Case Study Ravinder Saxena (Reference date 19 th December, 2009) Ravinder Saxena has approached you, a CERTIFIED FINANCIAL PLANNER CM Practitioner, for preparing a comprehensive Financial Plan to accomplish his financial goals. From your initial meeting, you have gathered the following information: Ravinder Saxena, aged 42 years, life expectancy 70 years, is an arts graduate. Ravinder s wife Sunanda aged 41 years with life expectancy 72 years is a housewife. The couple has three children, two sons Naresh, aged 13 years and Suresh, aged 10 years and one daughter Noori, aged 7 years. Naresh is studying in 7th standard while Suresh is studying in 4th standard and Noori is studying in 2nd standard. Ravinder is in the business of manufacturing of Gym equipments in Ahmedabad. He is also running Gym and fitness Centre for the last ten years. Both the business premises are owned by Ravinder. Ravinder is living in his self owned house along with his parents in Ahmedabad. He purchased another house in the same city in May 2004 for Rs. 18 lakh for investment purposes and further spent Rs. 3.15 lakh in August, 2005 on its renovation. He entered into an agreement for sale of this house for Rs. 35 lakh in March, 2008 and received Rs. 2 lakh towards advance. However, the buyer could not meet his commitment and the advance was forfeited by Ravinder. Ravinder has bought two Life Insurance policies with a total sum assured of Rs.18 Lakh. Policy-I, which is an endowment Plan was purchased in February, 2001 and has sum assured Rs. 10 lakh, term 15 years and annual premium Rs. 52,000. Policy-II is a Unit Linked Insurance Plan, purchased in September, 2005 with sum assured Rs. 8 Lakh, term 20 years and annual premium Rs. 28,500. Ravinder bought a floater Health Insurance policy in February, 2009 for his family for a cover of Rs. 10 lakh at an annual premium of Rs. 16,250. He also paid the annual renewal premium of his parents health insurance policy in March, 2009 for a combined cover of Rs. 5 lakh by paying a premium of Rs. 21,600. Ravinder had generated a net Income of Rs. 12 Lakh from manufacturing business and Rs. 7 Lakh from Gym and fitness Centre in FY 2008-2009. Following are the Assets, Liabilities and Monthly Expenses of Ravinder: Current Monthly Expenses 1. Household expenses Rs. 58,000 2. Personal expenses Rs. 25,000 3. Fuel & maintenance - Personal Cars & Vehicles Rs. 10,000 4. Fix payment to his parents Rs. 15,000 5. Children s education expenses Rs. 28,000 Assets Current Market Value 1. Self Occupied House Rs. 60 lakh 2. Second House Rs. 35 lakh 3. Gym Equipments- Manufacturing plant Rs. 45 lakh 4. Gym & fitness Centre Rs. 15lakh 5. Gold Ornaments (Sunanda) Rs. 15 lakh 6. Private Cars/ Vehicles Rs. 10 lakh 7. Life Insurance Policies Rs. 9 lakh 8. PPF A/c (A/c opened on 4 Jan 2000) Rs. 4.30 lakh# 9. 8.5 % Coupon Bonds (Purchased on 1 April 2006) Rs. 3.0 lakh # Balance as on 31-3-2009 1
Current Liabilities 1. Business Loan Rs. 14 lakh 2. Outstanding Credit Card Rs. 1.5 Lakh Ravinder s Goals & Aspirations 1. He will need Rs. 10 lakh in present terms for each child, when they complete 18 years of age for their higher education. 2. He will need Rs. 5 lakh in present terms for the marriage of their sons Naresh and Suresh, respectively when they complete 24 years of their respective age and Rs. 15 lakh in present terms for the marriage of their daughter Noori, when she completes 21 years. 3. He wants to retire at the age of 60 years and maintain same standard of living post retirement by getting an annuity equivalent to 75% of pre-retirement expenses. 4. He wants to do estate planning for smooth distribution of his assets. 5. Create a separate fund to provide every year vacation expenses amounting to Rs. 60,000 for the first year, increasing at the rate of 5% p.a. for the next 10 years. 6. Purchase a bigger car costing Rs. 15 lakh by the end of March 2010. 7. Float a private limited company to expand his manufacturing business. Assumptions 1. Risk free return 7.00% p.a. 2. Inflation 6.00% p.a. 3. Return on Equity/Equity MF 12.00% p.a. 4. Return on Debt / Debt Mutual fund 8.00% p.a. 5. Return on Balance MF 10.00% p.a. 2
Questions 1) Ravinder wants to know his tax liability for FY 2008-09 his Income in addition to Business Income (i.e. Income from House Property and Income from Other Sources) was Rs. 2.5 lakh. He has made investments to avail of the maximum limit of Deduction u/s 80C and has also paid the Medical Insurance Premium for his parents who are Senior Citizens. According to you the same is. A) Rs. 5,77,265 B) Rs. 5,84,065 C) Rs. 5,24,785 D) Rs. 5,60,450 2) Ravinder is willing to create a fund to ensure the higher education expenses requirement for his three children. You suggest Ravinder to invest in a Balance Mutual Fund scheme by way of monthly SIP starting from today and continuing till the withdrawal of funds for the youngest child. What monthly investment should be made to get this arrangement? (Assume current age of all children as completed today) A) Rs. 27,281 B) Rs. 24,800 C) Rs. 15,922 D) Rs. 26,290 3) Ravinder needs more funds for his manufacturing business. He has received an offer to sell his second house for Rs. 37 lakh. The brokerage charges to be incurred on sale transaction are 1.5% of sale amount. Ravinder wants to know from you the amount of capital gains on this sale transaction if provisions of AY 2009-10 are applicable today as well. Cost Inflation index (CII) for various Financial Years is 2004-05: 480; 2005-06: 497; 2006-07: 519; 2007-08: 551; 2008-09: 582; 2009-10: 632. A) Long term Capital gain of Rs. 11,37,270 B) Long term Capital gain of Rs. 9,55,000 C) Long term Capital gain of Rs. 11,55,000 D) Long term Capital gain of Rs. 8,08,870 4) Ravinder has informed you that he has not filed his Income Tax return for the AY 2009-10 within due date. He wants to know from you till which date he can furnish his belated return. A) 31 st March 2009 or before the completion of his assessment whichever is earlier. B) 31 st March 2010 or before the completion of his assessment whichever is earlier. C) 31 st March 2011 or before the completion of his assessment whichever is earlier. D) No time limit defined. 5) You have suggested Ravinder to accumulate funds for marriage expenses of Naresh and Suresh by making a Systematic Monthly Investment of a total sum of Rs. 12,000 in Equity, Debt and Risk Free instruments in the ratio of 55:25:20 from today. You have further suggested him to follow the Performance-Weighting Strategy for this investment, i.e. rebalance his investment corpus in the beginning of every year in the same ratio. What would be his return on investment at the end of four years? (Assume that the indicated rates for these asset classes hold year after year) A) 10.00% p.a. B) 10.42% p.a. C) 10.49% p.a. 3
D) 9.00% p.a. 6) Ravinder wants to know from you, what is the maximum amount that he can withdraw today from his PPF account as per PPF rules. No Investment has been made by him in this Financial Year till date. Outstanding as on PPF A/c balance Rs. 31-3-2000 40,000 31-3-2001 85,000 31-3-2002 1,35,000 31-3-2003 2,10,000 31-3-2004 2,95,000 31-3-2005 3,45,000 31-3-2006 4,15,000 31-3-2007 5,05,000 31-3-2008 3,80,000 31-3-2009 4,30,000 A) Rs. 2,07,500 B) Rs. 2,15,000 C) Rs. 1,07,500 D) Rs. 1,90,000 7) You suggest Ravinder to invest Rs. 1 Lakh every year in NSCs beginning from today till Noori completes 15 years of age. The maturity proceed of each NSC is reinvested in Debt Mutual Fund scheme. Ravinder asks you whether, with the amount thus accumulated, he would be able to achieve the goal of Noori s marriage, or there could be a shortfall in meeting such expenses. (Assume interest rate offered on NSC remains unchanged throughout the investment period and the return indicated on Debt Mutual Fund holds from year to year) A) Shortfall of Rs. 13,92,058 B) Shortfall of Rs. 16,88,400 C) Excess of Rs. 4,99,300 D) Shortfall of Rs. 14,09,740 8) Ravinder wants to invest in equity shares of PQR Ltd. The company PQR Ltd. has paid a dividend of Rs. 12.00 per share in the current year. The dividend is expected to grow @11% p.a. for the next 3 years and thereafter it is expected to grow @8% p.a. forever. He wants to know the intrinsic value of the equity share of PQR Ltd. today as per dividend discount model, given that his required rate of return from such investment is 15% p.a.? A) Rs. 200 B) Rs. 178 C) Rs. 211 D) Rs. 252 9) Ravinder has informed you that he has got an offer for a car loan from a finance company. The value of car which Ravinder wants to buy is Rs. 15 lakh. Ravinder wants to make Rs. 7 lakh as down payment 4
and wants to avail loan for the remaining amount. The company charges 2% processing fee and an interest @10% p.a. for the 45-month tenure on reducing monthly balance basis. Ravinder, however, pays only Rs. 7 lakh upfront and asks the company to cumulate the loan amount to the extent of processing fees. The company does so by ensuring that it charges 2% processing fees on the total loan amount. Ravinder wants to know the effective cost to be incurred by him by taking loan in such fashion for the specified tenure from the finance company. You calculate the same to be. A) 10.47% p.a. B) 11.14% p.a. C) 11.72% p.a. D) 10.00% p.a. 10) Recently a nationalized bank announced its 600-day Fixed Deposit with interest compounded quarterly. Ravinder is keen to invest in this FDR. You want to assess the real rate of return in this FDR keeping in view the prevailing inflationary trend, and advise Ravinder to have at least 4% p.a. real rate of return. Keeping this in view, which of the following is the least interest rate band in which the rate of the said Fixed Deposit should be, in order to be attractive enough for Ravinder to invest? A) 9.8 % p.a. to 9.9% p.a. B) 10.2% p.a. to 10.3% p.a. C) 10% p.a. to 10.1% p.a. D) 9. 60% p.a. to 9.70% p.a. 11) In the initial stage of Financial Plan preparation, you told Ravinder and also mentioned in the Engagement Letter that you would charge fixed fee for the Financial Plan construction and you would also earn commission on sale of recommended financial products, if the same is accepted. Which code of ethics binds the CFP CM Practitioner to disclose conflict of interests? A) Objectivity B) Fairness C) Integrity D) Professionalism 12) You suggest Ravinder to accumulate retirement corpus by investing Rs. 50,000 in first year, and increasing at the rate of 6% in a dedicated Pension Scheme annually till a year prior to his retirement. The pension scheme gives monthly pension till his life time in annuity due mode, immediately after the retirement age of 60 years. Assume the pension scheme yields 10% p.a. pre-retirement and 8% p.a. post-retirement, Ravinder wants to know from you, what will be the monthly amount he would receive from that pension scheme. (Assume that he starts investing in the Pension Scheme with immediate effect. Ignore taxes and charges) A) Rs. 44,840 B) Rs. 44,304 C) Rs. 40,276 D) Rs. 50,600 5
13) Ravinder wants to buy a life insurance policy on the life of his father as well as both his brothers. However, in case of any eventuality he wants to reserve all legal rights of receiving the policy benefits in his name. He wants to know whether it is legally possible for him. A) Yes, he can buy the policy in the desired way. B) Yes, but he cannot reserve the right to receive the policy benefits. C) No, in the absence of insurable interest he cannot buy life insurance policy in their name. D) He can buy the policy only in the name of his father in the desired way 14) Ravinder s father has made a Will deed for distribution of his assets. Ravinder discusses with you regarding Probate process, as per you which is not a feature of Probate process? A) The assets are gathered, applied to pay debts, taxes and expenses of administration and distribute to those designated as beneficiaries in the Will. B) Executor or Personal Representative named in the Will is in charge of this process. C) All legal heirs will receive notices from the court to file objections. D) The court will give orders to distribute the assets to the heirs as per intestate succession Act. 6
Thirukutti Murugan (Reference date 15 th December, 2009) Thirukutti Murugan has approached you to make a Financial Plan. His details are as follows: Thirukutti, born on 22 nd Nov 1969, and his wife Vaijanthi, born on 26 th Apr 1966. Both of them are professionally qualified and employed in an NGO. Thirukutti is a Team Leader and is in charge of several projects. Vaijanthi is an Executive Director and manages the activities of the core projects. They are at present staying in their own house in Namakkal, Tamil Nadu. Their daughter Naireeta, born on 30 Jun 2001 is studying in a prestigious boarding school in Kodaikanal. She is good in academics and also in extra-curricular activities. Thirukutti s parents Murugan Sami, born on 26 th Jun 1941 has retired from private job long ago and his mother Rukmani, born on 25 th Nov 1946 is a house wife. Murugan Sami has a house in Namakkal which has been given on rent. They are financially dependent on Thirukutti and are residing with him. You have collected the following data from Thirukutti: Assets Present Market Value (Unless otherwise stated) Residential Property Rs. 18.00 lakh Car Rs. 4.25 lakh Cash & Cash Equivalents Rs. 4.02 lakh Bonds 1 Rs. 0.55 lakh Fixed Deposits 1 Rs. 2.20 lakh PPF 2 Rs. 3.53 lakh ULIP 3 Rs. 0.22 lakh Equity Shares Rs. 0.94 lakh Equity Mutual Funds Rs. 4.95 lakh Debt Mutual Funds Rs. 1.26 lakh PO-MIS 1 Rs. 6.00 lakh Other Valuables Rs. 3.50 lakh 1 cost at the time of investments 2 value on 31 st March 2009 3 Details are as following - Yearly premiums Rs. 60,000, - Term 20 years, - Started from 21 th Nov 2009, - Sum assured Rs. 3 lakh, - Death benefit: sum assured or fund value whichever is more - Premium allocation charges 1 st year: 60% p.a., 2 nd Year to 5 th Year: 4.50% p.a., 6 th Year to 13 th Year: 2.50% p.a., 14 th Year to 20 th Year: Nil, - Policy Admin Charges: Rs. 750 for first year and increasing by 5% every year, - Fund Management Charges: 1.50% p.a. of year end Fund Value, - Mortality charges: 1.9 per thousand SA first year and increases by 5% p.a. every year (calculated on Sum Assured less beginning of the year fund value after payment of premium), it will be charged till fund value is less than sum assured. 7
Liabilities - Car Loan outstanding Rs. 1.37 lakh For the Financial Year 2008-09: Income Take home Salary of both Thirukutti and Vaijanthi Rs. 10.40 lakh (Net of Taxes) Expenditures House Hold exp Entertainment and Traveling Medical Insurance Car Insurance Schooling Financial Goals Rs. 1.80 lakh Rs. 0.35 lakh Rs. 0.06 lakh Rs. 0.07 lakh Rs. 1.20 lakh - They want to plan for Naireeta s higher education which would start by 1 st Jan 2020. The present cost would be Rs. 2.50 lakh p.a. for three years graduation and 4.00 lakh p.a. for two years post graduation. - They would like to provide for Naireeta s marriage and will require Rs. 30.00 lakh (present cost) when she completes 24 years. - They want to shift to a bigger house by 2012 and have a new car by 2013 worth Rs. 6.00 lakh (present cost). - Thirukutti would like to retire on 30 th Nov 2029 and would like to plan for their retirement from today. Assumptions 1) Risk free return 7.00% p.a. 2) Inflation 6.00% p.a. 3) Return on Equity/ Equity MF 12.00% p.a. 4) Return on Debt/ Debt MF 8.00% p.a. 5) Balanced MF 10.00% p.a. 6) life expectancy a. Thirukutti : 75 years b. Vaijanthi : 80 years 8
Questions 15) You have disclosed in writing to Thirukutti on your ability to advise and sell on a restricted range of products, and some other limitation of their capacity to serve him. You have complied with the Code of Ethics of. A) Integrity B) Objectivity C) Fairness D) Diligence 16) You have already mentioned to Thirukutti that you shall confirm in writing to him where a subsequent instruction given by him significantly alters the financial strategy or balance of an existing portfolio under your supervision. You have complied with the Code of Ethics of. A) Diligence B) Compliance C) Confidentiality D) Objectivity 17) The present cost of higher education is Rs. 2.50 lakh p.a. for three years graduation and 4.00 lakh p.a. for two years Post-Graduation. You have advised Thirukutti to accumulate funds for higher education of Naireeta for which the first withdrawal as estimated would be on 1 st Jan 2020. For this purpose he would invest in equity and debt in the ratio 70:30 and shift completely in Risk Free investment on 1 st Jan 2018. How much should he invest every month starting from 1st Jan 2010 till 1st Dec 2019? He would require funds on 1st of Jan every year. A) Rs. 15,471 B) Rs. 13,770 C) Rs. 13,429 D) Rs. 15,151 18) Thirukutti has allocated to Equity and Debt in the ratio of 70 and 30 in the Unit Linked Insurance Plan he has recently bought and he intends to continue paying the premium till its maturity. What approximate amount Thirukutti would receive at maturity? A) Rs. 29.89 lakh B) Rs. 30.43 lakh C) Rs. 25.35 lakh D) Rs. 37.03 lakh 19) Thirukutti wants to know, what are the factors that are included in the calculation of life insurance premium rate? 1. Rate of Mortality 2. Investment earnings 3. Expenses 4. Economic condition of the country 5. Political stability A) 1, 2, 3, and 4 B) 1, 2 and 3 9
C) 1 and 2 D) 1, 2, 3, 4 and 5 20) Thirukutti has invested a lump sum amount in POMIS on 1 st Dec 2009 in joint name along with Vaijanthi. He intends to invest monthly interest and maturity amount from this POMIS in Gold ETF which is expected to give an average monthly return of 0.75% p.m. (net of expense) and liquidate this investment at the time of retirement. Thirukutti also intends to start investing in an Equity MF scheme a fixed sum starting from 1 st Jan 2010 in addition to the investment in Gold ETF to accumulate for his retirement corpus. How much should he invest monthly in Equity MF Scheme? Post-retirement he would invest the whole corpus in Debt MF Scheme and wants to receive a monthly amount equivalent to present monthly Household Expenses which should last Vaijanthi s lifetime. (Please ignore taxes and charges if applicable) A) Rs. 5,080 B) Rs. 5,008 C) Rs. 4,974 D) Rs. 5,206 21) Thirukutti wants to invest monthly to accumulate funds for Naireeta s marriage. He started his PPF account on the day Naireeta was born. He has not invested in this PPF account since the beginning of this financial year. He intends to start investing in this PPF account and Equity MF scheme in the ratio of 60:40 every month starting from 1 st January, 2010 till one month before maturity of this PPF account. He would invest the maturity proceeds received from PPF Account and accumulated amount of Equity MF on the day of maturity of his PPF account in a Balanced MF scheme. How much amount should he invest monthly in the said combination as above? A) Rs. 20,322 B) Rs. 21,857 C) Rs. 4,070 D) Rs. 21,615 22) Thirukutti wants to know, if he opens a Senior Citizens Saving Scheme Account in a post office in the name of his parents and deposits Rs. 1 lakh on 1 st Jan 2010 what would be the total interest received till maturity of this account? (Please ignore charges and Taxes if applicable) A) Rs. 45,000 B) Rs. 47,500 C) Rs. 42,500 D) Rs. 40,000 23) Thirukutti has received offer to invest in New Fund Offers of open end equity growth schemes ABC and PQR of two Mutual Funds. The schemes have same investment objectives and other features, except in the Fund Management Charges (FMC), which is 2.25% p.a. for ABC and 1.50% p.a. for PQR. Thirukutti is not able to appreciate as to what difference this would make in the end analysis. You advise that if Thirukutti makes an investment of Rs. 5,000 each per month for twenty years in ABC and PQR, and assuming that both funds generate same pre-fmc return, say 12%, year after year, and the accumulated amount in PQR will be % higher than that of ABC after twenty years. A) 10.06 B) 9.14 10
C) 9.31 D) 10.31 24) Thirukutti's Mutual Fund investments consist of four different funds. Performance of these funds is as follows: Mutual Fund Fund Return of 1 year Beta A 15.86% 1.50 B 13.54% 1.40 C 11.25% 0.90 D 10.26% 0.65 He wants to determine which MF is earning the proper return for its level of risk. How would you rank these funds from the best to worst on the basis of Jensen s Measure? A) B, C, D, A B) A, C, D, B C) A, D, C, B D) B, D, C, A 25) Which of the following are the accepted ways globally for professionals certified by the Affiliates of FPSB Ltd. worldwide to write the certification mark against their name? 1. Certified Financial Planner 2. CFP 3. C.F.P. 4. CERTIFIED FINANCIAL PLANNER 5. C F P A) 1, 2 and 3 B) 1 and 5 C) 2 and 4 D) 1 and 3 26) Which of the following usages of the certification mark owned (outside the U.S.) by FPSB Ltd. are correct? 1. CFP Qualification 2. CFP Certification 3. CFP Education 4. CFP Professional 5. CFP Practitioner A) 1, 3 and 4 B) 1, 2 and 5 C) 2, 4 and 5 D) 1, 3 and 5 27) Thirukutti wants to know that in case he dies intestate, who among his following relatives would not get preference while his property is being devolved. 11
A) Naireeta B) Murugan Sami C) Vaijanthi D) Rukmani 28) Thirukutti has invested in a Debt MF scheme with Dividend Re-investment option. The scheme has just declared a dividend of 8%. The current value of his Debt MF scheme is as per the Cum-Dividend NAV of 12.7689. Thirukutti wants to know the total Dividend Distribution Tax that the Scheme will have to pay on the Dividend Distributed to him? (Please assume that the applicable tax laws are the same as that of AY 2009-10) A) Rs. 2,236 B) Rs. 1,789 C) Rs. 1,118 D) Rs. 1,342 12