 They can be obtained from the government (federal student loans) or private lenders.
 Federal student loans typically offer more favorable terms, such as fixed interest rates
and income-driven repayment plans, while private student loans may have variable
interest rates and less flexible repayment options.
5. Credit Cards:
 Credit cards are revolving lines of credit that allow consumers to make purchases up
to a predetermined credit limit.
 Cardholders can choose to pay off their balance in full each month or carry a
balance and pay interest on the outstanding amount.
 Credit cards often come with various features such as rewards programs, cashback
offers, and introductory interest rates.
6. Payday Loans:
 Payday loans are short-term, high-interest loans typically used by borrowers who need
immediate cash to cover expenses until their next payday.
 These loans are often characterized by high fees and interest rates, making them a
costly form of borrowing.
 Payday loans are typically repaid in full, including fees and interest, when the
borrower receives their next paycheck.
Each type of consumer loan has its own terms, conditions, and eligibility requirements, so it's essential
for borrowers to carefully consider their options and choose the loan that best fits their financial
needs and circumstances.

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Q4) a) Discuss the term Personal tax planning, also elaborate tax deductions available in Income
tax act for Tax Planning. [10]
Answer:
Personal tax planning refers to the process of arranging one's financial affairs in a manner that
minimizes the amount of taxes owed while remaining compliant with tax laws and regulations. The
goal of personal tax planning is to optimize tax efficiency by taking advantage of available
deductions, credits, exemptions, and other tax-saving strategies.
Elaborating on tax deductions available in the Income Tax Act for tax planning:
1. Standard Deduction:
 A fixed deduction allowed to all individual taxpayers to reduce taxable income.
 As of my last update, the standard deduction for individuals was set at a specific
amount determined by tax authorities.
2. Deductions under Section 80C:
 Section 80C provides various deductions for investments made in specified
instruments, up to a specified limit.
 Eligible investments under this section include contributions to Employee Provident
Fund (EPF), Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), National
Savings Certificate (NSC), Tax-saving Fixed Deposits, etc.
3. Deductions for Home Loan Interest:
 Interest paid on home loans is eligible for deduction under Section 24 of the Income
Tax Act.
 For a self-occupied property, the maximum deduction allowed is typically up to a
certain limit, while for let-out or deemed let-out properties, the entire interest paid can
be claimed as a deduction.
4. Medical Insurance Premiums:
 Premiums paid for medical insurance policies for self, spouse, children, and parents
are eligible for deduction under Section 80D.
 Additionally, premiums paid for health insurance policies for senior citizens qualify for
higher deductions.
5. Education Loan Interest:
 Interest paid on education loans for higher studies is eligible for deduction under
Section 80E.
 The deduction is available for a maximum of eight years or until the interest is fully
repaid, whichever is earlier.
6. Deductions for Donations:
 Donations made to specified charitable institutions or funds are eligible for deduction
under Section 80G.
 The deduction amount varies depending on the recipient organization and can be
either 100% or 50% of the donated amount.
7. House Rent Allowance (HRA):
 HRA received by an employee as part of their salary is partially or fully exempt from
tax, subject to certain conditions.
 The exemption is determined based on factors such as actual HRA received, rent
paid, and the location of the rented accommodation.
8. Interest on Savings Account:
 Interest earned on savings account deposits up to a specified limit is exempt from tax
under Section 80TTA.
 The maximum exemption allowed is typically a fixed amount per financial year.

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OR
b) Distinguish between Term Insurance Policy and Unit Linked Insurance Policy.
Answer:
Parameters Term Life Insurance ULIPs
Maturity
No maturity benefits offered
to policyholder, except in case
of return of premium plans
Redemption option provided;
units can be redeemed by the
investor at the current prevailing
price per unit
Type of Financial
Product
A pure life insurance product;
no wealth creation feature
Dual plan covering insurance
and investment both
Investment Feature N/A
Several investment choices
offered to the policyholder –
bonds, mutual funds, equities,
debts
Sum Insured
Provided to the beneficiary
under the plan only at the time
of death of the policyholder
In case of unforeseeable
circumstances, either the sum
insured or the market-linked return
is offered to the nominee,
depending on whichever is higher
Switch-over Facility N/A
Investor can switch between
funds linked in the ULIP plan in
case the original plan fails to
deliver desirable market returns;
risk returns can also be changed in
the ULIP policy
Lock-in Duration
No lock-in period; entire
death benefit received upon
demise of policyholder
ULIPs generally have a 5-year
lock-in period
Plan Charges
Policyholder charged only for
the death financial cover
provided under the plan
More charges applicable such
as fund-management fee,
allocation charge, fund-switching
fee, policy administration charges,
and the like
Affordability
Since the plan only covers
death benefit, it is relatively
more affordable for the
policyholder
ULIP plans offer maturity benefit
too along with death benefit so
more charges and higher
premium which makes it difficult to
afford for all
Policy Term
Both short-term and long-
term plans available; lifetime
renewal options with retirement
benefits also available
Different tenure options
available for different ULIP
investment plans; higher returns
generally expected on 10-15 year
investment plans

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Q5) a) What is mean by Retirement Planning, Explain the various means available for retirement
planning. [10]
Answer:
Retirement planning refers to the process of setting financial goals, accumulating savings,
and implementing strategies to ensure a secure and comfortable retirement. The aim of retirement
planning is to ensure that individuals have adequate financial resources to maintain their desired
lifestyle and meet expenses during retirement, when they are no longer earning active income from
employment.
Retirement planning requires careful consideration of various factors, including income
needs during retirement, life expectancy, inflation, healthcare costs, and risk tolerance. It's essential
for individuals to start planning and saving for retirement as early as possible to maximize the benefits
of compounding and ensure a financially secure retirement.
The various means available for retirement planning are as follows:
1. Employer-Sponsored Retirement Plans:
 Many employers offer retirement plans such as 401(k), 403(b), or pension plans to their
employees.
 These plans allow employees to contribute a portion of their salary to a retirement
account on a pre-tax or after-tax basis, depending on the plan type.
 Employers may also offer matching contributions, where they match a certain
percentage of the employee's contributions, effectively increasing the amount of
retirement savings.
2. Individual Retirement Accounts (IRAs):
 IRAs are tax-advantaged retirement savings accounts available to individuals.
 There are two main types of IRAs: Traditional IRA and Roth IRA.
 Contributions to a Traditional IRA may be tax-deductible, and earnings grow tax-
deferred until withdrawal during retirement.
 Contributions to a Roth IRA are made with after-tax dollars, but qualified withdrawals,
including earnings, are tax-free during retirement.
3. Annuities:
 Annuities are financial products offered by insurance companies that provide a
guaranteed stream of income during retirement.
 There are various types of annuities, including immediate annuities and deferred
annuities.
 Immediate annuities start providing income immediately after a lump-sum payment,
while deferred annuities accumulate funds over time and provide income at a later
date.
4. Social Security Benefits:
 Social Security is a government program that provides retirement benefits to eligible
individuals.
 Workers contribute to the Social Security system through payroll taxes during their
working years and receive retirement benefits based on their earnings history and
other factors.
 It's important for individuals to understand their Social Security benefits and factor
them into their overall retirement planning strategy.
5. Investment Portfolios:
 Building a diversified investment portfolio can be an effective way to accumulate
wealth for retirement.
 Investment options may include stocks, bonds, mutual funds, exchange-traded funds
(ETFs), real estate, and other assets.

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 Asset allocation strategies should be based on factors such as risk tolerance, time
horizon, and retirement goals.
6. Personal Savings:
 Saving a portion of income regularly and setting aside funds in savings accounts,
money market accounts, or other liquid assets can supplement retirement savings.
 Emergency funds should also be established to cover unexpected expenses and
prevent the need to tap into retirement savings prematurely.
OR
b) What are the tools of Estate Planning? Explain each in brief.
Answer:
Estate planning involves the process of arranging for the management and distribution of an
individual's assets and liabilities after their death. Various tools are available to facilitate estate
planning, each serving different purposes and addressing specific aspects of an individual's estate.
The common tools of estate planning, explained briefly:
1. Will:
 A will, also known as a last will and testament, is a legal document that outlines how
an individual's assets will be distributed upon their death.
 It allows individuals to specify beneficiaries for their assets, designate guardians for
minor children, and appoint an executor to manage the estate's administration.
 Wills can also include provisions for funeral arrangements, debt repayment, and
charitable bequests.
2. Trusts:
 Trusts are legal arrangements where a trustee holds and manages assets on behalf of
beneficiaries according to the terms specified in the trust document.
 Trusts can be used to achieve various estate planning goals, such as avoiding
probate, providing for minor children or individuals with special needs, and protecting
assets from creditors or irresponsible beneficiaries.
 There are different types of trusts, including revocable living trusts, irrevocable trusts,
testamentary trusts, and special needs trusts, each with unique features and benefits.
3. Beneficiary Designations:
 Beneficiary designations are instructions that dictate who will receive certain assets
upon an individual's death, typically outside of probate.
 Assets such as life insurance policies, retirement accounts (e.g., IRAs, 401(k)s), and
payable-on-death (POD) or transfer-on-death (TOD) accounts allow individuals to
designate beneficiaries directly.
 It's important to keep beneficiary designations up to date and coordinated with other
estate planning documents to ensure consistency and avoid unintended
consequences.
4. Power of Attorney (POA):
 A power of attorney is a legal document that grants authority to another person (the
agent or attorney-in-fact) to make financial or healthcare decisions on behalf of the
individual (the principal) in the event of incapacity.
 A durable power of attorney remains effective even if the principal becomes
incapacitated, while a springing power of attorney becomes effective only upon the
occurrence of a specified event, such as incapacity.
5. Healthcare Directives:

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 Healthcare directives, also known as living wills or advance directives, allow individuals
to specify their wishes regarding medical treatment and end-of-life care if they
become unable to communicate their preferences.
 Healthcare directives may include instructions regarding life-sustaining treatments,
organ donation, pain management, and other medical decisions.
6. Guardianship Designations:
 Guardianship designations allow individuals to appoint a guardian to care for minor
children or incapacitated adults in the event of their death or incapacity.
 It's important to designate a guardian who shares similar values and can provide
appropriate care for dependents.