Chapter 20: Case Studies

1. What are the assets that will be most suitable for Mr. C given his situation?

Caselet- Mr. C is a 45 year single earning member of his family with a good income. He is saving for different financial goals, some of which are due for funding now. He has a home loan and a car loan that he is servicing.

2. Mr has to park the funds from fixed deposits that have matured for a short period till it will be used for his daughter’s education. What will you suggest as a suitable investment option?

Caselet- Mr. C is a 45 year single earning member of his family with a good income. He is saving for different financial goals, some of which are due for funding now. He has a home loan and a car loan that he is servicing.

3. How would you best categorize Mr. C’s risk profile?

Caselet- Mr. C is a 45 year single earning member of his family with a good income. He is saving for different financial goals, some of which are due for funding now. He has a home loan and a car loan that he is servicing.

1. The amount required for compensating the difference required for inflation adjustment based on a discounting rate of 5% is higher than the corpus of Rs. 40 lakhs available with them. This means that:

Case - Mr. Smart (60) has just retired from service. He is entitled to a pension of Rs. 4,80,000/- p. received yearly in advance. The pension adjusts partially with inflation to the extent of 50%. Mr. Smart’s wife (Mrs. Smart-58) is entitled to the pension for her lifetime in case of the demise of Mr. Smart before her. Nobody else is dependent on the couple. The couple stays in their own home. Mr. Smart received Rs. 40 lakhs (after tax) as retirement dues. Their current living expenses are equal to the pension amount. Mr. Smart’s employer will continue to provide a family floater Mediclaim policy for both their life time that is considered adequate for their needs. Inflation is to be assumed at 6% p. Life expectancy is to be assumed to be 87 years for Mr. Smart and 85 years for Mrs. Smart. The couple wants to make provision for expenses on social occasions that arise & leisure travel expenditure to the tune of Rs. 1,00,000 p. (inflation 6% p.) apart from compensating for the inflation adjustment shortfall in the pension income. Assume the expenditure arises at the beginning of the each year.

2. If discounted @ 5% p. and assuming that the adjustment is fully required at the beginning of the year, the inflation adjustment required is:

Case- Mr. Smart (60) has just retired from service. He is entitled to a pension of Rs. 4,80,000/- p. received yearly in advance. The pension adjusts partially with inflation to the extent of 50%. Mr. Smart’s wife (Mrs. Smart-58) is entitled to the pension for her lifetime in case of the demise of Mr. Smart before her. Nobody else is dependent on the couple. The couple stays in their own home. Mr. Smart received Rs. 40 lakhs (after tax) as retirement dues. Their current living expenses are equal to the pension amount. Mr. Smart’s employer will continue to provide a family floater Mediclaim policy for both their life time that is considered adequate for their needs. Inflation is to be assumed at 6% p. Life expectancy is to be assumed to be 87 years for Mr. Smart and 85 years for Mrs. Smart. The couple wants to make provision for expenses on social occasions that arise & leisure travel expenditure to the tune of Rs. 1,00,000 p. (inflation 6% p.) apart from compensating for the inflation adjustment shortfall in the pension income. Assume the expenditure arises at the beginning of the each year.

3. The fixed income options available to the couple to earn the highest rate of interest from government schemes would be:

Case- Mr. Smart (60) has just retired from service. He is entitled to a pension of Rs. 4,80,000/- p. received yearly in advance. The pension adjusts partially with inflation to the extent of 50%. Mr. Smart’s wife (Mrs. Smart-58) is entitled to the pension for her lifetime in case of the demise of Mr. Smart before her. Nobody else is dependent on the couple. The couple stays in their own home. Mr. Smart received Rs. 40 lakhs (after tax) as retirement dues. Their current living expenses are equal to the pension amount. Mr. Smart’s employer will continue to provide a family floater Mediclaim policy for both their life time that is considered adequate for their needs. Inflation is to be assumed at 6% p. Life expectancy is to be assumed to be 87 years for Mr. Smart and 85 years for Mrs. Smart. The couple wants to make provision for expenses on social occasions that arise & leisure travel expenditure to the tune of Rs. 1,00,000 p. (inflation 6% p.) apart from compensating for the inflation adjustment shortfall in the pension income. Assume the expenditure arises at the beginning of the each year.

1. Both of them will need to buy Life Insurance policies in India for covering the risk of death. Which of the following is true?

Case - Mr. and Mrs. Gupta are both Indian Citizens (both 45 years ol who were working with multinational companies in the United States of America for the last 20 years. They have given up their jobs and have returned to India to pursue their own venture in India funded by a Venture fund based in the Silicon Valley. They had a house in the USA which they have given out on rent. They have substantial investments in their retirement investment accounts that are made on a tax deferred basis meaning that investments were made from pre-tax income and the contribution and the income accrued on it is taxed at the time of withdrawal. Both have taken substantial life insurance policies, on their own, in the USA which will payout the sum insured of USD 1 million each if any of them die in the next 15 years. Their employer paid for a health Insurance policy in the USA that continues to be valid till the end of the year but will cease thereafter unless they choose to renew it on their own. They have certain questions regarding their re-location and seek your opinion:

2. The income accrued on the deferred tax retirement account will be taxed only in the year when such money is withdrawn. Which of the following statements is true?

Case - Mr. and Mrs. Gupta are both Indian Citizens (both 45 years ol who were working with multinational companies in the United States of America for the last 20 years. They have given up their jobs and have returned to India to pursue their own venture in India funded by a Venture fund based in the Silicon Valley. They had a house in the USA which they have given out on rent. They have substantial investments in their retirement investment accounts that are made on a tax deferred basis meaning that investments were made from pre-tax income and the contribution and the income accrued on it is taxed at the time of withdrawal. Both have taken substantial life insurance policies, on their own, in the USA which will payout the sum insured of USD 1 million each if any of them die in the next 15 years. Their employer paid for a health Insurance policy in the USA that continues to be valid till the end of the year but will cease thereafter unless they choose to renew it on their own. They have certain questions regarding their re-location and seek your opinion:

3. Their health Insurance policies cover hospitalization expenses across the world, including Indi They can renew the policy on their own at the end of the year. Which of the following is true?

Case -Mr. and Mrs. Gupta are both Indian Citizens (both 45 years ol who were working with multinational companies in the United States of America for the last 20 years. They have given up their jobs and have returned to India to pursue their own venture in India funded by a Venture fund based in the Silicon Valley. They had a house in the USA which they have given out on rent. They have substantial investments in their retirement investment accounts that are made on a tax deferred basis meaning that investments were made from pre-tax income and the contribution and the income accrued on it is taxed at the time of withdrawal. Both have taken substantial life insurance policies, on their own, in the USA which will payout the sum insured of USD 1 million each if any of them die in the next 15 years. Their employer paid for a health Insurance policy in the USA that continues to be valid till the end of the year but will cease thereafter unless they choose to renew it on their own. They have certain questions regarding their re-location and seek your opinion:

4. After they become resident in India as per Indian tax laws, they will have to pay tax in India on their rental income from the US property. Is this statement true?

Case - Mr. and Mrs. Gupta are both Indian Citizens (both 45 years ol who were working with multinational companies in the United States of America for the last 20 years. They have given up their jobs and have returned to India to pursue their own venture in India funded by a Venture fund based in the Silicon Valley. They had a house in the USA which they have given out on rent. They have substantial investments in their retirement investment accounts that are made on a tax deferred basis meaning that investments were made from pre-tax income and the contribution and the income accrued on it is taxed at the time of withdrawal. Both have taken substantial life insurance policies, on their own, in the USA which will payout the sum insured of USD 1 million each if any of them die in the next 15 years. Their employer paid for a health Insurance policy in the USA that continues to be valid till the end of the year but will cease thereafter unless they choose to renew it on their own. They have certain questions regarding their re-location and seek your opinion:

1. How much will be left in the corpus after both goals are fulfilled (assume that he does not set apart money in the 6% corpus mentioned in Q1)?

Case - Mr. Y, aged 40, has the following goals ahead of him. (1) Son's post-graduate education: Due in Year Current cost Rs15,00,000 p. to be incurred at the end of each year for 2 years. Likely Inflation 15% p. (2) Daughter's marriage: Scheduled in end of Year Current cost Rs1,00,00,000. Inflation is assumed to be at 10% p. Mr. Y has provided a corpus of Rs2,00,00,000 towards these two needs. The corpus is invested in a mix of debt and equity yielding 8% p. Ignore taxation.

2. What is the likely outflow on account of the daughter's marriage in the year it is planned?

Case - Mr. Y, aged 40, has the following goals ahead of him. (1) Son's post-graduate education: Due in Year Current cost Rs15,00,000 p. to be incurred at the end of each year for 2 years. Likely Inflation 15% p. (2) Daughter's marriage: Scheduled in end of Year Current cost Rs1,00,00,000. Inflation is assumed to be at 10% p. Mr. Y has provided a corpus of Rs2,00,00,000 towards these two needs. The corpus is invested in a mix of debt and equity yielding 8% p. Ignore taxation.

3. How much money will need to be set apart from the corpus at the end of Year 5 to finance the son's post-graduate education? Assume the amount set apart will earn 6% interest.

Case - Mr. Y, aged 40, has the following goals ahead of him. (1) Son's post-graduate education: Due in Year Current cost Rs15,00,000 p. to be incurred at the end of each year for 2 years. Likely Inflation 15% p. (2) Daughter's marriage: Scheduled in end of Year Current cost Rs1,00,00,000. Inflation is assumed to be at 10% p. Mr. Y has provided a corpus of Rs2,00,00,000 towards these two needs. The corpus is invested in a mix of debt and equity yielding 8% p. Ignore taxation.

4. How would you describe the investment policy Mr. Y is using for the corpus?

Case - Mr. Y, aged 40, has the following goals ahead of him. (1) Son's post-graduate education: Due in Year Current cost Rs15,00,000 p. to be incurred at the end of each year for 2 years. Likely Inflation 15% p. (2) Daughter's marriage: Scheduled in end of Year Current cost Rs1,00,00,000. Inflation is assumed to be at 10% p. Mr. Y has provided a corpus of Rs2,00,00,000 towards these two needs. The corpus is invested in a mix of debt and equity yielding 8% p. Ignore taxation.

1. If he re-invests the entire retirement corpus in debt, what percentage of Mr. Z's portfolio will be in debt when he retires?

Mr. Z, aged 52 years, is working in a leading company. His net savings are Rs. 50,000 p.m. Based on salary growth and other factors, he expects this to rise by 20% p. till his retirement at age 60. This does not include monthly contributions of Rs. 9,000 (Rs.4000 own contribution; Rs.5000 employer contribution) to various funds towards retirement corpus. These are expected to grow by 20% p. till retirement. The retirement corpus by the end of the year will be Rs. 12 lakhs, entirely in debt, which will yield 8 % p. on average. Besides his own residential house and the retirement corpus, his savings and investments will amount to Rs.50 lakhs by the end of the year, 30% of which will be in equity. He has a practice of investing, at the end of each year, his disposable savings into debt and equity in the ratio of 80:20. In the long run, he expects equity to yield 15% and debt to yield 8.5%. At the end of age 55, he expects an outflow of funds amounting to Rs5lakhs, which he hopes to meet out of annual savings. He expects inflation of 10% and post-retirement investment return on his portfolio at 11%. His current expenses are Rs40,000 per month. Assume zero date as the end of age 5Calculations are to be done on annual basis. Ignore taxation and interest income on savings and contributions during the year.

2. On retirement, how much will Mr. Z have in his retirement corpus?

Case- Mr. Z, aged 52 years, is working in a leading company. His net savings are Rs. 50,000 p.m. Based on salary growth and other factors, he expects this to rise by 20% p. till his retirement at age 60. This does not include monthly contributions of Rs. 9,000 (Rs.4000 own contribution; Rs.5000 employer contribution) to various funds towards retirement corpus. These are expected to grow by 20% p. till retirement. The retirement corpus by the end of the year will be Rs. 12 lakhs, entirely in debt, which will yield 8 % p. on average. Besides his own residential house and the retirement corpus, his savings and investments will amount to Rs.50 lakhs by the end of the year, 30% of which will be in equity. He has a practice of investing, at the end of each year, his disposable savings into debt and equity in the ratio of 80:20. In the long run, he expects equity to yield 15% and debt to yield 8.5%. At the end of age 55, he expects an outflow of funds amounting to Rs5lakhs, which he hopes to meet out of annual savings. He expects inflation of 10% and post-retirement investment return on his portfolio at 11%. His current expenses are Rs40,000 per month. Assume zero date as the end of age 5Calculations are to be done on annual basis. Ignore taxation and interest income on savings and contributions during the year.

3. At the end of Age 55, what percentage of Mr. Z's portfolio will be in debt (excluding retirement corpus)?

Mr. Z, aged 52 years, is working in a leading company. His net savings are Rs. 50,000 p.m. Based on salary growth and other factors, he expects this to rise by 20% p. till his retirement at age 60. This does not include monthly contributions of Rs. 9,000 (Rs.4000 own contribution; Rs.5000 employer contribution) to various funds towards retirement corpus. These are expected to grow by 20% p. till retirement. The retirement corpus by the end of the year will be Rs. 12 lakhs, entirely in debt, which will yield 8 % p. on average. Besides his own residential house and the retirement corpus, his savings and investments will amount to Rs.50 lakhs by the end of the year, 30% of which will be in equity. He has a practice of investing, at the end of each year, his disposable savings into debt and equity in the ratio of 80:20. In the long run, he expects equity to yield 15% and debt to yield 8.5%. At the end of age 55, he expects an outflow of funds amounting to Rs5lakhs, which he hopes to meet out of annual savings. He expects inflation of 10% and post-retirement investment return on his portfolio at 11%. His current expenses are Rs40,000 per month. Assume zero date as the end of age 5Calculations are to be done on annual basis. Ignore taxation and interest income on savings and contributions during the year.

4. What is the corpus requirement to ensure that he is able to sustain the same standard of living for 15 years after retirement?

Mr. Z, aged 52 years, is working in a leading company. His net savings are Rs. 50,000 p.m. Based on salary growth and other factors, he expects this to rise by 20% p. till his retirement at age 60. This does not include monthly contributions of Rs. 9,000 (Rs.4000 own contribution; Rs.5000 employer contribution) to various funds towards retirement corpus. These are expected to grow by 20% p. till retirement. The retirement corpus by the end of the year will be Rs. 12 lakhs, entirely in debt, which will yield 8 % p. on average. Besides his own residential house and the retirement corpus, his savings and investments will amount to Rs.50 lakhs by the end of the year, 30% of which will be in equity. He has a practice of investing, at the end of each year, his disposable savings into debt and equity in the ratio of 80:20. In the long run, he expects equity to yield 15% and debt to yield 8.5%. At the end of age 55, he expects an outflow of funds amounting to Rs5lakhs, which he hopes to meet out of annual savings. He expects inflation of 10% and post-retirement investment return on his portfolio at 11%. His current expenses are Rs40,000 per month. Assume zero date as the end of age 5Calculations are to be done on annual basis. Ignore taxation and interest income on savings and contributions during the year.