Preface

Money
Simplified
Case Studies on
Financial Planning
Copyright:

Quantum Information
Services Pvt. Ltd.
Websites:
www.personalfn.com
www.equitymaster.com
Contact Information:
Quantum Information
Services Pvt. Ltd.,
404, Damji Shamji,
Vidyavihar (W),
Mumbai - 86, India
Email:
info@personalfn.com
Contact No.:
022 - 6799 1234
Fax No.:
022 - 2202 8550

Contents
Personalfn is the preferred financial planner for
thousands of individuals across the world. Every
month, a few hundred more opt for our personalised
financial planning services. In one sense or another
every individual is unique. And not surprisingly, so is
the financial plan.
Financial planning, as we understand it, requires
extensive personal interaction. It requires that each plan
be customised to the suit the specific needs of the
individual/family. So, one cannot simply adopt the
financial plan that is drawn up for another individual.
But one can certainly draw from it.

Providing for a child's education--------------------------------- ---- 3

How parents can plan for their children's Engineering and MBA degrees.

Retired? This is where you can invest ------------------------------8

We helped a retired couple generate monthly income.

When risk isn't bad --------------------------------------------------- 11

An investor with a high risk appetite wasnt taking on any risk!

Victim of mis-selling ----------------------------------------------------- 15

A client with a significant investible surplus fell prey to mis-selling.

Capital Gains: Where to invest --------------------------------------- 20

And that is our objective in this issue of the Money
Simplified. We discuss with you the financial plans we
presented to five individuals who had varied profiles
and needs so that you can 'learn' from them. We hasten
to reiterate that the purpose here is to only give you a
sense of what a financial plan could look like for an
individual with a specific profile and need. We encourage
you to engage the services of an honest financial
planner so that the right financial plan can be drawn up
for you.
We are certain you will benefit from this very special
issue of the Money Simplified. We encourage you to
write in to us with your views and feedback. It will go a
long way

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Team Personalfn
27th August, 2007

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DISCLAIMER

Content:
Abhijit Shirke
Dharmesh Chauhan
Himanshu Srivastava
Irfan Husain Rupani
Vicky Mehta
Rahul Goel

This booklet a) is for Private Circulation only and not for sale. b) is only for information purposes and Quantum Information Services
Private Limited (Personalfn) is not providing any professional/investment advice through it and Personalfn disclaims warranty of any
kind, whether express or implied, as to any matter/content contained in this booklet, including without limitation the implied warranties
of merchantability and fitness for a particular purpose. Personalfn will not be responsible for any loss or liability incurred by the user
as a consequence of his taking any investment decisions based on the contents of this booklet. Use of this booklet is at the users own
risk. The user must make his own investment decisions based on his specific investment objective and financial position and using
such independent advisors as he believes necessary. Information contained in this Report is believed to be reliable but Personalfn does
not warrant its completeness or accuracy.
Third party trademarks are used with the permission of their respective owners.
Copyright: Quantum Information Services Private Limited.

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Child's education

Child's education
Providing for a child's education
Providing for a child's education is
increasingly emerging as a priority with
parents. And rightly so! Not too long
ago, parents could easily manage to
provide their children with quality
education from their savings and income
streams. However with the cost of
education spiraling sharply, it can no
longer be treated as an incidental
expense. Now, there exists a definite need
to consider education as a significant
expenditure that should be intentionally
planned and provided for.

At Personalfn, we were recently

approached by Mr. Pawan Mehra (name
changed to protect the client's identity),
a 35-Yr old gentleman, who wanted to
provide for his 3-Yr old son's education.
The client had planned for his son to
first acquire an Engineering degree,
followed by an MBA degree. In this case
study, we discuss how we helped the
client provide for his son's education.
Facts of the case
The child was then 3 years of age. He

Planning for an MBA degree

Childs
Age
(Yrs)
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
3

Monthly
Investment
(Rs)
3,496
3,496
3,496
3,496
3,496
3,496
3,496
3,496
3,496
3,496
3,496
3,496
3,496
3,496
3,496

Lumpsum
Investment
(Rs)

Cash
Outflow
(Rs)

2,129,603
2,835,690

1,590,136
1,590,136

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Rate of
Return
(%)
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
10.0
10.0
10.0
8.0
8.0

would seek admission in an Engineering

college and a Business school at age 18
and 22 respectively.
A 4-Yr Engineering degree would then
cost Rs 700,000; while a 2-Yr MBA
degree would entail spending Rs
520,000. These costs included the tuition
fees along with the lodging expenses,
assuming that the child had to study in
a location different from his city of
residence.
Assumptions
We assumed that the education/
lodging expenses would rise by 10.0%
pa. As a result, 15 years hence, the
Engineering course would cost

approximately Rs 2,924,074; similarly, 19

years later, the MBA course would cost
around Rs 3,180,273.
The investment process was split into
3 phases. In the first phase, the highest
degree of risk would be borne to clock
higher returns i.e. 15.0% pa. The second
phase would yield a return of 10.0% pa;
the final phase would commence a year
prior to the time of admission.
Investments in this phase would deliver
a return of 8.0% pa.
The methodology
We worked backwards i.e. from the
sums desired eventually, when the child
seeks admission in the Engineering

Planning for an Engineering degree

Childs
Monthly
Lumpsum
Age
Investment
Investment
(Yrs)
(Rs)
(Rs)
3
5,832
4
5,832
5
5,832
6
5,832
7
5,832
8
5,832
9
5,832
10
5,832
11
5,832
12
5,832
13
5,832
14
1,818,326
15
16
17
2,421,206
18
19
20
21

Cash
Outflow
(Rs)

731,018
731,018
731,018
731,018

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Rate of
Return
(%)
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
10.0
10.0
10.0
8.0
8.0
8.0
8.0

Child's education
college and a Business school
respectively to the start of the
investment process. The intention was
to determine how much and where Mr.
Mehra should invest (at the start of the
investment process) in order to
accumulate the target sums.
De-risking was incorporated into the
investment process; hence the 3 phases
yielding returns of 15.0% pa, 10.0% pa
and 8.0% pa. The intention was to take a
lower degree of risk, once the target dates
approach. Initially, investments were to
be made in high-risk investment avenues
like diversified equity funds. By doing
so, one could capitalise on the ability of
equities to deliver over longer time
frames. The second (10.0% pa) phase
would entail investments in a
combination of equity and debt
instruments. The final phase (8.0% pa),
that was to commence a year before the
admission and run concurrently with the
period when the child is studying,
involved investments in low-risk debt
instruments.
The investment process
The following portion deals with the
investment process i.e. how investments
were to be made. Expectedly, it's numberheavy and uninitiated readers may not
find it appealing. Such readers can skip
the following paragraphs and instead
refer to the tables to understand details
of the investment process.
For the MBA degree
Let's begin with the MBA degree. The
child will seek admission for the same at
22 years of age. As mentioned earlier,
5

Child's education
the MBA degree would then cost Rs
3,180,273 i.e. around Rs 1,590,136 pa since
it's a 2-Yr course. This in turn means that
when the child is 21 years of age, Mr.
Mehra will need to have a corpus of Rs
2,835,690 invested at 8.0% pa (since it's
the third phase, involving low-risk
investments like short-term bonds and
fixed deposits).
To generate the aforementioned corpus
i.e. Rs 2,835,690, going back in time (to
the second phase, wherein investments
yield a return of 10.0% pa), Mr. Mehra
will have to make investments in a
combination of both equity and debt
instruments. Since the second phase
runs over a 3-Yr period, a lumpsum of Rs
2,129,603 will have to be invested when
the child is 18 years old. This corpus i.e.
Rs 2,129,603 will be apportioned between
equity and debt instruments in the ratio
of 30:70. It has been assumed that equity
and debt instruments will yield a return
of 15.0% pa and 8.0% pa respectively,
thereby delivering an average return of
around 10.0% pa. While the equity
component can be comprised of
diversified equity funds, the debt
component can include monthly income
plans (MIPs) and bonds
Between the start of the investment
process (when the child was 3 years old)
and when he turns 18, is the first phase.
This is the phase, wherein Mr. Mehra
will invest on a regular basis to
accumulate the lumpsum of Rs 2,129,603.
Herein investments will be made only in
diversified equity funds to yield a return
of 15.0% pa. Our Calc tells us that Mr.

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Mehra needs to invest around Rs 3,496

per month (pm) or Rs 44,758 pa.
For the Engineering degree
Similarly, the Engineering degree will
necessitate cash outflows of around Rs
731,018 pa over a 4-Yr period. Since the
child will enter the Engineering college
at the age of 18 years, Mr. Mehra will
need a corpus of Rs 2,421,206 invested
at 8.0% pa to provide for the
aforementioned cash outflows, when
the child is 17 years old.
In turn, the corpus of Rs 2,421,206 will
be generated by investing Rs 1,818,326
at 10.0% pa over a 3-Yr period. This is
the second phase for the Engineering
degree; the same will commence when
the child is 14 years old. Finally to
accumulate a lumpsum of Rs 1,818,326,
Mr. Mehra will have to make regular
investments during the first phase.
The first phase will run over an 11-Yr
period i.e. from start of the investment
process (when the child is 3 years old)
to the time when he turns 14. Since the
investments will be made in diversified
equity funds yielding a return of 15.0%
pa, Mr. Mehra will have to invest
approximately Rs 5,832 pm or Rs 74,677
pa.
Where investments will be made
For incorporating the equity
component, we have chosen the mutual
funds route (diversified equity funds in
particular) over direct equity investing.
The reason being investing directly in
equities is akin to a full-time activity.

The same would entail researching

various stocks, tracking them closely
and making changes in the portfolio, in
line with changing market conditions.
Retail investors (like Mr. Mehra) may not
have the time and/or competence to do
so. Instead, by opting for the mutual
funds route, the investor can access the
equity markets and also benefit from the
services of a qualified and competent
fund manager. Diversified equity funds
were selected based on a research
process we follow at Personalfn. Also
other variants (like MIPs) from the
mutual funds segment can help Mr.
Mehra in adding a debt component to
the portfolio.
By following the systematic investment
plan (SIP) route of investing, Mr. Mehra
could invest smaller portions of money
at regular time intervals, thereby
eliminating the need to indulge in
activities like timing the markets, which
most investors are incapable of doing
on a consistent basis in any case.
Finally, unit linked investment plans
(ULIPs) are avenues that are often
recommended by financial planners/
investment advisors on the grounds that
they combine insurance and investment
in a single avenue. However, we believe
investors would do well to maintain
distinct insurance and investment
portfolios. Most ULIP offerings
available don't have much of a track
record; also they can also work out to
be more expensive propositions over 1015 Yr time frames vis--vis a combination
of tax-saving funds and terms plans,

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ITC
Retirement Planning

Child's education
which we recommend as a replacement
for ULIP investments. Simply put,unless
its an exceptional ULIP offering,
investors would do well to stick to the
mutual funds segment for investment
purpose.
The regular investment trail
It should be noted that Mr. Mehra will
be required to make regular investments
only until the age of 49 years (i.e. when
his child will be 17 years old). Beyond
that point, a corpus will be generated
that will continue to be reinvested at
varying rates. The investment plan was
so designed to ensure that regular
contributions coincide with a period
when Mr. Mehra's income streams (by
way of salary) are stable. Also the
'burden' of regular investments will ease
over a period of time given that while
the salary receipts are likely to grow, the
commitment
towards
regular
investments will remain unchanged.
In conclusion...
While it may appear very simple at the
end, we recommend that investors who
find themselves in a similar situation
should not simply replicate Mr. Mehra's
plan. Rather they must discuss the
situation with their financial planner and
let him come up with a tailor-made
investment solution.
It must also be understood, that the
intention behind this exercise was to
arrive at a ballpark figure, so that Mr.

Mehra is equipped to adequately

provide for his child's education.
Achieving a perfect number or creating
a perfect investment plan wasn't the
intention; neither would it be possible
to do so, considering that we are dealing
with a 20-Yr time frame.
Constructing an investment plan and
executing it is like driving from one place
to another through rush hour traffic.
Once you are aware of the destination
and the course, you may need to take a
few detours on the way, but the key lies
in never losing sight of the destination
and getting there eventually.
Similarly, while providing for Mr. Mehra's
child's education, there will be
circumstances (like changing market
conditions for instance), when
deviations may have to be made from
the stated plan. However, the key lies in
making the necessary changes and
ensuring that Mr. Mehra stays on track
to accumulate the required funds, by the
time the child is ready for higher
education.
This is where the financial planner has
an important role to play. Not only will
he have to help in selecting various
investment avenues, he also has to play
a part in reviewing the investment plan
and incorporating changes, when
required. It would be fair to state that
conducting a thorough review of the
plan is as, if not more, important than
constructing the investment plan.

Retired? This is where you can invest

While there are a range of investment
options for investors who have longterm investment objectives, admittedly
investors with immediate needs have a
limited number of investment avenues.
Retired individuals looking to generate
a monthly income fall in the second
category.
At Personalfn we came across a retired
couple who wanted to generate a
monthly income post-retirement and
needed our assistance in achieving this
objective.
Facts of the case
The client, Mr. Shah (name changed to
protect the client's identity), is retired and
wanted to generate monthly income to
sustain his wife and himself.
Mr. Shah's children are settled and the
parents want to plan their finances
independently.
The client had a corpus of Rs 4,000,000
(Rs 40 lakhs) from which he had to
provide all his future expenditure.
Rs 300,000 was set aside to provide for
emergencies, in effect his retirement
corpus stood revised at Rs 3.7 m
Details of expenditure
The monthly expenditure of the couple
amounted to Rs 20,000.
The couple wanted to set aside Rs
50,000 for their annual travel plans.
Not enough
When we did the 'numbers' for Mr. Shah,

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we discovered that for him to

successfully meet all his post-retirement
commitments (monthly expenditure,
travel plans) he would need a retirement
corpus in excess of Rs 4.8 m. Compared
to the retirement corpus he had then i.e.
Rs 3.7 m ( Rs 4 m less Rs 0.3 m for the
emergency fund), Mr. Shah was at least
Rs 1.1 m shy of achieving his retirement
plan.
Two options for Mr. Shah
As we saw it, Mr. Shah had two options
in front of him. He could either decide to
continue with his existing retirement plan
without any changes or he could make
some adjustments and cut down
expenditure so as to have better chance
of realising his post-retirement plans
(monthly income and travel plans). If Mr.
Shah decided to opt for the first option
(status quo) he would have to take on a
lot more risk to meet his retirement
plans. Taking on higher risk could
jeopardise Mr. Shah's retirement plans
if the investments did not work out as
planned. Moreover, he did not have the
requisite time frame (since his need for
post-retirement income was immediate)
for making high risk investments like
stocks which perform well over the longterm (at least 3-5 years).
The more prudent option staring at Mr.
Shah was to make adjustments to his
retirement plans so that he could achieve
a large part of his dream retirement (if
not everything).

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Retirement Planning
Re-evaluation of the retirement plan
Mr. Shah re-evaluated his retirement
plan and decided to shave off some of
the needless expenditure from his
monthly expenses and cut down on his
annual travel plans.
a) He revised his monthly expenses
lower to Rs 15,000 (previously Rs 20,000).
b) He trimmed his annual travel
expenditure down to Rs 35,000
(previously Rs 50,000).
Mission achievable
Suddenly Mr. Shah's retirement plans
were within reach, all because he was
flexible (and prudent) enough to make
the necessary adjustments to his plans.
With the changes, it was possible for
him to lead his retirement life on his own
terms without taking on more risk and
losing out in the process.

not have any other income and b) he

qualifies for the higher threshold limit of
exemption for income tax. Also we gave
the highest weightages to avenues,
which had an element of assured income
since generating a monthly income was
Mr. Shah's primary objective. Avenues
like FMPs and MIPs (which do not
assure income) could be used to
generate monies for travel, which was
the secondary objective.

an 8% (taxable) return, which is paid

monthly.

Mr. Shah needed to have an investment

portfolio designed specifically to help
him generate the requisite postretirement income. We short-listed the
following as the likeliest investment
avenues for Mr. Shah given his
objectives:
a) Senior Citizens Savings Scheme - This
scheme gives a 9% (taxable) return,
which is paid out quarterly.

d) Fixed Maturity Plans (FMPs) - Like

FDs, the yield on FMPs varies
depending on the debt market
conditions among other factors. And
again, if invested at the right time (based
on the interest rate cycle), an FMP can
offer a very competitive return (again,
taxable). The dividend or growth option
can be selected depending on the
investor's needs, although for an
investment time frame exceeding 365
days the growth option is more tax
efficient.

b) The Post-Office Monthly Income

Scheme (POMIS) - This scheme gives

We set about preparing a financial plan

for Mr. Shah with
Mr Shah's retirement plan
the
revised
i n v e s t m e n t Age (at present)
Retirement planned at age
details.
Avenues
for
investment
We have assumed
an 8% post-tax
return on Mr.
Shah's retirement
corpus. In our
view, this is not
very difficult to
achieve given that
a) Mr. Shah does

Retirement Planning

Yrs
60
Yrs
60
Life expectancy
Yrs
80
Current monthly expenditure
Rs
15,000
Annual expenditure
Rs
180,000
Provision for travel, healthcare (annual expenditure) Rs
35,000
Annual expenditure at retirement
Rs
215,000
Post-retirement inflation
%
6.0
Post-retirement life expectancy
Yrs
20
Expected return post retirement
%
8.0
Present value of all post retirement expenses
Rs
3,621,331
(Mr. Shah does not wish to retain his capital at the end. Life expectancy for Mrs.
and Mr. Shah is assumed at 80 years. The post-tax return on Mr. Shah's corpus
is assumed at 8%.)

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c) Fixed Deposits (FDs) - While the rate

on FDs varies depending on the debt
market conditions among other factors,
if invested at the right time (based on
the interest rate cycle), even a AAA
rated FD can offer a very competitive
return (taxable). Most FDs have a
quarterly interest payout option.

e) Monthly Income Plans (MIPs) - For

older investors who can take on a little
risk investing in MIPs that invest about
10%-15% of their assets in equities is
an option. Investors should avoid
opting for the monthly dividend option
(although the name misleads one into
believing otherwise) and select the
quarterly dividend option. The return
(taxable) on MIPs is dictated by stock
and debt markets; nonetheless MIPs are
well placed to outperform conventional
debt investments over the long-term. .
In conclusion...
At the end, investors will appreciate that
what we recommended to Mr. Shah was
only a probable retirement plan. Even if
it applies accurately to Mr. Shah, it
cannot be replicated by other investors.
Every investor will have to
independently determine his own facts
of the case carefully after taking his
financial planner in close confidence.
Only then must he embark on his
investment plan.

Mr. Shah's retirement portfolio

Senior Citizens Savings Scheme

POMIS
FDs
FMPs
MIPs
Weighted average return

Expected
Return
9.0%
8.0%

Suggested
Allocation
30.0%
30.0%

Weighted
Return
2.7%
2.4%

9.0%
9.0%
9.0%

15.0%
10.0%
15.0%

1.4%
0.9%
1.4%
8.7%

(The rate of return on market-linked investments like FDs, FMPs and MIPs have been assumed on a
conservative basis. The 8.7% weighted return of the portfolio is pre-tax, given the higher exemption limit
for senior citizens Mr. Shah is placed comfortably to earn a 8.0% post-tax return.)

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10

Asset Allocation

ITC
Asset Allocation
When risk isn't bad
The title of this case study might take
most by surprise. After all, we have been
conditioned to believe that while
investing, risk is bad. Well, that's not
entirely correct. Taking on risk without
understanding its implications isn't right.
Similarly, a common mistake made is that
risk is considered in isolation. The right
approach for evaluating risk is to
consider it in conjunction with return;
what is commonly referred to as the riskreturn trade-off.
Another vital aspect about risk is being
aware of one's risk appetite and sticking
to it at all times i.e. being unambiguously
sure of how much risk one can take on
and not exceeding the same. Often age
is used as a reference point to evaluate
one's risk appetite i.e. the older an
individual gets, lower is his ability to take
on risk. This is at best a thumb rule. At
Personalfn, we have over the years
interacted with many clients who are
retired, but their risk appetite could only
be termed as high. Our advice: do not go
by such thumb rules.
Typically, market-linked investment
avenues like equities and mutual funds
would find favour with risk-taking
investors i.e. ones who can tolerate
erosion in capital invested and variable
returns in the quest for the opportunity
to clock attractive returns in the longterm. Conversely, conservative investors
(i.e. ones with a low risk appetite) are
likely to opt for avenues like fixed
deposits and bonds; these avenues offer
11

safety of capital invested and assured

returns. In the bargain, conservative
investors are willing to settle for lower
returns vis--vis those that can be
clocked by risk-taking investors
investing in what may be called 'risky'
avenues (like equity mutual funds/
shares).
This case study deals with a client i.e.
Ms. Vibha Khare (name changed to
protect the client's identity), who
required assistance in financial
planning.
Facts of the case
Ms. Khare was a 22-Yr old single lady
i.e. she had no dependents.
She was a salaried individual earning
Rs 40,000 per month (pm).
Her investment portfolio comprised
only of assured return schemes i.e. fixed
deposits, bonds and small savings
schemes.
Our observations
Prima facie, the client seemed to be a
risk-averse individual, hence the
'equity-free' investment portfolio.
In turn, she had lost out on the
benefits of asset allocation. Her portfolio
sorely lacked the presence of an equity
component, among other asset classes.
Finally, Ms. Khare had fallen prey to a
common malady. She would invest in a
random and directionless manner i.e. Ms.
Khare was yet to set any concrete
investment objectives like buying a

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house property or retirement planning.

tax-adjusted returns.

The course of action

We started off with a series of
discussions with Ms. Khare to better
understand her risk appetite and the
reasons for the 'equity-free' portfolio.
We were surprised to learn that she
wasn't a risk-averse investor at all. How
did we ascertain that? Well, we asked
her one simple question - If she was
investing in the stock markets for the
long-term, and the stock markets were
to fall 20.0% the next day, would she
panic? Her answer (and should be for
any investor who has monies committed
for the long-term to the stock markets)
was an emphatic "No".

Our first task was to impress upon her

the importance of asset allocation.
Simply put, asset allocation entails
investing in various asset classes in
different proportions, depending on the
investor's risk appetite and investment
objectives. The underlying intention is
to offset a downside in one asset class,
by the presence of another. In Ms.
Khare's case, there was a need to
incorporate equities in the portfolio.
Also other assets like gold and real
estate needed to enter the portfolio in
suitable proportions over time. The aim
being to convert the portfolio from an
assured return-dominated one to one
that was aptly diversified across asset
classes.

The reason Ms. Khare had steered clear

of equity/mutual fund investments was
because she didn't quite understand
what they were and how they
functioned. On the other hand,
investments in fixed deposits and small
savings schemes were something she
was conversant with and had
traditionally invested in. Hence, she
chose to stick to the same time-tested
investment avenues.
This adds a new aspect to our earlier
discussion on risk - wherein one fails to
invest in line with his risk appetite (in
this case take on an adequate degree of
risk), on account of lack of awareness.
So here we had a client who had a high
risk appetite, but was not taking on any
risk at all! The result - a sub-optimal
asset allocation, which delivered meager

An example will help us better

understand the importance and benefits
of holding a portfolio that is welldiversified across various asset classes.
Let's assume that we are dealing with a
risk-taking investor who has failed to
invest in line with his risk profile. As a
result instead of holding a portfolio
dominated by equities, he holds one that
is debt-heavy. Case 1 (refer table on the
next page) shows the investor's present
asset allocation wherein debt and gold
account for 65.0% of the portfolio; this
asset allocation results in a weighted
return of 7.5%.
Now, let's consider Case 2, wherein the
same investor realigns his portfolio to
match his risk profile. As a result of the

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12

Asset Allocation

Asset Allocation

Get the right allocation

Expected
Rate of Return
Real estate
10.0%
Equities
15.0%
Debt
7.0%
Govt. debt & gold
5.0%

Case1
Asset
Weighted
Allocation
Return
30.0%
3.0%
5.0%
0.8%
25.0%
1.8%
40.0%
2.0%
100.0%
7.5%

realignment, equities emerge as the

dominant asset class. The investor's
new portfolio yields a weighted return
of 11.7% i.e. an uptick of more than 50%
over Case 1.
The noteworthy feature of this example
is that, it isn't a case of taking on more
risk to clock better returns. Instead, it's
a case of realigning the portfolio to match
the investor's risk profile and benefiting
in the process.
Now let's get back to Ms. Khare's case
and her second problem area i.e. not
setting investment objectives. Ms.
Khare's investment activity was carried
out in an "off the cuff" manner. She
wasn't aware of the importance of setting
objectives before commencing any
investment activity. As a result, she was
yet to decide on any concrete
investment objectives. It transpired that
Ms. Khare planned to get married in
about 5 years. So there was an
investment objective that merited
immediate attention - accumulating
monies for the wedding. As per Ms.
Khare's estimate, she would need (at
present cost levels) a corpus of Rs
500,000 to meet the wedding expenses.
13

Case 2
Asset
Weighted
Allocation
Return
30.0%
3.0%
50.0%
7.5%
10.0%
0.7%
10.0%
0.5%
100.0%
11.7%

We created an investment plan that

would help Ms. Khare meet the
aforementioned investment objective.
Our recommendation to Ms. Khare was
that investments be made only in
equities. The reason being she already
had enough exposure to debt
instruments; so to get the overall asset
allocation right, incremental monies
needed to flow into equities.
Our view to utilise equities was also
based on the fact that we had an
adequate time frame to achieve the target
i.e. 5 years. Equities as an asset class are
best equipped to deliver over longer time
frames. Finally, Ms. Khare's appetite for
taking on risk also contributed to our
decision.
Using our Calc, we found out that Ms.
Khare could meet her objective by
investing approximately Rs 8,123 per
month at 15.0% pa.

particular) over direct equity Ms. Khare's wedding corpus

investing. The reason being Amount to be accumulated
investing directly in equities
Tenure to meet the target
is akin to a full-time activity.
Expected inflation
The same would entail
researching various stocks, Future value of money to be accumulated
tracking them closely and Solution
making changes in the Monies to be accumulated
portfolio, in line with Assumed return (Post-tax)
changing market conditions. Annual saving required
Or simply, a monthly investment of

A retail investor like Ms.

Khare had neither the time nor the
competence to do so. Instead, by opting
for the mutual fund route, she could
access the equity markets and also
benefit from the services of a qualified
and competent fund manager. Our
recommendation for Ms. Khare was to
start off a systematic investment plan
(SIP) in a few diversified equity funds,
which were selected based on a research
process we follow at Personalfn.
In conclusion
The striking feature of this case study
was the degree of risk that the client
was taking on, without being aware of
the same. Her investments in assured
return schemes (which on the surface
seem like "safe" investments) meant
that she was deprived of a proper asset

Rs
Yrs
%
Rs

500,000
5
7.0
701,276

Rs
%
Rs
Rs

701,276
15.0
104,010
8,123

allocation and ended up with a portfolio

yielding sub-par returns.
Her ad-hoc investment style meant that
she was not equipped to provide for any
of the future needs/obligations. Clearly
in Ms. Khare's case, playing safe was a
rather risky proposition. This case only
underscores the need for professional
and expert advice while investing, lest
one errs on the side of caution!
Finally, while it may appear very simple
at the end, we recommend that investors
who find themselves in a similar
situation should not simply replicate
Ms. Khare's plan. Rather they must
discuss the situation with their financial
planner and let him come up with a tailormade investment solution.

The next step, which was very critical,

was to educate Mr. Khare about what
equity mutual funds were all about and
how she could benefit by investing in
the same. We chose the mutual funds
route (diversified equity funds in

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14

Mis-selling

Interview
Mis-selling
Victim of mis-selling
As the country's workforce reaps the
benefits of the economic progress, cases
abound of individuals earning so much
that they either do not know how to
invest their money or investing it in all
the wrong avenues. You may wonder
why they invest in the wrong avenues,
after all no one would willfully surrender
his monies to a losing cause (read dud
investments). Scratch the surface and
you will find that behind the numerous
cases involving bad investment
decisions is a greedy/unethical agent
who mis-sold the investment only to
beef up his commissions.
At Personalfn, we came across a client
who was left with a significant surplus
(after accounting for all expenses and
investments) and had no idea how to go
about investing his money. Equally
pressing was the issue of providing an
adequate life cover, which he was misled
into believing, would be taken care of
by his ULIP (unit-linked insurance plan)
policy. Moreover, he wanted to
accumulate wealth over the long-term
and was led into believing (like a lot of
investors) that investing on stock tips
was a quick and easy way to achieve
that goal. As you would have guessed
by now, we had a lot on our hands while
interacting with this client.
Facts of the case
The client, Vivek (name changed to
protect the client's identity), is 32 years
old, he is married, does not have children.
His wife is a homemaker.
15

He works in a software firm; his posttax salary is Rs 100,000.

Details of expenditure/outflows
His regular monthly expenses
amounted to Rs 30,000.
His lifestyle expenses (holidaying,
dining out, movies) averaged Rs 10,000
every month.
His EMI (equated monthly installment)
payments added up to Rs 25,000. This
was towards his home and car loans.
Details of investments/insurance
He had taken a ULIP with an annual
premium of Rs 60,000. The ULIP had a
life cover of Rs 1,800,000.
Again, typical of the nature of the
investment, he had invested Rs 100,000
in stocks based mainly on tips from
friends and colleagues
He used to invest Rs 20,000 in PPF
(Public Provident Fund) annually for the
tax-free returns

investment/insurance decisions. Of
course, Vivek was not entirely to blame
for this; his financial planner played a
key role in leading Vivek to this mess
and Vivek probably trusted him enough
not to question his decisions.

2) Vivek's annual investment in PPF (Rs

20,000) in our view was unnecessary.
Vivek already had a large contribution
to EPF (Employees Provident Fund),
which was deducted from salary and
was also tax-free.

It is precisely for this reason that at

Personalfn, we maintain that the first
thing an investor must do (before he
begins investing) is connect with an
honest and competent financial advisor.
While it's not easy to determine these
traits in a financial planner, one relatively
easy way is to check up on references.

3) His surplus was lying idle in his salary

account, which was a waste given the
quantum of money involved. This
money had to be invested in an avenue
to meet his long-term investment
objectives.

How Personalfn did it differently

It is not very difficult to figure out what
was terribly wrong with Vivek's financial
plan. Some of the most obvious flaws in
his investment plan (if you can call it
that) were:
1) For a person with an annual surplus
of Rs 400,000, he was grossly underinsured with a Rs 60,000 ULIP that
covered him only for Rs 1,800,000.
Vivek's Human Life Value

It was clear from Vivek's income and

expenses details why he qualified as
someone with a lot of money who went
wrong because of his misguided
Vivek's net surplus
Post-tax income
EMI (Home and Car)
Monthly expenses
Lifestyle expenses
Net surplus

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Amt (Rs)
100,000
25,000
30,000
10,000
35,000

Vivek's age
Vivek's wife's age
Life expectancy of Vivek's wife
Number of children
Household expenditure
Of the above, how much is spent on Vivek
Expected inflation in household expenditure
Outstanding loans
Other liabilities
Medical expenditure
Rate of return on low-risk securities/deposits
Human Life Value

4) Vivek's ULIPs and stock investments

being aimless, needed to be re-evaluated
in light of the revised financial plan.
To address Point 1; we recommended
that Vivek opt for a term plan (as opposed
to a ULIP). Term plans offer the cheapest
insurance option and individuals can up
their insurance cover considerably. For
instance, if Vivek were to take a Rs 10 m
cover from a life insurer for 30-Yr it would
cost him only Rs 33,000 pa. In ULIPs
such a cover would come at an
exorbitant cost,
which would not
be justified. In
Yrs
32
any case, ULIPs
Yrs
28
are more of an
Yrs
70
investment
avenue
as
Rs
40,000
against
an
Rs
15,000
avenue
for
%
5.0
taking
life
Rs
3,000,000
insurance.
Rs
Rs
%
Rs

500,000
8.0
10,999,917

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H a v i n g
established
Vivek's crying
16

Mis-selling
need for an affordable life insurance
cover that did justice to his earning
potential, we set about calculating his
Human Life Value (HLV).
While there are many definitions of HLV,
most revolving around a person's future
income, we use the individual's future
expenses and liabilities as the focal point.
We used Personalfn's HLV Calculator to
determine how much Vivek must insure
himself for, in order to leave his
dependents (at present only his wife) in
a position to pay off all liabilities in his
absence. Also we advised him to
maintain a fund (of Rs 500,000) for
emergencies.
Our HLV Calculator indicates that given
Vivek's liabilities and expenses, his HLV
amounts to Rs 10,991,917 (approximately
Rs 11 m). In other words, to insure
himself adequately so that his
dependents can fend for themselves in
his absence, Vivek needs to take an
insurance cover of Rs 11 m. If Vivek opts
for a term plan of that amount, he will
have to pay a premium of just Rs 36,203
pa (the premium amount will vary across
insurers).
Another point to note is that Vivek's HLV
was a moving target. Given his lifestyle,
needs, expenses and dependents, his
HLV was Rs 11 m at that point in time.
With a change in these factors (income,
children, more lavish lifestyle, larger
emergency fund), his HLV would need
to be re-calculated. At that stage, Vivek
would either need to take on more

17

Mis-selling
insurance (which would be expensive)
or set aside more money in his
investment kitty. The idea is to leave the
family with the HLV value, which would
comprise both insurance and investment
components.
To address Point 2, Vivek's investment
in PPF (Rs 20,000) could be discontinued.
As we explained earlier, Vivek did not
really need to invest in PPF despite the
tax-free nature of the investment. He
could simply invest the minimum (Rs
500) to keep his PPF account active.
To address Point 3; we recommended
that Vivek put his surplus to better use
than stacking it in a savings account.
Assuming that he had a surplus of Rs
35,000 net of expenses, and no longer
needed to invest in PPF, he could invest
the entire amount in avenues that
coincided with his risk profile and met
his long-term investment objectives
(more on that later).
To address Point 4; since Vivek was not
capacitated to track his stock portfolio
over the long-term, we recommended
that he sell all the stocks and reinvest
the same in a portfolio dominated by
equities given that Vivek is young and
can take risk. For equities Vivek had two
options - he could either invest in stocks
or equity funds. Of the two, we
recommended equity funds over stocks
since Vivek was a busy professional who
neither had the competence nor the time
to track stocks over the long-term.
Mutual funds employ a professional
money manager who does the tracking

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for investors, so for investors like Vivek

mutual funds are an important option.
To that end, we made a portfolio of wellmanaged, diversified equity funds which
were selected based on a research
process we follow at Personalfn. To derisk the portfolio from market volatility,
we advised him to opt for the SIP
(systematic investment plan) route as
opposed to lumpsum investments.
On the same lines, since Vivek's ULIP
investment did not have a role to play as
far as providing a life cover was
concerned, he could discontinue his
ULIPs after the minimum premium paying
term so as to cap his overall exposure to
the policy.

When will Vivek become a crorepati

Amount to be accumulated
Money to be invested annually
Expected rate of return
Time required...

Rs
Rs
%
Yrs

10,000,000
364,000
15.0
11.7

that he could look forward to achieving.

As Personalfn's Crorepati Calculator
indicates, to become a crorepati, Vivek
needed 11.7 years. In Vivek's case this
was within reach, in fact if he increases
his annual contribution (which is quite
possible given that his salary could rise
over the years), he could become a
crorepati sooner.

In conclusion...
When we had finished planning Vivek's
finances, his plan had assumed a totally
different shape from where we had
Like we mentioned earlier, Vivek wanted started off. It was obvious that Vivek
to accumulate wealth over the long-term was a victim of a) mis-selling and b) an
and since he had considerable surplus incoherent investment plan. To that end,
after paying off the annual premium our solution involved a two-pronged
towards his term plan, we set about approach that undid the effects of mismaking a plan to help him with his selling on the one hand and gave Vivek
objective of wealth accumulation. We a solid investment objective that he
discussed with him the prospect of could look forward to achieving in
accumulating wealth to become a earnestness, on the other hand. While
crorepati. While wealth accumulation it may appear very simple at the end, we
does pass for an investment objective, recommend that investors who find
in our view, it's a little too general to themselves in a similar situation do not
stimulate the investor. At Personalfn we simply replicate Vivek's plan, rather
like to encourage investors to plan for discuss it with your financial planner and
something more concrete and hence the let him come up with a plan that is tailorcrorepati idea. This presented a well- made for you.
defined investment objective to Vivek

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18

Personalised Services from Personalfn

Who are we?
Personalfn is one of India's leading financial
planning initiatives.
We are a part of Quantum Information Services
Pvt. Ltd., - one of India's most experienced
research houses (set up in 1990). Quantum also
offers equity research on www.equitymaster.com.
Our offerings
We help individuals plan their investments so
that they can meet their financial commitments
(like retirement, marriage and child's education)
Research on mutual funds and debt instruments
Tools like the Asset Allocator and MyPlanner
which empower individuals to plan and track
their finances
Contact information
To benefit from Personalfn 's financial planning
services, please call us at
Ahmedabad - 6450 5215

Bangalore - 6535 9899

Chandigarh - 653 5304

Chennai

- 6526 2621

Hyderabad - 6591 8423

Jaipur

- 650 1396

Mumbai

- 6799 1234

New Delhi - 6450 5302

Pune

- 6602 9448

Alternatively, write to us at info@personalfn.com

or visit www.personalfn.com

19

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Interview
Capital Gains
Capital Gains: Where to invest
Whenever an individual sells a capital
asset like house property or gold for
instance, at a profit, he makes capital
gains on it. If the gains are made from a
property, which was held for more than
36 months, then it qualifies as a longterm capital gain. And if the property was
held for less than 36 months, then it
qualifies as a short-term capital gain. A
capital gain also attracts a tax liability.

or if it does not offer adequate taxadjusted returns, it is best to pay tax.

At Personalfn, we constantly meet
individuals who are faced with such a
dilemma. The basic problem that these
individuals face is that they are
indecisive about whether they will be
better-off by paying tax or by investing
in the relevant tax-saving avenues
(capital gains bonds) to save tax. The
following is a case study of one such
client.

In such cases (when one makes a longterm capital gain), individuals typically
have two options - either pay up the
capital gains tax or invest the gains in First let's understand the client's profile
instruments, which help avoid the tax The client, Mrs. Sinha (name changed
liability; and instinctively, it's the latter to protect the client's identity), was 50
one that one is tempted to choose. But years old.
not all tax-saving avenues are attractive She had two sons and both were
and/or apt for individuals across the settled abroad.
board. To be sure, tax-saving is like any
She had two house properties, one of
other investment activity where one has
to look at the suitability of the avenue, which she recently sold for Rs
among other factors before making an 1,600,000; while the other she continued
investment
decision. Hence, Invest in Capital Gains Bonds
Rs
1,600,000
the decision to Sale proceeds
Rs
275,500
pay tax or avoid it Less: Indexed cost of purchase
Rs
1,324,500
by investing in tax- Long-term capital gains
Rs
1,324,500
s a v i n g Amount invested in CGB
i n s t r u m e n t s Coupon rate of CGB
%
5.5
should be taken Investment tenure
Yrs
3
after considering Maturity proceeds from CGB (a)
Rs
1,543,043
these vital factors Amount invested in MIPs
Rs
275,500
in the first place. Assumed rate of return on MIPs (pa)
%
8.5
Therefore, if an Investment tenure
Yrs
3
avenue does not Maturity proceeds from MIPs (b)
Rs
351,893
fit in one's profile Total corpus at the end of 3-Yr (a+b)
Rs
1,894,936

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20

Capital Gains
to use as her residence. The
property which she sold was
purchased for Rs 50,000, some
time in the mid-seventies.
Her only investments were in
fixed deposits (FDs) that
provided her with earnings of Rs
4,000 per month (pm).

Capital Gains
Tax liability: Investments in Capital Gains Bonds
Amount invested in CGB
Assumed return (Pre-tax)
Tax rate assumed
Assumed return (Post-tax)
Investment tenure
Maturity proceeds

Mrs. Sinha wanted to utilise the sale

proceeds in a way that could help her
meet her regular monthly expenditure
going forward. Although her sons
provided her money on a regular basis,
she wanted to be self-reliant in taking
care of her needs.
Considering the profile of Mrs. Sinha,
we presented two options, which could
help her in meeting the desired objective.
Our recommendations
Option 1: Invest in capital gains bonds
(CGB) and the remaining amount in
monthly income plans (MIPs)
Under this option, she had to invest the
amount eligible as long-term capital
gains i.e. Rs 1,324,500 (after adjusting
for indexed cost of purchase, as shown
in the table 'Invest in Capital Gains
Bonds') in capital gains bonds to save
tax. These bonds have a lock-in period
of 3 years. We were constrained with
the lack of information on the coupon
rate of capital gains bonds, hence we
assumed a rate of 5.5%, which was quite
realistic and in line with the then rates.
Therefore, the maturity proceeds from

21

Rs
%
%
%
Yrs
Rs

1,324,500
5.5
33.99
3.6
3
1,468,760

capital gains bonds, at the end of the 3Yr period, could be expected to be
around Rs 1,543,043.
It must be noted that the interest
earnings from capital gains bonds are
taxable as per the individual's tax bracket.
In this case, since Mrs. Sinha's annual
income/earnings were not high enough
to create a tax liability, there were no tax
implications. However, this is an aspect
that other individuals with higher income
levels should take into account, while
calculating returns from capital gains
bonds. So, if Mrs. Sinha had been in the
highest tax bracket (i.e. 33.99%), after
deduction, the maturity amount on her
investments in capital gains bonds
would have been Rs 1,468,760 (refer table
below).
The balance amount i.e. Rs 275,500
(which was actually the indexed cost of
purchase, as shown in the table, and was
not accounted under capital gains)
could be invested in MIPs. The maturity
proceeds from investments in MIPs can
be expected to be around Rs 351,893 (at
an assumed rate of 8.5% pa).
Hence, by choosing this option, Mrs.
Sinha could have received a maturity

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amount of approximately Rs 1,894,936.

Of course, since Mrs. Sinha's need was
for regular income, she could have opted
for the regular interest/dividend payout
option. We calculated the maturity only
to give a sense of the effective returns
of one investment over the other.

which were selected based on a research

process we follow at Personalfn. Yes,
Mrs. Sinha wanted regular income from
her portfolio and we were well aware that
equities are not suited at all to such a
need. But there is a reason why we
presented this solution. Read on.

Assumptions under Option 1

1) The coupon rate of capital gains tax
saving bond, considered here, was 5.5%.
However, the same might vary
depending on the issuing institution and
the ongoing interest rate scenario in the
country.

Although, it is difficult to comment with

certainty on how much return stock
markets (and therefore equity funds)
would deliver over the next 3 years; in
our view, the broad market should return
15.0% CAGR (compounded annual
growth rate) over a 3-Yr time frame.
However, individuals must expect
volatility along the way and hence these
returns may vary depending on the
market conditions.

2) The rate of return from MIPs was kept

same and remained constant throughout
the tenure of investment. It should be
well understood that the investments
could be made in multiple MIPs; hence,
the returns from these schemes may
vary. But, for better understanding, we
had assumed single return (8.5%)
representing the entire category.
3) As mentioned earlier, investments in
capital gains bonds have a 3-Yr lock-in,
after which they can be redeemed.
Hence, for calculation purpose, we took
the same as investment horizon.
Option 2: Pay long-term capital gains
tax and invest the remaining amount in
equity-oriented mutual funds
This option revolved around paying
long-term capital gains tax (charged at
22.66%), which comes to Rs 300,132; and
investing the remaining amount i.e. Rs
1,299,868 in well-established diversified
equity funds for minimum 3-Yr period,

The maturity proceed that Mrs. Sinha

would receive by investing in Option 2
will be approximately Rs 1,976,937.
Assumptions under Option 2
1) The return of 15.0% on diversified
equity funds was kept as constant
throughout the tenure of investment (i.e.
minimum 3-Yr), while doing the
calculations. However, the same could
vary depending upon the market
conditions. Also, the investments under
diversified equity funds could be made
in multiple schemes, and these schemes
in turn may offer different returns. But
for understanding purpose, we assumed
a return (15.0%) that represents the
category as a whole.
2) In our view, investment in any equityoriented fund should be made for a

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22

Capital Gains
minimum of 3-Yr horizon.
Hence, the same time frame
was considered in the
calculation. It depends
entirely on investors, how
long they want to remain
invested in the funds (in
excess of 3-Yr).

Sale proceeds (a)

Less: Indexed cost of purchase
Long term capital gains
Capital gains tax implication
Total tax payable (b)
Investible amount in equity funds (a-b)
Assumed rate of return
Investment tenure
Maturity proceeds

Why recommend two

options?
While Option 1 opts for a
conservative path, Option 2, with its
investment in equity funds, was more
risk-taking in its approach.

But, looking at Mrs. Sinha's profile, she

had a good reason to take a bit more risk
and consider Option 2. The reason
being, then, her daily needs were taken
care by her investments in FDs (which
provided her Rs 4,000 pm) and from the
amount provided by her sons. Moreover,
given her age then, she still had around
10 more years over which she could
perhaps take some risk, and accumulate
a corpus that could provide for in her
golden years.
Of the two options, based on Mrs.
Sinha's risk appetite and her desire to be
independent of the monies she received
from her children, we suggested her to
opt for Option 1, which she agreed to.
In conclusion...
The most striking feature of this case
study is Mrs. Sinha's profile, which was
such that she could have opted for any
of the two options. But in our interaction
with her, we realised that she was averse
23

Money Simplified: Get your own copy!

Invest in Equity Mutual Funds

Rs
Rs
Rs
%
Rs
Rs
%
Yrs
Rs

1,600,000
275,500
1,324,500
22.66
300,132
1,299,868
15.0
3
1,976,937

to taking risk, and therefore Option 1

suited her best.
Whether you opt for a conservative
route (Option 1) or riskier route (Option
2) should depend on your risk profile.
So individuals, who have an appetite for
high risk investments, selecting Option
1 might just land them with unsuitable
investment avenues. Possibly, the more
prudent approach for them would be to
go for option 2.
Therefore, if a low risk avenue offering a
low, but assured return suits your
appetite for risk, then you should not
look beyond capital gains bonds in
combination with other less risky
investment avenues. However, if you are
the kind of investor who has an appetite
for risk and is looking at maximising
returns over the long-term, then
investing in equities (whether directly or
via mutual funds) may be the better
option.

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At the end, a word of advice - if you find

yourself in similar situations, it is always
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visit us at www.personalfn .com

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