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 investmen
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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 weconsider 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 fisher’s real rate equation.  Real rate = [(1+r)/(1+i)]  –  1 Where: r = rate of return, I = rate of inflationFor 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 amountN = no. of periodi/y = applicable loan rate M/Q/S/Apmt = 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 iseligible 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.  Public Provident Fund Account:  Interest 8%Compounding Yearly Minimum Investment 500Maximum Investment 70,000Tenure 15 year tenure, extend in a block of 5 yearsTax Benefit 80CLoan After 3 years  –  25% of the 2 nd preceding yearPremature withdrawal    After 5 years  –  50% of the 4 th precedingyear    At extension  –  60% of the closing bal of 15 th yearWho can invest? IndividualsMaturity of PPF is 15 full financial years i.e. account continues for 15 years after the year in which theaccount is opened. If the account is opened on 1 st   January 2000, then doesn’t mature on 31 st December 2015but it matures on 1 st April 2015.Deposit in the account should be made within first 5 days of the month to get the interest of that particularmonth. There can be maximum 12 monthly deposits in this account per year. Interest on monthly investmentis 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 1 st January 2000.For the financial year 1999-2000 the accumulated value will be: Deposit   Months forwhich interestto be calculated   Interest  1000 3 20.001000 2 13.331000 1 6.67 Total   40  Hence accumulated value on 31 st March,2000 is 3000+40 = 3040.Loan would be available from this account form 1 st April,2003 which will be 25% of the balance of the yearended on 31 st March 2002.Loan eligibility is only for 2 years after that withdrawal option commences. In the same case it commencesfrom 1 st April,2005 and eligible amount will be 50% of the closing balance of the year ended on 31 st March2002.This account can be extended in the block of 5 years. Number of extensions is not limited.
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