1.

1 CURRENT FINANCIAL SITUATION OF THE CLIENT

 INCOME:

Particulars Amt in Rs. (p.a)

Annual Salary 18,00,000
Rental 12,00,000
Dividend 50,000
Interest on Fixed Deposits 4,05,000
Gross Total Income 34,55,000
Less: Tax Deductions 10,36,500
Total Annual Income 24,18,500

 EXPENSES:

Particulars Amt in Rs. (p.a)

Household Expenses 4,22,000
Travelling Expenses 1,40,000
Education Expenses 5,00,000
Insurance Premium 45,000
Total 11,07,000

 ASSETS:

Particulars Amt in Rs. (p.a)

Real Estate 3,00,00,000
Gold 49,50,000
Fixed Deposits 55,00,000
Vehicle 20,00,000
Equity Investments 26,00,000
Cash 4,00,000
Total 4,54,50,000

 LIABLITIES:

Particulars Amt in Rs. (p.a)

 Car Loan 17,00,000
Housing Loan 33,00,000
Loan Against Property 22,00,000
Personal Loan 5,00,000
Total 77,00,000

 NETWOTH
Assets – Liabilities = Net Worth

4,54,50,000 – 77,00,000 = 3,77,50,000

 PROTECTION COVER

Life Insurance Cover – Rs.14,00,000

1.2 ANALYSIS ON PERSONAL FINANCIAL RATIOS

1. LIQUIDITY RATIO:
This ratio is an indicator of persons ability to meet his or her expenses. It is important to
perform this analysis on a regular basis so that a person can be prepared for any financial
hardships.

Cash = 4,00,000
Total Annual Expenses = 11,07,000
Monthly Expenses = 11,07,000 / 12 = 92,250
LIQUIDITY RATIO = CASH (near cash)/MONTHLY EXPENSES
= 4,00,000/92,250
= 4.33
INTERPRETATION: The ideal liquidity ratio is 4 to 8. The client is having a liquidity ratio
of 4.33. This means that the person has diversified the cash and invested in assets. The ideal
ratio can vary across age groups and income profiles.

2. SAVINGS RATIO:
This ratio is used to assess how much money a person is saving over a specified period of
time.

Savings = Equity Investments + Fixed Deposits

= 26,00,000 + 55,00,000 = 81,00,000
Gross Income = 34,55,000
SAVINGS RATIO = SAVINGS/GROSS INCOME
= 81,00,000/34,55,000
= 2.34

INTERPRETATION: There is no one ideal savings ratio for all, it depends on the age and
income of the person. The higher the savings ratio, the better it is to reach the financial goals.
The person’s savings ratio is 2.34, which shows that he can cut back on discretionary
expenses to increase savings.

3. DEBT TO ASSET RATIO:

This ratio helps to understand whether the person has overborrowed or the person is facing
solvency issues.

Total Liabilities = 77,00,000

Total Assets = 4,54,50,000
DEBT TO ASSET RATIO = TOTAL LIABILTIES/ TOTAL ASSETS
= 77,00,000/4,54,50,000
= 16.94%
INTERPRETATION: The ideal debt to asset ratio is less than 50%. This client’s debt to
asset ratio is 16.94% which is quite good. It shows that the person has less liabilities as
compared to his total assets. Since this person has more assets, he can pledge his assets and
borrow some loans to invest.

4. DEBT SERVICING RATIO:

This ratio measures debt obligation against monthly income. Hence, it the ratio of the EMI to
the income.

Monthly EMI Across all the Loans = 78,000

Monthly Total Income = 24,18,500 / 12
= 2,01,542
DEBT SERVICING RATIO = SHORT TERM LIABILITIES/ TOTAL INCOME
= 78,000/2,01,542
= 38.70%

INTERPRETATION: The ideal debt servicing ratio should not cross more than 40% of
total monthly income. The person’s debt servicing ratio is 38.70% which shows that this
person has control over the debt obligations, which is a good sign. He can further reduce his
debt obligations and convert the EMI outflow into Mutual Fund SIP Plan so that his debt will
reduce, and the savings increases.

5. SOLVENCY RATIO:

This ratio will help to understand whether the asset in the portfolios are adequate to service
the person’s debt.

Net worth = 3,77,50,000

Total Assets = 4,54,50,000
SOLVENCY RATIO = NETWORTH/TOTAL ASSETS
= 3,77,50,000/4,54,50,000
= 83.06%
INTERPRETATION: The ideal solvency ratio is more than 50%. The client is having a
solvency ratio of 83.06%, which is very good. This depicts that the person is able to pay off
its obligations with the total assets. The assets in this case include real estate, gold, fixed
deposits, vehicle, equity investments and cash.

6. LIFE INSURANCE COVERAGE RATIO:

This ratio helps to understand whether a person has adequate amount of life insurance
coverage or not.

Net worth = 3,77,50,000

Life Insurance Cover = 14,00,000
Total Annual Income (After Tax Deductions) =24,18,500
LIFE INSURANCE COVERAGE RATIO
=NETWORTH + EXISTING LIFE COVER/POST TAX SALARY
=3,77,50,000 + 14,00,000/24,18,500
=16.19

INTERPRETATION: The ideal insurance coverage ratio is more than 11. The client is
having an insurance coverage ratio of 16.19 which shows that this person has provided his
family 16 years’ worth of expenses. Hence, it is more than the ideal ratio and the person is
having an adequate existing life insurance cover. The tax deduction is the main advantage for
the client.

1.3 SUGGESTING CORRECTIVE ACTION TO IMPROVE FINANCIAL

POSITION

 The client can further improve his liquidity position by investing in more current assets
like cash equivalents and marketable securities. He can also park his monthly income in
contingency fund or emergency fund. The money set aside will help him to cover the
unexpected expenses and losses, thus this will reduce the uncertainty in the future and
overcome the risk of losses.
 The client can invest in Tax- Saving Mutual Funds, Bonds and Savings Account to
increase his savings. Investing in tax-saving funds can help the person to get tax rebates
under Section 80C of the Indian Income Tax Act, 1961. He can also invest in balanced
schemes of mutual funds in order to diversify his investment in different asset classes of
equity and fixed income securities. This way he can sure that his investments are safe.

 The person is not having any solvency issues and has also not over-borrowed. Since, he is
in a comfortable position to pay of his debts he can borrow loans up to his repayment
capacity. He should not over-borrow and make sure that his debt does not go beyond
50%.

 The client should also reduce his debt as it has almost touched a dangerous level
(38.70%). He can take loans which have low interest rates and EMI’s. The person can
also pay more than his monthly minimum payment, so that the debt does not accumulate
towards the end.

 The person’s solvency position is good. He can further improve it in the long run by
having an adequate portfolio of financial and real assets. The financial assets can include
stocks, bonds and cash. On the hand, the real assets include land, buildings, infrastructure
and commodities.

 The client is having an adequate life insurance cover for 16 Years to protect his family.
This is a term insurance policy. The client can also opt for whole life insurance as it
provides a permanent coverage for the entire life of the person. It is one of the cheapest
policies because the premium rate is low and the family members will get the death
benefits incase of demise of the person.