Case: Kartik Gupta (Reference date: 2 nd October, 2009) Kartik Gupta, aged 29 years, working with a Life Insurance company, has approached you for preparing his Financial Plan. He is staying in his own house at Valsad. He earns salary of Rs. 9.00 lakh p.a. His wife Abhilasha, aged 28 years, is a house wife at present. They are expecting a baby after two months. Kartik is also supporting his parents staying in their native near Valsad, to whom he sends about Rs. 9,000 p.m. He has also specified the goals to be achieved, over a period. Assets & Insurance House : Rs. 18.00 lakh (present market value) Motor Bike : Rs. 0.25 lakh (present market value) Cash/Bank Balance : Rs. 0.75 lakh PPF : Rs. 0.90 lakh (as on 1 st April, 2009) Endowment life insurance policy 1 : Rs. 2.50 lakh (Sum Assured) Money Back life insurance policy 1 : Rs. 2.00 lakh (Sum Assured) Medical Insurance 2 : Rs. 5.00 lakh (Sum Assured) Gold Ornaments : Rs. 8.50 lakh (present market value) Equity Mutual Fund : Rs. 2.85 lakh (present market value) Balanced Mutual Fund : Rs. 1.25 lakh (present market value) Shares of XYZ ltd 3 : Rs. 0.95 lakh (present market value) Equity Linked Saving Scheme : Rs. 1.75 lakh (present market value) National Saving Certificate : Rs. 0.30 lakh (principal amount) 1 for which he pays total premium of Rs. 26,821. 2 Family Floater Policy 3 10,000 Shares of face value Rs. 10.00 per share Liabilities Home loan 4 : Rs. 6.00 lakh (Principal amount) Personal loan 5 : Rs. 1.25 lakh(principal amount) 4 Home loan taken on 1 st April 2008 at a fixed interest of 8.5% p.a., for a 20 year term. 5 Personal loan from his aunt can be paid back without interest. Expenses His monthly house hold expenses total up to Rs. 11,000 p.m. Yearly expenses like travel, festival Repairs & maintenance are estimated to come to Rs. 22,000 p.a. Over and above the insurance premium and loan EMI. Goals To buy a 3 BHK Flat in the nearby area in 3 years To provide for the higher education of his expected child. Tuition expenses of Rs. 2.5 lakh p.a. (present value) has to be provided for three years of Graduation starting at the age of 18 years, Rs. 5 lakh p.a. (present value) for two years of post-graduation immediately after graduation and Rs. 15 lakh (present value) for marriage expenses, four years after completing post graduation. He wants to have Rs. 1.00 lakh in hand, to handle any emergency. To start a project for which he has few options. 1
Life Parameters Kartik s expected life : 75 years Abhilasha s expected life : 80 years Kartik s retirement age : 60 years Assumptions: Economic Indicators & Product Returns Rate of Inflation : 6.50% p.a. Equity Returns : 15.00% p.a. Balanced Fund Returns : 11.00% p.a. Real Estate Appreciation : 8.00% p.a. Gold Appreciation : 10.00% p.a. Debt Returns : 9.00% p.a. Risk Free Returns : 6.50% p.a. 2
Questions 1) Before beginning work on Kartik s Financial Plan, you have drafted a Letter of Engagement and sought Kartik s consent on the same. Kartik asked you about relevance of such a letter. In the context of Financial Planning Profession, you explain about the Letter of Engagement as a. A) professional requirement under Code of Ethics of FPSB India B) professional requirement under Practice Guidelines of FPSB India C) legal contract as per Contract Act 1872 D) document for his personal record 2) Kartik intends to build a retirement corpus through the Balanced Mutual Fund Scheme in which he is regularly investing Rs. 5,000 p.m. on 1 st of every month. This will continue till 1 st of March 2013. Thereafter, he plans to continue a certain amount through the SIP mode of investment from his Salary Account till his age of 55 years. What amount of SIP would you advise him to maintain in order to achieve the corpus to sustain throughout his life considering he would spend 80% of the value of his house hold expenditure at his preretirement period? A) Rs. 428 B) Rs. 4,521 C) Rs. 255 D) Rs. 674 3) The construction of Kartik s house was completed on 31 st March 2008. The bank started recovery of EMI s after that, the first EMI recovered on 1 st May 2008. Prior to 31 st March 2008, Kartik paid only the interest on his loan which was disbursed in full by the bank on 1 st Aug 2006, when the construction started. He wants to know the interest portion allowable as deduction under section 24 of the Income Tax Act for the AY 2009-10. A) Rs. 50,542 B) Rs. 67,542 C) Rs. 1,35,542 D) Rs. 1,50,000 4) Kartik purchased 7,000 Units of Equity Mutual Funds @Rs. 50 per unit on 2 nd April 2008. The Equity Mutual Fund declares a dividend of Rs. 10 per unit. The record date for the dividend was 15 th June 2008. Kartik sells 1,000 units on 5 th March 2009 at Rs. 46 per unit. A) He gets short Term Capital Gains of Rs. 14,000 B) He gets Short Term Capital Gains of Rs. 6,000 C) He can claim Short Term Capital Loss of Rs. 4,000 D) He cannot claim any Short Term Loss for Tax computation 5) Kartik wants to know according to which Act his father s estate would be distributed in case he dies Intestate. A) Hindu Succession Act, 1956, under which people belonging to Sikh, Hindu, Buddhist, Jain religion are covered B) Hindu Succession Act, 1956, under which people belonging to Sikh, Hindu, Parsi & Jain religion are covered C) Indian Succession Act, 1925, under which people belonging to Sikh, Hindu, Buddhist, Jain & Parsi religion are covered D) Indian Succession Act, 1925, under which people belonging to Sikh, Hindu, Jain, Parsi, Christian & Jews religion are covered 3
6) For the purpose of his child s education and marriage, Kartik wants to start investing immediately on a monthly basis in a Balanced MF Scheme so as to withdraw for the first time 18 years from now for graduation. The monthly investments will continue till his expected child completes graduation. How much approximately should he invest every month to achieve the same? (Please ignore fraction of the year for calculation and also ignore charges and taxes if applicable) A) Rs. 12,500 B) Rs. 12,000 C) Rs. 13,000 D) Rs. 11,500 7) Kartik wants to know whether he is eligible to withdraw from his Employees Provident Fund for purchase of a bigger house. A) Yes, as he has been a member of the fund for more than 3 years B) No, as he has not been a member of the fund for more than 10 years C) Yes, as he has been a member of the fund for more than 5 years, and provided he purchases the house in his own name or jointly with his wife D) Yes, as he has been a member of the fund for more than 5 years, and provided he purchases the house in his own name or in his wife s name 8) Kartik wants to create a reasonable financial security of Rs. 4 Lakh p.a. (subject to inflation) for Abhilasha, in case he meets any eventuality due to any unforeseen event. What should be his life insurance cover today to get this amount for Abhilasha s financial security till the remaining expected life of Abhilasha? Assume life insurance policy proceeds of Kartik are invested in debt instruments by her. (Indicate nearest figure without considering any existing asset) A) Rs. 116 lakh B) Rs. 91 lakh C) Rs. 119 lakh D) Rs. 122 lakh 9) Kartik's Mutual Fund investments consist of four different funds. Performance of these funds is as follows: Mutual Fund Fund Return of 5 years Beta A 18% p.a. 1.30 B 14% p.a. 0.85 C 16% p.a. 1.02 D 17% p.a. 1.20 How would you rank these funds from the best to worst on the basis of Jensen's Alpha? A) A, C, B & D B) C, A, D & B C) C, A, B & D D) D, B, A & C 10) Kartik wants to invest Rs. 2 Lakh in 390 days Bank fixed deposit yielding 9% p.a., which also attracts tax on such interest @30%. From Tax Planning perspective, you advise him to invest a fixed sum into the Growth option of a Fixed Maturity Plan (FMP) of a Mutual Fund, more than one year term, and 4
expected to yield same pre-tax return as the Bank fixed deposit. Kartik wants to know the tax advantage to him, if investment is done in the FMP of Mutual Fund vis-à-vis the Bank fixed deposit. (Please ignore surcharge and cess if applicable) A) Tax advantage to the extent of 20.00% is possible. B) Tax advantage to the extent of 10.00% is possible. C) Tax advantage to the extent of 12.50% is possible. D) There is no apparent Tax advantage in FMP vis-a-vis the Bank fixed deposit 11) Kartik wants to know what is the best instrument to get market returns over a sufficiently long period with the least recurring cost. A) Diversified Equity Growth Mutual Fund Scheme. B) Equity Index Funds. C) Equity Shares. D) Growth Option of ULIP. 12) Kartik saw your name with CFP Marks; he wants to know different ways in which the CFP Marks in India can be written. i) CERTIFIED FINANCIAL PLANNER CM ii) CFP CM iii) CFP cm iv) C.F.P. v) CFPCM vi) Certified Financial Planner CM A) i) & ii) B) ii), iii), vi) C) iv), v) & vi) D) ii), v) & vi) 13) Kartik wants to invest in ULIP, but he wants to be cautious before entering a long period of contract. As Per IRDA ULIP Guidelines, if he wants to return the policy within 15 days free look period what amount would be refunded to him? A) He shall be refunded the fund value subject to deduction of expenses towards medical examination, stamp duty and proportionate risk premium for the period of cover. B) Full Premium paid is returned back to him. C) Premium paid less commission paid to intermediary is refunded to him. D) He shall be refunded the fund value. 14) Kartik wants to know how you will ensure that information and relevant documents given to or gathered by you are securely stored? This would be is accordance to FPSB India's Rules that relate to the Code of Ethics of. A) Integrity B) Diligence C) Compliance D) Professionalism 15) Kartik invested in shares of XYZ ltd on 12 th October 2006 at Rs. 3.50 per share discount to the Face Value of the share. He received dividends of Rs. 0.30 per share, Rs. 0.50 per share on 8 th December 2007 and 30 th November 2008 respectively. If he sells the entire holding of shares at present market value what returns would he have got from this transaction? 5
A) 17.4% B) 19.5% C) 45.9% D) 16.6% 6
Case: Chandrika Raj (Reference date: 23 rd October, 2009) Chandrika Raj, aged 38 years, stays in Bengaluru in her own flat along with her husband Mr. Jagdish Raj, aged 40 years, and her two sons Rajdeep, aged 14 years, and Sujoy, aged 11 years. She has approached you, a CERTIFIED FINANCIAL PLANNER CM professional, to prepare a Financial Plan for her family. Her husband runs a motor garage which yields an annual income of Rs. 9 lakh. Chandrika is a Chemical Engineer and is offering professional services for the last 8 years to a private firm engaged in manufacturing coated fabrics. The firm pays an all inclusive consultancy fees of Rs. 6.05 lakh p.a. to Chandrika which is subject to an upward revision of 10% in January every year on renewal of contract. She has an outstanding housing loan and a personal loan. The sum assured towards various insurance policies for Jagdish is Rs. 20 lakh and for Chandrika Rs. 10 lakh. Chandrika has shared with you the following details of her assets, liabilities, expenses and other income, and her goals: Income & Expenses 1. Current Income Chandrika (net of TDS) : Rs. 5.43 lakh p.a. 2. Income contributed by Jagdish : Rs. 5.00 lakh p.a. 3. Income from MF investments : Rs. 0.35 lakh p.a. 4. Equated Monthly Installments Loans 1 : Rs. 4.56 lakh p.a. 5. School fees and related expenses : Rs. 1.50 lakh p.a. 6. Household expenses : Rs. 4.80 lakh p.a. 1 Housing loan and Personal loan only Assets & Liabilities Fixed Assets a. Current Value of self-occupied flat : Rs. 65 lakh b. Current Value of Garage : Rs. 120 lakh c. Garage equipment (written down) : Rs. 18 lakh Other Assets for self-consumption a. Car Jagdish (written down) : Rs. 2.30 lakh b. Car Chandrika (at cost) : Rs. 6.50 lakh c. Gold Jewellery (at cost) : Rs. 2.00 lakh d. Gold - coins & bars (market value) : Rs. 4.00 lakh Liabilities a. O/s Housing Loan 2 : Rs. 23.47 lakh b. O/s Personal loan 2 Chandrika : Rs. 1.07 lakh c. O/s Term Loan 2 on Garage : Rs. 37.43 lakh 2 Principal amount of loan as on 1 st October, 2009 pursuant to payment of installment, if due. Investments (Outstanding units & Market Value as on 23 rd October, 2009) 1. Mutual Fund schemes a. Equity Growth scheme Jagdish : 15,179.638 units valuing at Rs. 3.87 lakh b. Income scheme Chandrika : 11,254.512 units valuing at Rs. 2.09 lakh c. Fixed Maturity Plan (FMP) 3 Jagdish : 37,500.000 units valuing at Rs. 3.86 lakh 2. ULIP 4 - Chandrika : 17,007.364 units - Market Value Rs. 3.12 lakh 3. ETF on Nifty Jagdish : 1,500 units - Market Value Rs. 7.53 lakh 4. Portfolio of equity shares Jagdish : Rs. 9.84 lakh (Market Value) 5. PPF Account Chandrika : Rs. 4.27 lakh (Balance 31-Mar-2009; Maturity 1-Apr- 2018) 6. Bonds 5 of Face Value Rs. 100 Chandrika: 5,000 bonds 7
3 The FMP is quarterly interval plan with dividend pay-out option, last maturity/roll-over was on 10 th Oct. 09. 4 Annual premiums is Rs. 50,000 for a 20-year plan and life cover of Rs. 10 lakh. Five annual premiums have been paid till now. Units are of Face Value Rs. 10. Premium is payable on 27 th April every year. 5 Bonds were issued on 1 st January, 2008, and carry coupon of 10% p.a. payable annually on 1 st January every year. They are redeemable 25% of Face Value on 1 st January, 2011, further 35% of Face Value on 1 st January, 2014 and balance 40% of Face Value on 1 st January, 2018. Financial Goals 1. To build a corpus equivalent of Rs. 20 lakh each (at current prices) for Rajdeep and Sujoy at the end of 6 years from now for them to pursue either Engineering or Management from India s premium Technological/Management Institutes. 2. To accumulate total funds amounting to Rs. 30 lakh in about 15 years from now for the purpose of marriage of both her sons. 3. To accumulate a corpus of Rs. 2 crore by her age of 60 years for the future expenses of the couple. 4. To pay off her housing loan in the next three years. 5. To renovate Jagdish s garage after the present loan is fully repaid, it will cost Rs. 1.50 crore then, they will have to take a business loan then. 6. To shift to a bigger house after 8 years from now. 7. To purchase a Farm House after 10 years. You have made a reasonable assumption as following: - Average rate of inflation : 6.00% p.a. - Risk free rate of return : 6.00% p.a. Average Annual Effective Rate of Return - Equity Market and Equity products 6 : 13.00% p.a. - Balanced Mutual Fund schemes : 10.50 % p.a. - Income Mutual Fund schemes : 8.50% p.a. - Money Market MF/ Liquid schemes : 6.50% p.a. 6 Including Equity Growth MF schemes Cost Inflation Index: 2000-2001: 406; 2001-2002: 426; 2002-2003: 447; 2003-2004: 463; 2004-2005: 480; 2005-2006: 497; 2006-2007: 519; 2007-2008: 551; 2008-2009: 582; 2009-2010: 632 8
Questions: 16) Chandrika availed of the housing loan at an interest rate of 9% p.a. (on reducing monthly balance basis) on 1 st December, 2003 for a term of 15 years. The first EMI was paid on 1 st January, 2004 and thereafter on 1 st of every month. Chandrika wants to know by how much the EMI should be increased from 1 st November, 2009 if the entire loan is to be repaid by 1 st December, 2012. (Assume that the housing loan company agrees to such an arrangement without any penalty or charges) A) Rs. 39,426 B) Rs. 38,223 C) Rs. 39,802 D) Rs. 39,984 17) To fund higher EMI on her housing loan due to early repayment, you advise Chandrika to sell gold coins & bars and her income scheme portfolio, and convert the proceeds to a liquid fund. She purchased this gold at a cost of Rs. 3.25 lakh as well as invested in income schemes at NAV of Rs. 16.77 per unit in May, 2006. What is the tax incidence of this conversion? (Ignore surcharge & cess) A) Long term Capital Gain Rs. 24,501 B) Long term Capital Loss Rs. 16,593 C) Long term Capital Gain Rs. 4,239 D) Short term Capital Loss Rs. 24,501 18) In order to accumulate the corpus for higher education of her sons to use the same on 1 st January, 2016 for Rajdeep and 1 st January, 2018 for Sujoy, you advise Chandrika to invest systematically a sum of Rs. 15,000 per month in equity growth MF scheme beginning 1 st January, 2010. From 1 st January, 2013 an additional sum of Rs. 65,000 per month is invested. You suggest Chandrika to continue these investments till 1 st December, 2015. After the redemption of funds required for Rajdeep, you advise redeeming of the remaining funds to the extent of 25% every 6 months and invest the same in a Money Market MF scheme. What surplus/shortfall in accumulated corpus for Sujoy do you estimate on redemption of both equity and money market funds? (Assume that the returns from Equity Growth Fund and Money Market MF scheme are uniformly distributed over this period; Ignore inflation effect till January, 2010) A) Rs. 12.10 lakh shortfall B) Rs. 9.20 lakh shortfall C) Rs. 2.20 lakh surplus D) Rs. 10.00 lakh surplus 19) You advise Chandrika to immediately start investing for her retirement corpus. Though she is constrained for funds due to various other priorities, you advise her to invest Rs. 5,000 every month in a Balanced MF scheme starting from 1 st January, 2010. The amount should be increased by 10% in January every year so as to accumulate the corpus by 31 st December, 2031. You estimate that by investing systematically in this fashion she would be able to accumulate a sizable portion of her targeted retirement corpus. If the returns from Balanced MF scheme are uniformly distributed during this period, the accumulation till 31 st December, 2031 will be. A) Rs. 94.00 lakh B) Rs. 108.00 lakh C) Rs. 114.00 lakh D) Rs. 125.00 lakh 9
20) Jagdish availed of a 5-year Term Loan for Rs. 57 lakh from a bank in April, 2006, secured against his Garage and Equipment therein. The rate of interest is 10.75% payable quarterly on 1 st of the beginning month of a calendar quarter on the outstanding amount of loan. The terms of loan repayment are 1/3 rd on 1 st April, 2009, another 1/3 rd on 1 st April, 2010 and the balance on 1 st April, 2011. After the first repayment, Jagdish has option to repay principal amount in multiples of 1% of the original loan amount, but not exceeding 5% on the due dates of interest payment. Jagdish shall repay 5% of original principal amount on 1 st January, 2010 for which the funds have been tied up. He wishes to repay further additional 5% along with due repayment and due interest on 1 st April, 2010 by redeeming entirely his Equity Growth scheme, ETF on Nifty and Portfolio of equity shares a week prior to the due date. What absolute growth should he expect in this period from equity markets to meet this obligation? A) 2.87% B) 7.25% C) 7.61% D) 8.31% 21) Chandrika wants to know whether her investment in ULIP would meet the expenditure on marriage of her sons, if the current rate of return is maintained throughout the tenure of the Plan. You obtain the information that the premium allocation of the Plan was 85% in the 1 st year, 95% in the 2 nd year, 98% in the next three years and 100% thereafter, and estimate the deficit/surplus to be. A) Deficit Rs. 0.50 lakh B) Surplus Rs. 5.70 lakh C) Surplus Rs. 6.60 lakh D) Surplus Rs. 11.80 lakh 22) Chandrika took personal loan at 17% p.a. rate of interest (reducing monthly balance basis) for tenure of 39 months. The installments are payable on the 1 st of every month. Eight installments are yet to be paid. The foreclosure charges are 2% of the amount outstanding. She asks you the better option than to repay the loan at this stage. You suggest that the money to be repaid now has to be invested alternatively in an Investment vehicle to generate a return while paying monthly installments from that Investment fund. What should be the breakeven annual yield to be targeted from that Investment? (5) A) 5.34% B) 8.13% C) 10.59% D) 16.04% 23) You advise Chandrika to invest the future income as well as redemption proceeds from Bonds as and when they are received in a separate Balanced Mutual Fund scheme so as to supplement her proposed retirement corpus. You estimate that the returns from the chosen Balanced Fund are uniformly distributed over the period, the accumulated amount on 31 st December, 2031 would be. A) Rs. 32 lakh B) Rs. 46 lakh C) Rs. 49 lakh D) Rs. 57 lakh 24) You suggest Chandrika to limit her annual investments in the PPF A/c in such a way that she may invest just Rs. 5,000 in the beginning of April every year in her PPF A/c. for the remaining years to its maturity. The current financial year s deposit of Rs. 5,000 may be made on 1 st January, 2010. You estimate the gross corpus on maturity to be. 10
A) Rs. 9.20 lakh B) Rs. 9.11 lakh C) Rs. 9.16 lakh D) Rs. 8.84 lakh 25) Before finalizing the Financial Plan, Chandrika tells you that she wants to entrust the estate issues to a solicitor, who is a friend of Jagdish. Which of the following is your best stand? A) Estate issues being substantial in the case, you maintain that the Financial Plan cannot be an integrated one if the same is outside your purview, hence decline. B) This is permissible subject to such an arrangement finding an explicit mention in the Financial Plan for the said activity. C) This is permissible subject to the advice of the solicitor being integrated into the Financial Plan and monitored along with the Plan. D) You agree to the arrangement subject to the advice of solicitor made known to you so that you modify the Financial Plan accordingly. 26) Jagdish tells you that he has a total sum insured to the extent of Rs. 50 lakh for his garage including equipments therein. The cost of land is Rs. 95 lakh and the current cost of construction of workshop area and office is Rs. 35 lakh whereas the depreciated value of garage premises is Rs. 25 lakh. The total equipments if to be replaced are valued at Rs. 52 lakh. What do you infer regarding under/over insurance of his garage and equipments, if the insurance is taken on reinstatement basis for construction of workshop area and office only? A) Rs. 37.00 lakh, underinsured B) Rs. 27.00 lakh, underinsured C) Rs. 3.00 lakh, underinsured D) Rs. 7.00 lakh, over insured 27) As per current IRDA guidelines for ULIP products, you advise Chandrika to invest in her ULIP policy through top up without increasing the sum assured. What maximum amount can be put as top up by Chandrika today? A) Rs. 50,000 B) Rs. 62,500 C) Rs. 1,25,000 D) No such cap on top up amount is prescribed 28) Jagdish wants to invest Rs. 4.00 lakh every year, beginning April, 2010, for the next 7 years at the end of every financial year in an investment vehicle yielding 9% gross return per annum with tax deducted at source @ 10% on income generated at the end of the year. What amount of money would be available after nearly 8 years from now, say beginning of October, 2017, for buying a bigger house? A) Rs. 50.00 lakh B) Rs. 40.24 lakh C) Rs. 46.16 lakh D) Rs. 41.88 lakh 11