Financial plan construction

1. Financial Plan Construction
Module 5

2. Module Overview
Introduction 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 Goals
Implementing the Analyzing and
Financial plan Evaluating Financial
recommendations Status
Developing and
Presenting Financial
Planning
Recommendations/
Alternatives

5. Components of Financial Plan
1. Covering letter 10. Retirement Planning
2. Cover page 11. Tax Planning
3. Summary of the plan 12. Asset Allocation – Portfolio
Rebalancing
4. Client profile
13. Disclosures
5. Goals of the client
14. Disclaimers
6. Financial statements
15. Risks
7. Assumptions
16. Cash Flow Projections
8. Risk Management &
Insurance needs 17. Recommendations
9. 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 by
budgeting 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 management
Home Loan
Lease

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 RATIOS
Effective Income tax ratio = Income tax/ total realized increases in net worth
INFLATION PROTECTION RATIOS
Inflation 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 demand
Demand 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 on
Administered 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 & GDP
Gross National This is the value of output of goods and services
This is the value of output of goods and services
Gross National produced by Indian companies, regardless of whether
Product (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 India
Gross Domestic The value of output of goods and services produced
The value of output of goods and services produced
Gross Domestic in the country, regardless of whether businesses are
Product (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 on
Gross National Gross Domestic foreign owned Indian owned
Product (GNP)
Product (GNP) Product (GDP)
Product (GDP) businesses
businesses
outside India

21. GDP
GDP is the measure of total value of final goods and services
produced in the domestic economy each year. The following
is 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 the
economy 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 Insurance
Risk: Risk is an uncertain event or condition, which if occurs, would have an
undefined or unknown impact on the achievement of objectives.
Classification of risk: There are different kinds of risks, some of which
may be insured, according to the nature and possible consequences of the
hazard involved.
The following classifications of risk should be noted:
Pure and Speculative risks
Fundamental and Particular risks
Financial & Non-financial Risk

28. Principle of Insurance
Basic 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 Insurance
Requirements 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/Analyse
loss 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 Insurance
Insurance 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 interest
Insurance contracts are special type of contracts which have
certain 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 value
This 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 individual's average annual earned income from the person's
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 one's 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 annuity's payments begin.

34. Disability insurance
Personal Accident insurance policies
It covers any accident caused to the insured by any physical ,violent and visible means
resulting into injuries, which may lead to the death of the insured, or results in some
temporary or permanent disablement.
It is a benefit policy which pays the insured for an injury from an accidental event. Such
injuries may lead to death or disablement of the insured.
These policies commonly provide for payment of benefits on the following contingencies
occurring:
1.Death
2.Permanent disablement
3.Permanent total disablement
4.Permanent partial disablement
5.Temporary total disablement
6.Expense for the carriage of the body
7.Education fund for dependent children
8.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 bonus
2. 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 client's 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 valuables
4. Plate glass
5. Breakdown of domestic appliances
6. TV, VCR
7. Pedal Cycle
8. Baggage
9. Personal accident
10. Third party legal liability & workmen's 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 for
1. Bodily injury (unlimited amount as mandated by Motor Vehicles Act)
2. Death
3. 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 Act
2. 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 insured's
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
available
1. Overseas Mediclaim cover which is strictly a medical insurance cover
2. 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 Plans
1. 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 paid
2. 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. Return
Return 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 future
Type of returns:
 Holding period return
 Annualized return (CAGR)
 Risk free return

46. Measurement of return
Historical return: Total return, Average return
Expected return: The expected rate of return is the weighed average of all
possible 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 world
Portfolio return: The expected return on a portfolio of securities weighted
average of expected return for the individual investment in a portfolio.

47. Risk
Risk 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 Risk
Historical risk:
 Variance: It measures the dispersion of returns around the expected return. Larger
the dispersion, more is the risk involved.
Standard Deviation: It is a measure of variability of returns of an asset as
compared 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 a
diversified portfolio.
Expected risk:
The variance of a probability distribution is the sum of the squares of the deviations of
actual returns from the expected return, weighted by the associated probabilities.
σ 2 = ∑ Pi Ri –E(Ri) 2
Where,
E(Ri) = Expected return from the stock
Ri = Return from stock under state i
Pi = Probability that the event i occurs
n = 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 portfolio
based on the market risk (i.e. the systematic risk).
Treynor's 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 based
on 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 a
managed portfolio performed relative to an unmanaged portfolio of equal risk.
It determines how much the realized return differs from the required return. The following
formula is used to find alpha:
ά = Rp- Rf+ (R m- Rf) Beta
The alpha value indicates whether a portfolio manager is superior or inferior in market timing
and stock selection. A positive alpha indicates a superior fund manager, and negative alpha
indicates an inferior fund manager

51. Equity valuation
Valuation of preference share
Valuation of equity share
Single Period Valuation
Multi period valuation
Plough back ratio
Derivative
Forward contract
Future contract
Option: Call & Put

52. Fixed interest instrument
 Valuations
 Risk associated with fixed interest instrument
Interest rate risk
Reinvestment risk
Credit risk
Types 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 fund
15 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 the
financial year of opening of the account and before completion of the 5thyear
Amount cannot exceed 40% of the amount that stood to credit at the end of fourth year
preceding the year of withdrawal or at the end of preceding year whichever is lower
Premature withdrawal is permissible every year after completion of 5 years from the
end 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 Computation
The 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 implication
Initial issue expense : Expenses that are incurred in the launch of the fund are
called 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 such
scheme will not charge Entry load
IN CES, IIE shall be amortized on a weekly basis over the period of
scheme.
IN OES, the sales, marketing and other expenses of sales should be
met from the entry load and not IIE

58. Wealth cycle for investors
Stage Financial needs Investment preferences
Accumulation stage Investing for long term identified Growth options and long term
financial goals products.High risk appetite
Transition Stage Near term needs for funds as Liquid and medium term investments.
pre-specified needs draw closer Lower risk appetite
Reaping Stage Higher liquidity requirements Liquid and medium term investments.
Preference for income and debt products
Long term investment of
Inter Generational Low liquidity needs.
inheritance
Ability to take risk and invest for the long
transfer
term
Sudden 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. Salary
Tax 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 securities
Income, by way of interest on securities, is chargeable under the head "income
from other sources", if such income is not chargeable to income-tax under the
head, "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 behalf
of a local authority or a company or a corporation established by Central, State
or Provincial Act.
For income-tax purposes what is to be charged to tax is the gross amount of
interest. Therefore, if the net-interest is given, it has to be grossed up to arrive
at the taxable amount. Net Interest can be grossed up as under:
Net interest x 100
100 - 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. 50000
If aggregate amount of such money received by an individual/HUF during a financial
year 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 Planning
Cash Flow planning
Ratio analysis
Loan repayment schedule: Detailed sum
Inflation adjusted interest rates
Rule of 72
Ethics 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)