introduction to financial planning

Certified Financial Planner Module 1: Introduction to Financial Planning

Module 1Module 1

Introduction to Financial Planning


This session will help you understandThis session will help you understand

•

Financial Planning-

the concepts and implementation

•

Regulatory, ethical and professional aspects of financial planning.

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Cash flow planning and budgeting.

•

Personal Asset management.

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Financial Statement analysis and mathematics.

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Economic Environment and indicators.

•

Forms of business ownership.

•

Ways of taking legal title to property.


Financial PlanningFinancial 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 and prioritizing

short & long term goals

Defining and prioritizing

short & long term goalsAccessing current

finances & commitments

Accessing current finances & commitments

Deciding where you want to be in the future

Deciding where you want to be in the future

Identifying realistic strategies to achieve the

goals

Identifying realistic strategies to achieve the

goalsPutting the plan into

action

Putting the plan intoactionMonitoring PerformanceMonitoring Performance


The Financial Planning process involves 6 The Financial Planning process involves 6 steps:steps:

2.Establishing and Defining the client-Planner relationship

2.Establishing and Defining the client-Planner relationship

3.Gathering Client Data & Goals

3.Gathering Client Data & Goals

1.Monitoring the recommendations

1.Monitoring the recommendations

The Financial Planner should:

Discuss his objectives & expectations

Discuss the services available

Clarify responsibilities and time frame

Finalize the scope of the engagement

Determine the fee/compensation arrangement


Obtain information & documents

Help your client “refine” or crystallize goals

Help your client develop an understanding of his/ her values & attitudes

The Financial Planner should

Analyze information

Identify problems & opportunities across each major financial planning discipline

Finance –

Asset & Liability Structure, Cash Flows

Investment Taxation –

Ordinary and Income

Risk Management –

Insurances & Asset Protection

Law –

Estate, Charitable & Legacy Planning


The Financial Planning process involves 6 The Financial Planning process involves 6 steps:steps:

4.Analysing and Evaluating Financial

Status

4.Analysing and Evaluating Financial

Status

5.Developing and Presenting Financial

Planning Recommendations/

Alternatives

5.Developing and Presenting Financial

Planning Recommendations/

Alternatives

6. Implementing the Financial plan

recommendations

6. Implementing the Financial plan

recommendations


Prepare & present a personalized financial plan

Establish a review cycle


Assist the Client or manage the process as defined in the Engagement Agreement

The financial planner and the client should:

Review changes in personal circumstances

Review and evaluate impact of changing tax laws

Review and Discuss changing life circumstances

Make periodic adjustments or recommendations as necessary


Objectives of Financial PlanningObjectives of Financial Planning

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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.


•

Capital accumulation for•

Education funding.

•

Retirement funding.

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General investment fund.

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Reduction of tax burden•

During one’s life time

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After death for income accruing to the heirs.

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Estate planning

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Investment and property management

Objectives of Financial PlanningObjectives of Financial Planning


How to make Financial Planning work:How to make Financial Planning work:

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Set measurable goals

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Understand effects of financial decisions on other financial issues

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Periodically Re-evaluate Financial Plans

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

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Take charge of the financial planning engagement

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Look at the big picture –

It is more than just retirement planning or tax

planning

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Don’t confuse financial planning with investing

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Don’t expect unrealistic returns on investments

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


Establishing the ClientEstablishing the Client-- Planner Planner EngagementEngagement


Responsibilities: Client & PlannerResponsibilities: Client & Planner

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Express concerns, hopes and goals

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Do not procrastinate•

Be honest with your answers to questions

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Live within your current income and do not live up to or beyond it

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Be open to formulating a financial plan and identifying strategies to reach goals and objectives

Client

•Evaluating client’s financial and other needs

•Explaining financial concept and clarify client goal

•Analyzing client circumstances and prepare financial plan

•Implementing and monitoring financial plan

Planner


Gathering Client Data and Determining Gathering Client Data and Determining Goals and Expectations Goals and Expectations


Data obtained from ClientData obtained from Client-- 2 types2 types

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Quantitative Data-•

May be described as statements of fact. •

A client's name, date of birth and salary are some examples.

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Qualitative Data-•

These may be defined as ‘relevant information that is not factual in nature’.

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More difficult to obtain and define. •

Relates more to personal and social attitudes of the client. •

Examples : attitude to risk, future employment prospects


Data Collection FormData Collection Form

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Very useful tool to obtain useful qualitative & quantitative information from the client.

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Should contain at least the following sections:•

Personal Details

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Basic Financial Details

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Cash Flow

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Insurance

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Estate Planning

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Qualitative information

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Attitude to risk


Personal DetailsPersonal DetailsPersonal details should include the following:

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Name

•

Date of birth

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Employment history

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Employment history

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Health/family history

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Family structures

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Legal structures

•

Employee benefits


Basic Financial DetailsBasic Financial Details

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Financial planner should gather detailed information on client’s

financial assets & Liabilities

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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.

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Note the date of acquisition of the assets and the purchase price.

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Be sure to differentiate between ' lifestyle', or personal assets and

investment assets wherever possible


Cash FlowsCash Flows

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Related to Income Sources & expenditures of the client.

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More rigorous approach required in this area, as only rough

estimates usually provided by client.

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Financial planners mostly use an expense calculator to

assist clients in calculating their domestic budget.

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Main elements typically found an expense calculator are

housing, transport, health, education and personal.


InsuranceInsurance

•

The financial planner should find out which insurance policies the

client has in force

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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.


Estate PlanningEstate Planning

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The financial planner should confirm that client has a current, valid will and that its location is known.

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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.


Some tips for better data gatheringSome tips for better data gathering

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Start with personal questions, rather than their financial position

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Ask open ended questions

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Listening Skills

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Avoid negative non-verbal communication at all times


Goal SettingGoal Setting

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Financial Planning process begins with Goal Setting

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

long term (take more than 12 months to achieve)

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

comprehensive (retirement planning)

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Goals sometimes compete for available Funds; they sometimes

overlap; and sometimes interact

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Goals must be an extension of your values


Goal SettingGoal Setting

Goals must be SMART

-

Specific

- Measurable

-

Action Oriented

- Realistic

-

Time Bound


Analyzing Client Objectives, Needs & Analyzing Client Objectives, Needs & Financial Situation Financial Situation


Clients seek advice from financial Clients seek advice from financial planners toplanners to

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Simplify investments by having someone else do the paperwork

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Reduce tax paid

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Ensure appropriate application of a windfall gain;

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Protect against time off work due to sickness, accidents, or untimely death;

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Overcome lack of savings or rising debt obligations

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Have a second opinion on a financial plan developed by them;


Financial ObjectivesFinancial Objectives Needs and WantsNeeds and Wants

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The process of 'mutually-defining' is essential to determine what activities may be necessary to proceed with the client engagement.

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Personal values and attitudes shape a client's goals and objectives and the priority placed on them.

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Wants and Needs are two different things.•

'Wants‘ are desires or things 'hoped for'; 'needs' are

requirements or things.


Clients Needs can be categorized intoClients Needs can be categorized into

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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.

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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


Identifying the Client’s Attitude to RiskIdentifying the Client’s Attitude to Risk

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Quantitative information may not be sufficient for a financial planner to formulate strategies for the client

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Qualitative information is required to understand the client’s appetite for risk

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Planner should evaluate the client's grasp on general knowledge on financial matters

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When the financial planner begins the process of strategy selection within the plan, it is critical to understand the client's attitude to risk.


Analysis of relevant informationAnalysis of relevant informationPersonal 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:

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Employment history •

Health/family history •

Family structures•

Legal structures


Analysis of relevant informationAnalysis of relevant informationFinancial Details:

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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.

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Expenditure of the client: Using the budget form, try to

isolate discretionary from non-discretionary expenses.

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The purpose of isolating these expenses is to find out what

the basic requirements are.


Developing Appropriate StrategiesDeveloping Appropriate Strategies


Developing StrategiesDeveloping StrategiesThe following things need to be kept in mind:

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Clients Risk Tolerance

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Assessment of Option

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Research Analysis & Modelling

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Draft Financial Plan

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Implementation of Plan

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Monitor and evaluate soundness of Recommendation

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Make recommendations to Accommodate New or

Changing Circumstances


Client’s Risk ToleranceClient’s Risk Tolerance

There are three types of clients for whom risk tolerance assessment is particularly difficult.

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

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Clients who have the financial ability but don’t have the willingness to take risks.

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All other clients


Client’s Risk ToleranceClient’s Risk Tolerance

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Selecting appropriate insurance coverage and determining investment suitability depend on the planner’s ability to assess

risk tolerance

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Risk tolerance has four distinct aspects. An analysis of client risk tolerance involves an evaluation of four risk concepts: propensity, attitude, capacity and knowledge


Dimensions of Risk ToleranceDimensions of Risk Tolerance

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Risk propensity: The clients’ attitude toward risk can be determined by reviewing their real-life decisions in financial situations.

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Risk attitude: The clients’ willingness to incur financial risk

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

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Risk knowledge: The client’s understanding of risk


Development of StrategiesDevelopment of Strategies

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

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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.


The Strategy Development ProcessThe Strategy Development Process

Check that you have all the information

Check that you have all the information

Secure the client’s current financial position

Secure the client’s current financial position

Establish the client’s goal and financial concern

Establish the client’s goal and financial concern

Recommendations to meet client's desired

future financial position

Recommendations to meet client's desired

future financial position


Drafting the Financial PlanDrafting the Financial Plan•

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

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

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Financial planning software can be used for this purpose, however, these should not be used in isolation for developing the plan.


Essentials Components of a written financial Essentials Components of a written financial planplan

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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


Implementing and Monitoring the Implementing and Monitoring the financial Planfinancial Plan


Implementing and monitoring the Implementing and monitoring the financial planfinancial 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


Financial planning reviewFinancial planning review

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

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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.


Financial planning reviewFinancial planning review

The following issues can be expected at this step:

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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?


Need for financial planning reviewNeed 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.


Steps in the financial planning reviewSteps in the financial planning review

The review process should take the following steps:

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Measuring the performance of the implementation vehicles;

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Update information on the client’s personal and financial situation;

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Examine the impact of economic, tax or the financial environment

on the effectiveness of the plan.


Benchmarking Performance & Benchmarking Performance & updationupdation of of plansplans

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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.


To summarize…To summarize…

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Soundness of a comprehensive financial plan is based on how well

the individual chosen strategies complement each other.

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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.


Regulatory Requirements for CFP Regulatory Requirements for CFP CertificantsCertificants


Certification requirementsCertification requirements

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Student Member Requirements•

The Association of Financial Planners requires certain declarations acceptance as Student Members.

•

These disclosures are given on registration for the program.

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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.


Certification requirementsCertification requirementsModules: 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


Certification requirementsCertification requirementsCFP™ 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


Ethical and Professional ConsiderationEthical and Professional Consideration


•

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.

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

Professional Conduct.

Professional StandardsProfessional Standards


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

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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

The Code of EthicsThe Code of Ethics



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Code of Ethic 1 – IntegrityMembers shall observe high standards of honesty in conducting their financial planning business and shall offer and provide financial planning services with integrity.

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Code of Ethic 2 – ObjectivityMembers shall disclose to the client any limitation on their ability to provide objective financial planning services.

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Code of Ethic 3 – CompetenceMembers 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.

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Code of Ethic 4 – Fairness Members shall provide financial planning services in a manner that is fair and reasonable.



•

Code of Ethic 5 – ConfidentialityMembers 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.

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Code of Ethic 6 – ProfessionalismMembers shall ensure their conduct does not bring discredit to the financial planning profession.

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Code of Ethic 7 – DiligenceMembers shall act with due skill, care and diligence in providing financial planning services.

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Code of Ethic 8 – ComplianceMembers 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.


Rules of professional conductRules 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


Assessment of Risk & Client BehaviorAssessment of Risk & Client Behavior


Risk AssessmentRisk Assessment

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

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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.


Risk ToleranceRisk 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.


Risk PropensityRisk 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.


Risk AttitudeRisk 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:


Risk AttitudeRisk Attitude•

Ranking investment objectives

•

Allocating a make-believe windfall among various investment options

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The level of thrill or anxiety felt after making financial decisions

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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.


Risk CapacityRisk 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.


Risk KnowledgeRisk 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.


Importance of Risk AssessmentImportance 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.


Cash Flow Planning and BudgetingCash Flow Planning and Budgeting


Cash Flow Planning And BudgetingCash Flow Planning And Budgeting

•

Short-term cash flow planning

•

Cash budgeting

•

Preparing monthly household budget

•

Long-term cash flow planning


Cash FlowsCash 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.


Top ten features of a successful Top ten features of a successful budgetbudget

•

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.


Some things to keep in mind while Some things to keep in mind while budgetingbudgeting

•

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


Why do people keep cash?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.


MONITORING, EVALUATION AND COMPLIANCE OF MONITORING, EVALUATION AND COMPLIANCE OF BUDGETS: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.


Personal Use Asset ManagementPersonal Use Asset Management


Financing of Personal AssetsFinancing of Personal Assets

Following are the main types of personal assets financing instruments:

•

Home loans•

Mortgages

•

Leases•

Refinancing

•

Hire-purchase•

Consumer loans

•

Credit cards


Mortgage LoansMortgage 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


Types of MortgagesTypes of Mortgages

Simple MortgageSimple Mortgage Mortgage by conditional sale

Mortgage by conditional sale

UsufructaryMortgage

UsufructaryMortgage

EnglishMortgage

EnglishMortgage

A mortgage without the transfer of any property.

A mortgage without the transfer of any property.

Involves an ostensible sale

to start with which becomes

absolute on default

Involves an ostensible sale

to start with which becomes

absolute on default

Possession stands transferred

to the mortgagee and rents and profits

from the property can be enjoyed by the mortgagee till

payment of the mortgage money

Possession stands transferred

to the mortgagee and rents and profits

from the property can be enjoyed by the mortgagee till

payment of the mortgage money

Property stands absolutely

transferred to the mortgagee with a covenant to repay

the mortgage money on a certain

date by the mortgagor, when the

property will be re-transferred to the

mortgagor.

Property stands absolutely

transferred to the mortgagee with a covenant to repay

the mortgage money on a certain

date by the mortgagor, when the

property will be re-transferred to the

mortgagor.


Types of MortgagesTypes of Mortgages

Mortgage by deposit of title deeds

Mortgage by deposit of title deeds

The security for the money is intended to be created by

deposit of the title deeds or papers

of the property .

The security for the money is intended to be created by

deposit of the title deeds or papers

of the property .

A simple mortgage giving an added right to

take possession in case of defaults of

payment becomes an anomalous mortgage.

A simple mortgage giving an added right to

take possession in case of defaults of

payment becomes an anomalous mortgage.

Anomalous MortgageAnomalous Mortgage


Lease FinancingLease 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.


Personal Financial Statement AnalysisPersonal Financial Statement Analysis


Personal Financial Statement Analysis 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.


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

Personal Financial Statement AnalysisPersonal Financial Statement Analysis


Calculation of ratiosCalculation of ratios

Basic Liquidity Ratio = Liquid assets/ Monthly expenses

Expanded Liquidity Ratio = Liquid Assets and Other Financial Assets / Monthly Expenses

Liquid Asset Coverage Ratio = liquid asset / total debt

Solvency Ratio = liquid and other financial assets / total debt

Current Ratio = liquid assets / non- mortgage debt


Calculation of ratiosCalculation 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


Economic Environment and IndicatorsEconomic Environment and Indicators


Importance of Economic and Business Importance of Economic and Business EnvironmentEnvironment

•

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.


ECONOMIC FACTORS: GNP & GDPECONOMIC FACTORS: GNP & GDP

Gross National Product (GNP)


Gross DomesticProduct (GDP)


This is the value of output of goods and services produced by Indian companies, regardless of whether

the production is inside or outside the India

This is the value of output of goods and services produced by Indian companies, regardless of whether

the production is inside or outside the India

The value of output of goods and services produced in the country, regardless of whether businesses are

owned and operated by Indians or foreigners.

The value of output of goods and services produced in the country, regardless of whether businesses are

owned and operated by Indians or foreigners.




Gross DomesticProduct (GDP)= - profits on

foreign owned businesses

+profits on

Indian owned businesses

outside India


GDPGDPGDP 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= C + I + G +C + I + G + (X- M)(X- M)

C = personal consumption spending on goods and servicesC = personal consumption spending on goods and services

I = Private sector fixed capital expenditureI = Private sector fixed capital expenditure

G = Government expenditureG = Government expenditure

(X-M)= Net of export receipts (X) and import payments (M)(X-M)= Net of export receipts (X) and import payments (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.


Example:Example:

The following information is available for an economy.Consumption (C) = Rs

3000Private Investment (I) = Rs

500Government Expenditure (G) = Rs

2000Exports (E) = Rs

1000Imports = Rs

1500Calculate the GDP for the economy?

Answer:GDP

= 3000 + 500 + 2000 + (1000-1500)= 5500 –

500= 5000


BUSINESS CYCLESBUSINESS CYCLES-- PhasesPhases•

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


INFLATION/ DEFLATIONINFLATION/ 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.


Types of InflationTypes of Inflation

Demand Pull InflationDemand Pull Inflation

Cost Push InflationCost Push Inflation

Administered PricesAdministered Prices

StagflationStagflation

Result of a steady increase in aggregate demand for goods and services when the economy is unable to adequately fill this demand.

Result of a steady increase in aggregate demand for goods and services when the economy is unable to adequately fill this demand.

Result of a higher cost factor of production being passed along to the consumer

in the form of higher prices.

Result of a higher cost factor of production being passed along to the consumer

in the form of higher prices.

Producers exerting a strong influence on the price of the product because

of a lack of competition.

Producers exerting a strong influence on the price of the product because

of a lack of competition.

Inability to solve the simultaneous problems of economic stagnation and inflation

through the use of monetary and fiscal policies. This occurs when high rates of inflation and high rates of unemployment happen

simultaneously.

Inability to solve the simultaneous problems of economic stagnation and inflation

through the use of monetary and fiscal policies. This occurs when high rates of inflation and high rates of unemployment happen

simultaneously.


MONETARY POLICY AND INTEREST RATES MONETARY POLICY AND INTEREST RATES & FISCAL POLICY.& 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.


Fiscal policies of the governmentFiscal 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


INTEREST RATES / YIELD CURVEINTEREST 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.


LongLong--term interest rates are influenced byterm 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.


CRR and SLRCRR 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%.


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.


Categories of Common StockCategories of Common Stock

GrowthStocks

IncomeStocks

CyclicalStocks

DefensiveStocks

Good Earning Potential and very low yield because the company is

reinvesting the bulk of its earnings in expansion.

Blue ChipStocks

Stocks in companies

whose earnings are good, but

are not growing much

Stock which fluctuates

widely over swings in the

business cycle. This is the stock of

companies whose sales and earnings vary greatly.

One which declines less

than most in a general

downturn of the market.It is usually

income stock

The least risky form of stock.These are the

stocks of older, well-

established companies, which have proved that

they can earn 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.


Preferred StockPreferred 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:

CumulativeCumulative Non-Cumulative

Non-Cumulative ParticipatingParticipating ConvertibleConvertible

Dividends accumulate from prior years. When the company declares dividends, those in arrears receive back dividends

If no dividends are paid in prior years, The corporation is not liable for such failure to pay dividends

If earnings suffice, the preference shareholder will also share equally, the dividend paid to common share holders

Can be exchanged for common stock or other securities in the same company or other companies, at the option of the stockholder


Financial MathematicsFinancial Mathematics


The Time Value of MoneyThe Time Value of Money

•

The Interest Rate•

Simple Interest

•

Compound Interest•

Amortizing a Loan

•

Compounding More Than Once per Year


TIME allows you the opportunity to postpone consumption and earn INTEREST


Types of InterestTypes of InterestSimple InterestInterest paid (earned) on only the original amount, or

principal, borrowed (lent).

Compound InterestInterest paid (earned) on any previous interest earned, as

well as on the principal borrowed (lent).


General General Future ValueFuture Value FormulaFormula

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


General General Present Value Present Value FormulaFormula

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


AnnuityAnnuity

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


Steps to Solve Time Value of Money ProblemsSteps to Solve Time Value of Money Problems

Read problem thoroughlyCreate a time linePut cash flows and arrows on time lineDetermine if it is a PV or FV problemDetermine if solution involves a single CF, annuity stream(s), or mixed flowSolve the problemCheck with financial calculator (optional)


Frequency of CompoundingFrequency 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


Effective Annual Interest RateEffective Annual Interest Rate

Effective Annual Interest RateThe 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


COMPARISON OF INVESTMENT RETURNSCOMPARISON OF INVESTMENT RETURNS

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

(1+r)0

(1+r)1 (1+r)2 (1+r)nWhere,

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


IRRIRR

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 equation0 = A0 + A1 + A2 + ………….. + An

(1+r)0

(1+r)1 (1+r)2 (1+r)nIn 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.


PAY BACK PERIODPAY 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.


Financial Functions Using Microsoft ExcelFinancial Functions Using Microsoft Excel

•

FVFV(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.


•

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.

•


If payments are due at the beginning of the period, type should

be 1.



•

NPVNPV(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.



•

RATERATE(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.



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.




•

Fv is the future value, or a cash balance you want to attain after the last payment is made.

•


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.


IRRIRR

•

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.


QuestionQuestionSundram

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 4 Rs.13,500•


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


Forms of Business OwnershipForms of Business Ownership



•

Sole Proprietorship•

Partnership

•

Limited Liability Companies•

Trusts

•

Foundations•

Professional Association

•

Cooperative Societies



Sole Proprietorship Partnership Co-operative

Societies

•

Owned by an individual.

•

The individual is in charge of all operations.

•

The personal property is attached.

•

Can be a disadvantage if the owner is unable to continue the business

General Partnership•

Owned by 2 or more partners

•

Partners are equally and personally liable for debts.

•

The personal property is attached.

•

In a limited partnership-

Partner’s liability is limited to money invested.

•

Limited partner not involved in decision making

•

Enterprise owned and controlled by the people working in it.

•

Each member has equal control-

1 man 1 vote.

•

Anyone who fulfills qualification criteria can join.

•

Profits can be retained in business or distributed proportionately

•

Member should primarily benefit from business participation

•

Interest on loan/ share capital limited in some specific way

Limited Company

•

Liability of the stockholders are limited to the amount invested by them.

•

Enjoys advantages of perpetual life span.



Corporations

•

Corporations are chartered

•

Incorporation certificate needs to be filed.

•

Subject to laws of the state in which they operate

•

Continuous life span•

Total worth divided into shares of stock

•

Each share represents unit of ownership

TrustsTrade Associations

•

Created to hold assets for the benefit of certain persons or entities, managed by a trustee on behalf of the trust

•

Founded by persons called Thrusters, settlers and/ or donors, who execute a written declaration of trust –

outlines terms and conditions of operation

ProfessionalAssociations

•

Formed to protect interests of professionals they represent.

•

Virtually every trade/ profession has such an association.

•

Most of these are registered under The Societies Registration Act-

1860.•

There is a registration fee.

•

The memorandum of society will define the objects of the association.

•

An association of individuals or companies in a specific business or industry organized to promote common interests.

•

A particular sector or class of business may face the same problems-

to seek solutions for these, they may form themselves into a trade association.

•

CII and ASSOCHAM are some examples


FoundationsFoundations

•

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.


FranchisingFranchising

•

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.


DistributorshipDistributorship•

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.


Ways of taking legal title to propertyWays of taking legal title to property


Transfer of PropertyTransfer 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.


Transfer of Property Act, 1882 (TOPA)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.


Transfer of PropertyTransfer 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.


What cannot be transferred?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.


What cannot be transferred?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.


What can be transferred?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.


Who is competent to transfer?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.


Sale of immovable propertySale 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.


Lease of immovable propertyLease 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.


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

Transfer of ownership in exchange for a price paid or promised or part-

paid and part-

promised.Sale of a tangible immovable property takes place by a registered instrument or delivery of tangible, immovable property taking place when the seller places the buyer or such person as he directs, in possession of the property.

Sale

A transfer of a right to enjoy property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or money, a share of crops, service or any other thing of value, to be rendered periodically, or on specified occasions to the transferee, who accepts the transfer on such terms.

Lease

If the mortgage money remains unpaid, the title to property may pass to the mortgage in certain kinds of mortgages

Mortgage


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

When two persons mutually transfer the ownership of one thing for the ownership of another, neither thing being money only, the transaction is called an exchange. 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.

Exchange

The transfer of certain existing moveable or immovable property made voluntarily and without consideration, by one person, called the donor, to another, called donee.

Gifting


Legal Aspects of Financial PlanningLegal Aspects of Financial Planning


ContractContract

“An Agreement Enforceable by law”

“An Agreement Enforceable by law”

“Every promise and every set of promises forming the

consideration for each other "

“Every promise and every set of promises forming the

consideration for each other "

According to Indian Contract Act, 1872

According to Indian Contract Act, 1872

According to Section 2(e)According to Section 2(e)

AgreementAgreement

PromisePromise According to Section 2(b)According to Section 2(b)

"When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.

Proposal when accepted, becomes a promise"

"When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.

Proposal when accepted, becomes a promise"


Essentials of a valid contractEssentials 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.


Types of ContractsTypes of Contracts

On the basis of formation

On the basis of formation

Expressed

Implied

Tacit

On the basis of Legality

On the basis of Legality

Void

Voidable

Unenforceable

Illegal

On the basis of Performance

On the basis of Performance

Executed

Executory

Unilateral

Bilateral


Void

Voidable

Unenforceable

Illegal

A contract without any legal effect and cannot be enforced in a 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 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 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 void but all void agreements are not necessarily illegal.

Eg: A contract to commit a crime

On the basis of LegalityOn the basis of Legality


A contract expressed in words, either spoken or written.

A contract that is implied by law, even though the parties to the 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. A good example of this is a sale by fall of hammer during an auction sale.

On the basis of formationOn the basis of formation

Expressed

Implied

Tacit


If consideration for the contract is give or executed, such a contract is called a, “Contract with executed consideration”

When the obligation or promise in a contract is outstanding on the part of both the parties

On the basis of performanceOn the basis of performance

So called because the reciprocal promises or obligation which serves as consideration is to be performed in future.

A one-sided contract in which only one party has to perform his promise or obligation to do or forbear.

Executed

Executory

Unilateral

Bilateral


Void Contracts VS Void Contracts VS VoidableVoidable contractscontracts

A voidable

contract on the other hand is voidable

of the option aggrieved party, and remains valid until rescinded by him. Contract caused by coercion, undue influence, fraud, misrepresentation are voidable

A void contract is valid when it is made but subsequently becomes unforceable

on certain grounds such as, subsequent illegality, repudiation of a voidable

contract, a contingent contract depending upon happening of an uncertain event, when occurrence of such event becomes impossible.

Nature

A Voidable

contract is an agreement which is enforceable by law at the option of one or more of the parties thereon, but not at the opinion of other or others.

As per Section 2(g) and (j) a contract which ceases to be enforce able by law becomes void when it ceases to be enforceable.

Definition

Voidable contractVoid Contract


Professional Liability 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



•

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.



•

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.


Consumer Protection ActConsumer 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.


The Justice Delivery Forums, under the The Justice Delivery Forums, under the Consumer Protection ActConsumer 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.


Justice delivery ForumsJustice delivery Forums

DistrictForum

StateCommission

NationalCommission

•

Has pecuniary Jurisdiction of upto

Rs. 5,00,000.

•

Each district is supposed to have a District Forum

•

Has pecuniary Jurisdiction above Rs. 5,00,000 and upto

Rs. 20,00,000 and an appellate jurisdiction over orders passed by District forums under that state.

•

Each state is supposed to have a state commission.

•

Situated at New Delhi

•

Has pecuniary Jurisdiction of above Rs. 20,00,000 and appellate and revisional

jurisdiction over the orders passed by respective state commissions

•

Each district is supposed to have a District Forum


TortsTorts•

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


These classes do not come within the These classes do not come within the sphere of Tortsphere 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.


TortsTorts•

Tortuous liability can take the shape of:•

Trespass

•

Defamation•

Nuisance

•

Abuse of legal procedure•

Negligence

•

Liability of dangerous premise•

Dangerous chattels


AgencyAgency

•

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.


Essentials of AgencyEssentials 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.


Creation of AgencyCreation 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.


Duties of the agentDuties 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


Modes of Termination of AgencyModes 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.


Negotiable InstrumentsNegotiable 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.


Negotiable Instruments Act 1881Negotiable 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.


Types of Negotiable InstrumentsTypes 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.


Rules regarding Negotiable InstrumentsRules 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.


Fiduciary RelationshipFiduciary 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".


Investor ProtectionInvestor Protection

•

Securities and Exchange Board of India (SEBI) is the governing body

•

Extensive Guidelines for disclosure and investor protection

•

In case of violations SEBI may:Direct the concerned person not to access capital market for a particular periodDirect the concerned stock exchange not to list or permit tradingDirecting the concerned stock exchange to forfeit the security deposit made by the issuer companyAny other direction which SEBI may deem fit and proper in the circumstances of the case.

Equity Share Investments•Company’s (amendment) Act 2000-

many provisions for investor protection for investor protection. safety of FD’s•Separate limits for company deposits as multiples of their net worth•Strict disclosure requirements in any advertisement soliciting deposits-

details such as:

•Names of promoters, directors, associate companies•Management Structure•Financial Condition, paid up capital, existing deposits and so on.

•Section 58AA inserted-

protection to small depositors•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

Fixed Deposits (FD)


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introduction to financial planning

Economy & Finance