Investment Planning

Personal Investment Plan

Plan prepared for
Mr. Baban Bhai

Plan prepared by
ABC Advisory Services Pvt. Ltd.
(Add- Tel- Fax- )
www.abc.com

Disclaimer
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 Case Study

Index

Particulars Page No.

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 Investment Planning

Case History
Name Mr. Baban Bhai Age 30 years
Profession Business Risk appetite Moderate to Low
Monthly expenses Rs. 20,000/- p.m.

i. Retirement planning –

You want to retire at the age of 55 years (alternatively at 60 years) and want to create a corpus, which
is sufficient to fund you and your spouse’s retirement expenses till the age of 75 years (alternatively till
80 years of age). Currently you have a life insurance policy with a sum assured of Rs. 5 lacs only.


1
ii. Child’s higher education expense planning* :-–

You want to create a corpus for your child’s higher education expense. You expect to spend Rs. 10 lacs
in today’s value. This amount will be needed after 25 years, when the child attains an age of 22 years.


iii. Child’s marriage expense planning*1:-

You want to create a corpus for your child’s marriage expenses. You expect to spend Rs. 20 lacs them
in today’s value. This amount will be needed after 28 years, when the child attains an age of 25 years.


1
iv. Child’s basic education expense planning* :-

You want to create a corpus for your child’s basic education expenses. You expect to spend Rs. 1 lac
annually in today’s value. This amount will be needed when the child attains an age of 5 years and till
the time they attain an age of 22 years.
1
* Mr. Baban Bhai will get married in next 6 months time and expects to have one child 3 years from now.

Assumptions
1. Inflation is assumed @ 5% p.a.
2. Net returns (after tax) expected from debt portfolio – 7% p.a.
3. Net returns (after tax) expected from equity portfolio – 12% p.a.
4. Retirement corpus post retirement is assumed to grow at 7% p.a.
 Case Study

Asset Allocation
Proper asset allocation is an important area of personal financial planning. While higher exposure to equity can
result in higher returns, it is exposed to high volatility. Any future expense planning is inevitable and must be
planned carefully. Investment made to achieve the goals should not be very aggressive. Since your risk appetite is
low, we have planned your goals with two different asset allocations;

A. with a debt-equity in the proportion of 80:20 (as requested by you) &

B. with a debt-equity in the proportion of 50:50 (our suggestion).

Plan A Plan B.

We, however, advise you to review the asset allocation on an annual basis. Due to lower return expectation in debt
schemes and higher returns expectation in equity schemes, the asset allocation (in market value terms) may tilt in
favor of equity schemes over a period of time. While this has been a prime reason of recommending an initial asset
allocation of 50:50, annual reviews are important so that you remain in control of the situation.

Retirement Goal – Calculations

Scenario 1 – Taking retirement age as 55

Current Age 30 Years

Retirement Age 55 Years
Number of years left before retirement 25 Years
Inflation rate 5.00%

Life Expectancy 75 Years 80 Years

Current monthly expenses INR 20,000 INR 20,000
Monthly exp. Post retirement INR 67,727 INR 67,727
Corpus needed at the time of retirement* INR 13,555,006 INR 16,184,549

Investments To Be made
Life Expectancy 75 Years 80 Years
Asset Allocation(Debt:Equity) 0.8 : 0.2 0.5 : 0.5 0.8 : 0.2 0.5 : 0.5
Expected portfolio return** 8.00% 9.50% 8.00% 9.50%
Annually (for next 25 yrs) INR 171,681 INR 135,666 INR 204,986 INR 161,984
Monthly(for next 25 yrs) INR 14,307 INR 11,306 INR 17,082 INR 13,499

* Meaning of Retirement corpus:-

If you invest Rs.1.35 crores with an anticipated return of 7% pa. (net of taxes) and inflation is assumed @ 5% p.a., then the
retirement corpus will provide for your living expenses for the next 20 years. The value of the retirement corpus at the end of
75 years will become Nil.
 Investment Planning

** Expected portfolio return is the weighted average of the two asset class.
Note – Expected portfolio return is the effective annual rate. So in case of monthly investments, the monthly rate has been
taken into consideration which gives the same annual effective return, instead of just dividing the given annual rate by 12.

Post retirement expenses and corpus (graphical representation)

(As per scenario 1 – Taking retirement age as 55)

Note – Annual expenses increase @ 5% p..a. (inflation rate), Retirement corpus grows @ 7% p.a.

Scenario 2 - Taking retirement age as 60

Current Age 30 Years

Retirement Age 60 Years
Number of years left before retirement 30 Years
Inflation rate 5.00%

Life Expectancy 75 Years 80 Years

Current monthly expenses INR 20,000 INR 20,000
Monthly exp. Post retirement INR 86,439 INR 86,439
Corpus needed at the time of retirement INR 13,594,668 INR 17,300,004

Investments To Be made
Life Expectancy 75 Years 80 Years
Asset Allocation(Debt:Equity) 0.8 : 0.2 0.5 : 0.5 0.8 : 0.2 0.5 : 0.5
Expected portfolio return** 8.00% 9.50% 8.00% 9.50%
Annually (for next 25 yrs) INR 111,117 INR 82,941 INR 141,402 INR 105,547
Monthly(for next 25 yrs) INR 9,260 INR 6,912 INR 11,784 INR 8,796
 Case Study

Child’s higher education: - Calculations

Cost of higher education in today’s term - Rs. 10 Lacs. This amount will be needed after 25 years, when child attain an age of
22 years.

Cost of higher education in today’s term INR 1,000,000

Amount needed after (Years) 25 Years
Expected inflation rate (%) 5.00%
Actual inflation adjusted amount needed after 25
yrs INR 3,386,355

Investment required to be made

Asset Allocation(Debt:Equity) 0.8 : 0.2 0.5 : 0.5

Expected portfolio return 8.00% 9.50%
Annually (for next 25 yrs) INR 42,890 INR 33,893
Monthly(for next 25 yrs) INR 3,574 INR 2,824

Life insurance requirement - To protect this goal, you need to take a Life insurance coverage of Rs. 10 lacs at least for next 20
years.

Rs. 33.86 lacs

 Investment Planning

Child’s marriage expense planning: - Calculations

Expected expenses to be incurred for marriage in today’s term – Rs. 20 lacs per child. This amount will be needed after 28
years, when child attain an age of 25 years.

Expected Marriage expenses in today’s term INR 2,000,000

Amount needed after 28 Years
Expected inflation rate 5.00%
Actual inflation adjusted amount needed after 28
yrs INR 7,840,258

Investment required to be made

Asset Allocation(Debt:Equity) 0.8 : 0.2 0.5 : 0.5

Expected portfolio return 8.00% 9.50%
Annually (for next 25 yrs) INR 76,144 INR 58,167
Monthly(for next 25 yrs) INR 6,345 INR 4,847

Life insurance requirement- Again, to protect this goal, you need to take a Life insurance coverage of Rs. 20 lacs at least for
next 25 years.
 Case Study

Child’s annual education expenses: - Calculations

In this case it is assumed that you need Rs. 1 lac every year (in today’s term) for child’s basic education from the time when the
child attain an age of 5 years till the time they attain 22 years of age. Hence, you need this amount every year for seventeen
(17) years beginning nine (9) years from now.

Expected annual education expenses in today’s term INR 100,000

Amount needed after ( years ) - every year for next 17 years 8 Years
Expected inflation rate 5.00%
Actual inflation adjusted amount needed after 8 yrs INR 147,746
Corpus needed after 8 years INR 2,003,592

Investment required to be made

Asset Allocation(Debt:Equity) 0.8 : 0.2 0.5 : 0.5

Expected portfolio return 8.00% 9.50%
Annually (for next 25 yrs) INR 12,861 INR 12,015
Monthly(for next 25 yrs) INR 1,072 INR 1,001

Total Amount To be Invested –

Asset Allocation(Debt:Equity) 0.8 : 0.2 0.5 : 0.5

Expected portfolio return 8.00% 9.50%
Retirement Planning ( assuming retirement at 55 years ) INR 171,681 INR 135,666
Child’s higher education Planning INR 42,890 INR 33,893
Child’s marriage expense planning INR 76,144 INR 58,167
Child’s annual education expenses Planning INR 12,861 INR 12,015
Total Yearly Investment Required INR 303,577 INR 239,741
Total Monthly Investment Required INR 25,298 INR 19,978
 Investment Planning

Product recommendations
Snapshot
Expected post tax
Product Category Risk
return
PPF Debt 8% Low
PO MIS + PO RD Debt 8.74%*1 Low
HDFC Fixed deposit Debt 9.2% to 9.8%*2 Low
Debt Mutual Funds Debt 7% to 8% Low to Moderate
Equity Mutual Funds –
Equity 12% High
Diversified
Equity Mutual Funds – ELSS Equity 12% High
Equity Mutual Funds - Hybrid Equity 10% Moderate

*1 – Assuming investment is done in the name of family member having nil tax liability.
*2 – depends on the tenure of the FD and assuming investment is done in the name of family member having nil tax liability.

Product details:-
A. Public Provident Fund (Regular investment scheme)

Return 8% p.a. Lock-in period 15 years

Min Investment Rs. 500 p.a. Max Investment Rs. 70,000 p.a.
Loan facility Yes Partial withdrawal Yes (after 6 years)
Tax benefit Deductions u/s 80C Tax on interest Exempt

B. Post Office Monthly income scheme + Post office recurring deposit

Open a POMIS a/c with a lump sum deposit and transfer the monthly income to PO recurring deposit a/c.
Example – Invest Rs. 1 lacs in PO MIS. Interest income per month will be Rs. 666.67. Transfer the same to PO RD a/c for next
6 years. At the time of maturity, the final proceeds including bonus will be around Rs. 1.65 lacs (i.e. a pre-tax return of 8.74%
p.a.). To save taxes, this can be done in the account of the family members whose income does not fall under taxable bracket.
Post Office Monthly income scheme (One time investment scheme)

Return 8% p.a. Lock-in period 6 years

Rs. 4.5 lacs (single a/c) or
Min Investment Rs.1 500 Max Investment
Rs. 9 lacs (joint a/c)
Bonus 5 % (at maturity) Premature closure After 1 year with penalty
Tax benefit Nil

Post office recurring deposit (Regular investment scheme)

 Case Study

7.5% quarterly
Return Lock-in period 5 years
compounded.
60 monthly investment
Min Investment Tax benefit Nil
with min. Rs. 10 p.m.
Loan facility Yes Premature closure After 3 years
Rs. 10 invested per month for 5 years gives back Rs. 728.90 at the time of maturity.

C. HDFC Fixed deposits.

a. HDFC Premium Deposits

Rate of interest (% p.a.)
Period (months)
Individuals Senior Citizens
30 9.55 9.80
45 9.30 9.55
b. HDFC Regular Deposits
Rate of interest (% p.a.)
Period (months)
Individuals Senior Citizens
>12 upto 35 9.45 9.70
36 - 60 9.20 9.45

Note – In both the above cases -

a. Interest income will be taxable
b. TDS will be applicable in case where annual interest income is more than Rs. 5000.
c. Minimum deposit amount is Rs. 10,000.
d. Additional interest of 0.1% on a single deposit of Rs. 1 lac and above.

D. Debt Mutual Funds.

Fund
Size* Past Performance (%)** Portfolio
Fund Name
Debt Cash
Rs. Crs. 1 yr 3 yrs 5 yrs (%) (%)
Canara Rabeco Income-Growth 413 29.5 13.1 10.3 73.8 26.2
IDFC D B F- Plan A - Growth 343 19.2 12.2 8.4 93.4 6.6
Kotak Bond Regular Plan - Growth 437 13.8 11.1 8.1 86.1 13.9
Birla Sunlife Income-Growth 688 11.1 11.8 8.1 78.3 21.7
Reliance Income Fund - Retail - G P - Growth 2159 12.8 10.3 7.8 93.5 6.5
ICICI Pru Income Fund-Growth 1480 15.7 11.3 7.7 89.4 10.6
Birla Sun Life Income Plus - Growth 2420 13.3 11.6 7.6 86.3 13.7
*as on 31st Jan ’09.
**as on 12th Feb’09.
Note- Income in bond mutual fund is treated as capital appreciation and is eligible for indexation benefit.

E. Equity Mutual Funds

a. Equity Diversified funds
Fund
Fund Name Size* Past Performance (%)** Portfolio
Rs. Crs. 1 yr 3 yrs 5 yrs Equity(%) Debt(%) Cash(%)
Reliance-Growth 3213 -46.2 -0.2 22.2 69.8 - 30.2
 Investment Planning

DSP Top 100 Equity-

Growth 982 -32.1 6.7 18.1 89.5 13.6 -3.1
HSBC Equity-Growth 1019 -39.1 3.1 17.0 78.7 5.5 15.9
HDFC-Growth 806 -41.2 2.7 16.2 82.6 - 17.4
Note- Long term (above 12 months) gain in equity mutual fund is fully tax-exempt.
b. Equity linked savings scheme (ELSS)
Fund
Fund Name Size* Past Performance (%)** Portfolio
Rs. Crs. 1 yr 3 yrs 5 yrs Equity(%) Debt(%) Cash(%)
Sundaram BNP Tax Saver-
Growth 515 -38.2 0.5 23.2 78.5 - 21.5
HDFC Tax Saver-Growth 956 -42.5 -6.3 19.2 95.2 - 4.8
Note-
a. These funds qualify for sec 80C deductions.
b. Lock-in period of 3 years.
c. Long term (above 12 months) gain in ELSS is fully tax-exempt.
c. Hybrid Funds – Equity-Debt
Fund
Fund Name Size* Past Performance (%)** Portfolio
Rs. Crs. 1 yr 3 yrs 5 yrs Equity(%) Debt(%) Cash(%)
SBI-Magnum Balance 301 -35.9 0.1 16.3 65.5 12.6 21.8
HDFC-Prudence 1791 -36.4 0.2 14.1 74.0 23.6 2.5
Note - Long term (above 12 months) gain in hybrid (where min. 65% is equity) is fully tax-exempt.
*as on 31st Jan ’09.
**as on 12th Feb’09.