PERSONAL FINANCIAL PLANNER

 A Financial Planner or Financial Advisor is a

certified professional who prepares financial
plans for individuals.

 He provides financial advises and services to

client according to their specific needs.
QUALITIES OF PERSONAL FINANCIAL PLANNER

 Analytical Skills:
In determining an investment portfolio for a client, personal
financial advisors must be able to take into account a range
of information, including economic trends, regulatory
changes, and the client’s comfort with risky decisions.
 Interpersonal Skills:
A major part of a personal financial planner job is making
clients feel comfortable. Advisors must establish trust with
clients and respond well to their questions and concerns.
 Math Skills:
Personal financial planner should be good at
mathematics because they constantly work with
numbers.
They determine the amount invested, how that amount
has grown or decreased over time, and how a portfolio is
distributed among different investments.
 Marketing Skills: To expand their base of clients,
personal financial planner must be convincing and
persistent in selling their services.
Responsibilities of Financial Planner
TIME VALUE OF MONEY
 The idea behind the theory Of Time of Value of Money
(TVM) is the fact that the money received today is worth
more than the same amount of money receivable at a
future date.

 The value of a rupee to be received in future is less than

the value of a rupee on hand today.
NEED FOR TIME VALUE OF MONEYS
 Risk and uncertainty
 Investment Opportunities
 Inflationary economy
BASIC VALUATION TECHNIQUES
 Future Value/ Compounding Techniques
 Present Value/ Discounting Techniques
FUTURE VALUE/ COMPOUNDING TECHNIQUES

 The theory of compounding facilitates ascertaining the

Future Value(FV) of today’s money.

 It is similar to the concept of ‘compound interest’ which

anticipates the re-investment of the principal amount
along with the interest earned during the previous year at
the prevailing rate of interest.
FUTURE VALUE OF SINGLE CASH FLOW
 The future value of a single cashflow can be computed
by applying the following formula:

Where,
FV- Future Value
PV= Present Value
r= Rate of Interest and
n = Time gap after which FV is to be ascertained.
EXAMPLES
 Calculation of FV of Rs.1,000 at 10% after 7 Years

= 1,000 (1+0.10)7
= 1,000 * 1.95
= Rs.1,950
 Calculation of FV of Rs.5,000 at 11% after 9
Years

=
 Calculation of FV of Rs.50,000 at 16% after 3
Years

= 50,000 (1+0.16)3
= 50,000 (1.16)3
= 50,000*1.56
= Rs.78,000
EXERCISE
 You are required to find out the amount to be
received by Govind after 8 years from the
following data:
i. Govind has a deposit of Rs.10,000 in bank.
ii. The bank pays 8% interest compounded
annually for 8 years.
 Suppose you deposited Rs.5,000 in a savings account
that earns an annual compound interest of 7%; what
would be the value of the money in the savings account
after ten years?
Solution
PV = 5,000.
FVN = ?
r = 7%.
N =10.
FV=PV(1+r)N=5,000(1+0.07)10=9,835.7568
FUTURE VALUE OF UNEVEN CASHFLOW
 The formula to be applied to calculate Future Value
of uneven cash flow streams is
FV= R1(1+r)n-1+ R2(1+r)n-2+ R3(1+r)n-
3+............+ Rn

Where,
FV= Future Value
R= Payment per compounding period
r= Interest rate per compounding periods
 Calculate the future value of income stream from the
following data:
i) Mr. A is planning to save some money to purchase a
car and plans to deposit the following cashflow stream
each year:
Year 1 2 3 4

Rs. 1,500 3,000 2,200 3,000

ii) Interest rate is 9% for 4 years compounded semi

annually.
 Solution:
Payment per compounding period(Rs.)= Rs.1,500
Payment per compounding period(Rs.)= Rs.3,000
Payment per compounding period(Rs.)= Rs.2,200
Payment per compounding period(Rs.)= Rs.3,000

Interest rate per compounding periods (r)= 0.09/2= 0.045

Time gap after which FV is to be ascertained (n)= 4 Years
 FV = 1,500(1+0.045)4-1*2+3,000(1+0.045)4-2*2 +
2,200 (1+0.045)4-3*2 + 3,000 (1+0.045) 4-4*2
= Rs.10,933.29
FUTURE VALUE OF ANNUITY/ SERIES OF EQUAL CASH FLOWS

 When investment decision may involve regular cash

flows of equal amount during successive years in future
for a number of years, in lieu of a single cash flow.
 Such cash flows are referred to as “Annuity”.
 It can be defined as any regular and equal cash flows at
fixed intervals for a specified period of time.
 An annuity that has no end is called “Perpetuity”.
CALCULATION OF FV OF AN “ANNUITY”
 Example: Calculate the future value of annuity at the end
of five years from the following data:
i) Deposition of Rs.10,000 in five equal annual payments
in the FD.
ii) Interest rate per year is 10%.
Solution:

= 10,000 [(1+0.10)5 – 1/0.10]

= Rs. 61,100
GROWING ANNUITY
 A finite series of regular cashflow growing at
fixed rate every year is referred as growing
annuity.
 Following is the general formula which may be applied to
calculate “Growing Annuity”
When i < or > g
FV (A) = A (1+i)n – (1+g)n/i-g
When i=g
FV (A) = A*n (1+i)n-1

Where,
FV(A) = The value of the annuity at time
A = The value of the individual payments in each compounding
period
I= The interest rate that would be compounded for each period of
time
n= The number of payment periods.
g= Growth rate
EXAMPLE
 Calculate the investor’s investment at the end of 15 years
from the following data
i) Annual Salary is Rs.5 lac
ii) Salary increases by 5% every year.
iii) Investment at 20% of the salary every year in a SIP
iv) Rate of return on SIP is 12%
v) Investment in SIP is for 15 years
Answer: 48,50,000
FUTURE VALUE OF MULTIPLE FLOWS
 When investor may like to increase the amount in
the second year and more in subsequent years.
 Calculate the compound value at the end of the 5 th year
from the following data:
i) Alok made an investment of Rs.500, Rs.1,000,
Rs.1,500, Rs.2,000 and Rs.2,500 at the end of each year.
ii) The cashflows to accumulate at the end of year 5.
iii) The interest rate 5% is compounded annually on the
investment.
EXERCISE QUESTIONS
1. Calculate the future value of an investment of
Rs.4,000 compounded annually at the rate of 6%,
after 4 years period.
A= Rs.5,049.90
2. A sum of Rs.8,200 is deposited into a time deposit
account today that pays 5% per annum. How much
will it be in the next 5 years if compounded

i) Quarterly = Rs.10,512.73
ii) Semi-annually = Rs.10,496.82
Iii) annually = Rs.25,023.94
 3. Calculate the future value of the investment from the
following data:
i) Mr. A is planning to paint his house in Diwali which
would incur cost of Rs.12,000. He decided to deposit
Rs.2, 500 during each period.
ii) Interest rates for each period are expected to be as
follows:
ii) Interest rates are compounded annually.
Period 1 2 3 4

% 3 4 5.5 5

A= Rs.10,573.25
4. Calculate the future value of annuity at the end
of next five years assuming:
i) 6% compounded annually.
ii) The investor deposits Rs.5,000 at the end of
each year for next 5 years.

A = Rs.28,185
 How much amount is required to be invested every year
so as to accumulate Rs.3,00,000 at the end of 10 years if
the interest is compounded annually at 10%?

 A= Rs.18,823.62
PRESENT VALUE/DISCOUNTING TECHNIQUES

Determining the present value of a payment or a stream

of payments is called discounting which is likely to be
received in the future.

Discounting is the method which is used to ascertain the

worth of future payments or receipts today.
PRESENT VALUE OF SINGLE CASHFLOWS
 Calculate the present value from the following data:
a) A person will receive Rs.3,000 after 8 Years.
b) The discount rate is 10%
Solution:

PV = FV/ (1+r)n
= 3,000 /(1+0.10)8
= 3,000/2.1435
= 1,399.5801
PRESENT VALUE OF UNEVEN CASHFLOW
Formula:
PV = PV = R1/(1+r)1 + R2/(1+r)2+ R3/(1+r)3........+Rn(1+r)n

Calculate the present value of the following cashflow

stream from the following data:
Period 1 2 3 4

% 3 4 5.5 5

Rs. 1,500 3,000 2,200 3,000

A= Rs. 8,571.64
PRESENT VALUE OF ANNUITY/SERIES OF EQUAL CASHFLOWS

Formula:
PV(A) = A [(1+r)n – 1/ r(1+r)n]
Calculate the PV from the following data:
i) Amount of annuity Rs.50,000
ii) Discount rate is 8%

iii) Annuity duration is 5 years

A= 1,99,750
GROWING ANNUITY
 The present value of a growing annuity can be
arrived at as follows:
When i <or> g
PV = CF1/ r-g [ 1 – (1+g/1+r)n ]
Where,
CF1= Cashflow at the end of the period 1
r= rate of interest
g= growth rate
n= life of annuity
If r=g , then
PV = CF1* n/(1+r)
Example: Calculate the PV of the scheme from the following
data:
i) A person opens a recurring deposit account fro a period
of 10 years earning 12% interest.
ii) The scheme is accepted under the two conditions that:
a) For the first year the deposit is Rs.3,150
b) For subsequent years the deposit amount will increase
by 5% every year.
PRESENT VALUE OF PERPETUITY
Perpetuity is defined as a constant stream of
identical cashflows at regular intervals with no
end.
Formula:
PV= Annual cash flow/r
 Example:
The present value of an investment, which is
expected to yield a return of Rs.2,500 p.a. for an
indefinte period, if the rate of return is 12% .

PV = 2,500/0.12 = 2,083.33
GROWING PERPETUITY
 Growing perpetuity is a type of annuity which
involves gradually increasing payments over an
indefinite period of time.

PV = cashflow 1/ (r-g)