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OVERVIEW –

ADVANCED FINANCIAL
PLANNING
SIX STEP PROCESS
1. Establishing the
relationship

6. Review & revision 2. Data gathering &


of plan goal setting

6 step process of
Financial Planning

5. Implementation 3. Identification of
of recommendations financial problems

4. Written alternatives
& recommendations

25 June 2007 ADVANCED FINANCIAL PLANNING


COMPONENTS OF FINANCIAL PLAN
 Covering letter

 Cover page

 Summary of the plan

 Client profile

 Goals of the client

25 June 2007 ADVANCED FINANCIAL PLANNING


COMPONENTS OF FINANCIAL PLAN
 Financial statements

 Assumptions

 Risk Management & Insurance needs

 Goal Funding

 Retirement Planning

25 June 2007 ADVANCED FINANCIAL PLANNING


COMPONENTS OF FINANCIAL PLAN
 Tax Planning

 Asset Allocation – Portfolio Rebalancing

 Disclosures

 Disclaimers

 Risks

25 June 2007 ADVANCED FINANCIAL PLANNING


COMPONENTS OF FINANCIAL PLAN
 Cash Flow Projections

 Recommendations

 Action Plan

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SECTORAL VIEW

INVESTMENTS
INVESTMENTS
 OVERALL PRODUCT KNOWLEDGE

 PRODUCT’s STAR FEATURES

 ASPECTS AFFECTING CASH FLOWS

 TAXATION ASPECTS

25 June 2007 ADVANCED FINANCIAL PLANNING


RELIEF BONDS (TAX-FREE)
 Issued in March 2003

 Tenure – 5 years (2008)

 Interest @ 6.5% (Half yearly)

 Interest payments – 1st July & 1st January

 Compounding – Half yearly

 Maturity Value – Rs. 1000 becomes Rs. 1377

25 June 2007 ADVANCED FINANCIAL PLANNING


RELIEF BONDS (TAX-FREE)
 Individuals & HUF (No NRIs)

 Min – Rs. 1,000

 I.T & W.T – Exempt

 Premature encashment at the end of 3 years: timing at the


interest payment dates – penalty @ half of the interest due for the
last 6 months

 Discontinued by F.A 2004

25 June 2007 ADVANCED FINANCIAL PLANNING


RELIEF BONDS (TAXABLE)
 April 2003

 8% Interest (Taxable)

 6 years

 Interest payments – Half yearly (1st February & 1st August)

 Compounding – Half yearly

 Maturity Value – Rs. 1000 becomes Rs. 1601

25 June 2007 ADVANCED FINANCIAL PLANNING


RELIEF BONDS (TAXABLE)
 Individuals & HUF (No NRIs)

 Min – Rs. 1,000

 I.T & W.T – Taxable

 No Premature encashment at the end of 3 years

25 June 2007 ADVANCED FINANCIAL PLANNING


NATIONAL SAVING CERTIFICATES
 Minimum – Rs. 100

 Interest compounded half yearly

 100 becomes 160.10

 Six years – no premature encashment

 Premature allowed in case of death

25 June 2007 ADVANCED FINANCIAL PLANNING


NATIONAL SAVING CERTIFICATES
 Encashment Features:

 Within a year – only face value

 One year to three years – face value + simple interest

 More than 3 years – as per schedule

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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 5th
year.

25 June 2007 ADVANCED FINANCIAL PLANNING


PUBLIC PROVIDENT FUND
 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.

25 June 2007 ADVANCED FINANCIAL PLANNING


POST OFFICE SCHEMES
 Kisan Vikas Patra

 Post Office Monthly Income Scheme

 Post Office Saving Account

 RD – Rs. 10 becomes Rs. 728.9 (5 years)

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INVESTMENT CONCEPTS
 Return (HPR) & CAGR

 Expected Return on Security/ Portfolio

 Standard Deviation on Security/ Portfolio

 Co-efficient of correlation

 Co-variance

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INVESTMENT CONCEPTS
 Share Valuation

 Constant Growth Model

 Above normal growth rate & constant growth

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OPTIONS
 Call & Put Strategies

 Protective Put

 Covered Call

 Straddle

 Spread

 Collar

 Break even of put or call


25 June 2007 ADVANCED FINANCIAL PLANNING
TIME VALUE OF MONEY
 Present Value

 Future Value

 Present value of Annuity

 Future Value of Annuity

 Growing Annuity – Present Value

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SECTORAL VIEW

RETIREMENT
RETIREMENT CONCEPTS
 GRATUITY
 Gratuity as per POGA (calculation)
 3 types of workers:
 Month rated, piece rated and seasonal
 Month – 15 days salary
 Piece rated – 3 month avg salary
 Seasonal employees – 7 days wages for each season
 Gratuity after 5 years of service.

25 June 2007 ADVANCED FINANCIAL PLANNING


RETIREMENT CONCEPTS
 Provident Funds (not taxable after 5 years of service)

 Leave Salary

 VRS/ Retrenchment Compensation

 Super Annuation

25 June 2007 ADVANCED FINANCIAL PLANNING


RETIREMENT INCOME STREAMS
 Senior Citizens Saving Scheme

 Age – 60 years (55 years, for those who have retired)

 9% p.a.

 Qtrly interest – March, June, Sept & Dec

25 June 2007 ADVANCED FINANCIAL PLANNING


SECTORAL VIEW

INCOME-TAX
INCOME TAX CONCEPTS
 Heads of Income
 Salaries

 Business/ Profession

 Capital Gains

 House Property

 Other Sources
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INCOME TAX CONCEPTS
 Other Important Topics
 Clubbing of Income

 Set off & Carry Forward

 Agricultural Income

 Taxability of Gifts

 STT
25 June 2007 ADVANCED FINANCIAL PLANNING
SECURITIES TRANSACTION TAX
 Tax on purchase or sale of shares or derivatives or Units Of Equity
Oriented Mutual Fund In Recognized Stock Exchange Or Sale Of
Units To Mutual Fund.
 Taxable Service Is Price Of Securities Traded Or Futures Traded Or
In Case Of Option, Total Of Strike Price & Option Premium.
 Rate Of Tax:
Between From 1/06/05 To 31/05/06:
Delivery Based Sale Or Purchase Of
Securities From Stock Exchange 0.1%
Non Delivery Based 0.02%
Derivatives 0.0133%
Sale Of Units To Mutual Funds 0.2%
No Surcharge Or Education Cess.

25 June 2007 ADVANCED FINANCIAL PLANNING


SECURITIES TRANSACTION TAX
 Rate Of Tax:
Between From 1/10/04 To 31/05/05:
Delivery Based Sale Or Purchase Of
Securities From Stock Exchange 0.075%
Non Delivery Based 0.015%
Derivatives 0.01%
Sale Of Units To Mutual Funds 0.15%
No Surcharge Or Education Cess.
 Rate Of Tax:
FROM 1/06/06 (Till Date):
Delivery Based Sale Or Purchase Of
Securities From Stock Exchange 0.125%
Non Delivery Based 0.025%
Derivatives 0.17%
Sale Of Units To Mutual Funds 0.25%
No Surcharge Or Education Cess.

25 June 2007 ADVANCED FINANCIAL PLANNING


DIVIDEND DISTRIBUTION TAX
UPTO A.Y. 2006 – 07:
TAX ON DIVIDEND BY DOMESTIC COMPANY OR MUTUAL FUNDS AFTER
01/04/2003.
 TAX @ 12.5% + SURCHARGE + EDUCATION CESS.

FOR DIVIDEND BY MUTUAL FUND FROM 09/07/2005 TO PERSONS


EXCEPT INDIVIDUALS & HUF TAX @ 20%.
FOR DIVIDEND FROM EQUITY ORIENTED MUTUAL FUNDS, DDT IS EXEMPT.
 A.Y. 2007 – 08:
 Companies – 15%,
 MMMF & Liquid Fund – 25%,
 Other Funds – 12.5% (Individuals), 20% (Corporates)
 Equity Funds - Exempt

25 June 2007 ADVANCED FINANCIAL PLANNING


SALARIES
 Incl. Pension also
 Taxable on due or receipt basis (bonus taxable only on receipt
basis)
 Conveyance Reimbursement Fully Exempt.
 Conveyance Allowance. (EXEMPT UPTO Rs. 800/-P.M.) No Proof Of
Spending Needed.
 Medical Reimbursement. (EXEMPT UPTO Rs. 15,000/- P.A. IF IN
INDIA AND UPTO Rs.2,00,000/- If Abroad) Bills To Be Attached.
 Medical Allowance Fully Taxable.
 Mediclaim Of Employees & Their Family Paid By Employer Fully
Exempt.
 Children Education Allowance. (EXEMPT UPTO Rs. 100/- P.M.P.C.
Max. 2 Children) No Bills To Be Attached.
 Hostel Expenditure Allowance. (EXEMPT UPTO Rs. 300/- P.M.P.C.
Max. 2 Children) No Bills To Be Attached.

25 June 2007 ADVANCED FINANCIAL PLANNING


SALARIES
 HRA :
LOWEST OF:
1. ACTUAL HRA PAID.
2. RENT PAID OVER 10% OF SALARY.
3. 50% OF SALARY. (40% IN CASE OF NON METROS)

25 June 2007 ADVANCED FINANCIAL PLANNING


HOUSE PROPERTY
 Income derived from property (land and buildings
appurtenant)

 Received by the owner

 Not used for business or profession

25 June 2007 ADVANCED FINANCIAL PLANNING


COMPUTATION OF INCOME
 Gross Annual Value (as per specifications)

 Deduct Municipal Taxes (only paid by the owner during the year)

 Derive Net Annual Value

 Deduct Standard Deduction @ 30%

 Deduct interest on housing loan

 Net income/ loss offered to tax

25 June 2007 ADVANCED FINANCIAL PLANNING


BUSINESS/ PROFESSION
 Income from business, vocation and profession

 Speculative income

 Interest, commission of partners

 Deductions – expenses incurred wholly and exclusively


for business purposes

25 June 2007 ADVANCED FINANCIAL PLANNING


SPECIFIC EXPENSES
 Depreciation

 Repairs, rent, rates and taxes

 Bad debts

 Interest

 Bonus/ Commission to employees

 Insurance premium (health)


25 June 2007 ADVANCED FINANCIAL PLANNING
CAPITAL GAINS
 Capital asset means any property whether for business
or otherwise except stock in trade, personal effects
(except jewellery & house) & agricultural land in India.

 Long term capital asset is which is held for more than


12 months for shares & mutual funds and more than 36
months for others. others are called short term capital
assets.

25 June 2007 ADVANCED FINANCIAL PLANNING


COMPUTATION OF CAPITAL GAINS
 Full value of Sale Consideration (sale of property)

 Deduct: Expenses on transfer

 Net Sale consideration

 Deduct: Cost (Indexed) of acquisition

 Deduct: Cost (Indexed) of improvement

 Check for exemption of CG


25 June 2007 ADVANCED FINANCIAL PLANNING
CAPITAL GAIN ON SHARES
 No long term capital gain on shares and mutual funds if
securities transaction tax is paid.
 Short term capital gain on shares and mutual funds if
STT is paid is taxed @ 10%.
 If STT is not paid, STCG = added in total income. LTCG
= 20% with indexation or 10% without indexation.
 In case capital gain is taxed at concessional rate tax, no
80C to 80U benefit. but, minimum exemption limit
available in case of other income lower than exemption
limit.

25 June 2007 ADVANCED FINANCIAL PLANNING


OTHER SOURCES
 Dividends

 Income from vacant land

 Winnings from lotteries

 Maintaining race horses

 Family Pension (1/3rd or 15,000)

25 June 2007 ADVANCED FINANCIAL PLANNING


GIFTS
 Gifts received by individual or HUF only are treated as
income.

 Firm, company , trust, etc. Are exempt.

 Gifts received after 01/09/2004 and if above Rs.


5O,000/- from a single person are taxable. (w.e.f 1
April 2006)

 If gift received from more then 1 person together above


Rs. 50,000/- not taxable.

25 June 2007 ADVANCED FINANCIAL PLANNING


EXEMPT GIFTS
 Gifts received on marriage are exempt.

 Gift for some consideration exempt.

 Gift under will or inheritance or death of payer exempt.


 Relatives include:
 Spouse
 Brother or sister of self/ spouse
 Lineal ascendant or descendant
 Brother or sister of parents
 Spouse of each of the above

25 June 2007 ADVANCED FINANCIAL PLANNING


CLUBBING
 Transfer of income without transfer of asset is clubbed in the
hands of owner of asset.

 Income from revocable transfer except irrevocable during the


lifetime of the transferee is clubbed in the hands of transferor.

 Income from asset transferred without adequate consideration or


unreasonable remuneration to spouse is clubbed except if there is
technical or professional qualification.

 Income from asset transferred to son’s wife is also clubbed.

 Income of minor child is clubbed with higher income earning


parent except if the child is physically or mentally handicapped or
the child is using his own skill.

25 June 2007 ADVANCED FINANCIAL PLANNING


SET OFF & CARRY FORWARD
 Business loss is not allowed to adjusted with salary income.
 Loss from speculation can be setoff only with income from speculation.
 Loss from owning & maintaining horses will be setoff only against horse
racing income.
 Short term capital loss can be setoff with long term as well as short term
capital gain.
 Long term capital loss cannot be setoff with short term capital gain but
only with long term capital gain.
 Loss from exempted income cannot be setoff against taxable income.
 Loss from any head cannot be adjusted with winning from lotteries,
betting, etc.
 All unadjusted losses can be carried forward for 8 years except horse
racing loss which can be carried forward for 4 years.
 Such carried forward loss can be setoff in subsequent years only against
same heads.
 For all losses to be carried forward except loss

25 June 2007 ADVANCED FINANCIAL PLANNING


SECTORAL VIEW

RISK MANAGEMENT &


INSURANCE PLANNING
REQUIREMENTS OF INSURABLE RISKS
 Existence of sufficiently large number of homogenous
exposure units

 Loss must be definite and measurable

 Loss must be fortuitous and accidental

 Loss must not be catastrophic

25 June 2007 ADVANCED FINANCIAL PLANNING


STEPS OF RISK MANAGEMENT
 Identify Risks

 Analyze & Evaluate Risks

 Develop alternatives for handling risks: Risk control &


Risk financing

 Choose & implement appropriate strategy

 Monitor the strategy


25 June 2007 ADVANCED FINANCIAL PLANNING
CATEGORIES OF RISK
 Personal Risk:
 Death
 Disability
 Medicals

 Property Risk:
 Asset protection

 Liability Risk:
 Protection of liabilities towards people

25 June 2007 ADVANCED FINANCIAL PLANNING


TYPES OF POLICIES
 Term Plans:
 Level Benefit
 Increasing Benefit
 Decreasing Benefit

 Endowment Plans

 Money Back Plans

 Whole Life Plans

 Unit linked Plans


25 June 2007 ADVANCED FINANCIAL PLANNING
APPROACHES TO QUANTIFY RISKS
 Human Life Value Approach: Economic Value

 Multiple Approach: Apply a multiple to salary

 Needs Based Approach: Total of all needs

 Capital Retention Approach: Living only on income

25 June 2007 ADVANCED FINANCIAL PLANNING


CONCEPTS – GENERAL INSURANCE
 Average Clause - Coinsurance clause

 Indemnity Clause

 Valued Policy/ Indemnity with reinstatement

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SECTORAL VIEW

FINANCIAL RATIOS
FINANCIAL RATIOS
 Liquidity

 Solvency

 Risk Coverage

 Tax Burden

 Net Worth

25 June 2007 ADVANCED FINANCIAL PLANNING


LIQUIDITY RATIOS
 Basic Liquidity Ratio = Liquid Assets/ Monthly expenses

 Expanded Liquidity Ratio = (Liquid Assets + Other


Financial Assets)/ Other Expenses

25 June 2007 ADVANCED FINANCIAL PLANNING


SOLVENCY RATIOS
 Liquid Asset Coverage Ratio = Liquid Assets/ Total Debt

 Solvency Ratio = Liquid + Other Financial Assets/ Total


Debt

 Current Ratio = Liquid Assets/ Current Liabilities

25 June 2007 ADVANCED FINANCIAL PLANNING


RISK RATIOS
 Life Insurance Coverage Ratio = Net Worth + Death
Benefits/ Salary

25 June 2007 ADVANCED FINANCIAL PLANNING


TAX RATIOS
 Effective Income tax ratio = Income tax/ total realised
increases in net worth

 INFLATION PROTECTION RATIOS

Inflation Hedge Ratio = Equity, persona and


tangible assets/ Net Worth

25 June 2007 ADVANCED FINANCIAL PLANNING


NET WORTH RATIOS
 Net Worth Growth Ratio = Net Increase in Net worth/
Net worth at the beginning of the year

 Net worth entities ratio

25 June 2007 ADVANCED FINANCIAL PLANNING


SECTORAL VIEW

CODE OF ETHICS
CODE OF ETHICS
 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

25 June 2007 ADVANCED FINANCIAL PLANNING


CODE OF ETHICS
 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

25 June 2007 ADVANCED FINANCIAL PLANNING


CODE OF ETHICS
 COMPETENCE:
 Be informed of the developments in FP

 Offer advice only in areas of competence

 Representatives to be reasonably appointed

25 June 2007 ADVANCED FINANCIAL PLANNING


CODE OF ETHICS
 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

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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

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CODE OF ETHICS
 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

25 June 2007 ADVANCED FINANCIAL PLANNING


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


25 June 2007 ADVANCED FINANCIAL PLANNING
CODE OF ETHICS
 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


representatives activities, performance.

25 June 2007 ADVANCED FINANCIAL PLANNING


THANK YOU

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