Case Study # 1 Sample Case Study (F) Nishant, aged 35, life expectancy 75, is working for a Life Insurance company for last 3 years, from where he is enjoying a current income package of Rs 18 Lakh pa. The break up of his salary is: Basic Salary Rs. 9 Lakh, D.A Rs. 6 Lakh (2/3 to be taken for the purpose of calculating retirement benefits), HRA Rs. 3 Lakh. He is getting an average growth of 10% per annum in his salary and plans to retire at the age of 55 years although the prescribed retirement age of his company is 60 years. Nishant s wife, Pallavi, aged 32, life expectancy 77, is managing her own boutique, from which she has earned a net profit of Rs 6 Lakh in the current year. Pallavi has taken a business loan from a financial institution to the tune of Rs 10 Lakh for investment in her boutique. Pallavi s business loan was repayable in 120 EMI s starting from the end of one month from the date on which the loan was disbursed. However two EMI s were payable in advance & a 2% processing fee was also charged on the nominal loan amount. The loan was offered at a nominal interest rate of 7.75% pa. The couple has a child Rohan, aged 3 years. Pallavi s mother had deposited a sum of Rs 3 Lakh in the name of Rohan in a Post Office MIS account under the guardianship of Pallavi, wherein Rohan gets a monthly amount of Rs 2,000 as interest income. Pallavi does not want to continue her profession once Rohan is 12 years old as she is of a firm belief that her growing child would require full time and energy. Nishant s father died a few years back and the couple is supporting Nishant s mother, aged 68, life expectancy another 7 years from today, currently to the extent of Rs 15,000 p.m. (inflation linked). Nishant s mother inherited a portfolio from her husband. The portfolio comprises of two securities A and B, their Standard Deviations being 12.26 and 14.58 respectively, while the Correlation Coefficient is 0.89. The present proportion of investment of A and B in the portfolio are equal. Today s market value of this portfolio is Rs. 13,98,500. Nishant s mother stays in an individual house situated in Pune. This house was purchased by her in 1979 for Rs.1,20,000. Fair market value of this house on 01/04/1981 was Rs.2,00,000. The family stays in a flat situated in a posh locality of Navi Mumbai. The flat was purchased for Rs 45 Lakh (in the joint name of Nishant & Pallavi each having 50% defined share in their names) with a loan of Rs 25 Lakh on 1 st Aug 2005 @9% pa for 10 years (EMI starts from 31 st Aug 2005, regularly paid by Nishant & Pallavi equally). The balance amount of Rs. 20 Lakh was paid from their personal savings. Both have their own vehicle, Nishant s being owned by his company and that of Pallavi owned by her self. The couple has approached you, a CFP practitioner, for providing valuable insights into the family s finances and subsequently drawing their financial plan. For this purpose, they have submitted their annual income and expense statement as follows: 1
Income & Expenditure Statement for the Financial Year 2007-2008 Nishant Pallavi Family Income Rs. Rs. Salary 18 Lakh Nil Business income Nil 6 Lakh Agriculture income 54,000 Nil Income from taxable securities transactions Nil 81,450 ** ** Securities transaction tax (STT) paid 17,144 Family Expenses Household Expenses 10 Lakh Vacation trip once a year 1 Lakh Life insurance premium 45,000 25,000 Savings/Investments Debt based Mutual Fund NIL 2,00,000 NSC (purchased on 31 st Mar 2007) 1,00,000 2,00,000 Investment in direct equity (as on 31 st Mar 2007) 5,00,000 2,00,000 Gold Jewellery (Market value as on 31 st Mar 2007) 1,50,000 8,70,000 Balance in saving accounts 1,56,326 12,225 Rate of returns: Long-term (> 5 years) 12 % p.a Mid-term (3-5 Years) 8 % p.a Short-term (< 3 years) 6% p.a Notes: Inflation is expected to remain approx 4.2 % pa for the remaining period. For the F.Y. 2007-08, out of total repayment of Rs. 3,80,028 made in home loan, interest portion was Rs. 1,92,398. EMI on Pallavi s Business loan is Rs. 12,001 per month. Questions 1) Pallavi is eager to know if there is any provision in the new pension scheme of the Central Government, effective from 01-01-2004, for the possible joining of this scheme by a self employed person. Advise her. (2) A) Yes, there is such a provision in the scheme. B) No, there is no such provision. C) Yes, but only for senior citizens. D) Yes, but only for females. 2) For the current Financial Year, you have suggested Nishant to invest some amount in a good Equity Linked Saving Scheme (ELSS). Consequently he has identified a good mutual fund. However he is confused between the two different schemes of the same Mutual Fund: One is an existing scheme in which current NAV is Rs. 285.65 with an entry load of 2.25 % and second is a New Fund Offer with an opening offer of Rs. 10 carrying the same entry load of 2.25%. According to you, taking the growth prospect into account, which one among the two is advisable? (2) A) Existing scheme, as it has achieved a high growth over a period of time. B) Both schemes are the same, as current NAV doesn t make any difference on future growth. C) NFO, as its current NAV is low and has a good chance to grow fast. D) NFO, as the tax rebate is available for investment in NFO s only. 2
3) One day Nishant came to know that recently SEBI has waived off entry load applicable on schemes of Mutual Fund/s. However Nishant is not sure if he falls in the category of the investors who can avail this benefit. According to you what would be the option available to Nishant? (2) A) This benefit is available under all circumstances. B) This benefit is available for the clients of a CFP CM Practitioner only. C) This benefit is available for ELSS scheme investors only. D) This benefit is available for any investor only if he wishes to invest directly with the AMC or through internet. 4) Nishant had earlier also contacted a CFP CM practitioner for preparation of his Financial Plan. In his first meeting with the practitioner, Nishant asked him the sources of compensation available to the practitioner. But the practitioner refused to answer this question by saying that this is out of the scope of engagement. According to FPSB code of ethics, the practitioner has violated. (3) A) Code of Ethic of Objectivity B) Code of Ethic of Professionalism C) Code of Ethic of Fairness D) Code of Ethic of Integrity 5) One day Pallavi borrowed her friend s diamond Jewellery to attend a wedding. Unfortunately, the next night, her house is burgled and she lost all the Jewellery including the borrowed one. Pallavi wants to know whether she can lodge a claim for the entire loss, including her friend s Jewellery as their house is insured for burglary and theft. (3) A) No, because Pallavi cannot include borrowed goods in her claim. B) No, because she has no insurable interest in her friend s Jewellery. C) No, because the insurance cover includes only the property defined on the date of insurance and not any other item that is subsequently kept in the house. D) No, because there is a clear negligence on the part of Pallavi, as she should have returned the Jewellery immediately after attending the wedding. 6) Pallavi desires to accumulate a retirement fund which will produce a monthly income stream, equal to her current income from her boutique. However, she wants this income adjusted for inflation. All investments, pre & post retirement, are to be done in long- term investments. She is not willing to use any part of her current savings into this arrangement. What monthly investments are required to be made by her, starting from the end of one month from now, to get this amount? (3) A) Rs. 56,426 B) Rs. 55,700 C) Rs. 25,483 D) Rs. 28,541 7) As a Financial Planner you have been explaining to Nishant the risk of a portfolio, its analysis and implications. This has raised considerable interest in his mind and he requested you to calculate the risk on his mother s portfolio if the proportion of the higher risk security in the portfolio is increased to 70 %? (3) A) 12.63 B) 13.05 C) 170.26 D) 13.58 8) Nishant is planning to invest some funds in Government Bonds. As his investments u/s 80C are already exhausted with repayment of housing loan as well as insurance premium, he is not willing to invest further into NSC s. He is considering three options: (i) RBI Savings Bonds (Taxable), 3
(ii) Post Office Kisan Vikas Patra, & (iii) RBI Tax Free Bonds. Taking his taxation status into account, which one would you recommend to Nishant? (3) A) Post Office Kisan Vikas Patra B) RBI Savings Bonds (Taxable) C) RBI Tax Free Bonds D) Irrespective of Nil tax exemption, NSC is the best choice. 9) Pallavi had made some investments in a Debt Based Mutual Fund on 31 st January 2008. She intends to redeem this investment on 30 th September 2008 for using this fund during her younger sister s marriage. She has opted for the Growth option while investing in this fund. Taking her taxation status into account, what would you recommend to Pallavi? (3) A) She should continue with her investment strategy. B) She should switch to Dividend Re-investment option of the same scheme. C) She should withdraw her fund & have a bank FDR. D) She should switch her investment into an equity based Mutual Fund scheme. 10) Of late, Nishant s mother wants to stay with Nishant & Pallavi on a permanent basis. Before that, she wants to settle her estate. She has decided to give her existing equity portfolio to her daughter Nalini & her Pune house to Nishant. The current market value of this house is Rs. 25 lakh. Since Nishant is permanently settled in Mumbai & has no intention of returning to Pune, he shall dispose the house immediately on receipt at current market value and invest this amount in his retirement portfolio. From tax planning perspective, what would be the right course of action for Nishant for transaction relating to this house property? (3) A) Nishant s mother should sell this house first and then gift the sale proceed to him. B) Nishant s mother should gift this house through a gift deed to Nishant first and then he should sell the house. C) Nishant s mother should gift this house through a Will to Nishant first and then he should sell the house. D) There is no difference between the above options. 11) Pallavi feels that the financial institution from where she has taken her business loan has misguided her about the rate of interest on her business loan. She wants to know the effective annual rate of interest on her business loan? (4) A) 8.54% B) 7.75 % C) 7.54% D) 8.75% 12) Pallavi has earned a considerable income from her share market transactions during the Financial Year 2007-08. You have informed her about certain rebates available to her u/s 88E of the Income Tax Act for these transactions. She wants to know the amount of such rebate available to her. (4) A) Rs. 1,00,000 B) Rs. 17,144 C) Rs. 81,450 D) Rs. 15,585 13) Nishant wants to know his income tax liability for the A.Y. 2008-09. The same is: (5) A) Rs. 5,41,120 B) Rs. 4,79,710 C) Rs. 4,87,360 4
D) Rs. 5,08,420 14) The company where Nishant is working has a standing provision in it s HR policy that after serving for a minimum period of 15 years, any employee of the company can take VRS and a tailor made package can be offered to the employee. Nishant wants to know if he avails this option and invests the VRS proceeds into long term investments, what replacement value may be accepted as VRS compensation for his remaining service years till his desired retirement? (5) A) Approx 631.00 Lakh B) Approx 417.00 Lakh C) Approx 89.41 Lakh D) Approx 280.63 Lakh 15) Nishant s employer company is floating a scheme called Children Education Insurance Scheme. In this scheme if Nishant deposits an annual premium of Rs. 25,000 for 16 continuous years, then after 25 years of the policy commencement, the company is promising a maturity value of Rs. 13 lakh with a life cover for Nishant worth Rs. 5 lakh for the entire term of 25 years. At the age of Nishant the mortality table premium for the term plan is Rs. 4.15 per thousand for the same 25 year term. Nishant wants to know whether it makes financial sense to subscribe to this insurance scheme taking into account the long-term return rate. (5) A) Yes B) No, it doesn t make a financial sense. C) No, because as per IRDA rules, an employee of an insurance company is not entitled to subscribe for his/her employer company s policy. D) Yes, provided that insurance company should guarantee the maturity amount. 5
Case Study # 2 Today is 24 th February 2008. Mr. Ravi Mehta, aged 39 years, life expectancy 72 years, is an individual Stock Broker of National Stock Exchange of India. He is a bachelor due to his own wish. His father is a retired IAS officer and lives separately with Ravi s mother. Ravi is having his self-owned fully furnished head office in Delhi with many branches in most of the upcoming cities of India. He is running his business in proprietorship status but managing the same in a fully corporate style having almost 50 executives working for him. Ravi lives in a rented flat in Delhi. Ravi s business was running & growing smoothly until 21 st & 22 nd January 2008 when Indian Stock Markets witnessed a massive down fall. Many of Ravi s clients holding huge open positions through his terminal went bankrupt and were unable to fulfill their exchange obligations. As a natural consequence, Ravi Mehta s membership was suspended from the exchange and not only was his total cash margin squared off, but all of his bank guarantees, furnished with the exchange were also evoked in fulfillment of his firm s obligations. All the banks from where bank guarantees were furnished to the exchange, initiated recovery proceedings against his proprietorship. Ravi received notices for auctions of most of his business as well as personal properties mortgaged with the banks against the bank guarantees. This incidence gave him an un-bearable financial and mental set back. Ravi s father had already exhausted his funds (except for a deposit of Rs. 15 lakh in the Senior Citizen Saving Scheme) in the initial business setup of Ravi s firm. Now he also felt helpless in this situation. Ravi does not want to lose his NSE membership as he is of the view that once he is able to get rid of this temporary set back, he will be able to revive his business once again. One of Ravi s friends has referred him to you, a Financial Planner, for getting some help in confronting this financial disaster. Ravi has submitted his firm s financials as follows: Income/s (01-04-2007 to 22-01-2008) Rs. (lakh) Brokerage earned 159.00 Dividend on Equity Shares Holdings 6.30 Interest accrued on bank FDRs 14.66 Loss on Speculative Derivative Trades* (219.10) Expenditures (from 01-04-2007 till date) Rs. (lakh) Firm s indirect expenses** 119.33 * All contracts were settled without taking any delivery. The firm had also paid brokerage of Rs.1.44 lakh on these transactions, which is included in this loss. ** Excluding Depreciation & Bad Debts. Balance Sheet of Ravi s Firm (as of date) Sources of Funds Rs. (lakh) Capital account of Ravi Mehta 631.15 Secured Loans Public Sector Banks 351.50 Unsecured Loans Private Creditors 183.05 1165.70 6
Application of Funds Rs. (lakh) Immovable Properties Head office at Delhi 183.50 Office at Gurgaon 132.00 Farm House 105.30 420.80 Machinery & Equipments Furniture / Fixtures 61.33 Computers 27.62 Motor Cars 09.43 98.38 NSE Membership Right 125.00 Security Deposit with NSE** 100.00 225.00 ** Interest Free Trade Debtors 419.86 Cash & Bank Balances 1.66 1165.70 Notes on Balance Sheet: 1. All immovable properties are mortgaged with Banks and auction notice has been served on all properties. 2. 95% of trade debtors are now bankrupt and the amount has turned into bad debts. 3. NSE membership right and security deposit can be redeemed on surrender of membership. 4. All immovable properties are expected to be sold at 75% of their market value in case of forced selling. 5. The firm s equity holdings were pledged with the exchange & were liquidated immediately by the exchange in recovery of his firm s obligation. 6. His firm had bank FDR s worth Rs.183 lakh until the day of the loss. After that day, all FDR s were liquidated and adjusted in repayment of bank liabilities. Current bank liability is after adjusting bank FDR s. 7. All fixed / current asset valuations are as of 31-03-2007. 8. Real estate has appreciated 15% since 01-04-2007. 9. Applicable depreciation rates for the current financial year are as follows: Furniture=10%, Computers=60%, Motor Cars=20% Life Insurance policy details of Ravi 1. Ravi is contributing Rs. 3 lakh p.a. in a ULIP since last 8 years. His basic sum assured is Rs. 50 lakh under this policy. 2. An initial upfront expense of 25% pa was applicable for first three years of this policy. 3. At the inception of the policy, mortality premium was Rs. 1.55 per thousand for Ravi. This charge was fixed for the whole term of the policy and was deductable at the begenning of every year for every full policy year. 4. His fund was invested in pure equity fund for which the CAGR was 15% pa for the last 8 year. 5. An additional 12% bonus of basic premium was paid by the insurance company after every 4 th completed policy year. 6. His policy has completed 8 years today. 7
Questions 16) On meeting Ravi, you find that he appears very disappointed with the financial condition of his life. During discussions, he enquired of you the probable reasons that might have severe impact on stock markets. According to you, which among the following, would impact the stock markets most severely? (3) A) A 100 basis points increase in interest rates by RBI B) A 100 basis points decrease in CRR by RBI C) Excess trading volumes on Stock Markets D) Settlement default by 2 major clients 17) Ravi s firm was maintaining a Unit Link Defined Benefit Group Superannuation policy for their employees since last 8 years. All of his employees were member of this scheme. Currently this policy has accumulated a cash value of Rs. 42 lakh. Ravi wants to know whether his firm can take a loan on this policy or the firm can surrender this policy. (3) A) Firm can take a loan on this policy B) Firm can surrender this policy C) Both options are available D) No option is available 18) Ravi is seeking all possible ways to recover his loss. Since it is a mandatory requirement for all Stock Brokers to contribute a pre-defined percentage of their turnover into Investor Education and Protection Fund, Ravi s firm was also a contributor to this fund. Ravi is considering claiming maximum possible loss from this fund. What is the maximum amount he can claim from this fund? (3) A) Rs. 1 lakh B) Rs. 10 lakh C) Rs. 1 Crore D) Nil 19) Ravi is unaware of the term basis point. In financial context, out of Rs. 100, 1 basis point equals to: (3) A) Rupee 1 only B) Rupee.10 only C) Rupee.01 only D) None of the above 20) Ravi s life is not covered after discontinuing his existing life insurance policy. What type of life insurance policy would you now recommend for Ravi at this stage of his life? (3) A) A new Unit Link Insurance Policy B) An endowment policy C) A money back policy D) A pure term plan policy 21) Out of the total defaulter clients of Ravi, a major portion of the clients were through one of Ravi s business associates in Delhi. This business associate was entitled to get 40% of the brokerage out of total brokerage paid by the clients referred by him to Ravi s firm. This business associate was also a SEBI registered sub broker of Ravi s stock broking firm. Ravi wants to know his legal status for filing a civil suit for recovery of his dues against this business associate on account of his client s defaults? (3) A) Yes, he can do so B) No, due to SEBI Act 1992 C) No, due to Indian Contract Act 1872 D) No, due to Securities Contracts (Regulations) Act 1956 8
22) A private bank is offering Ravi a commercial loan for purchasing a new office in Delhi. This bank offers a choice of repayment options at the same rate of interest, but Ravi is not sure which option suits best his current financial situation. According to you, what would be the best option for Ravi in the current situation? (3) A) Balloon repayment B) Amortized repayment C) EMI repayment D) Any of the above options 23) Ravi was contributing Rs. 50,000 pa in his PPF account since 31-03-1994. Assuming that he has been contributing the same amount every year and his account fetches him a constant interest rate of 8% pa since inception, what is the maximum amount Ravi can withdraw today from his PPF account? (4) A) Rs. 7 lakh B) Rs. 4.16 lakh C) Rs. 6.05 lakh D) Nil 24) Ravi s father had joined the Senior Citizen Savings Scheme on 17-09-2006. In light of Ravi s desperate financial condition, he is considering withdrawing a partial amount from this deposit without closing the account. What is the maximum permissible amount that Ravi s father can withdraw from this scheme? (4) A) Rs. 5 lakh B) Rs. 10 lakh C) Rs. 14,77,500 D) Nil 25) Apart from the bank loan liability, Ravi is also concerned about his income tax liability. For this he wants to know his firm s Gross Total Income for the A.Y 2008-09. (Assume income and expense figures till date as final and no other income for the year). (5) A) Loss of Rs. 369.13 lakh B) Loss of Rs. 588.23 lakh C) Income of Rs. 60.63 lakh D) Income of Rs. 29.74 lakh 26) The immovable properties of Ravi will most likely be auctioned by the Banks. He wants to know what surplus or deficit will be left with him after meeting the Bank s loan liability? (5) A) Surplus of Rs. 69.30 lakh B) Surplus of Rs. 132.42 lakh C) Surplus of Rs. 11.44 lakh D) Deficit of Rs. 35.90 lakh 27) On 21 st January 2008 one of Ravi s clients had an open short position of 100 lots of Nifty futures, with an average price of Rs. 5699. On 21 st January, Nifty closed at Rs. 5208. But he did not square off his position until 22 nd January 2008 when Nifty dipped to an intra day low of Rs. 4454. His position was squared off at this lowest price. On 22 nd January 2008 Nifty closed at Rs. 4912. The lot size of a Nifty future is 50. What profit or loss was booked by Ravi s client on his position? (5) A) Profit of Rs. 62.25 lakh B) Loss of Rs. 62.25 lakh C) Profit of Rs. 37.70 lakh D) Loss of Rs. 37.70 lakh 9
28) As part of a financial recovery plan, you have advised Ravi to surrender his existing life insurance policy. However he would like to know the surrender value of this policy before taking a decision. What should be the surrender value of his policy? (Indicate nearest figure) (6) A) Rs. 41.09 lakh B) Rs. 38.82 lakh C) Rs. 48.05 lakh D) Rs. 42.32 lakh 10
Keys for Challenge Status exams Note: No negative marks for wrong answers STAGE - 2 S No: Correct Marks 1 A 2 2 B 2 3 D 2 4 A 3 5 B 3 6 A 3 7 D 3 8 C 3 9 B 3 10 A 3 11 A 4 12 D 4 13 D 5 14 B 5 15 B 5 16 A 3 17 D 3 18 D 3 19 C 3 20 D 3 21 C 3 22 A 3 23 B 4 24 D 4 25 A 5 26 C 5 27 A 5 28 A 6 Total 100 11