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.
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 80C
Loan After 3 years 25% of the 2
nd
preceding year
Premature withdrawal After 5 years 50% of the 4
th
preceding
year
At extension 60% of the closing bal of
15
th
year
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 1
st
January 2000, then doesnt mature on 31
st
December 2015 but 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 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 1
st
January 2000.
For the financial year 1999-2000 the accumulated value will be:
Deposit
Months for
which interest
Interest
to be calculated
1000 3 20.00
1000 2 13.33
1000 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 year ended
on 31
st
March 2002.
Loan eligibility is only for 2 years after that withdrawal option commences. In the same case it commences from
1
st
April,2005 and eligible amount will be 50% of the closing balance of the year ended on 31
st
March 2002.
This account can be extended in the block of 5 years. Number of extensions is not limited.