8/2/2019 Basic Rules for Advance Financial Planning
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Basic Rules for Advance Financial Planning
Nominal Rate: Basic rate which is without any adjustment or
compounding
Effective Rate: Compounded rate
Investment rates: Annual Effective rate. E.g. equity shares,
mutual funds, gold ETF etc.
Savings rate: Annual Nominal rate. E.g. bank FD
Loan rate: Annual Nominal rate
Rule 1: When investment is made every year, use Annual Effective
rate as i/y
Rule 2: When investment is made M/Q/S, use M/Q/S nominal
rate.
Note: The rates of return quoted on investment are the maximum
return which can be achieved. So if we
consider those rates as nominal our effective return will be
more than the rate quoted, which is not possible.
Rule 3:When withdrawals are subject to inflation use fishers
real rate equation.
Real rate = [(1+r)/(1+i)]1
Where: r = rate of return, I = rate of inflation
For M/Q/S withdrawal we need M/Q/S nominal real rate.
Components of Loan Amortization Schedule
Step 1: calculation of EMI
Process:
PV = loan amount
N = no. of period
i/y = applicable loan rate M/Q/S/A
pmt = EMI (always use end mode of calculation)
Step 2: Repayment Schedule (assume 1,00,000 loan, rate 12% and
period is 10 years)
Month Opening Balance Interest EMI Capital
1 100000 =100000*0.01=1000 1435 =1435-1000=435
2 =100000-435=99565 =99565*0.01=995.65 1435
=1435-995.65=439.35
Loan and Taxation: Interest on housing loan is eligible for
deduction u/s 24 and principal component is
eligible for deduction u/s 80C up to maximum of Rs.1,00,000.
Pre-construction interest is to be amortized equally over period
of 5 years after the construction gets over.
8/2/2019 Basic Rules for Advance Financial Planning
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Public Provident Fund Account:
Interest 8%
Compounding Yearly
Minimum Investment 500
Maximum Investment 70,000
Tenure 15 year tenure, extend in a block of 5 years
Tax Benefit 80CLoan After 3 years25% of the 2
ndpreceding year
Premature withdrawal After 5 years50% of the 4th
precedingyear
At extension60% of the closing bal of15
thyear
Who can invest? Individuals
Maturity of PPF is 15 full financial years i.e. account
continues for 15 years after the year in which the
account is opened. If the account is opened on 1stJanuary 2000,
then doesnt mature on 31
stDecember 2015
but it matures on 1st
April 2015.
Deposit in the account should be made within first 5 days of the
month to get the interest of that particular
month. There can be maximum 12 monthly deposits in this account
per year. Interest on monthly investment
is calculated on simple basis during the year and gets
compounded at the end of the year.
Example: deposit of 1000 every month in an account which is
opened on 1st
January 2000.
For the financial year 1999-2000 the accumulated value will
be:
Deposit
Months for
which interest
to be calculated
Interest
1000 3 20.00
1000 2 13.33
1000 1 6.67
Total 40
Hence accumulated value on 31st
March,2000 is 3000+40 = 3040.
Loan would be available from this account form 1st
April,2003 which will be 25% of the balance of the year
ended on 31st
March 2002.
Loan eligibility is only for 2 years after that withdrawal
option commences. In the same case it commences
from 1st
April,2005 and eligible amount will be 50% of the closing
balance of the year ended on 31st
March
2002.
This account can be extended in the block of 5 years. Number of
extensions is not limited.
