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Case study of Jay Mehta on Financial Planning: No -1 Mr. Jay Mehta (35) is into business of textile garments.

His family includes his wife Shefali (30) & a son Aryan (5).Till now he has invested all his business profits into business working capital & in purchasing the flat where he lives. He is now seeking advice to invest his yearly savings of about Rs. 12 Lakh into various assets other than business, which will enable him to meet his financial goals in life. At present Jays annual living expenses are about Rs. 10 lakh including household expenses, nursery fee, personal expenses & one vacation in India per year. They have consciously decided not to spend more than their annual savings unless in case of emergency. Jay has now requested you to prepare a Financial Planfor his family which will provide crystal clear direction for the future course of action towards achievement of his financial goals. You have gathered the couples personal & financial data & after analyzing set their goals into financial figures. CURRENT NET WORTH STATEMENT of Jay Mehta (PERSONAL) a) ASSETS AMOUNT (In lakh Rs) Residential Flat 75.00 PPF 1.00 Fixed Deposits 1.00 Car 5.00 Cash on hand 1.00 Floater Mutual Fund 3.60 TOTAL ASSETS 86.60 b) LIABILITIES Credit Card Loan TOTAL LIABILITIES NETWORTH (a-b) 1.00 1.00 85.60

After discussions with Jay & his wife and on the basis of financial information provided by him, you have recommended the following investments keeping in view the benefits of diversified asset allocation: CREDIT CARD OUTSTANDING:Before starting any investments you have strongly suggested Jay to clear his credit card outstanding as he is paying roughly 30% p.a. interest on his outstanding balance. FAMILY.S FINANCIAL SECURITY:In case Jay Mehta meets any eventuality, the living expenses for survivors are assumed at Rs. 5 lakh per annum post inflation considering Shefalis Life Expectancy of 75 years.

Hence at the moment you recommend Jay to go for 30 years term Life Insurance Policy with Sum Assured of Rs 70 Lakh which will be enhanced further in future . This will also include accident death benefit, premium waiver benefit in the case of permanent disability. For this the total premium comes to Rs. 35,000/- per annum. A comprehensive mediclaim insurance of Rs. 5 lakh for the whole family. GOLD:Gold is considered to be one of the most liquid assets & the most popular mode of investment in India. Gold prices reflect an annual growth rate of roughly 10% p.a. Thus you recommend Jay to allocate 5% of his annual savings i.e. Rs. 60,000/- into this asset class as well. After having implemented the above recommendations Jay.s asset allocation would be diversified sufficiently to provide ample returns over the period. ESTATE PLANNING: As part of estate planning strategy you have suggested Jay to prepare a Will & get it registered. He should also issue a power of attorney in favor of his wife Shefali. PROPOSED INVESTMENT PORTFOLIO

Asset Class Annual Investments (Rs.)


Equity Mutual Funds ELSS Stocks Liquid Funds Bonds Bank FD Gold Mediclaim Life Insurance 2.70 1.00 2.00 3.00 1.80 0.50 0.60 0.05 0.35

Net Annual Investment 12.00 On the basis of above mentioned case study and the assumptions as below, answer the questions that follow.

Assumptions
1. All the costs are on the present cost of living. 2. Inflation is estimated to be at 4.5% p.a. 3. Risk free rate of returns is to be at 6% p.a. 4. Equity returns are estimated to be 15% p.a. 5. Returns on liquid funds estimated to be 5%. 6. Bank FD and Bond returns to be 7%. 7. Gold returns to be 10%.

QUESTIONS : 1. What should be the life insurance cover of Jay such that in case he meets any eventuality today, his family should receive the minimum amount of living expenses for the remaining life of Shefali? Assume life insurance proceeds of Jay are invested by Shefali in risk free instruments. 2. If Jay invests as per the advised portfolio what will be the average annual returns of the portfolio at the end of 10 th year (consider investments of the first year only for this purpose)? 3. The Mehta.s want to start saving for their son Aryan.s higher education. He will spend six years at college beginning at age 18. The present cost structure of higher education in US is: Year 1 Rs. 15 lakh Year 2 Rs. 17 lakh Year 3 Rs. 19 lakh Year 4 Rs. 21 lakh Year 5 Rs. 23 lakh Year 6 Rs. 25 lakh The cost of education is increasing by 6% every year. If Jay starts investing in an equity Mutual Fund how much he need to deposit at the end of each year to pay for Aryan.s higher educational requirements? Assume that educational expenses are withdrawn at the beginning of each year and that the last deposit will be made at the beginning of the last year of Aryan.s college education. 4. Jay wants to invest in two mutual funds A and B which have given the following historical returns: Fund A Fund B Year 1 7% 4% Year 2 12% 11% Year 3 -1% 21% As a practicing Certified Financial Planner, which fund will you recommend to Jay on the basis of risk? 5. Jay received the following amounts in the FY 2006-07: 1. Gift of Rs. 63,000/- from a friend. 2. Gift of Rs. 24,000/- from his neighbor. What is the total taxable amount from the above receipts for Jay?

6. Jay is considering the following investment projects: Cash Flows (Rs) Projects C0 C1 C2 C3 1 -10,000/+10,000/NIL NIL 2 -10,000/+7,500/+7,500/NIL 3 -10,000/+2,000/+4,000/+12,000/4 -10,000/+10,000/+3,000/+3,000/Assuming the projects are independent and mutually exclusive advise Jay which project he should opt for on the basis of IRR and NPV respectively at 10% rate of discount. 7. Jay wants to know how you would go about in the process of Estate Planning. What is the sequential process you would advise Jay regarding his Estate, explain your reasons. 1. Establish priorities for estate objectives. 2. Prepare a written plan. 3. Define problem areas including liquidity, taxes, etc. 4. Gather client information and establish objectives. 8. Which of the following is / are correct regarding budgeting in case it is to be done for Jay, give your reason with examples? 1. The budget should be adjusted yearly to reflect actual expenditures. 2. Inflation should not be considered when budgeting. 3. If clients are close to retirement age, budgeting is not useful. 4. Budgeting requires planning for the unexpected. 9. Jay has entered into a covered American call option with a strike price of Rs. 75/- and a premium of Rs. 5/- and this is at-the-money. He wants you to find the break even point of this covered call option. 10. Workout the following ratios based on the financial statements. A . Solvency Ratio B. Liquidity Ratio