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Module 1

Introduction to Financial Planning

Certified Financial Planner Module 1: Introduction to


Financial Planning
This session will help you understand

• Financial Planning- the concepts and implementation

• Regulatory, ethical and professional aspects of financial planning.

• Cash flow planning and budgeting.

• Personal Asset management.

• Financial Statement analysis and mathematics.

• Economic Environment and indicators.

• Forms of business ownership.

• Ways of taking legal title to property.

Certified Financial Planner Module 1: Introduction to Financial Planning


Financial Planning
• Process of meeting life’s goals by efficient management of your
financial resources
• Process involves defines short-term and long-term goals and
prioritizing and Assessing current financial situation and
commitments

Role of Financial Planning

Defining
Definingand
andprioritizing Deciding
prioritizing Accessing
Accessingcurrent
current Decidingwhere
whereyou
youwant
want
short finances
finances&&commitments to be in the future
short&&long
longterm
termgoals
goals commitments to be in the future

Identifying
Identifyingrealistic
realistic
Putting
Puttingthe
theplan
planinto
into
Monitoring
MonitoringPerformance
Performance strategies
strategiesto
toachieve
achievethethe
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action goals
goals

Certified Financial Planner Module 1: Introduction to Financial Planning


The Financial Planning process involves 6
steps:
2.Establishing
2.Establishingand
and
1.Monitoring
1.Monitoringthe
the 3.Gathering
3.GatheringClient
ClientData
Data&&
Defining the client-
Defining the client-
recommendations
recommendations Goals
Goals
Planner
Plannerrelationship
relationship

The Financial Planner The Financial Planner The Financial Planner


should: should: should
Discuss his objectives & Analyze information
expectations Obtain information &
documents
Discuss the services available Identify problems &
opportunities across each major
Clarify responsibilities and time Help your client “refine” or financial planning discipline
frame crystallize goals
Finance – Asset & Liability
Finalize the scope of the Structure, Cash Flows
engagement Help your client develop an
understanding of his/ her Investment Taxation –
Determine the fee/compensation values & attitudes
arrangement Ordinary and Income

Risk Management –
Insurances & Asset Protection

Law – Estate, Charitable &


Legacy Planning

Certified Financial Planner Module 1: Introduction to Financial Planning


The Financial Planning process involves 6
steps:
5.Developing
5.Developingand
and
4.Analysing
4.Analysingand
and 6.
6.Implementing
Implementingthethe
Presenting
PresentingFinancial
Financial
Evaluating Financial
Evaluating Financial Financial plan
Financial plan
Planning
Planning
Status
Status recommendations
recommendations
Recommendations/
Recommendations/
Alternatives
Alternatives

The Financial Planner The Financial Planner The financial planner


should: should: and the client should:

Prepare & present a Assist the Client or manage Review changes in personal
personalized financial plan the process as defined in the circumstances
Engagement Agreement
Establish a review cycle Review and evaluate impact of
changing tax laws

Review and Discuss changing


life circumstances

Make periodic adjustments or


recommendations as necessary

Certified Financial Planner Module 1: Introduction to Financial Planning


Objectives of Financial Planning
• Emergency Funding: To accumulate liquid assets to fund the short-
term financial needs.

• Protection against personal risks: To provide for personal risks such


as premature death, sudden disabilities, medical emergencies and
so on.

• Special needs funding: to accumulate savings to fund special needs


• higher education for children,
• wedding expense for each of the children,
• a lump sum for the down-payment deposit for a condominium
(apartment),
• an overseas holiday tour for the family and so on.

Certified Financial Planner Module 1: Introduction to Financial Planning


Objectives of Financial Planning

• Capital accumulation for


• Education funding.
• Retirement funding.
• General investment fund.

• Reduction of tax burden


• During one’s life time

• After death for income accruing to the heirs.

• Estate planning
• Investment and property management

Certified Financial Planner Module 1: Introduction to Financial Planning


How to make Financial Planning work:

• Set measurable goals

• Understand effects of financial decisions on other financial issues

• Periodically Re-evaluate Financial Plans

• Start as early as possible and start with what you have got

• Take charge of the financial planning engagement

• Look at the big picture – It is more than just retirement planning or tax
planning

• Don’t confuse financial planning with investing

• Don’t expect unrealistic returns on investments

• Don’t wait until a money crisis to begin financial planning

Certified Financial Planner Module 1: Introduction to Financial Planning


Establishing the Client- Planner
Engagement

Certified Financial Planner Module 1: Introduction to Financial Planning


Responsibilities: Client & Planner

Client Planner

• Express concerns, hopes and •Evaluating client’s financial and


goals
other needs
• Do not procrastinate
•Explaining financial concept and
• Be honest with your answers to
questions clarify client goal
• Live within your current •Analyzing client circumstances
income and do not live up to or and prepare financial plan
beyond it
•Implementing and monitoring
• Be open to formulating a
financial plan and identifying financial plan
strategies to reach goals and
objectives

Certified Financial Planner Module 1: Introduction to Financial Planning


Gathering Client Data and Determining
Goals and Expectations

Certified Financial Planner Module 1: Introduction to


Financial Planning
Data obtained from Client- 2 types

• Quantitative Data-
• May be described as statements of fact.
• A client's name, date of birth and salary are some
examples.

• Qualitative Data-
• These may be defined as ‘relevant information that is not
factual in nature’.
• More difficult to obtain and define.
• Relates more to personal and social attitudes of the client.
• Examples : attitude to risk, future employment prospects

Certified Financial Planner Module 1: Introduction to Financial Planning


Data Collection Form
• Very useful tool to obtain useful qualitative &
quantitative information from the client.

• Should contain at least the following sections:


• Personal Details
• Basic Financial Details
• Cash Flow
• Insurance
• Estate Planning
• Qualitative information
• Attitude to risk

Certified Financial Planner Module 1: Introduction to Financial Planning


Personal Details
Personal details should include the following:
• Name
• Date of birth
• Employment history
• Employment history
• Health/family history
• Family structures
• Legal structures
• Employee benefits

Certified Financial Planner Module 1: Introduction to Financial Planning


Basic Financial Details
• Financial planner should gather detailed information on client’s
financial assets & Liabilities
• Planner should ensure that they have a full list of the real and
estimated value of assets. Identify what is real and which has been
estimated.
• Note the date of acquisition of the assets and the purchase price.
• Be sure to differentiate between ' lifestyle', or personal assets and
investment assets wherever possible

Certified Financial Planner Module 1: Introduction to Financial Planning


Cash Flows

• Related to Income Sources & expenditures of the client.


• More rigorous approach required in this area, as only rough
estimates usually provided by client.
• Financial planners mostly use an expense calculator to
assist clients in calculating their domestic budget.
• Main elements typically found an expense calculator are
housing, transport, health, education and personal.

Certified Financial Planner Module 1: Introduction to Financial Planning


Insurance

• The financial planner should find out which insurance policies the
client has in force

• Should include life insurance, asset protection, income protection,


disability cover, and trauma / critical illness cover.

• In addition the financial planner should identify the level of


insurance protection over fixed assets.

Certified Financial Planner Module 1: Introduction to Financial Planning


Estate Planning

• The financial planner should confirm that client has a


current, valid will and that its location is known.

• Similarly the financial planner should confirm whether


the client is aware of the benefits of having relevant
powers of attorney in place for all those in the family
with assets.

Certified Financial Planner Module 1: Introduction to Financial Planning


Some tips for better data gathering

• Start with personal questions, rather than their


financial position

• Ask open ended questions

• Listening Skills

• Avoid negative non-verbal communication at all times

Certified Financial Planner Module 1: Introduction to Financial Planning


Goal Setting

• Financial Planning process begins with Goal Setting

• Goals may be short term (take less than 12 months to achieve) or


long term (take more than 12 months to achieve)

• Goals may be focused and specific (establishing a budget) or


comprehensive (retirement planning)

• Goals sometimes compete for available Funds; they sometimes


overlap; and sometimes interact

• Goals must be an extension of your values

Certified Financial Planner Module 1: Introduction to Financial Planning


Goal Setting
Goals must be SMART

- Specific

- Measurable

- Action Oriented

- Realistic

- Time Bound

Certified Financial Planner Module 1: Introduction to Financial Planning


Analyzing Client Objectives, Needs &
Financial Situation

Certified Financial Planner Module 1: Introduction to Financial Planning


Clients seek advice from financial
planners to

• Simplify investments by having someone else do the paperwork


• Reduce tax paid
• Ensure appropriate application of a windfall gain;
• Protect against time off work due to sickness, accidents, or
untimely death;
• Overcome lack of savings or rising debt obligations
• Have a second opinion on a financial plan developed by them;

Certified Financial Planner Module 1: Introduction to Financial Planning


Financial Objectives
Needs and Wants
• The process of 'mutually-defining' is essential to
determine what activities may be necessary to proceed
with the client engagement.

• Personal values and attitudes shape a client's goals and


objectives and the priority placed on them.

• Wants and Needs are two different things.


• 'Wants‘ are desires or things 'hoped for'; 'needs' are
requirements or things.

Certified Financial Planner Module 1: Introduction to Financial Planning


Clients Needs can be categorized into

• Protection Needs – The need to protect assets against losses

• Safety Needs - the need to accumulate funds for expenses


("saving to spend" needs) as well as to provide a liquid source
of funds for financial emergencies. Also a temporary
"parking place" for funds to be invested elsewhere in the
near future.

• Income Needs - the need to receive a constant, consistent


cash flow from assets.

• Growth Needs - the need to invest funds in wealth building


or appreciation oriented products to achieve longer term,
capital-intensive goals, such as education or retirement

Certified Financial Planner Module 1: Introduction to Financial Planning


Identifying the Client’s Attitude to Risk

• Quantitative information may not be sufficient for a financial


planner to formulate strategies for the client

• Qualitative information is required to understand the client’s


appetite for risk

• Planner should evaluate the client's grasp on general knowledge on


financial matters

• When the financial planner begins the process of strategy selection


within the plan, it is critical to understand the client's attitude to
risk.

Certified Financial Planner Module 1: Introduction to Financial Planning


Analysis of relevant information
Personal Details: The main points to consider are :
• The age and life expectancy of the income earner in relation to
the likelihood of death or disablement;
• The gender of client and any dependants;
• The effects of smoking and
• The number and status of dependants

Other information which requires in-depth analysis


includes:
• Employment history
• Health/family history
• Family structures
• Legal structures

Certified Financial Planner Module 1: Introduction to Financial Planning


Analysis of relevant information
Financial Details:
• Analyze the assets and liabilities: Financial planner must
analyze assets & Liabilities situation of client to formulate
financial plan.
• Sources of Income: A tax return is a good basis to cover all
aspects. Note also any employer-provided perquisites.
• Expenditure of the client: Using the budget form, try to
isolate discretionary from non-discretionary expenses.
• The purpose of isolating these expenses is to find out what
the basic requirements are.

Certified Financial Planner Module 1: Introduction to Financial Planning


Developing Appropriate Strategies

Certified Financial Planner Module 1: Introduction to Financial Planning


Developing Strategies
The following things need to be kept in mind:
• Clients Risk Tolerance
• Assessment of Option
• Research Analysis & Modelling
• Draft Financial Plan
• Implementation of Plan
• Monitor and evaluate soundness of Recommendation
• Make recommendations to Accommodate New or
Changing Circumstances

Certified Financial Planner Module 1: Introduction to Financial Planning


Client’s Risk Tolerance
There are three types of clients for whom risk tolerance
assessment is particularly difficult.

• Clients who have the willingness to take risks, but don’t have
the financial ability.
• Clients who have the financial ability but don’t have the
willingness to take risks.
• All other clients

Certified Financial Planner Module 1: Introduction to Financial Planning


Client’s Risk Tolerance

• Selecting appropriate insurance coverage and determining


investment suitability depend on the planner’s ability to assess risk
tolerance

• Risk tolerance has four distinct aspects. An analysis of client risk


tolerance involves an evaluation of four risk concepts: propensity,
attitude, capacity and knowledge

Certified Financial Planner Module 1: Introduction to Financial Planning


Dimensions of Risk Tolerance

• Risk propensity: The clients’ attitude toward risk can be


determined by reviewing their real-life decisions in financial
situations.

• Risk attitude: The clients’ willingness to incur financial risk

• Risk capacity: The client’s financial ability to incur risk

• Risk knowledge: The client’s understanding of risk

Certified Financial Planner Module 1: Introduction to Financial Planning


Development of Strategies
• Six main strategic : cash flow and budgeting, investment planning,
taxation planning, investment planning, risk management &
insurance planning and estate planning.

• Wide range of alternative strategies available within each area.

• Only a comprehensive plan taking into consideration all the


strategic areas can help in achieving the client’s goals.

Certified Financial Planner Module 1: Introduction to Financial Planning


The Strategy Development Process

Check
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thatyou
youhave
have
all the information
all the information

Secure
Securethe
theclient’s
client’s
current
current financialposition
financial position

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Establishthe
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and financial concern

Recommendations
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client'sdesired
desired
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financialposition
position

Certified Financial Planner Module 1: Introduction to Financial Planning


Drafting the Financial Plan
• Using data collected via various sources of data collection,
financial planner to draft the financial plan.

• The plan should be in a lucid language so client can


understand

• Financial planning software can be used for this purpose,


however, these should not be used in isolation for
developing the plan.

Certified Financial Planner Module 1: Introduction to Financial Planning


Essentials Components of a written financial
plan

• Executive summary/ financial plan summary


• Statement of current situation and financial objectives
• Assumptions
• Financial planning strategy
• Specific recommendations
• Projections
• Services, fees and commissions
• Summary of recommendations
• Action to proceed
• Authority to proceed/Letter of engagement
• Disclosures

Certified Financial Planner Module 1: Introduction to Financial Planning


Implementing and Monitoring the
financial Plan

Certified Financial Planner Module 1: Introduction to Financial Planning


Implementing and monitoring the
financial plan
Implementing the plan:
• Implementation of the plan is the next step in the process.
• A financial plan is useful to the client only if it is put into action.
• Financial planner to assist the Client or manage this process as
defined in the Engagement Agreement

Monitoring the plan- The Financial Planner and the Client should:
• Conduct periodic reviews when:
• Changes in personal circumstances
• Changing tax laws
• Changing life circumstances
• Make periodic adjustments or recommendations as necessary

Certified Financial Planner Module 1: Introduction to Financial Planning


Financial planning review

• The financial planner should establish a client file and a system for
periodic review and revision.

• The financial planner to monitor performance of investments,


changes in tax laws & regulations (the general economic
environment) and also evaluate new financial products for possible
inclusion.

• Financial planner to regularly evaluate the plan with respect to


any changes in the client’s situation.

Certified Financial Planner Module 1: Introduction to Financial Planning


Financial planning review

The following issues can be expected at this step:

• Have the client or the planner agreed to have the


recommendations and the client’s financial progress monitored
periodically?

• If so, does the planner review and evaluate changing


circumstances and make new recommendations based on the
changes, as and when it is appropriate?

Certified Financial Planner Module 1: Introduction to Financial Planning


Need for financial planning review

Regular reviews are necessary for :


• Changes in personal circumstances- Plans may need to be revised
for reasons such as loss of a job, addition of a new family member
and so on.

• Changes in the external environment- Changes in regulations,


economic and market conditions may warrant changes in the
financial plans

• Product related factors- To find out if the product recommended


to the client is still applicable to his needs.

Certified Financial Planner Module 1: Introduction to Financial Planning


Steps in the financial planning review

The review process should take the following steps:

• Measuring the performance of the implementation vehicles;

• Update information on the client’s personal and financial


situation;

• Examine the impact of economic, tax or the financial environment


on the effectiveness of the plan.

Certified Financial Planner Module 1: Introduction to Financial Planning


Benchmarking Performance & updation of
plans

• Setting a performance benchmark helps track progress made


towards the goal. The type of benchmarks to be used is important.
• These are important indicators for both the client and the financial
planner. They trigger off action that may be required
• The review process will help in identification of areas which need
changes to be made.
• Situation may require focus on a particular goal to shift or
abandonment of goals.
• A new plan should then be presented to the client, incorporating
such changes.

Certified Financial Planner Module 1: Introduction to Financial Planning


To summarize…

• Soundness of a comprehensive financial plan is based on how well


the individual chosen strategies complement each other.

• There are six fundamental strategy areas that should be addressed

• The options chosen as recommendations to the client from each of


these categories should work together to enhance the client's
overall financial position, both now and in the future.

Certified Financial Planner Module 1: Introduction to Financial Planning


Regulatory Requirements for CFP
Certificants

Certified Financial Planner Module 1: Introduction to Financial Planning


Certification requirements
• Student Member Requirements
• The Association of Financial Planners requires certain
declarations acceptance as Student Members.

• These disclosures are given on registration for the program.

• Candidates should fill in the required details. Students from


any discipline, including undergraduates can apply for CFP™
certification.

• The work experience criterion is not necessary to enroll for the


program.

Certified Financial Planner Module 1: Introduction to Financial Planning


Certification requirements
Modules: The CFP™ certification is granted to individuals who have
demonstrated technical competency, enabling them to write (to
international standards) a comprehensive and detailed financial plan
for an individual.

The certification covers six India-localized course modules as


follows:
Module 1: Introduction to Financial Planning
Module 2: Risk Management and Insurance Planning
Module 3: Retirement Planning and Employee Benefits
Module 4: Investment Planning
Module 5: Tax Planning and Estate Planning
Module 6: Financial Plan Construction

Certified Financial Planner Module 1: Introduction to Financial Planning


Certification requirements
CFP™ Certification Requirements:
Candidates have a maximum of seven years to complete
the certification process.

For certification, you are required to meet the following


four initial certification requirements (known as the
four "Es").
• Education
• Examination
• Experience
• Ethics

Certified Financial Planner Module 1: Introduction to Financial Planning


Ethical and Professional Consideration

Certified Financial Planner Module 1: Introduction to Financial Planning


Professional Standards

• Professional Standards have been adopted by the Financial


Planning Standards Board (FPSB), India to provide Code of Ethics
and Rules of Professional Conduct to all its Members.

• The Standards consists of two parts: Code of Ethics and Rules of


Professional Conduct.

Certified Financial Planner Module 1: Introduction to Financial Planning


The Code of Ethics
• The Code of Ethics are statements expressing in
general terms the ethical and professional ideals
expected of members

• The Rules of Professional Conduct are derived from the


tenets embodied in the Code of Ethics. As such, the
Rules set forth the standards of ethical and
professionally responsible conduct expected to be
followed in particular situations

Certified Financial Planner Module 1: Introduction to Financial Planning


The Code of Ethics
• Code of Ethic 1 – Integrity
Members shall observe high standards of honesty in conducting their
financial planning business and shall offer and provide financial planning
services with integrity.

• Code of Ethic 2 – Objectivity


Members shall disclose to the client any limitation on their ability to
provide objective financial planning services.

• Code of Ethic 3 – Competence


Members shall provide competent financial planning services and maintain
the necessary knowledge and skill to continue to do so in those areas in
which the Member is engaged.

• Code of Ethic 4 – Fairness


Members shall provide financial planning services in a manner that is fair
and reasonable.

Certified Financial Planner Module 1: Introduction to Financial Planning


The Code of Ethics
• Code of Ethic 5 – Confidentiality
Members shall not disclose any confidential client information without the
specific consent of the provider of that information unless compelled to
by law or as required to fulfill their legal obligations.

• Code of Ethic 6 – Professionalism


Members shall ensure their conduct does not bring discredit to the
financial planning profession.

• Code of Ethic 7 – Diligence


Members shall act with due skill, care and diligence in providing financial
planning services.

• Code of Ethic 8 – Compliance


Members must maintain knowledge of and comply with the Constitution of
the AFP, the AFP's Code of Ethics and Rules of Professional Conduct and all
applicable laws, rules and regulations of any government, government
agency, regulatory organization, licensing agency or professional
association governing the members' professional activities.

Certified Financial Planner Module 1: Introduction to Financial Planning


Rules of professional conduct
There are a number of rules of professional conduct that have
been set for CFP Candidates. These relate to the following broad
categories:

• Rules that Relate to the Code of Ethic of Integrity


• Rules that Relate to the Code of Ethic of Objectivity
• Rules that Relate to the Code of Ethic of Competence
• Rules that Relate to the Code of Ethic of Fairness
• Rules that Relate to the Code of Ethic of Confidentiality
• Rules that Relate to the Code of Ethic of Professionalism
• Rules that relate to the Code of Ethic of Diligence
• Rules that related to the Code of Ethics of Compliance

Certified Financial Planner Module 1: Introduction to Financial Planning


Assessment of Risk & Client Behavior

Certified Financial Planner Module 1: Introduction to Financial Planning


Risk Assessment

• Risk profiling: A method of determining clients’ attitude to risk

• This technique involves asking the client a prescribed series of


questions whose answers are designed to produce a value or point
on a scale that indicates the client’s risk acceptance.

• It is sound practice to discuss the nature of various investment


risks with the client so that the data you gather is based on a full
client understanding of those risks.

Certified Financial Planner Module 1: Introduction to Financial Planning


Risk Tolerance
• Assessing client risk tolerance is one of the most important and
most nebulous, activities for financial planners.

• Selecting appropriate insurance coverage & determining


investment suitability depend on planner’s ability to assess risk
tolerance. However, no definitive standard for evaluating risk
tolerance has emerged.

• There are three types of clients for whom risk tolerance


assessment is particularly difficult.
• The first type consists of clients who have the willingness to incur risk,
but don’t have the financial ability.
• The second type consists of clients who have the financial ability to
incur risk but don’t have the willingness.
• The third type consists of all other clients.

Certified Financial Planner Module 1: Introduction to Financial Planning


Risk Propensity
• Risk propensity The client’s attitude toward risk can be
determined by reviewing the client’s real-life decisions in financial
situations.

• For example, Clients who carry too little insurance or hold highly
risky assets are risk tolerant.

• But, Clients often make financial decisions without fully


understanding their impact. The client may be underinsured
because of simple procrastination or ignorance of the nature of the
risks they face.

• Sometimes they keep in their portfolios assets that were obtained


by inheritance or marriage, and may retain assets for family,
sentimental or tax reasons.

Certified Financial Planner Module 1: Introduction to Financial Planning


Risk Attitude
• Risk Attitude: The clients willingness to incur financial
risks.

• Planners should use a scientifically designed


questionnaire that directly addresses risk attitude.

• Among the types of questionnaire items used to


evaluate attitude are the following:

Certified Financial Planner Module 1: Introduction to Financial Planning


Risk Attitude
• Ranking investment objectives

• Allocating a make-believe windfall among various investment


options

• The level of thrill or anxiety felt after making financial decisions

• Selecting the preferred risk/return trade-off from a set of possible


alternatives

• Specifying the odds that would be required to entice the


respondent to accept a bet with a specified amount of gain or loss

• Specifying the rate of return that would be required to entice the


respondent to accept a bet with a specified set of odds.

Certified Financial Planner Module 1: Introduction to Financial Planning


Risk Capacity
• Risk Capacity: The client’s financial ability to incur risks, starting with the
client’s age and family responsibilities.

• Considers amount & stability of income relative to fixed & discretionary


expenses.

• Analysis of the balance sheet- asset allocation and portfolio


diversification, risk exposure in the portfolio, and the size and payment
structure of the liabilities and other contractual commitments are also
done.

• Portfolio goals and constraints (including time horizons) and the need for
current income, capital preservation and growth are part of the risk
capacity evaluation.

• An often forgotten aspect of capacity is the adequacy of the client’s


insurance coverage, which protect clients from some financial risks, thus
allowing them to take other financial risks.

Certified Financial Planner Module 1: Introduction to Financial Planning


Risk Knowledge

• Risk knowledge: The client’s understanding of risk.

• It is presumed that, Clients are more likely to make


informed financial decisions if they understand the nature of
risk and their exposure to it

• Further, clients who understand risk are less likely to panic


if investments do not perform upto expectations.

Certified Financial Planner Module 1: Introduction to Financial Planning


Importance of Risk Assessment

• The planner can find out if their client’s financial situation allows
them to take greater risks.

• If their financial situations allow them to take greater risks, they


will be more willing to do so.

• For clients whose risk capacity is low relative to attitude, planners


can point out factors that will improve risk capacity, based on the
assessment of risks.

Certified Financial Planner Module 1: Introduction to Financial Planning


Cash Flow Planning and Budgeting

Certified Financial Planner Module 1: Introduction to Financial Planning


Cash Flow Planning And Budgeting

• Short-term cash flow planning

• Cash budgeting

• Preparing monthly household budget

• Long-term cash flow planning

Certified Financial Planner Module 1: Introduction to Financial Planning


Cash Flows
• Cash flows for an individual client mean his or her income and
expenditure.
• 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 to enable you to do the things
that bring you satisfaction and enjoyment.
• Choosing and following a course toward medium and long term
financial goals such as buying a house, sending your kids to college, or
retiring comfortably.
• Building a financial safety net to prevent financial disasters caused by
catastrophic illnesses or other personal tragedies.

Certified Financial Planner Module 1: Introduction to Financial Planning


Top ten features of a successful
budget
• Put expenses into categories that fit personal situation and spending
habits of the client, not somebody else’s.

• Project incomes accurately.

• Have enough categories to give a meaningful picture of where money goes


and where costs can be cut, but don’t make it too expansive.

• Include expenses that don't occur on a monthly basis, such as vehicle


maintenance, homeowners insurance, personal property taxes, service
contracts, etc.

• Regularly review categories to determine if more or fewer are needed,


review expenses, and brainstorm about ways to trim costs in each
category.

Certified Financial Planner Module 1: Introduction to Financial Planning


Some things to keep in mind while
budgeting
• Track and record expenditure and spending: Cash disappears
quickly and if you don't write down everything you spend it on,
you'll have a distorted look at your spending.

• Align item for savings so you treat a contribution to your savings


account just as you would a bill you owe.

• Have realistic written goals: Without goals, your budget is just a


pair of handcuffs.

• Identify spending patterns: This may identify expensed you may


not have been aware of when you weren't tracking your spending

Certified Financial Planner Module 1: Introduction to Financial Planning


Why do people keep cash?

• Transaction motive: Cash for day-to-day routine transactions such


as buying daily groceries.

• Precautionary motive: Keeping cash as a precaution against


unforeseen events and emergencies.

• Speculative motive: Keeping cash for investing in securities when


the right time arises.

• Compensation motive: A minimum balance is needed to avail of


bank accounts, credit cards, ATM cards, personal loans etc.

Certified Financial Planner Module 1: Introduction to Financial Planning


MONITORING, EVALUATION AND COMPLIANCE OF
BUDGETS:
• Budgeting and complying with the budget is important

• Budget needs to be evaluated & monitored on a continuous basis to find


out variations.

• A statement of variances may need to be prepared, which, shows variance


from budgeted figures, with reasons thereof and specific measures taken
to address them.

• These variances may as a result of an error in budgeting the figures due to


some wrong assumptions about economic indicators or ignoring some
associated expenses with a particular head.

• Financial planners should ensure that there is a continuous compliance


with the budget estimates to facilitate clients to meet their short-term
and long-term financial goals.

Certified Financial Planner Module 1: Introduction to Financial Planning


Personal Use Asset Management

Certified Financial Planner Module 1: Introduction to Financial Planning


Financing of Personal Assets
Following are the main types of personal assets financing
instruments:
• Home loans
• Mortgages
• Leases
• Refinancing
• Hire-purchase
• Consumer loans
• Credit cards

Certified Financial Planner Module 1: Introduction to Financial Planning


Mortgage Loans
There are six different types of mortgages:

• Simple Mortgage.
• Mortgage by conditional sale.
• Usufructuary mortgage.
• English mortgage.
• Mortgage by deposit of title deeds.
• Anomalous mortgage

Certified Financial Planner Module 1: Introduction to Financial Planning


Types of Mortgages
Mortgage
Mortgageby
by Usufructary
Usufructary English
English
Simple
SimpleMortgage
Mortgage conditional sale
conditional sale Mortgage
Mortgage Mortgage
Mortgage

Property
Propertystands
stands
absolutely
absolutely
Possession
Possessionstands
stands transferred
transferredto tothe
the
transferred
transferred mortgagee
mortgageewithwithaa
Involves
Involves to
to themortgagee
the mortgagee covenant
covenantto torepay
repay
AAmortgage
mortgagewithout
without an
an ostensiblesale
ostensible sale and
and rentsand
rents andprofits
profits the mortgage
the mortgage
the
the transferof
transfer of to start with
to start with from the property
from the property money
moneyon onaacertain
certain
any property.
any property. which
whichbecomes
becomes can
canbe beenjoyed
enjoyedbyby date by the
date by the
absolute
absoluteonondefault
default the
themortgagee
mortgageetill
till mortgagor,
mortgagor,
payment of the
payment of the when
whenthethe
mortgage
mortgagemoney
money property
property willbe
will be
re-transferred
re-transferred tothe
to the
mortgagor.
mortgagor.

Certified Financial Planner Module 1: Introduction to Financial Planning


Types of Mortgages
Mortgage
Mortgagebybydeposit
deposit Anomalous
AnomalousMortgage
Mortgage
of
oftitle
titledeeds
deeds

The
Thesecurity
securityfor
forthe AAsimple
the simplemortgage
mortgage
money
moneyisisintended giving
intended giving an addedright
an added righttoto
to
tobebecreated
createdbyby take possession in
take possession in
deposit of the case
deposit of the caseofofdefaults
defaultsof
of
title
titledeeds
deedsororpapers payment
papers paymentbecomes
becomesan an
of
of the property..
the property anomalous
anomalousmortgage.
mortgage.

Certified Financial Planner Module 1: Introduction to Financial Planning


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.

Certified Financial Planner Module 1: Introduction to Financial Planning


Personal Financial Statement Analysis

Certified Financial Planner Module 1: Introduction to Financial Planning


Personal Financial Statement Analysis
• Analysis of client’s financial condition is necessary to help him/
her
• better manage financial resources,

• develop effective spending patterns consistent with


consumption and investment goals, and

• to guard against excessive use of debt.

• Sources of information for Personal Financial Statement Analysis


• Bank passbook or statements

• Return of income filed and Form 16A

• Other statements- Other sources of information include bills


received, insurance policies, fixed deposit statements and
other investments.

Certified Financial Planner Module 1: Introduction to Financial Planning


Personal Financial Statement Analysis
Each of these ratios should provide information that is either
predictive or diagnostic about the client’s financial situation.

The ratios we will suggest provide information about the following six
aspects of the client’s financial situation:
• Liquidity
• Debt
• Risk exposure
• Tax burden
• Inflation protection
• Net worth

Certified Financial Planner Module 1: Introduction to Financial Planning


Calculation of ratios

ƒ Basic Liquidity Ratio = Liquid assets/ Monthly


expenses

ƒ Expanded Liquidity Ratio = Liquid Assets and


Other Financial Assets / Monthly Expenses

ƒ Liquid Asset Coverage Ratio = liquid asset / total


debt

ƒ Solvency Ratio = liquid and other financial


assets / total debt

ƒ Current Ratio = liquid assets / non- mortgage debt

Certified Financial Planner Module 1: Introduction to Financial Planning


Calculation of ratios
• Life insurance coverage ratio = net worth + death
benefits of principal wage earner / salary of principal
wage earner
• Effective income tax ratio = income tax liability / total
realized increases in net worth
• Inflation hedge ratio = equity, tangible and personal
assets /net worth
• Net cash flow ratio = 1 – Realized Decreases in net
worth
Realized Increases in net worth
• Net worth growth ratio = net increase in net worth /
net worth at beginning of the year

Certified Financial Planner Module 1: Introduction to Financial Planning


Economic Environment and Indicators

Certified Financial Planner Module 1: Introduction to Financial Planning


Importance of Economic and Business
Environment
• Significant implications on the financial plans and
recommendations.

• Recommendations depend on a number of assumptions about the


future performance of the economy.

• Financial planners should always keep a track of economic


environment to make reasonable assumptions.

• A thorough understanding of economic environment helps in


reviewing the existing financial plans.

Certified Financial Planner Module 1: Introduction to Financial Planning


ECONOMIC FACTORS: GNP & GDP

Gross This
Thisisisthe
thevalue
valueof
ofoutput
outputofofgoods
goodsand
andservices
GrossNational
National produced
services
Product
Product(GNP)
(GNP) produced by Indian companies, regardless ofwhether
by Indian companies, regardless of whether
the production is inside or outside the
the production is inside or outside the IndiaIndia

Gross The
Thevalue
valueof
ofoutput
outputof
ofgoods
goodsand
andservices
servicesproduced
GrossDomestic
Domestic in
produced
Product
Product(GDP)
(GDP) in the country, regardless of whether businessesare
the country, regardless of whether businesses are
owned and operated by Indians or foreigners.
owned and operated by Indians or foreigners.

-
profits on

= +
profits on
Gross
GrossNational
National Gross
GrossDomestic
Domestic Indian owned
foreign owned
Product
Product(GNP)
(GNP) Product
Product(GDP)
(GDP) businesses
businesses
outside India

Certified Financial Planner Module 1: Introduction to Financial Planning


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= CC ++ II ++ GG ++ (X-
(X- M)
M)
CC==personal
personalconsumption
consumptionspending
spendingon
ongoods
goodsand
andservices
services

I I==Private
Privatesector
sectorfixed
fixedcapital
capitalexpenditure
expenditure

GG==Government
Governmentexpenditure
expenditure

(X-M)=
(X-M)=Net
Netof
ofexport
exportreceipts
receipts(X)
(X)and
andimport
importpayments
payments(M)
(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.

Certified Financial Planner Module 1: Introduction to Financial Planning


Example:
The following information is available for an economy.
Consumption (C) = Rs 3000
Private Investment (I) = Rs 500
Government Expenditure (G) = Rs 2000
Exports (E) = Rs 1000
Imports = Rs 1500
Calculate the GDP for the economy?

Answer:
GDP = 3000 + 500 + 2000 + (1000-1500)
= 5500 – 500
= 5000

Certified Financial Planner Module 1: Introduction to Financial Planning


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

Certified Financial Planner Module 1: Introduction to Financial Planning


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.

Certified Financial Planner Module 1: Introduction to Financial Planning


Types of Inflation
Result
Resultof ofaasteady
steadyincrease
increasein
inaggregate
aggregatedemand
demand
Demand
DemandPull
PullInflation for
Inflation forgoods
goodsand
andservices
serviceswhen
whenthe theeconomy
economy
isisunable to adequately fill this demand.
unable to adequately fill this demand.

Result
Resultof
ofaahigher
highercost
costfactor
factorof
ofproduction
production
Cost
CostPush
PushInflation
Inflation being
beingpassed
passedalong
alongto
tothe
theconsumer
consumer
in
inthe
theform
formof
ofhigher
higherprices.
prices.

Producers
Producersexerting
exertingaastrong
stronginfluence
influenceon
on
Administered
AdministeredPrices
Prices the
theprice
priceof
ofthe
theproduct
productbecause
because
of a lack of competition.
of a lack of competition.

Inability
Inabilityto
tosolve
solvethe
thesimultaneous
simultaneousproblems
problemsof of
Stagflation
Stagflation economic stagnation and inflation
economic stagnation and inflation
through
throughthetheuse
useof
ofmonetary
monetaryand
andfiscal
fiscalpolicies.
policies.
This occurs when high rates of inflation
This occurs when high rates of inflation
and
andhigh
highrates
ratesofofunemployment
unemploymenthappen
happen
simultaneously.
simultaneously.

Certified Financial Planner Module 1: Introduction to Financial Planning


MONETARY POLICY AND INTEREST RATES
& 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.

Certified Financial Planner Module 1: Introduction to Financial Planning


Fiscal policies of the government
Fiscal policy deals with spending, borrowing and taxes and has a
major influence on raising debt and on interest rates.

It is based on revenue and outlays, revenue income from taxation,


sale of government assets and borrowings.

Goals of fiscal policy goals include:


• Maximum employment.
• Minimizing the impact of the business cycle.
• A growing economy.
• Stable or gradually rising prices

Certified Financial Planner Module 1: Introduction to Financial Planning


INTEREST RATES / YIELD CURVE

Monetary policy of the RBI aims to stabilize the economy


through regulation of the money supply.

Monetary policy acts upon interest rates and these in turn


affect the level of investment undertaken in the
economy.

Certified Financial Planner Module 1: Introduction to Financial Planning


Long-term interest rates are influenced by

• Inflationary expectations are added to the real interest rate


required to get the interest rate.

• Real interest rate required

• Term of maturity –longer the maturity, higher the rates as greater


risk is associated with long-term than with the short-term
investment.

• Borrowers’ characteristics- interest rates also depend on the risk


profile of the borrowers. Interest rates on secured loan will be less
than that of on the unsecured loans.

Certified Financial Planner Module 1: Introduction to Financial Planning


CRR and SLR
• Short term interest rates, are influenced by the bank rate and the
cash reserve ratio (CRR) and the statutory liquidity ratio (SLR).

• CRR is the cash reserve which banks are required to keep with the
RBI ; SLR is the proportion of funds that banks need to keep in
Government Securities

• The CRR is currently 5.5% while the SLR is 25%.

Certified Financial Planner Module 1: Introduction to Financial Planning


EQUITY INVESTMENT AND REAL RETURN

• Equity Stockholders share in profits and control business with their


voting rights

• Common stockholders may be called the owners of the corporation.

• Stockholders also share in losses and are liable to creditors of the


corporation but only to the extent of their investment.

Certified Financial Planner Module 1: Introduction to Financial Planning


Categories of Common Stock

Growth Income Cyclical Defensive Blue Chip


Stocks Stocks Stocks Stocks Stocks

Good Earning Stocks in Stock which One which The least risky
Potential and companies fluctuates declines less form of stock.
very low yield whose earnings widely over than most in a These are the
because the are good, but swings in the general stocks of older,
company is are not business cycle. downturn of well-
reinvesting the growing much This is the the market. established
bulk of its stock of It is usually companies,
earnings in companies income stock which have
expansion. whose sales proved that
and earnings they can earn
vary greatly. profits.

Besides these, we have speculative stocks - Stocks of new, small firms whose chances
for success are not great (mining stocks, etc.). An investor should not place money in
these stocks if they cannot afford to lose it during bad times.

Certified Financial Planner Module 1: Introduction to Financial Planning


Preferred Stock
• Preferred stock is a type of stock issued by a corporation that gives
some kind of preference to the purchasers.
• The preferred stockholder will not only receive a fixed dividend, but
will also have the opportunity for capital appreciation.
• Types of Preferred Stock Include:

Non-
Non-
Cumulative
Cumulative Participating
Participating Convertible
Convertible
Cumulative
Cumulative
Dividends If no dividends If earnings Can be
accumulate from suffice, the exchanged for
are paid in
prior years. preference common stock or
prior years,
When the shareholder will other securities
company The corporation also share in the same
declares is not liable for equally, the company or
dividends, those such failure to dividend paid to other
in arrears pay dividends common share companies, at
receive back holders the option of the
dividends stockholder

Certified Financial Planner Module 1: Introduction to Financial Planning


Financial Mathematics

Certified Financial Planner Module 1: Introduction to Financial Planning


The Time Value of Money

• The Interest Rate


• Simple Interest
• Compound Interest
• Amortizing a Loan
• Compounding More Than Once per Year

Certified Financial Planner Module 1: Introduction to Financial Planning


TIME allows you the opportunity to
postpone consumption and earn INTEREST

Certified Financial Planner Module 1: Introduction to Financial Planning


Types of Interest
Simple Interest
Interest paid (earned) on only the original amount, or
principal, borrowed (lent).

Compound Interest
Interest paid (earned) on any previous interest earned, as
well as on the principal borrowed (lent).

Certified Financial Planner Module 1: Introduction to Financial Planning


General Future Value Formula
FV1 = P0(1+i)1
FV2 = P0(1+i)2

General Future Value Formula:


FVn = P0 (1+i)n
or FVn = P0 (FVIFi,n) -- See Table

Certified Financial Planner Module 1: Introduction to Financial Planning


General Present Value Formula
PV0 = FV1 / (1+i)1
PV0 = FV2 / (1+i)2

General Present Value Formula:


PV0 = FVn / (1+i)n
or PV0 = FVn (PVIFi,n) -- See Table

Certified Financial Planner Module 1: Introduction to Financial Planning


Annuity
The future value of an ordinary annuity can be viewed as
occurring at the end of the last cash flow period, whereas
the future value of an annuity due can be viewed as
occurring at the beginning of the last cash flow period

Certified Financial Planner Module 1: Introduction to Financial Planning


Steps to Solve Time Value of Money Problems

z Read problem thoroughly


z Create a time line
z Put cash flows and arrows on time line
z Determine if it is a PV or FV problem
z Determine if solution involves a single CF, annuity
stream(s), or mixed flow
z Solve the problem
z Check with financial calculator (optional)

Certified Financial Planner Module 1: Introduction to Financial Planning


Frequency of Compounding

General Formula:
FVn = PV0(1 + [i/m])mn
n: Number of Years m:
Compounding Periods per Yeari: Annual
Interest Rate FVn,m: FV at the
end of Year n
PV0: PV of the Cash Flow today

Certified Financial Planner Module 1: Introduction to Financial Planning


Effective Annual Interest Rate

Effective Annual Interest Rate


The actual rate of interest earned (paid) after adjusting
the nominal rate for factors such as the number of
compounding periods per year.

(1 + [ i / m ] )m - 1

Certified Financial Planner Module 1: Introduction to Financial Planning


COMPARISON OF INVESTMENT RETURNS

NET PRESENT VALUE


NPV = Present value of future cash flows
NPV = A0 + A1 + A2 + ………….. + An

(1+r)0 (1+r)1 (1+r)2 (1+r)n


Where,
NPV = Net present value
At = cash flow occurring at the end of year t (t = 0,1,2, ……, n)
r = discount rate
n = period of cash flows

Certified Financial Planner Module 1: Introduction to Financial Planning


IRR
The internal rate of return of a project is the discount
rate which makes its net present value equal to zero. It
is the discount rate in the equation
0= A0 + A1 + A2 + ………….. + An
(1+r)0 (1+r)1 (1+r)2 (1+r)n
In the net present value calculation we assume that the
discount rate (cost of capital) is known and determine
the net present value of the project. In the internal
rate of return calculation, we set the net present value
equal to zero and determine the discount rate (internal
rate of return) which satisfies this condition.

Certified Financial Planner Module 1: Introduction to Financial Planning


PAY BACK PERIOD
• The payback period is the length of time required to recover the
initial cash outlay on the project. According to the payback
criterion, the shorter the payback period, the more desirable the
project.

• The accounting rate of return, also called the average rate of


return, is defined as Profit after tax/ Book value of investment

• The numerator of this ratio is the average annual post tax profit
over the life of the investment and the denominator is the average
book value of fixed assets committed to the project.

Certified Financial Planner Module 1: Introduction to Financial Planning


Financial Functions Using Microsoft Excel

• FV
FV(rate,nper,pmt,pv,type)
• Rate is the interest rate per period.
• Nper is the total number of payment periods in an annuity.
• Pmt is the payment made each period; it cannot change over the
life of the annuity. Pmt must be entered as a negative number.
• Pv is the present value, or the lump-sum amount that a series of
future payments is worth right now. If pv is omitted, it is assumed
to be 0 (zero). PV must be entered as a negative number.
• Type is the number 0 or 1 and indicates when payments are due. If
type is omitted, it is assumed to be 0 which represents at the end
of the period. If payments are due at the beginning of the period,
type should be 1.

Certified Financial Planner Module 1: Introduction to Financial Planning


Financial Functions Using Microsoft Excel
• PV
• PV(rate,nper,pmt,fv,type)
• Rate is the interest rate per period. For example, if you obtain an
automobile loan at a 10 percent annual interest rate and make monthly
payments, your interest rate per month is 10%/12, or 0.83%. You
would enter 10%/12, or 0.83%, or 0.0083, into the formula as the rate.
• Nper is the total number of payment periods in an annuity. For example,
if you get a four-year car loan and make monthly payments, your loan
has 4*12 (or 48) periods. You would enter 48 into the formula for nper.
• Pmt is the payment made each period and cannot change over the life of
the annuity. Pmt must be entered as a negative amount.
• Fv is the future value, or a cash balance you want to attain after the last
payment is made. Fv must be entered as a negative amount.
• Type is the number 0 or 1 and indicates when payments are due. If type is
omitted, it is assumed to be 0 which represents at the end of the
period. If payments are due at the beginning of the period, type should
be 1.

Certified Financial Planner Module 1: Introduction to Financial Planning


Financial Functions Using Microsoft Excel
• NPV
NPV(rate,value1:value29),+cash investment
• Rate is the rate of discount over the length of one period.
• value1: value29 are 1 to 29 periods representing income.
• +cash investment represents the cash investment for the project.

Example: =NPV(F9,C10:C14),+C9
F9 contains the required rate of return
C10:C14 contains the postive cash flow generated by the project
each period
+C9 contains the cash investment required by the project.
The cash investment must be entered as a negative amount.

Certified Financial Planner Module 1: Introduction to Financial Planning


Financial Functions Using Microsoft Excel

• RATE
RATE(nper,pmt,pv,fv,type,guess)
Nper is the total number of payment periods in an annuity.
Pmt is the payment made each period and cannot change over the
life of the annuity.
Pmt must be entered as a negative amount.
Pv is the present value that the future payment is worth now. Pv
must be entered as a negative amount.

Certified Financial Planner Module 1: Introduction to Financial Planning


Financial Functions Using Microsoft Excel
Fv is the future value, or a cash balance you want to attain after the last
payment is made. If fv is omitted, it is assumed to be 0 (the future value
of a loan, for example, is 0).
Type is the number 0 or 1 and indicates when payments are due. If type is
omitted, it is assumed to be 0 which represents at the end of the
period. If payments are due at the beginning of the period, type should
be 1.
Guess is your guess for what the rate will be. If you omit guess, it is
assumed to be 10 percent. If RATE does not converge, try different
values for guess. RATE usually converges if guess is between 0 and 1.
• NPER
• NPER(rate, pmt, pv, fv, type)
• Rate is the interest rate per period.
• Pmt is the payment made each period; it cannot change over the life of
the annuity. Pmt must be entered as a negative amount.
• Pv is the present value, or the lump-sum amount that a series of future
payments is worth right now. Pv must be entered as a negative amount.

Certified Financial Planner Module 1: Introduction to Financial Planning


Financial Functions Using Microsoft Excel
• Fv is the future value, or a cash balance you want to attain after
the last payment is made.
• Type is the number 0 or 1 and indicates when payments are due. If
type is omitted, it is assumed to be 0 which represents at the end
of the period. If payments are due at the beginning of the period,
type should be 1.
• PMT
• PMT(rate,nper,pv,fv,type)
• For a more complete description of the arguments in PMT, see PV.
• Rate is the interest rate for the loan.
• Nper is the total number of payments for the loan.
• Pv is the present value, or the total amount that a series of future
payments is worth now; also known as the principal.
• Fv is the future value, or a cash balance you want to attain after
the last payment is made. If fv is omitted, it is assumed to be 0
(zero), that is, the future value of a loan is 0.

Certified Financial Planner Module 1: Introduction to Financial Planning


IRR

• IRR
• IRR(values,guess)
• Values is an array or a reference to cells that contain
numbers for which you want to calculate the internal
rate of return.
• · Values must contain at least one positive value and
one negative value to calculate the internal rate of
return.
· IRR uses the order of values to interpret the order of
cash flows. Be sure to enter your payment and income
values in the sequence you want.
· If an array or reference argument contains text,
logical values, or empty cells, those values are ignored.
• Guess is a number that you guess is close to the result
of IRR.

Certified Financial Planner Module 1: Introduction to Financial Planning


Question
Sundram expects to pay out the following in the next few
years:
• End of Year 1 Rs.10,000
• End of Year 2 Rs.15,000
• End of Year 3 Rs.12,000
• End of Year 4 Rs.13,500
• End of Year 5 Rs.11,000

If Sundram wants to cater to these cash flows, how much


should he have now, assuming an annual rate of 5%?

Ans:53,220.57

Certified Financial Planner Module 1: Introduction to Financial Planning


Forms of Business Ownership

Certified Financial Planner Module 1: Introduction to Financial Planning


Forms of Business Ownership

• Sole Proprietorship
• Partnership
• Limited Liability Companies
• Trusts
• Foundations
• Professional Association
• Cooperative Societies

Certified Financial Planner Module 1: Introduction to Financial Planning


Forms of Business Ownership
Sole Limited Co-operative
Partnership
Proprietorship Company Societies

General Partnership • Liability of the • Enterprise owned and


• Owned by an controlled by the
individual. • Owned by 2 or more stockholders are
people working in it.
partners limited to the
• The individual is • Each member has
amount invested equal control- 1 man 1
in charge of all • Partners are equally
by them. vote.
operations. and personally liable
• Enjoys advantages • Anyone who fulfills
• The personal for debts. qualification criteria
of perpetual life
property is • The personal property can join.
span.
attached. is attached. • Profits can be retained
in business or
• Can be a • In a limited distributed
disadvantage if partnership- Partner’s proportionately
the owner is liability is limited to • Member should
unable to money invested. primarily benefit from
continue the business participation
• Limited partner not
business • Interest on loan/ share
involved in decision capital limited in some
making specific way

Certified Financial Planner Module 1: Introduction to Financial Planning


Forms of Business Ownership
Corporations Professional Trade
Trusts Associations Associations

• Created to hold assets for • Corporations are • Formed to protect • An association of


the benefit of certain chartered interests of individuals or
persons or entities, • Incorporation professionals they companies in a
managed by a trustee on represent. specific business or
certificate needs to be
behalf of the trust filed. • Virtually every trade/ industry organized
• Founded by persons called profession has such to promote common
• Subject to laws of the an association.
Thrusters, settlers and/ or state in which they interests.
donors, who execute a • Most of these are
operate • A particular sector
registered under The
written declaration of • Continuous life span or class of business
Societies Registration
trust – outlines terms and may face the same
• Total worth divided into Act- 1860.
conditions of operation problems- to seek
shares of stock • There is a
solutions for these,
• Each share represents registration fee.
they may form
unit of ownership • The memorandum of
themselves into a
society will define
trade association.
the objects of the
association. • CII and ASSOCHAM
are some examples

Certified Financial Planner Module 1: Introduction to Financial Planning


Foundations

• Can be formed by 7 or more members associated for any


purpose as is described in Section 20 of the Act.

• Formed by filing a Memorandum of Association with the


registrar of Joint Stock Company

• The property belonging to a society registered under this


Act, if not vested in trustees, shall be deemed to be vested,
in the governing body of such society, and in all civil and
criminal proceedings, may be described as the property of
the governing body of such society by their proper title.

Certified Financial Planner Module 1: Introduction to Financial Planning


Franchising
• Franchising is something of a halfway house, lying
somewhere between entrepreneurship and
employment.

• It holds many of the attractions of running a small


business; at the same time eliminating some of the
risks.

• For example, the failure rate for both franchisers and


franchisees is much lower than for the small business
sector as a whole.

Certified Financial Planner Module 1: Introduction to Financial Planning


Distributorship
• Could be for a particular product, such as a make of car.

• Sometimes referred to as an agency, but there are differences


between these two concepts.

• Both parties are legally independent, (as vendor and purchaser)

• The purchaser, in exchange for certain exclusive territorial rights,


helped by the vendor's advertising, promotion and/ or, training of
staff, will be expected to hold adequate stock and maintain the
premises in a way that reflects well on the vendor's product or
service.

Certified Financial Planner Module 1: Introduction to Financial Planning


Ways of taking legal title to property

Certified Financial Planner Module 1: Introduction to Financial Planning


Transfer of Property

• A transfer may be by way of sale, exchange, gift, lease,


mortgage or actionable claim.

• Prior to 1882 no law existed which really governed


activities of transfer of properties in India

• Since then the law relating to the transfer of properties


by is codified in the Transfer of Property Act, 1882.

Certified Financial Planner Module 1: Introduction to Financial Planning


Transfer of Property Act, 1882 (TOPA)
Contains provisions that define:

• What is transfer of the property,

• Person competent to transfer,

• Conditions restraining the transfer,

• Transfer for the benefit of unborn person,

• Transfer in perpetuity for the benefit of public,

• Conditional transfer, etc.

Certified Financial Planner Module 1: Introduction to Financial Planning


Transfer of Property
• Transfer of possession from one person to another.

• TOPA contains specific provisions regarding such transfer.

• As per the Act, 'transfer of property' means an act by which a


living person conveys property to one or more other living
persons, or to himself and one or more other living persons.

• The Act may be done in the present or for the future

• A living person may include an individual, company, association,


or body of individuals, whether incorporated or not.

• Under the Act, property of any kind may be transferred, unless


prohibited by any law for the time being in force.

Certified Financial Planner Module 1: Introduction to Financial Planning


What cannot be transferred?
• The chance of an heir-apparent succeeding to an estate,
• The chance of a relation obtaining a legacy on the death of a
kinsman, or any other mere possibility of a like nature.
• A mere right of re-entry for breach of a condition subsequently
cannot be transferred to anyone except the owner of the property
affected thereby.
• An easement cannot be transferred apart from the dominant
heritage.
• An interest in property restricted in its enjoyment to the owner
personally.
• A right to future maintenance, in whatsoever manner arising,
secured or determined.

Certified Financial Planner Module 1: Introduction to Financial Planning


What cannot be transferred?
• A mere right to sue cannot be transferred.

• A public office cannot be transferred, nor can the salary of a


public officer, whether before or after it has become payable.

• No transfer can be made:


o in so far as it is opposed to the nature of the interest affected
thereby, or
o for an unlawful object or consideration within the meaning of
section 23 of the Indian Contract Act, 1872 (9 of 1872), or
o to a person legally disqualified to be transferee.

• Stipends allowed to military, naval, air-force and civil pensioners


of the government and political pensions cannot be transferred.

Certified Financial Planner Module 1: Introduction to Financial Planning


What can be transferred?

• Nothing in this section shall be deemed to authorize a


tenant having an untransferable right of occupancy, the
farmer of an estate in respect of which default has
been made in paying revenue, or the lessee of an
estate, under the management of a Court of Wards, to
assign his interest as such tenant, farmer or lessee.

Certified Financial Planner Module 1: Introduction to Financial Planning


Who is competent to transfer?
• Every person competent to contract and entitled to transferable
property, or authorized to dispose of transferable property not his
own, either wholly or in part, and either absolutely or
conditionally, in the circumstances, to the extent and in the
manner, allowed and prescribed by any law for the time being in
force.

• Unless a different intention is expressed or necessarily implied, a


transfer of property passes forthwith to the transferee all the
interest which the transferor is then capable of passing in the
property and in the legal incidents thereof.

Certified Financial Planner Module 1: Introduction to Financial Planning


Sale of immovable property

• Sale is a transfer of ownership in exchange for a price paid,


promised, or part-paid and part-promised.

• Such transfer in case of tangible immovable property of value of Rs


100 or more can be made only by a registered instrument.

• Delivery of tangible immovable property is made when a seller


places the buyer, or such person as he directs, in possession of the
property.

• Thus, delivery of immovable property can be only by handing over


actual possession to the buyer or to a person authorized by the
buyer.

Certified Financial Planner Module 1: Introduction to Financial Planning


Lease of immovable property
• A lease of immovable property is a transfer of a right to use the
property, for a certain time, express or implied, or in perpetuity.

• Such transfer of right should be in consideration of a price paid or


promised to the transferor by the transferee, who accepts the
transfer on such terms.

• The transferor is called the lessor, the transferee is called the


lessee, the price is called the premium, and the money, share,
service or other thing to be so rendered is called the rent.

Certified Financial Planner Module 1: Introduction to Financial Planning


According to the Transfer of Property Act, Transfer of
property may take place in the following means

Sale Lease Mortgage


Transfer of ownership in
exchange for a price paid A transfer of a right to
or promised or part- paid enjoy property, made for
and part- promised. a certain time, express or
implied, or in perpetuity,
Sale of a tangible
in consideration of a price
immovable property takes
paid or promised, or If the mortgage money
place by a registered
money, a share of crops, remains unpaid, the title
instrument or delivery of
service or any other thing to property may pass to
tangible, immovable
of value, to be rendered the mortgage in certain
property taking place
periodically, or on kinds of mortgages
when the seller places the
specified occasions to the
buyer or such person as he
transferee, who accepts
directs, in possession of
the transfer on such
the property.
terms.

Certified Financial Planner Module 1: Introduction to Financial Planning


According to the Transfer of Property Act, Transfer of
property may take place in the following means
Exchange Gifting

When two persons mutually transfer The transfer of certain existing


the ownership of one thing for the moveable or immovable property
ownership of another, neither thing made voluntarily and without
being money only, the transaction is consideration, by one person, called
called an exchange. the donor, to another, called donee.
In this transaction, each party has
the rights and is subject to the
liabilities of a seller as to that he
gives and has the rights and is
subjected to the liabilities of a seller
as to that which he gives and has the
rights and is subjected to the
liabilities of a buyer as to that which
he takes.

Certified Financial Planner Module 1: Introduction to Financial Planning


Legal Aspects of Financial Planning

Certified Financial Planner Module 1: Introduction to Financial Planning


Contract Agreement
According
AccordingtotoIndian
Indian According
Accordingto
toSection
Section2(e)
2(e)
Contract
ContractAct,
Act,1872
1872 “Every
“Everypromise
promiseand
andevery
everyset
setof
of
promises
promisesforming
formingthe
the
“An
“AnAgreement
Agreement consideration
considerationfor
foreach
eachother
other""
Enforceable
Enforceableby
bylaw”
law”

Promise According
Accordingto
toSection
Section2(b)
2(b)
"When
"Whenthe
theperson
personto
towhom
whomthe
theproposal
proposalisismade
made
signifies
signifieshis
hisassent
assentthereto,
thereto,the
theproposal
proposalisissaid
saidto
tobe
beaccepted.
accepted.
Proposal
Proposalwhen
whenaccepted,
accepted,becomes
becomesaapromise"
promise"

Certified Financial Planner Module 1: Introduction to Financial Planning


Essentials of a valid contract

• Essential elements of a valid contract: According to Section 10,


“all agreements are contracts if they are made by the free
consent of parties competent to contract, for a lawful
consideration and with a lawful object and are not hereby
expressly declared to be void."

• The following essential elements must co-exist in order to make a


valid contract:
• Create legal obligations through offer and acceptance.
• Lawful Consideration.
• Capacity.
• Free Consent.
• Lawful agreement.

Certified Financial Planner Module 1: Introduction to Financial Planning


Types of Contracts
On
On the
the basis
basis of
of On
On the
the basis
basis of
of On
On the
the basis
basis of
of
Legality
Legality formation
formation Performance
Performance

Void Expressed Executed

Voidable Implied Executory

Unenforceable Tacit Unilateral

Illegal Bilateral

Certified Financial Planner Module 1: Introduction to Financial Planning


On the basis of Legality
A contract without any legal effect and cannot be enforced in a
Void Court of Law.
Eg: When the consideration or object of an agreement is
unlawful, (Section 23).

An agreement which is enforceable by law at the option of


Voidable one or more the parties but not at the option of the other(s)
Eg. A contract brought about as a result of Coercion, Undue
influence

A contract that is good in substance, but due to some


Unenforceable technical defect, (such as absence in writing, imitation, etc)
one of the parties cannot act upon it

A contract that the law forbids. All illegal agreements are


Illegal void but all void agreements are not necessarily illegal.
Eg: A contract to commit a crime

Certified Financial Planner Module 1: Introduction to Financial Planning


On the basis of formation

Expressed A contract expressed in words, either spoken or written.

A contract that is implied by law, even though the parties to the


Implied same never intended it.
For Eg: A delivers by mistake goods at B's warehouse instead of
at C's place. Here there is an obligation on the part of B to return
the goods to A, though they never intended to
enter into a contract

A contract that is inferred from the conduct of the parties.


Tacit A good example of this is a sale by fall of hammer during an
auction sale.

Certified Financial Planner Module 1: Introduction to Financial Planning


On the basis of performance

If consideration for the contract is give or executed, such a


Executed
contract is called a, “Contract with executed consideration”

So called because the reciprocal promises or obligation


Executory
which serves as consideration is to be performed in future.

A one-sided contract in which only one party has


Unilateral to perform his promise or obligation to do or forbear.

When the obligation or promise in a contract is outstanding


Bilateral on the part of both the parties

Certified Financial Planner Module 1: Introduction to Financial Planning


Void Contracts VS Voidable contracts

Void Contract Voidable contract

As per Section 2(g) and (j) a contract A Voidable contract is an agreement


which ceases to be enforce­ able by law which is enforceable by law at the option
Definition becomes void when it ceases to be of one or more of the parties thereon,
enforceable. but not at the opinion of other or others.
A void contract is valid when it is made A voidable contract on the other hand is
but subsequently becomes unforceable voidable of the option aggrieved party,
on certain grounds such as, subsequent and remains valid until rescinded by him.
illegality, repudiation of a voidable Contract caused by coercion, undue
Nature contract, a contingent contract influence, fraud, misrepresentation are
depending upon happening of an voidable
uncer­tain event, when occurrence of
such event becomes impossible.

Certified Financial Planner Module 1: Introduction to Financial Planning


Professional Liability
• An employer is liable for the negligence of his employee and the
employer's liability arises when the act so complained of is
committed in the course of; and within the scope of employment.

• Breach of contractual duties give rise to a cause of action to the


client against the professional on in the absence of a contract, a
duty of care may arise, where trust or confidence is placed in the
person or there is a fiduciary relationship.

• Professional risk may entail professional negligence, resulting in


financial losses or bodily injuries.

• Professional indemnity policies cover the legal liabilities and take


care of the risk to the professionals keeping in view the increasing
claims, which are being made by clients against the professionals

Certified Financial Planner Module 1: Introduction to Financial Planning


Professional Liability
• For financial advisors, management consultants, lawyers, chartered
accountants, the indemnity clause in such policies states that the
indemnity applies to claims arising out of losses and/or damages
during the period of insurance first made in writing against the
professional insured.

• The professional insured is indemnified for any breach of


professional duty by reason of any negligent act, error or negligence
committed during the period of insurance by the insured, or any
employee of the insured firm or the predecessors in the business of
the insured firm in respect of whom insurance cover is expressly
provided in the insurance schedule of the policy.

• The policy excludes claims with respect to any dishonest,


fraudulent, criminal or malicious act by the professional or a
deliberate non-compliance with technical standards, commonly
observed in professional practice laid down by official bodies of
such professions, and such other conditionalities.

Certified Financial Planner Module 1: Introduction to Financial Planning


Professional Liability
• Due care and diligence has to be exercised by a professional
irrespective of the field of specialisation to ensure that no claims
or demands are made for any negligence, omission or deficiency on
the part of the professional or its employees.

• Any deviation from normal reasonable standards could lead to legal


action by the client, which would be prejudicial not only to the
personal interest of the professional but would also bring disrepute
to the profession which is practiced.

Certified Financial Planner Module 1: Introduction to Financial Planning


Consumer Protection Act

• A statute, enacted to
• confer additional consumer rights and
• to preserve and guard the existing one under the law.

• Creates a hierarchy of redressal agencies & also provides for


sanctions to carry out their orders.

• One of the aims of the Act is to make the justice quick and
smooth for the consumers.

Certified Financial Planner Module 1: Introduction to Financial Planning


The Justice Delivery Forums, under the
Consumer Protection Act
• The justice delivery system under the Consumer Protection Act,
1986 consists of a two-tier structure at the state level, which is as
follows:

• District Forum - (having a pecuniary jurisdiction of Rs. 500,000).


Each district of the State is supposed to have a District Forum.

• State Commission - (having a pecuniary jurisdiction above Rs.


500,000 with an upper limit of Rs. 2,000,000 lakh and also
exercising appellate jurisdiction over orders passed by the
respective District Forums in that state). Each state is supposed to
have a State Commission.

• At the national level, we have the National Commission, at New


Delhi which is vested with a pecuniary jurisdiction of above Rs.
2,000,00 and also exercises appellate & revisional jurisdiction over
orders passed by the respective State Commissions.

Certified Financial Planner Module 1: Introduction to Financial Planning


Justice delivery Forums

District State National


Forum Commission Commission

• Has pecuniary • Has pecuniary • Situated at New Delhi


Jurisdiction of upto Rs. Jurisdiction above Rs.
• Has pecuniary
5,00,000. 5,00,000 and upto Rs.
Jurisdiction of above Rs.
20,00,000 and an
• Each district is supposed 20,00,000 and appellate
appellate jurisdiction
to have a District Forum and revisional jurisdiction
over orders passed by
over the orders passed by
District forums under that
respective state
state.
commissions
• Each state is supposed to
• Each district is supposed
have a state commission.
to have a District Forum

Certified Financial Planner Module 1: Introduction to Financial Planning


Torts
• The law that is most susceptible to change.
• May be defined
• as a civil wrong for which the remedy is a common law action for
damages and
• which is not exclusively the breach of a contract or the breach of
a trust or other merely equitable obligation.

• Mainly sourced from the common law as opposed to statute law.


• Tort may be committed by
• a positive act/ by an omission where there is a legal duty to act.
• It could be a fault of the defendant, which may require intention
e.g. deceit, negligence

• Tortuous liability arises from the breach of duty primarily fixed by


law, whereas in the case of contract the duties are fixed by the
parties themselves

Certified Financial Planner Module 1: Introduction to Financial Planning


These classes do not come within the
sphere of Tort

Criminal Civil Wrong which,

creates no right of action,


but gives rise to some other form of civil remedy
exclusively;

are exclusively breaches of contract;

are exclusively breaches of trust or of


some other merely equitable obligation.

Certified Financial Planner Module 1: Introduction to Financial Planning


Torts
• Tortuous liability can take the shape of:
• Trespass
• Defamation
• Nuisance
• Abuse of legal procedure
• Negligence
• Liability of dangerous premise
• Dangerous chattels

Certified Financial Planner Module 1: Introduction to Financial Planning


Agency
• According to Section 182 of the Contract Act 1872, an agent is a
person employed to do any act for another or to represent
another in dealings with a third person.

• The person for whom such an act is done, or who is represented is


called the 'principal'.

• The expression 'agency' is used to connote the relation which exists


where one person has an authority to create legal relations
between a person occupying the position of principal and third
parties.

Certified Financial Planner Module 1: Introduction to Financial Planning


Essentials of Agency

• The principal should be competent to contract.


• An infant is not competent to create an agency, as he does not
have sufficient discretion to choose an agent to act for him.
• However an agent need not be competent to contract.

• A consideration is not necessary to create an agency.


• Generally an agent is remunerated by way of commission for
services rendered but no consideration is immediately
necessary at the time of appointment.

Certified Financial Planner Module 1: Introduction to Financial Planning


Creation of Agency

The relationship of principal and agent may be created


in any of the following ways:
• by express appointment;
• by the conduct of the parties;
• by necessity of the case; or
• by subsequent ratification of an act.

Certified Financial Planner Module 1: Introduction to Financial Planning


Duties of the agent

• To carry out the mandate of his principal.


• To conduct the business of his principal according to the his direction
and to keep himself within the confines of his authority.
• To conduct the business of agency with as much skill as is generally
possessed by persons engaged in similar business.
• To use all reasonable diligence of communicating with his principal
and seeking to obtain his instructions if there are difficulties.
• To avoid conflict of interest with his principal.
• Not to make a secret profit.
• To render proper accounts to his principal on demand

Certified Financial Planner Module 1: Introduction to Financial Planning


Modes of Termination of Agency

• By revocation,
• Renunciation by agents.
• Completion of business.
• Principal's or agent's death.
• Principal or agent becoming person of unsound mind.
• Insolvency of principal.
• Expiry of time.

Certified Financial Planner Module 1: Introduction to Financial Planning


Negotiable Instruments
• An instrument which when transferred by delivery or by
endorsement and delivery, passes to the transferee a
good title to payment according to its tenor and
irrespective of the title of the transferor, provided he
is bona fide holder for value without notice of any
defect attaching to the instrument or in the title of the
transferor.

• In the present day context, negotiable instruments are


now merely instruments of credit, readily convertible
into money and easily passable from one hand to
another.

Certified Financial Planner Module 1: Introduction to Financial Planning


Negotiable Instruments Act 1881

• A codification of the Common Law or Law of Merchant.


• Defines negotiable instruments as promissory notes,
bills of exchange or cheques payable either to order or
to bearer.
• It is essential that either promise or order, must be
unconditional, amount mentioned must be certain and
incapable of variation
• Further, the person to whom money is promised must
be indicated to provide for certainty.

Certified Financial Planner Module 1: Introduction to Financial Planning


Types of Negotiable Instruments
• Promissory note- An instrument in writing (except a currency
note) signed by the maker, containing an unconditional
undertaking to pay a certain sum of money only to a certain
person or his order or to the bearer.

• Bill of Exchange- An instrument in writing signed by the


maker, but it is an unconditional order addressed to a third
person to pay a certain sum of money only to a certain
person or his order or bearer.

• Cheque- A special form of bill of exchange drawn on a


specified banker and always payable on demand.

• Generally, where an instrument is construed either as a


promissory note or as a bill of exchange, the holder has the
option of treating it as either and the instrument shall be
treated accordingly.

Certified Financial Planner Module 1: Introduction to Financial Planning


Rules regarding Negotiable Instruments
• If amounts are different in word and in figure then amount in word is to
be taken.
• Where no time is specified it is payable on demand. The expression 'at
sight' and 'on presentment' means on demand.
• The expression' after sight' means after presentation for sight, in case of a
promissory note.
• In a bill of exchange, after acceptance or noting or non-acceptance or
protest for non­-acceptance
• Every person cable of contracting may become a party to a negotiable
instrument and is bound in the same way as in other contracts.
• One of the distinctive characteristics of negotiable instruments is that the
date due under it may be assigned over to a third party by what is called
negotiation. Such negotiation takes place in two ways:
• If the instrument is payable to bearer - it is negotiable by delivery
thereof.
• If it is payable by order - negotiation can take place only by endorsement
of the holder and delivery by him.

Certified Financial Planner Module 1: Introduction to Financial Planning


Fiduciary Relationship

• A confidential relationship necessary to bring this doctrine into


operation extends to certain ties.

• Such cases under the Indian Contract Act, 1872 are generally dealt
with as part of the doctrine of "undue influence".

• When the relation between 2 persons is such that one of them is in


a position to influence the decisions of the other, to his own
benefit and advantage at the expense of the person trusting him,
the relation existing between them is of a "fiduciary character".

Certified Financial Planner Module 1: Introduction to Financial Planning


Investor Protection
Equity Share Investments Fixed Deposits (FD)
• Securities and Exchange Board of India (SEBI) •Company’s (amendment) Act 2000- many
is the governing body provisions for investor protection for investor
protection. safety of FD’s
• Extensive Guidelines for disclosure and
investor protection •Separate limits for company deposits as
multiples of their net worth
• In case of violations SEBI may:
•Strict disclosure requirements in any
ƒ Direct the concerned person not to
advertisement soliciting deposits- details such
access capital market for a particular
as:
period
•Names of promoters, directors, associate
ƒ Direct the concerned stock exchange
companies
not to list or permit trading
•Management Structure
ƒ Directing the concerned stock exchange
to forfeit the security deposit made by •Financial Condition, paid up capital,
the issuer company existing deposits and so on.
ƒ Any other direction which SEBI may •Section 58AA inserted- protection to small
deem fit and proper in the depositors
circumstances of the case. •Any default in repayment or interest payment
made by the company has to be informed to the
company law board
•Punishment for failure to comply- fine of Rs.
500 per day of default or 3 years imprisonment

Certified Financial Planner Module 1: Introduction to Financial Planning


Thank You

Certified Financial Planner Module 1: Introduction to Financial Planning