Nism XB V Imp Case Studies and Short Notes

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NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2)

CASE STUDIES
NISM XB CASE STUDY QUESTIONS BASED ON
EXCEL / FORMULA / MATHEMATICAL CALCULATIONS

IMP – THE STUDENT IS EXPECTED TO HAVE GOOD KNOWLEDGE OF MS EXCEL / OPEN
OFFICE FOR DOING THE CALCULATIONS
(The Short Notes ie. summary of NISM book - are after the case studies)
Q 1. Mr. Sunny has planned that he would need a sum of Rs 8 crores when he retires. His
retirement is 22 years away. The returns on investment can be estimated at 7.6%
What would be the investments he need to make at the end of each year for the next 22
years to achieve his retirement corpus goal.
a. Rs. 16,74,960
b. Rs. 15,16,068
c. Rs. 17,11,634
d. Rs. 18,22,721
Answer – b - Rs. 15,16,068
Answer Explanation :
We have to use the PMT function in Excel
The Rate of return is 7.6%
The time period ( Nper ) – is 22 years
Future Value ( FV ) is Rs. 8,00,00,000
Present Value (PV) is Zero.

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In Excel, click on ‘Formulas’ – ‘Financial’ - ‘PMT’ in Excel as under :

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Substituting the values, we get –
The answer is Rs 15,16,068.
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Q 2. Govind is of 30 years and he has planned to retire at the age of 55 years. His current
yearly income is Rs 12 lakhs which he expects to grow at 10% every year. What will be the
income required by Govind in retirement if he requires an income replacement of 75%?
a. Rs 76,55,175
b. Rs 83,53,411
c. Rs 89,85,400
d. Rs 97,51,235
Answer – d - Rs 97,51,235
CASE STUDIES
Rate is 10%
Time period (Nper) is 25 years ( 55 years – 30 years)
Present Value (PV) is Rs 12,00,000
Using Future Value (FV) function in Excel –
The FV is Rs 1,30,01,647
75% of this is Rs 97,51,235
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CASE STUDIES
Q 3. Mr. Deven is 50 years old and he has been investing a sum of Rs 40,000 at the end of
every month to make his retirement corpus. The investment returns are at 10% pa. What
will be the sum accumulated when he has reached 60 years of age?
a. Rs. 87,52,780
b. Rs. 81,93,799
c. Rs. 93,15,990
d. Rs. 78,52,555
Answer – b - Rs. 81,93,799

CASE STUDIES
We have to use the Future Value – FV function in Excel
The Rate is 10% yearly. So the monthly rate will be 10% / 12
The period is 10 years. In months it will be 10*12 = 120
Pmt – Monthly Investment = Rs 40,000
Substituting in Excel we get –
The sum accumulated will be Rs. 81,93,799
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CASE STUDIES
Q4. Mr. A is 40 years old and receives a salary of Rs 80,000 per month. He has a life
insurance cover of Rs 20 lakhs. He wants to make sure that his family will continue to
have the income to meet their expenses even if he dies by taking sufficient insurance
cover. He plans to retire after 20 years. What will be additional insurance cover Mr. A
will need to enable this? The inflation is at 6% and investment returns are at 8%.
a. Rs. 1.76 crores

b. Rs. 1.59 crores
c. Rs. 1.39 crores
d. Rs. 1.03 crores
Answer – Rs. 1.39 crores
First we should know the Real rate of Return
Real Rate of Return = (1 + Nominal Rate / 1 + Inflation Rate) – 1
The nominal rate ie. the investment rate of return = 8%
8/100 = 0.08
Inflation rate = 6% = 6/100 = 0.06
Substituting in the above formula
= (1+ 0.08 / 1 + 0.06) – 1

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= (1.08 / 1.06) – 1
= 1.01886 – 1
Real Rate of Return = .0189 or 1.89%. This is for the year. Monthly rate will be = 1.89%/12
Years to retirement = 20 = 240 months
Salary per month = Rs. 80,000
We have to use the PV (Present Value) function in MS Excel.
Open MS Excel and choose – ‘Formulas’ - ‘FINANCIAL’ – PV as shown below :

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Once you click on PV, you will see the following screen –
Substituting the above values in this –
Interest Rate = 1.89%/12
Period = Nper = 240 months
Salary per month = Rs 80000
We get PV = Rs 1,59,77,940 = Rs 1.59 crores. The exiting insurance cover of Rs 20 lakhs has
to be deducted from Rs. 1.59 crores = Rs. 1.39 crores
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CASE STUDIES
Q 5. Ms. Supriya is of age 38 years and she done her investments in the following ratios in
various asset classes :
Equity : 50%
Gold : 20%
Debt : 10%
Liquid Assets : 20%
In the last financial year, the compounded annual growth rates from these asset classes
have been 30%, 15%, 8% and 6% respectively.
Calculate the asset allocation in Supriya’s portfolio at the end of the year.
a. 52.56 : 23 : 7.51 : 17.09

b. 45.75 : 21.50 : 11.50 : 21.25
c. 48 : 25.25 : 13 : 13.75
d. 54.16 : 19.16 : 9 : 17.66
Answer – d- 54.16 : 19.16 : 9 : 17.66
Allocation at the Yearly returns and Allocation at year New Allocation Ratio
Asset Class beginning Return Factor end (Appx)
Equity 50 30% 1.3 50*1.3=65 65/120*100=54.16
Gold 20 15% 1.15 20*1.15=23 23/120*100=19.16
Debt 10 8% 1.08 10*1.08=10.80 10.8/120*100=9
Liquid 20 6% 1.06 20*1.06=21.20 21.2/120*100= 17.66
Total = 120
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CASE STUDIES
Q 6. Mr. Adarsh works for a textile manufacturing company and his company provides for
health insurance cover of Rs. 5 Lakhs. But due to growing medical costs, Mr. Adarsh feels
that this cover is inadequate. So he takes another health policy for his family with a Rs 3
Lakhs cover with a different insurance company.
During the year, Mr. Adarsh makes a claim for Rs. 7 lakhs for hospitalization expenses from
the health insurance providers. How will the claims of Mr. Adarsh be settled?
a. Mr. Adarsh can choose which insurance company can settle the claim first and the
balance amount will be settled by the other health insurance provider
b. Rs 5 lakhs will be settled by the company designated health insurance provider and
the balance Rs 2 lakhs will be settled by the personal health policy provider
c. Rs 4 lakhs will be settled by the company designated health insurance provider and
the balance Rs 3 lakhs will be settled by the personal health policy provider
d. The insurance taken from both the companies is Rs 5 and Rs 3 lakhs. The ratio comes
to 62.5 : 37.5. The Rs 7 lakh claim will be divided in this ratio
Answer – a - Mr. Adarsh can choose which insurance company can settle the claim first and
the balance amount will be settled by the other health insurance provider
Answer Explanation: Sometimes multiple health insurance policies cannot be avoided as

the employer may offer policies upto a certain amount and the employee may wish to
cover a larger sum insured or to have an independent policy on their own.
In such cases the contribution clause is not applicable except where the sum insured of the
policy chosen by the Insured is lower than the claim amount. It is the choice of the Insured
person to choose from which company to get her claim from.
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CASE STUDIES
Q 7. Dimple is creating a corpus to meet her son’s educational needs. For this she is already
investing in an equity mutual fund. Her son is planning to do a 2 year specialized course
which is currently costing Rs 5 lakhs. This course will commence after 6 years. Inflation is at
10%.
To protect this corpus from equity volatility, she plans to shift the required sum of money
from the equity fund to a debt fund after 5 years. The returns on debt fund is at 6.5%.
Calculate how much amount which Dimple has accumulated should be moved into the debt
fund at the end of 5 years to finance the two years of education.
a. Rs. 18.53 Lakhs

b. Rs. 21.25 Lakhs
c. Rs. 15.87 Lakhs
d. Rs. 16.90 Lakhs
Answer – d- Rs. 16.90 Lakhs
Dimple requires Rs. 5 lakhs inflated at 10% in years 6 and 7 respectively.
Let’s find out the inflated costs first.
Inflation is at 10% = 0.1
Formula = Amount * (1+Interest) ^Time period
Inflated cost in year 6 = 500000 * (1.1)^6
To calculate 1.1^6, on Financial calculator of your system, click 1.1, x^y, 6 = 1.771
= 500000*1.771 = 885780
Inflated cost in year 7 = 500000 * (1.1)^7
= 500000*1.9487 = 974358
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OR it can be calculated in Excel as under :
But since these amounts are to be shifted debt funds at the end of 5 years, we can calculate
their PV by discounting them at 6.5% (Return on Debt Fund)
Thus, Rs. 16.90 Lakhs have to be shifted to debt funds.
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CASE STUDIES
Q 8. Mr. Srinivas is 80 years old, his son Mohit is 50 years old and daughter Megha is 45
years old. Mohit has read about personal finance etc. and decides that its important for his
father to make a Will.
Mohit and his sister discuss it with their father about the Will but he does not have an
opinion on it except that he wants to give a fixed sum of his money to Megha who has
some financial problems.
Mohit and his sister decide to draught a will for their father distributing his assets among
themselves as they are his only surviving Class 1 legal heirs, in a way that is acceptable to
them. They also decide that the proceeds of a life insurance policy of Mr. Srinivas will go to
Megha in the will as required by Mr. Srinivas. They decided not to trouble Mr. Srinivas with
the details of the will since he is not keeping well. Mohit is named as the executor of the
will.
The will is duly signed by Mr. Srinivas. It is properly witnessed and registered. As soon as
this will is made, Mohit also makes his will and includes the property which he will receive
as per his fathers will in his estate.
Later on, for a few days, Mr. Srinivas felt better and he wanted to bequeath a sum of
money to his daughter in his will. Accordingly a Codicil was drawn up for this duly signed by
Mr. Srinivas and witnessed.
After a brief period, Mr. Srinivas dies. Answer the below questions as per the information
provided above.
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Q8.1 Mohit is the nominee in the life insurance policy of Mr. Srinivas. When Mr. Srinivas
dies, who will have the legal rights over the proceeds of the insurance policy?
a. Megha will have the legal rights, as the Will supersedes all nominations
b. Mohit will have the legal rights, as he is the beneficial nominee in the policy
c. As there is a dispute between the clauses of the will and the nomination, the policy
amount will be shared equally by Megha and Mohit.
d. This matter will have to be settled in a court of law
Answer- a - Megha will have the legal rights, as the Will supersedes all nominations.
Answer Explanation - A Will supersedes a nomination. But the company or mutual fund can
still make payment of proceeds to the nominees. The nominee takes the amount subject to
any claim or right of the owners/heirs or other persons
Q 8.2 Megha has laid a claim to the money which Mr. Srinivas has bequeathed to her in the
Codicil to his will. However, her brother Mohit raises an objection to it. Which of the
following is true as per the law?
a. Megha is not entitled to the amount as the codicil was not registered
b. Megha is entitled to the amount as she is not a class 1 heir but an agnate
c. Megha is entitled to the amount as it was made through a valid codicil signed by Mr.
Srinivas
d. Megha is not entitled to the amount as she was not a beneficiary in the original will
signed by Mr. Srinivas
Answer – c. Megha is entitled to the amount as it was made through a valid codicil signed
by Mr. Srinivas
Answer Explanation - If a will is registered, all subsequent Wills or amendments need not
be registered.
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Q8.3 Identify the true statement with respect to Mohit’s own Will.
a. Mohit cannot include the property which he is likely to get from his father in his own
estate
b. Mr. Srinivas Will is registered. This means that all the bequeaths made in the will are
irrevocable. So the proportionate property can form a part of Mohit’s Will.
c. As Mohit’s Will is dated after Mr. Srinivas’s Will, Mohit will be entitled to include the
assets he is likely to receive in his estate
d. As Mohit is not the sole heir to Mr. Srinivas’s property, he cannot include the assets
he is likely in his estate
Answer - a - Mohit cannot include the property which he is likely to get from his father in
his own estate
Answer Explanation - Since Mr. Srinivas was still alive and could make change or
alterations to his will, Mohit cannot include the property he is likely to get under his fathers
will in his own.
Q 8.4 Which was the ideal way for Mr. Srinivas to ensure that his daughter Megha for
immediate financial assistance to get over her financial difficulties?
a. Mr. Srinivas should have made Megha a joint holder in all his investments so that she
could have sold them when ever she wanted to get the required funds.
b. Mr. Srinivas should have gifted the investment/amount to her so that the resources
will be available immediately to Megha and Gift is also tax-free
c. Megah, who is married, is not a legal heir. Mr. Shrinivas should have made her the
nominee in his investments. In this way Megha would have received the amount on
the death of Mr. Srinivas
d. Mr. Srinivas should have bequeathed the amount to Megha so that she becomes
legally entitled to it
CASE STUDIES
Answer – b - Mr. Srinivas should have gifted the investment/amount to her so that the
resources will be available immediately to Megha and Gift is also tax-free
Answer Explanation - A gift deed is a highly efficient way of transferring immovable assets
from one generation to another. The large benefit it derives from the fact that the transfer
happens immediately and does not have to wait for years.
Q8.5 - On what grounds can the Will of Mr. Srinivas be challenged?
a. The Will can be challenged because Mr. Srinivas did not have the knowledge of the
contents of the Will
b. The Will can be challenged because neither Mohit nor Megha had been granted a
power of attorney by Mr. Srinivas to act on his behalf
c. The Will can be challenged because Mr. Srinivas did not have the physical and mental
capacity to make the will
d. All of the above
Answer – D – All of the above
Answer Explanation - According to Section 59 of the Indian Succession Act, below elements
are the essentials for making a will:
a) Testamentary capacity and sound mind
b) Knowledge of contents
c) Free from undue influence/fraud/coercion
d) Voluntary act
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CASE STUDIES
Q9- Ms. Shreya is receiving a salary of Rs 1,00,000 per month. She has taken a 12% personal
loan with an outstanding of Rs. 5 lakh and four years to go. She also has taken a 8% home
loan with an outstanding of Rs 32 lacs and 10 years to go.
Shreya’s grandfather has gifted her Rs. 5,00,000. She wants to use this amount to improve
her financial situation.
Identify which of these can be the optimum use of the gift received by Shreya to better her
financial situation?
a. It will be advisable for Shreya to pay off the personal loan which will bring down the
Debt to Income Ratio from 63% to 32%
b. It will be advisable for Shreya to pay off the personal loan which will bring down the
c. It will be advisable for Shreya to pay off the personal loan which will bring down the
d. It will be advisable for Shreya to pay off the personal loan which will bring down the
Answer – d - It will be advisable for Shreya to pay off the personal loan which will bring
down the Debt to Income Ratio from 52% to 39%
First lets find the EMI (Equated Monthly Installment) for the home loan using the PMT
function in Excel.
The interest cost is 8% per year = 8%/12 per month
The period pending is 10 years = 10*12 = 120 months
Outstanding amount is Rs 32 Lakhs

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In Excel, Click on Formula - Financial – PMT and substitute as under :
Therefor the EMI comes to Rs 38,824
Now lets calculate the EMI for personal loan :
The interest cost is 12% per year = 12%/12 per month
The period pending is 4 years = 4*12 = 48 months
Outstanding amount is Rs 5 Lakhs
Substituting in the PMT function in Excel we get :

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The EMI for personal loan comes to RS 13,166
Now we know that Home loan EMI is Rs 38824 and Personal loan is Rs 13166
Shreya’s debt comes to 38824+13166 = 51990
His income is Rs 100000
So the Debt to Income ratio is 51990/100000 = 0.5199 = 52%
Since the personal loan has a comparatively higher interest rate, it is prudent to pay off the
personal loan first.
Paying off the personal loan will bring down the debt expense to only the home loan which
is Rs. 38824.
Thus the Debt to Income Ratio will become 38824/100000 = 39% appx
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CASE STUDIES
Q 10. Mr. and Mrs. Gupta are both Indian Citizens (both 45 years old) who were working
with multinational companies in the United States of America for the last 20 years. They
have given up their jobs and have returned to India to pursue their own venture in India
funded by a Venture fund based in the Silicon Valley.
They had a house in the USA which they have given out on rent. They have substantial
investments in their retirement investment accounts that are made on a tax deferred basis
meaning that investments were made from pre-tax income and the contribution and the
income accrued on it is taxed at the time of withdrawal. Both have taken substantial life
insurance policies, on their own, in the USA which will payout the sum insured of USD 1
million each if any of them die in the next 15 years.
Their employer paid for a health Insurance policy in the USA that continues to be valid till
the end of the year but will cease thereafter unless they choose to renew it on their own.
They have certain questions regarding their re-location and seek your opinion:
Q 10.1) After they become resident in India as per Indian tax laws they will have to pay tax
in India on their rental Income from the US property. Is this statement true?
a) Yes they will have to pay tax in India on the rental income from the US property but will
get credit for the tax paid in USA
b) No – they will not have to pay any tax in India on the rental income from the US property
c) Yes they will have to pay tax in India on the rental income from the US property without
getting any credit for the tax paid in the US on such rental income
Answer – a - Yes they will have to pay tax in India on the rental income from the US
property but will get credit for the tax paid in USA
Answer Explanation: For Resident Indians worldwide income will be taxable in India. And as
far as tax credits are concerned, with DTAA, countries can avoid double taxation by
allocating the taxing rights or by giving credit for taxes paid in the source state by the
residence state.
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Q 10.2) The income accrued on the deferred tax retirement account will be taxed only in
the year when such money is withdrawn. Which of the following statements is true?
a) If the deferred tax retirement account is notified under newly introduced section 89A
then tax in India will also be paid in the year of withdrawal and credit will be available for
the tax paid in the US
b) No tax is payable in India on the income accrued on the deferred tax retirement account
in the US
c) Tax is payable in India in the year in which the Income accrues on the deferred tax
retirement account and credit will be given for the tax payable in the US on such Income in
the same year
Answer – a - If the deferred tax retirement account is notified under newly introduced
section 89A then tax in India will also be paid in the year of withdrawal and credit will be
available for the tax paid in the US
Answer Explanation : Earlier, non-residents who later on settle down in India used to face a
typical issue of double taxation in case of their overseas retirement funds. At present the
withdrawal from such funds may be taxed on receipt basis in such foreign countries, while
on accrual basis in India.
In order to address this mismatch and remove this genuine hardship, it is proposed to insert
a new section 89A to the Act to provide that the income of a specified person from
specified account shall be taxed in the manner and in the year as prescribed by the Central
Government.
CASE STUDIES
Q 10.3) Both of them will need to buy Life Insurance policies in India for covering the risk of
death. Which of the following is true?
a) They will need to buy fresh life Insurance policies in India as, after becoming persons
resident in India, they will not be allowed to remit the premiums for keeping the existing
Life Insurance policies alive
b) They will need to buy fresh life Insurance policies in India as the Indian law does not
allow persons resident in India to buy or maintain a policy of life insurance outside India
c) They need not buy fresh life Insurance policy in India and can either pay the premiums
for the existing Life Insurance policy from their rental income in US or remit it from India
Answer – c - They need not buy fresh life Insurance policy in India and can either pay the
premiums for the existing Life Insurance policy from their rental income in US or remit it
from India
Answer Explanation : Indian residents can use their Liberalised Remittance Scheme
entitlement of up to USD 2,50,000 per annum to buy Insurance policies of foreign
companies.
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Q 10.4) Their health Insurance policies cover hospitalization expenses across the world,
including India. They can renew the policy on their own at the end of the year. Which of the
following is true?
a) It would be advisable to continue the existing health insurance policies. It is not

necessary to buy any fresh health Insurance in India and incur additional expenditure as the
existing policies already cover hospitalization costs in India.
b) It would be advisable to continue the existing health insurance policies and also buy an
additional fresh health Insurance in India to create a no claim history on a health Insurance
policy in India, even if there is an additional cost involved in buying such a policy.
c) They should give up their health Insurance policies in the US as it is expensive and buy a
fresh health Insurance policy in India as it is quite economical
Answer – a - It would be advisable to continue the existing health insurance policies. It is

not necessary to buy any fresh health Insurance in India and incur additional expenditure as
the existing policies already cover hospitalization costs in India.
Answer Explanation : Since the cover provides also for hospitalization expenses in India,
the policy can be continued.
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CASE STUDIES
Q11. Mr. Tejas has a monthly income of Rs 100000. When he will retire, he expects that his
expenses will be 50% of his current income and he expects to fund 25 years in retirement.
Mr. Tejas is a disciplined investor and he has invested Rs. 5000 every month in good equity
funds for the last 8 years. He intends to continue with this to contribute to his retirement
corpus.
Consider long term returns from equity funds at 10%, inflation at 6% and investment
return in retirement at 7.5%.
Calculate the corpus that Mr. Tejas will require to fund his retirement. Also calculate the
additional amount that Mr. Tejas will have to set aside for this apart from continuing his
investment in equity funds?
a. Rs. 5.41 crores ; Rs. 29,180

b. Rs. 4.33 crores ; Rs. 25,750
c. Rs. 4.89 crores ; Rs. 32,100
d. Rs. 6.74 crores ; Rs. 17,240
Answer – Rs. 5.41 crores ; Rs. 29,180
First we calculate amount of expenses in retirement after inflation.
50% of Mr. Tejas income = Rs. 100000 / 2 = Rs. 50,000
Inflation is at 6% = 0.06
Years in retirement = 25 years
Formula : Amount * (1+Inflation rate)^time period
Inflated amount of expense at retirement = 50000*{(1.06)^25}
(To calculate 1.06^25, use scientific calculator of your computer. Type 1.06, then type x^y
and then type 25 = 4.29187
50000*4.29187 = Rs. 214593

CASE STUDIES
Now we need to find the corpus required in retirement to manage this expense for another
25 years.
= (1+.075) / 1+0.06) - 1
= 1.01415 – 1 = 0.01415
= 1.42%
= Monthly Rate = 1.42%/12
Period = 25 years = 25x12 = 300 months
PMT as calculated above = Rs. 214593
Using PV function in Excel :

CASE STUDIES
Now we know that the corpus required at retirement is close to 5.41 Crores. Though we
already know our answer, we can find out the monthly investment requirement. But since
Mr. Tejas has been already investing for this since 8 years, we need to find the current
corpus built so far as well.
Rate of return on equity funds is 10% ie. Monthly 10%/2
Period of investment = 8 years or 8*12 = 96 months
Monthly investment = Rs 5000
Using FV – Future Value function in Excel
Mr. Tejas has accumulated 7.3 Lakhs so far. We need to do further calculations considering
the same to find out how much more he needs to invest in equity fund.
CASE STUDIES
The Return on equity fund is 10%, Monthly = 10%/12
Years to retirement = 25 years or 300 months
The Future Value (FV) ie. the corpus required at retirement is Rs 5.41 crores (Rs 54164370)
The corpus already built ie. the PV = Rs 730905
Using the PMT function in Excel to find the monthly investments required.
This shows that monthly investment required is Rs. 34180. But since Mr. Tejas is already
investing 5000 pm, additional investment required is Rs. 29180.
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CASE STUDIES
Q12 - Mr Ravi Gupta, aged 45 years, saves Rs 55000 p.m. Based on salary growth and other
factors, he expects this to rise by 10% p.a. till his retirement at age 60. This does not include
monthly contributions of Rs 15000 (own contribution plus employer contribution) to
various funds towards retirement corpus. These are expected to grow by 6% pa till
retirement. The retirement corpus by the end of the current year will be Rs 30 lakhs,
entirely in debt which will yield 7% pa on average.
Calculate the amount Mr. Ravi will have in his retirement corpus on his retirement.
a. Rs. 152 lakhs

b. Rs. 148 lakhs
c. Rs. 133 lakhs
d. Rs. 169 lakhs
Answer – a – Rs. 152 lakhs
Retirement Corpus = Future Value of increasing contributions + Future Value of current

retirement corpus
In order to calculate this, we can do it in the following manner:
First, we have the current retirement corpus i.e., 30 Lakhs
Now, the contribution to this corpus will be 15,000 p.m. i.e., 1,80,000 this year.
Also, Mr. Ravi will earn an interest of 7% on his already accumulated corpus.
So, corpus at the end of year will be the beginning corpus + Interest on this corpus + The
additional Investment
Mr. Ravi will retire after 15 years (60 – 45)

CASE STUDIES
CASE STUDIES
Q 13 . Mr. Ravi Gupta, aged 45 years, saves Rs 55000 p.m. Based on salary growth and other
factors, he expects this to rise by 10% p.a. till his retirement at age 60. Besides the
retirement corpus, his savings and investments will amount to Rs 80 lakhs by the end of the
current year, one-fourth of which will be in equity, balance in debt. He has a practice of
investing at the end of each year, his disposable savings into equity and debt in the ratio of
30:70. In the long run, he expects equity to yield 11% and debt to yield 8%.
At the end of age 47, what percentage of Mr. Ravi’s investment portfolio will be in debt
(excluding retirement corpus)?
a. 71.5%
b. 70.6%
c. 72.8%
d. 73.4%
Answer – d – 73.4%
Value of corpus at the end of Year 1 = Value of Initial Corpus + Interest earned on initial
corpus + Additional contributions made in that Year.
In the same way, we can calculate value of corpus at the end of future subsequent years.
CASE STUDIES
CASE STUDIES
Q14. Mr Ravi Gupta is aged 45 years. Post retirement at age 60, he expects investment
return on his portfolio at 11%. His current expenses are Rs 50,000 per month. Assume zero
date as the end of age 45. Calculations are to be done on annual basis. Ignore taxation and
interest income on savings and contributions during the year. Inflation is assumed to be 7%.
Assuming that the life expectancy is 75 years, calculate the corpus requirement on
retirement to ensure that he is able to sustain the same standard of living for the rest of his
life.
a. Rs. 194 lakhs

b. Rs. 201 lakhs
c. Rs. 182 lakhs
d. Rs. 251 lakhs
Answer – a – Rs. 194 lakhs
Answer Explanation:
First we need to calculate Ravi’s inflated expense at retirement.
=(50000*12)*{(1.07) ^15}
= 1655419
Real Rate of Return = 1.11/1.07 – 1 = 3.73%

CASE STUDIES
With this inflated expense, we can now find out his expense required at retirement using
the PV (Present Value) formula in Excel :
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CASE STUDIES
Q 15. Mr. Vishwanath, age 35 years, works for a private limited company. When he was 30
years old he took a life insurance policy. As he was not clear of his likely expenses and goals,
he based it on replacing his income of Rs. 50000 till his retirement at 60 years.
Currently his expenses are 75% of his income. These have gone up 10% per year since he
was 30 and he wants to provide an income to cover this expense to his 32 your old wife till
she is 85 years old in the event of his death.
Mr. Vishwanath also has an outstanding home loan of Rs. 35 lacs. He also wants to provide
for his child's future needs which will be around Rs. 40 lacs.
Return on investment can be expected at 8% and inflation at 6%.
What is the action that Mr. Vishwanath has to take to bring his life insurance cover to
where it should be?
a. He should take life insurance cover of Rs 1.7 crores
b. He should take additional life insurance cover of Rs 2.75 crores
c. He should take life insurance cover of Rs 2.49 crores
d. He should take additional life insurance cover of Rs 1.95 crores
Answer – c - He should take life insurance cover of Rs 2.49 crores
Answer Explanation:
Mr. Vishwanath’s insurance requirement = Present Value (PV) of his income for his wife +
Any other goals + Liabilities
Mr. Vishwanath’s income has gone up by 10% since he was 30
Which makes his income 50000*(1.1^5) = 80525

CASE STUDIES
Now we calculate the PV of 75% of this income till his wife reaches 85 years of age.
No. of years for wife to become 85 years = 85 – 32 (current age) = 53 years
Real rate of return = (1 + Nominal Rate / 1 + Inflation Rate) – 1
= 1.08/1.06 – 1 = 1.89%
PMT = Expenses of 60393 ie. 75% of income 80525
Substituting these values in PV function in Excel :

CASE STUDIES
Insurance Required = 2.4268917 Crores + 40 Lakhs (Child’s future needs) + 35 Lakhs

(Outstanding loan)
= Rs. 3,17,68,917
But since Mr. Vishwanath already taken a policy, he only needs to take an additional policy.
Now we calculate the value of policy already taken -
He had taken the policy when he was 30 years and will mature at 60 years. So the number
of years = 30. Months = 30*12 = 360
The return is 8%
The amount to be received by wife in case of death Rs 50000
Substituting these values in PV function in Excel :
Value of already taken policy = Rs. 68,14,174
Thus new policy cover required = Total Required – Existing Policy
= 3,17,68,917 – 68,14,174 (Appx 3.17 crores – 68 lakhs)
=Rs. 2.49 Crores (appx)

*************
CASE STUDIES
Q16 – Rahul is 35 years old and he is working for an IT company. He gets a salary of Rs.
1,00,000 from which he spends Rs. 10% for his own expenses.
Rahul wants to take an insurance cover which will provide for the expenses in case he dies,
for his wife who is 30 years old. Rahul plans to retire at 60 years and he expects his wife to
live for 85 years. Inflation is at 6% and investment return at 7.5%.
Calculate the insurance cover that Rahul should take for providing a corpus to meet the
household expenses and goals in case he dies.
a. Rs. 3.96 crores

b. Rs. 5.06 crores
c. Rs. 3.77 crores
d. Rs. 4.12 crores
Answer – d – Rs. 4.12 crores
As given in the question, Rahul has a monthly income of Rs. 100000. Out of which he
spends 10% or 10,000 as his personal expenses. The remaining amount (Rs. 90,000) is used
for the household expenses and other savings. Rahul wants to provide for this incase of
unforeseen circumstances for his wife until her age of 85. We can find the amount required
for this in the following way.
First we should know the Real rate of Return
= (1+.075) / 1+0.06) - 1
= 1.01415 – 1 = 0.01415
= 1.42%
= Monthly Rate = 1.42%/12

CASE STUDIES
Years = Wives current age is 30 and she is expected to live till 85 years. So the tenure is 85 -
30 = 55 years
Tenure in months : 55 x 12 = 660 months
Monthly expenses are 90000 ( 1 lac less 10%)
Using PV (Present Value) function in Excel (Formulas – Financial – PV)
Answer = Rs 4.12 crores
***********
CASE STUDIES
Q 17. Ms. Simran is planning to take a Term insurance which gives her a 25 year cover for a
premium of Rs 120 per Rs 100000 sum assured. She is also studying an endowment plan
where a 25 year Rs 100000 sum assured plan has a premium is Rs 4300 and the maturity
benefit is Rs. 210000.
Which policy should Ms. Simran choose and what is the reason behind her choice? Note –
There are some investments in the market are giving a return of 12%
a. Although the returns on Endowment plan is 6.3% and its lower than 12% which other
investments can give but returns on the endowment plan are tax free and these tax
free returns are comparable to other investments. So Ms. Simran should choose the
Endowment plan
b. The return on Endowment plan is only 5.4%. So Ms. Simran should opt for Term
insurance and the premium saved of Rs 4180 can be invested in other investments
giving 12% returns
c. The return on Endowment plan is only 7.8%. So Ms. Simran should opt for Term
insurance and the premium saved of Rs 4180 can be invested in other investments
giving 12% returns
d. Although the returns on Endowment plan is 8.3% and its lower than 12% which other
investments can give but returns on the endowment plan are tax free and also they
are guaranteed. So Ms. Simran should choose the Endowment plan
CASE STUDIES
Answer – b - The return on Endowment plan is only 5.4%. So Ms. Simran should opt for
Term insurance and the premium saved of Rs 4180 can be invested in other investments
giving 12% returns
Answer Explanation:
To calculate the feasibility of the plan, we need to calculate the return rate on the extra
money being paid. The extra money he is paying Rs 4300 – Rs 120 = Rs 4180.
The maturity value (the future value) of endowment plan is Rs 21,00,000.
We will need to find the rate of interest for this endowment plan using Rate function in
Excel -
CASE STUDIES
The period of payment is 25 years
The extra amount paid is Rs 4180
The Sum assured is Rs 2,10,000
Substituting these values :
We get the rate of return of 5.37% ie. 5.4% on the extra sum paid in endowment plan. This
is far lower than the returns on other investments which can give 12% returns.
So Ms. Simran should opt for the Term insurance and put the premium saved of Rs 4180 in
other investments fetching 12% returns.
************
CASE STUDIES
Q18. Read the following caselet and answer the questions that follow:
Ms. T invests Rs 60,000 in a 10% yielding asset, using leverage of 1.4 times. Borrowing was
at 9% p.a.
Q 18.1 How much own funds did Ms. T invest?
a. Rs 35,000
b. Rs 25,000
c. Rs 42,857
d. Rs 17,143
Answer – b - Rs 25,000
Answer Explanation – Leverage of 1.4 times means, she is borrowing 1.4 times his own
funds.
Let ‘X’ be her own fund
So 1.4 * X = 60000 – X
1.4X + X = 60000
2.4X = 60000
X = 60000/2.4 =
= 25000
Therefore Rs 25000 are her own funds and 25000*1.4 = Rs. 35000 are borrowed funds.
CASE STUDIES
Q 18.2 How much interest did Ms. T need to pay?
a. Rs 2,250
b. Rs 5,400
c. Rs 3,150
d. Rs 3,500
Answer – c - Rs 3150
Answer Explanation – Ms. T has borrowed Rs 35000 (as calculated above). The interest cost
on borrowed money is 9%
So 35000 x 9% = Rs 3150
Q 18.3 What was Ms. T’s net return?
a. Rs 6,000
b. Rs 2,850
c. Rs 3,750
d. Rs 2,500
Answer – b - Rs 2850
Answer Explanation – Ms. T will receive 10% on Rs 60000 = Rs 6000
She has to pay Rs 3150 as interest on borrowed money (as calculated above)
Net Return = Rs 6000 – Rs 3150 = Rs 2850

CASE STUDIES
Q 18.4 What was Ms. T’s return on equity?
a. 1%
b. 10.4%
c. 10.9%
d. 11.4%
Answer – 11.4%
Answer Explanation – The Net return is Rs 2850 (As calculated above)
Her equity ie. her investment is Rs 25000
So the return on Rs 25000 is Rs 2850 = 2850/25000 x100 = 11.4%
**********
CASE STUDIES
Q19. Mr. Bose is a salaried person working with a consumer durable company.
He wants to do a one-year upskilling course after 2 years and for that he is investing Rs
9000 per month in an equity mutual fund for the last 5 years. The cost of this upskilling
course is Rs. 325000 today. He will receive his regular salary while he is doing the course.
He wants to build an emergency fund which should be equal to 6 months of his expenses
and savings. This, according to him will be 80% of his current salary of Rs. 125000.
Calculate the goal value Mr. Bose has to provide for with respect to the time-off he
planning to take. Explain how he should structure his investments to be able to fund his
goal in the best possible manner. Inflation on the upskilling course is 8%. Returns from
Equity funds is 11% .
a. The goal value is Rs 910000 lacs. The amount accumulated in the equity fund will exceed
the goal value by Rs. 133280. So Mr. Bose should do a systematic withdrawal of Rs. 9560
each month for two years so that the amount in the equity fund will be perfect for funding
the goal
b. The goal value is Rs 865760. The amount accumulated in the equity fund will not be
adequate to meet the goal. So Mr. Bose should move the amount accumulated in the
equity fund to a safe savings bank account to protect from volatility and start a 2 year SIP in
the equity fund for Rs. 4600 for two years to make up the shortfall
c. Rs 979080. The amount accumulated in the equity fund will exceed the goal value to buy
Rs. 152174 at the end of 7 years. To avoid volatility in equity funds, Mr. Bose should move
the amount required to fund the goal to a savings bank account so that it can be easily be
drawn to meet the goal
d. Rs 816770. The amount accumulated in the equity fund will fall short of goal value. To
avoid volatility, Mr. Bose should move the money from the equity fund to a short duration
fund two years before the goal is to be funded. An additional contribution of Rs. 4760 per
month for two years in equity funds will be required to make up for the shortfall
CASE STUDIES
Answer – c - Rs 979080. The amount accumulated in the equity fund will exceed the goal
value to buy Rs. 152174 at the end of 7 years. To avoid volatility in equity funds, Mr. Bose
should move the amount required to fund the goal to a savings bank account so that it can
be easily be drawn to meet the goal
Answer Explanation:
Value of corpus required in 2 years = 6 months of living expenses + Cost of course.
Living Expenses are be 80% of current income : 125000 x 80% = 1,00,000
Six months of expenses = 100000 x 6 = Rs. 6,00,000
Now lets calculate the effect of inflation on the course cost
The formula is : Current Cost (1 + Inflation Rate)^Time period
The current cost is Rs 325000
Inflation rate is 8% pa = 0.08
Time = 2 years
Substituting : 325000 (1 + 0.08)^2
= 325000 (1.08)^2
Using scientific calculator on your computer : 1.08 , x^y , 2 = 1.1664
325000 * 1.1664 = Rs 379080
Value of corpus required = 6 years expenses + Inflated course cost
= 600000 + 379080 = 979080

CASE STUDIES
Now let’s find out the corpus that will be built by Mr. Bose if he continues with the SIP in
equity funds.
Rate of return on equity is 11%. Monthly rate will be 11% / 12
He has invested for 5 years + he will invest for 2 more years = 7 years x12 months = 84
months
Rs 9000 is the monthly investment
Using the Future Value (FV) function in Excel :
The corpus built is Rs 11,31,254 which quiet more than Rs 9,79,080 required and has a
surplus of Rs 1,52,174
CASE STUDIES
Q 20. In his family, Mr. Vikas (38 years) has his wife (35 years), his parents and two children.
The household expenses are currently Rs 45000 each month.
He is a little cautious about the future of his family and wants that in case of his death, his
wife should get Rs 45000 per month till she is 85 years old. He also wants to provide for a
corpus of Rs. 50 lakhs for his children’s needs.
Consider inflation at 6% and returns on investments at 8% pa.
Calculate the life insurance cover Mr. Vikas should take to protect his family’s needs.
a. Rs 2.24 crores
b. Rs 2.73 crores
c. Rs 1.57 crores
d. Rs 3.44 crores
Answer – a - Rs 2.24 crores
To find out the insurance cover required, we need to consider the cover for household
expenses as well as the 50 Lakhs which he wants to provide for his children.
Real Rate of return = (1 + Nominal Rate / 1 + Inflation Rate) – 1
= (1+0.08 / 1 + 0.06) – 1 = 1.89% pa or monthly = 1.89%/12
Tenure = 50 years ( 85 -35) or 50 *12 = 600 months
Monthly Expenses = Rs 45000

CASE STUDIES
Substituting the above in PV function in Excel :
The insurance cover required is of Rs 1.74 crores
In addition to this, Rs 50 lakhs are required for children’s needs.
So the total cover required is of Rs 1.74 cr + Rs 50 lakhs = Rs 2.24 crores
***********
CASE STUDIES
Q 21 - Manav is a working professional working in the financial sector for the last 8 years.
His spouse is planning to start her own business of home tuitions shortly. They currently do
not have any meaningful savings.
Manav and his wife are planning to have a child soon and want to do better financial
planning. To save on the rent they on paying for their residential house, they plan to buy a
house soon. Manav also has some insurance policies which he had bought primarily to save
on taxes.
The company in which Manav works provides him and his family with adequate medical
health insurance.
Q 21.1. A friend of Manav, who is an insurance agent, gives a suggestion to Manav to

combine investments with insurance and buy some endowment plans. What is the likely
outcome of this action?
a. Manav will have good life cover and also good corpus
b. Manav will have inadequate life cover and poor investment returns on the premium
paid
c. Manav will have a high life cover and a portfolio of low risk investment
d. Manav will have good life cover and also a good corpus due to equity portion in the
investment
Answer – b - Manav will have inadequate life cover and poor investment returns on the
premium paid
Answer explanation - Endowment plans usually have higher premiums and low return on
the additional premiums. It is advisable to not combine insurance and investment. Both
aspects should be kept separate in order for them to fulfill their purpose.
CASE STUDIES
Q 21.2. Identify what is most important for the financial security of Manav and his family.
a. Purchasing a house
b. Having adequate life insurance
c. Savings – at least 30% of income
Answer – b - Having adequate life insurance

Answer Explanation – Manav is the only earning member of his family. Financial security of
Manav and his family can be secured by having an adequate life insurance cover.
Manav should have a life insurance policy for a sum adequate to meet his family’s financial
needs and goals, then he would have protected them from the financial effects of his death.
Q 21.3. As per the current situation of Manav’s household, what do you think will be a
suitable asset allocation for Equity, Debt and Gold investments?
a. Equity Shares 40%, Debt (Long Term) 20%, Debt (Short Term) 35%, Gold 5%
b. Equity Shares 30%, Debt (Long Term) 30%, Debt (Short Term) 20%, Gold 20%
c. Equity Shares 70%, Debt (Long Term) 20%, Debt (Short Term) 5%, Gold 5%
d. Equity Shares 50%, Debt (Long Term) 25%, Debt (Short Term) 15%, Gold 10%
Answer – d - Equity Shares 50%, Debt (Long Term) 25%, Debt (Short Term) 15%, Gold 10%
Answer Explanation - Given that the couple is young and have no other dependents, they
can have a higher allocation to equity. But since only one of them is currently earning and
they expect to have a child soon, they need to be little conservative as well.
CASE STUDIES
Q 21.4. As per the current household situation of Manav, which of these insurance products
is NOT an immediate priority?
a. Home owner’s insurance – This will protect them from rise in housing prices as they
are planning to buy a house soon
b. Life insurance policy for Manav’s wife as she is not an income generating member
c. Health Insurance for Manav’s wife for expenses on pregnancy etc.
d. All of the above
Answer – d - All of the above
Answer Explanation - All the three above statements are false as –
1. Health insurance policies usually do not cover pregnancy related medical expenses
2. Life insurance should never be taken for non-earning member as the basic premise of
life insurance is to provide for the family incase the earning member dies
3. A homeowner's insurance policy does not provide protection against any real estate
price rise. It covers damages to house property from fire, theft, vandalism etc
Q 21.5. Which of these should be given top priority :
a. Buying a house to save on rent and also to save on taxes

b. Invest in equities to build a long term corpus
c. Building an emergency fund to protect the household from any job loss
d. Take health insurance to meet expenses related to pregnancy
Answer – c - Building an emergency fund to protect the household from any job loss
Answer Explanation - Regardless of how important your other goals are, building an
emergency fund should always come first. An emergency fund consists of money that you
set aside for worst-case-scenarios.
************
CASE STUDIES
Q 22 - Mr. Y, aged 40, has the following goals ahead of him.
A - Son's post-graduate education: Due in Year 5. Current cost Rs15,00,000 p.a. to be

incurred at the end of each year for 2 years. Likely Inflation 15% p.a.
B - Daughter's marriage: Scheduled in end of Year 7. Current cost Rs1,00,00,000. Inflation is

assumed to be at 10% p.a. Mr. Y has provided a corpus of Rs2,00,00,000 towards these two
needs. The corpus is invested in a mix of debt and equity yielding 8% p.a. Ignore taxation.
Q 22.1 How much money will need to be set apart from the corpus at the end of Year 5, to
finance the son's post-graduate education? Assume the amount set apart will earn 6%
interest.
a. Rs. 59,34,184
b. Rs. 62,90,235
c. Rs. 64,12,209
d. Rs. 60,35,259
Answer – b - Rs. 62,90,235
Answer Explanation:
To calculate the amount required to be set apart at the end of year 5, we need to find the
inflated cost at that point of time.
Current Cost is 15,00,000 p.a.
Inflated cost can be calculated as follows:
Inflated Cost = Current Cost * (1+Inflation Rate) ^ (No of years)
Inflated cost at the end of year 5= 1500000*((1.15)^(5)) = 3017036

CASE STUDIES
But now since the amount set apart is going to earn 6%, we don’t need to set aside the
entire 3469591 required at the end of year 6. We can set aside only the discounted value.
Discounted Value = Amount Required/((1+Discount Rate) ^ (No of years))
Discounted Value = 3469591/((1+0.06) ^ (1)) = 3273199
Total amount to be set aside = 3273199 + 3017036 = 6290235
We need to be set apart from the corpus at the end of Year 5. This means only the amount
needed in 6th year is to be discounted. The amount required in Year 5 is to be immediately
used.
Rs 3017036 + Rs 3273199 = Rs 6290235

CASE STUDIES
Q 22.2 What is the likely outflow on account of daughter's marriage in the year it is
planned?
a. Rs. 1,94,87,171
b. Rs. 1,77,15,610
c. Rs. 2,14,35,888
d. Rs. 2,05,10,865
Answer – a - Rs. 1,94,87,171
Answer Explanation:
To calculate the amount required at the end of year 7, we need to find the inflated cost at
that point of time.
Current Cost is 1,00,00,000 p.a.
Inflated cost can be calculated as follows:
Inflated Cost = Current Cost * (1+Inflation Rate) ^ (No of years)
************
CASE STUDIES
Q 22.3 How much will be left in the corpus after both goals are fulfilled (assume that he
does not set apart money in the 6% corpus mentioned in Q1)?
a. Rs. 81,24,932
b. Rs. 69,65,820
c. Rs. 75,23,085
d. Rs. 66,42,292
Answer – c - Rs. 75,23,085
Answer Explanation:
The current value of portfolio is 2,00,00,000 and it yields 8%. There are no additions to this
portfolio but withdrawals will take place at the end of year 5,6 & 7 as given in previous
questions. We can create a projected cash flow chart and it will be as follows:
CASE STUDIES
Q 22.4 - How would you describe the investment policy Mr. Y is using for the corpus?
a. A little conservative
b. A little aggressive
c. Very aggressive
d. Very conservative
Answer – d - Very conservative
Answer Explanation: Mr. Y has cash requirements in end of Year 5,6 & 7. The goal for which
he needs the money is Son’s post-graduate education and daughter’s marriage. These goals
are critical in nature and with such a short span of time, having an aggressive portfolio is
not recommended.
***********
CASE STUDIES
Q23. Mr. C is a 45 year single earning member of his family with a good income. He is saving
for different financial goals, some of which are due for funding now. He has a home loan
and a car loan that he is servicing.
Q 23.1 How would you best categorize Mr. C’s risk profile?
a. Conservative
b. Moderate
c. Liquidity seeker
d. Aggressive
Answer – b - Moderate
Answer Explanation – Some of the qualities of a moderate Investors are :
• May have some experience of investment, including investing in risky assets such as
equities. • Understand that they have to take investment risks in order to meet their long-
term goals. • Are likely to be willing to take risk with a part of their available assets.
CASE STUDIES
Q 23.2 What are the assets that will be most suitable for Mr. C given his situation?
a. Primarily growth with some income-oriented assets

b. Primarily liquid assets
c. Primarily growth assets
d. Combination of liquid and income-oriented assets
Answer- a - Primarily growth with some income-oriented assets
Answer Explanation – Mr. C is 45 years old. So, he is neither very young (where he can take
full risks) nor very old (where he cannot take any risks)
So he can invest primarily in growth securities like equites with some income oriented safe
assets like debt.
Q23.3 Mr C. has to park the funds from fixed deposits that have matured for a short period
till it will be used for his daughter’s education. What will you suggest as a suitable
investment option?
a. Large-cap equity, to capture growth but with lower risk

b. Current account, to enable liquidity
c. Alternative investments, to increase the corpus
d. Short-term fixed deposit, to ensure liquidity and some return
Answer – Short-term fixed deposit, to ensure liquidity and some return
Answer Explanation – Since Mr. C needs the funds in a short time for his daughters
education, he cannot take any risks with these funds. So short term fixed deposits are the
best option as they are safe and will also provide him some interest returns.
************
CASE STUDIES
Q 24. Mr. Z, aged 52 years, is working in a leading company. His net savings are Rs. 50,000
p.m. Based on salary growth and other factors, he expects this to rise by 20% p.a. till his
retirement at age 60. This does not include monthly contributions of Rs. 9,000 (Rs.4000
own contribution; Rs.5000 employer contribution) to various funds towards retirement
corpus. These are expected to grow by 20% p.a. till retirement. The retirement corpus by
the end of the year will be Rs. 12 lakhs, entirely in debt, which will yield 8 % p.a. on average.
Besides his own residential house and the retirement corpus, his savings and investments
will amount to Rs.50 lakhs by the end of the year, 30% of which will be in equity. He has a
practice of investing, at the end of each year, his disposable savings into debt and equity in
the ratio of 80:20. In the long run, he expects equity to yield 15% and debt to yield 8.5%. At
the end of age 55, he expects an outflow of funds amounting to Rs5lakhs, which he hopes
to meet out of annual savings.
He expects inflation of 10% and post-retirement investment return on his portfolio at 11%.
His current expenses are Rs40,000 per month. Assume zero date as the end of age 52.
Calculations are to be done on annual basis. Ignore taxation and interest income on savings
and contributions during the year.
Q 24.1 On retirement, how much will Mr. Z have in his retirement corpus?
a. Rs. 46,65,905
b. Rs. 50,65,910
c. Rs. 44,81,442
d. Rs. 48,65,914
Answer – d - Rs. 48,65,914

CASE STUDIES
Mr. Z’s retirement corpus consists of -
1. Contribution of 9,000 p.m.

2. Accumulated debt corpus of 12 Lakhs
So now we know that 9,000 p.m. is being added every month to the already accumulated
corpus of 8 Lakhs. And this amount of Rs. 9,000 increases by 20% every year and we are
earning a yield of 8% on this corpus. We can calculate the future value of this investment as
follows
Therefore on retirement, Mr. Z will have Rs 48,65,914 in his retirement corpus.

CASE STUDIES
Q 24.2 At the end of Age 55, what percentage of Mr. Z's portfolio will be in debt (excluding
retirement corpus)?
a. 69.49%
b. 68.29%
c. 66.99%
d. 71.79%
Answer – a – 69.49%
The portfolio excluding Retirement Corpus will be Rs. 5000000 at the end of this with
allocation of 70:30 in debt and equity. Annual contributions this year will be Rs. 600000
(50000*12) which increase 20% every year.
In addition to this, we also have been given that at the end of age 55, he expects an outflow
of funds amounting to Rs. 5 lakhs, which he hopes to meet out of annual savings. Because
of this, the contributions made in this will decrease accordingly.
For this we need to find his Savings at Age 55
Savings at age 52= 600000
Savings at Age 53= 720000 (600000*1.2)
Savings at age 54= 864000 (720000*1.2)
Savings at age 55= 1036800 (864000*1.2)
Now out of this amount, 500000 will be used for the cash outflow.
So disposable savings in this year = 1036800-500000= 536800
This amount will be invested in Debt and Equity in the Ratio 80:20 (429440 and 107360)
CASE STUDIES
Because of this particular outflow, there will be a slight deviation in additions to investment
portfolio at Age 55.
The cash flow chart will look as follows:
Q 24.3 If he re-invests the entire retirement corpus in debt, what percentage of Mr. Z's
portfolio will be in debt when he retires?
a. 72.76%
b. 70.51%
c. 74.21%
d. 76.29%
CASE STUDIES
Answer – c – 74.21
Answer Explanation:
To answer this question, we need to calculate future values of each investment portfolio at
retirement. The projected investments and their future values are as follows.
CASE STUDIES
Q 24.4 - What is the corpus requirement to ensure that he is able to sustain the same
standard of living for 15 years after retirement?
a. Rs. 14,496,632
b. Rs. 13,861,919
c. Rs. 15,239,389
d. Rs. 15,254,894
Answer - a - Rs. 14,496,632
Answer Explanation: To calculate the retirement corpus required, we first to need to

calculate the monthly expense at retirement age 60.
Annual Expenses = 480000 (40000 * 12)
This can be calculated as = (Current expense) *[(1+Inflation Rate)^(No of Years to

Retirement)]
= (480000)*[(1.1) ^8] = 1028992
Now with this inflated amount and using the inflation adjust return, we can find the corpus
that is required for the next 15 years. The calculation is done as follows:
************
CASE STUDIES
Q 25. Mr. Smart (60) has just retired from service. He is entitled to a pension of Rs.
4,80,000/- p.a. received yearly in advance. The pension adjusts partially with inflation to the
extent of 50%. Mr. Smart’s wife (Mrs. Smart-58) is entitled to the pension for her lifetime in
case of the demise of Mr. Smart before her. Nobody else is dependent on the couple.
The couple stays in their own home. Mr. Smart received Rs. 40 lakhs (after tax) as
retirement dues. Their current living expenses are equal to the pension amount. Mr.
Smart’s employer will continue to provide a family floater Mediclaim policy for both their
life time that is considered adequate for their needs. Inflation is to be assumed at 6% p.a.
Life expectancy is to be assumed to be 87 years for Mr. Smart and 85 years for Mrs. Smart.
The couple wants to make provision for expenses on social occasions that arise & leisure
travel expenditure to the tune of Rs. 1,00,000 p.a. (inflation 6% p.a.) apart from
compensating for the inflation adjustment shortfall in the pension income. Assume the
expenditure arises at the beginning of the each year. The couple seek your advise.
Q 25.1 If discounted @ 5% p.a. and assuming that the adjustment is fully required at the
beginning of the year, the inflation adjustment required is ______.
a) 80,18,710
b) 76,36,867
c) 1,91,39,462
Answer – a - 80,18,710
Mr. Smart will have an annual expense outflow and pension inflow of Rs. 4,80,000 each. In
addition to this, he and his spouse also want to set aside 1,00,000 for other needs. This
signifies a shortfall of 1,00,000.
In addition to this, the expense outflow will increase by 6% p.a. as per the inflation rate and
the pension inflow will cover only half the adjustment. Thus it will increase by 3% (50% of
6%). This is will lead to an even bigger shortfall next year. And due to the pension income
increasing at only half the rate of the expense, this shortfall is ought to keep on increasing
year on year.
CASE STUDIES
Here, we first need to find out the shortfall in each year as shown in the excel sheet.
After this, we need to find out the inflation adjusted requirement. For this, we need to
discount the shortfall in each year up to the year of retirement by 5% (As given in the
question)
The discounted value of shortfall can be found out in the following manner:
Present Value of Shortfall = (Shortfall in a particular year)/((1+Rate of Discount)^(No of

Years))
CASE STUDIES
Q 25.2 The amount required for compensating the difference required for inflation
adjustment based on a discounting rate of 5% is higher than the corpus of Rs. 40 lakhs
available with them. This means that:
a) The couple cannot meet their expenses requirement for the next 27 years, if the corpus
earns 5% p.a.
b) The couple can meet the expense requirements provided the corpus of Rs. 40 lakhs earns
@9.90% p.a.
c) The couple can meet the expense requirements provided the corpus of Rs. 40 lakhs earns
@9.22% p.a.
d) The couple can easily meet the expense requirements for the next 27 years with the
Corpus amount of Rs. 40,00,000
Answer – b - The couple can meet the expense requirements provided the corpus of Rs. 40
lakhs earns @9.90% p.a.
To calculate how the corpus of 40,00,000 will meet the shortfall in the consequent years,
we need to check the various options and check which one of them stand true.
Here, we now know the annual requirements. The annual requirements are equal to the
shortfall in every year. Now we need to find out the rate of interest at which the corpus
needs to grow in order for us to have the balance at the end of term as 0.
So here we do a trial and error basis of all the rates given in the options.
CASE STUDIES
The balance at the end is 4097 which can be considered as near zero in the context of this
solution.
CASE STUDIES
Q 25.3 The fixed income options available to the couple to earn highest rate of interest
from government schemes would be:
a) Senior Citizen savings Scheme 2019 upto a maximum investment of Rs. 15 lakhs
b) PM Vaya Vandana Yojana from LIC upto a maximum investment of Rs. 15 lakhs 476
c) Fixed deposit schemes available from Public sector banks for senior citizens without any
limit
Answer – a - Senior Citizen savings Scheme 2019 upto a maximum investment of Rs. 15
lakhs
Answer Explanation : Senior Citizen savings Scheme is a Government Scheme. PM Vaya

Vandana Yojana is from LIC and Public Sector FDs are from the respective PSU banks.
CASE STUDIES
Q 26. Mr. Vishal, age 47 years has a monthly salary of Rs. 350000. He spends Rs. 50000 for
is own expenses. He has also taken a 15 year – Rs. 1 crore home loan for which he pays an
EMI of Rs. 90000 with Rs. 70 lakhs outstanding. He also has a Rs. 1.5 crore term policy for
which he pays an insurance premium of Rs. 30000.
The company in which Mr. Vishal works has given him a bonus of Rs. 8 lakhs. He feels he
should use it to pre-pay some part of the home loan.
He has estimated that he will need Rs. 1.3 crore to take care his children’s needs. For this
he is investing Rs. 1 lakh every month in an equity fund. This corpus fund is now worth Rs.
25 lakhs.
After all the above expenses and savings, the balance amount is used for household
expenses. The age of Mr. Vishal’s wife is 45 years and she is expected to live till 85 years.
Mr. Vishal wants to make sure that there is adequate insurance for all expenses and to
provide for his wife in case of his death.
The Provident Fund account of Mr. Vishal has a balance of Rs. 35 Lakhs which is earning a
return of 7.5% pa. The average yearly contribution to provident fund has been estimated at
Rs. 350000 pa during his employed years.
Mr. Vishal plans to retire at 60 years and expects to fund 25 years in retirement. The
expenses in retirement will be 90% of his current household expenses. He has daughter –
Preeti. Mr. Vishal has to draw on the corpus fund for Preeti’s two years masters program
which is after 6 years. This masters program is costing Rs 20 lakhs each year today. To
safeguard her goal against volatility in the equity markets, Mr. Vishal plans to shift the
required amount to a short duration debt fund after 5 years.
Mr. Vishal’s employer has provided a health insurance cover for his family for Rs. 5 Lakhs.
He feels that this is inadequate and so has taken a top-up of policy of Rs. 10 lakhs with Rs. 3
lakhs deductible.
(Returns outlook : Conservative Return @ 7.5%, Long term Equity Returns @ 12% and Short
term debt fund @ 6.5%. Inflation linked to education @ 10% and general inflation @ 6%)
Answer the below questions based on this data.

CASE STUDIES
Q 26.1 During the financial year, there were three expenditures due to hospitalizations. The
amount spent was Rs. 2 lakhs, Rs 6 lakhs and Rs. 1 lakhs. Was there any expenses from this
which was borne by Mr. Vishal?
a. No, as the total expenditure on hospitalization was below the total health cover of
Rs. 15 lakhs
b. No, as the total expenditure on hospitalization was below the top-up cover of Rs. 10
lakhs
c. Yes, he has to bear Rs. 6 lakhs
d. Yes, he had to bear Rs. 3 lakhs
Answer – d – Yes, he had to bear Rs. 3 lakhs
Answer Explanation : Since the top up policy has a deductible of Rs. 3 Lakhs, this Rs. 3 Lakhs
of expense is borne by Mr. Vishal and thus an expenditure for him.
CASE STUDIES
Q 26.2 To avoid the volatility in equites, Mr. Vishal plans to shift some part of the corpus
which he has accumulated for his children’s needs to short term debt fund. How much
corpus should he shift after 5 years to fund the two years of education? (Inflation for
education is 10% and returns from short term debt fund is 6.5%)
a. Rs. 75 lakhs
b. Rs. 53 lakhs
c. Rs. 71 lakhs
d. Rs. 68 lakhs
Answer – d – Rs. 68 lakhs
Cost of education today is 20 Lakhs per year.
The amounts are required in year 6 and 7.
Inflated amount in Year 6 = 2000000 * (1.1)^6 = 3543122
Inflated amount in Year 7 = 2000000 * (1.1)^7 = 3897434
Return on debt fund is 6.5%
So amount that needs to be transferred in Year 5 for Year 6 = 3543000/(1.065) = 3326875
and amount that needs to be transferred in Year 5 for Year 7 = 3897434/(1.065^2) =

3436209
Total amount that needs to be transferred = 3326875 + 3436209 = 6763084

CASE STUDIES
Q 26.3 What is the amount of life insurance that Mr. Vishal should take so that in the case
of his death, the house hold expenses and other goals are met? (Inflation as mentioned
above is at 6% and investment returns at 7.5%)
a. Rs. 1.47 crores

b. Rs. 2.11 crores
c. Rs. 0.80 crores
d. Rs. 1.38 crores
Answer – d – Rs. 1.38 crores
Life Insurance Cover K should take = Insurance Required – Insurance Cover already there
Insurance cover Required = Loan Amount Outstanding + Amount required for children +
PV of expense outgo
Monthly expense currently after all outgo = Rs. 80,000
(+) Salary 350000

(-) Own Expense -50000
(-) Home Loan EMI -90000
(-) Insurance Premium -30000
(-) Investment in Equity Fund -100000
Remainder 80000
PV of further outgo’s: Using PV function in Excel –

CASE STUDIES
Thus insurance required = 7000000 + 10500000 + 11300000 = 28800000
But since Mr. Vishal already has an insurance of 1.5 Crore, additional insurance required is
1.38 Crore
CASE STUDIES
Mr. Vishal, age 47 years has a monthly salary of Rs. 350000. He spends Rs. 50000 for is own expenses. He
has also taken a 15 year – Rs. 1 crore home loan for which he pays an EMI of Rs. 90000 with Rs. 70 lakhs
outstanding. He also has a Rs. 1.5 crore term policy for which he pays an insurance premium of Rs. 30000.
The company in which Mr. Vishal works has given him a bonus of Rs. 8 lakhs. He feels he should use it to
pre-pay some part of the home loan.
He has estimated that he will need Rs. 1.3 crore to take care his children’s needs. For this he is investing Rs.
1 lakh every month in an equity fund. This corpus fund is now worth Rs. 25 lakhs.
After all the above expenses and savings, the balance amount is used for household expenses. The age of
Mr. Vishal’s wife is 45 years and she is expected to live till 85 years. Mr. Vishal wants to make sure that
there is adequate insurance for all expenses and to provide for his wife in case of his death.
The Provident Fund account of Mr. Vishal has a balance of Rs. 35 Lakhs which is earning a return of 7.5%
pa. The average yearly contribution to provident fund has been estimated at Rs. 350000 pa during his
employed years.
Mr. Vishal plans to retire at 60 years and expects to fund 25 years in retirement. The expenses in
retirement will be 90% of his current household expenses. He has daughter – Preeti. Mr. Vishal has to draw
on the corpus fund for Preeti’s two years masters program which is after 6 years. This masters program is
costing Rs 20 lakhs each year today. To safeguard her goal against volatility in the equity markets, Mr.
Vishal plans to shift the required amount to a short duration debt fund after 5 years.
Mr. Vishal’s employer has provided a health insurance cover for his family for Rs. 5 Lakhs. He feels that this
is inadequate and so has taken a top-up of policy of Rs. 10 lakhs with Rs. 3 lakhs deductible.
(Returns outlook : Conservative Return @ 7.5%, Long term Equity Returns @ 12% and Short term debt fund
@ 6.5%. Inflation linked to education @ 10% and general inflation @ 6%)
Q 26.4 – Mr. Vishal has decided to give importance to retirement planning. Calculate how
much will be the corpus required and what will be the monthly sum to be set aside to
achieve the corpus required after taking into account the contribution to provident fund.
(Inflation as mentioned above is 6%, investment return in retirement is 7.5% and long term
equity return is at 12%)
a. Corpus Required : Rs. 3.87 crores, Monthly sum : Rs. 60500

b. Corpus Required : Rs. 4.02 crores, Monthly sum : Rs. 41700
c. Corpus Required : Rs. 3.22 crores, Monthly sum : Rs. 33500
d. Corpus Required : Rs. 3.51 crores, Monthly sum : Rs. 34200
CASE STUDIES
Answer – a - Corpus Required : Rs. 3.87 crores, Monthly sum : Rs. 60500
First let’s calculate the retirement corpus. Current monthly household expense is 80000 (as
calculated in Q26.3 above). After retirement, 90% of this i.e. 72000 will be required.
Inflating this amount at 6% for 13 years gives us (1.06^13)*72000 = 153570. This will be the
expense per month starting at 60. This will be required for 25 years.
Calculation for Rate:
Return post-retirement is 7.5% and Inflation post-retirement is 6%
While finding retirement corpus, we need to take into consideration the real rate of return.
Real Rate of Return = (Investment Return-Inflation Rate)/(1 + Inflation Rate)
Real Rate of Return = (7.5% - 6%)/(1 + 6%)
Real Rate of Return = 1.5%/1.06
Let’s find the retirement corpus required.
Using the PV function in Excel :

CASE STUDIES
So, retirement corpus required is close to 3.87 Crores. Now let’s find the future value (FV)
of the provident fund.
FV of the provident fund is close to 1.62 Crores. Now we can find the monthly investment
required for the difference amount of 2.25 Crores (3.87 Crores – 1.62 Crores)
So, the additional monthly investment required for the corpus is close to Rs.60500 per
month.
CASE STUDIES
Q 26.5 If Mr. Vishal decides to use the bonus money to prepay a part of the home loan,
then what will be the change in the tenor?
a. 9 years
b. 11 years
c. 12.34 years
d. As per rules, the tenor cannot be changed, only the EMI can be reduced for adjusting
any prepayment of loan
Answer – b – 11 years
Let’s find the original terms (interest rate) of the loan first. Using Rate function in Excel :
Rate of interest thus is 13.52% (1.12 * 12) for the home loan.
CASE STUDIES
Now if Mr. Vishal uses the bonus of Rs. 8 Lakhs for the loan, the outstanding amount goes
down from 70 Lakhs to 62 Lakhs. Now let’s find out how is the tenure affected if the EMI is
not changed. Using NPER function in Excel :
No of payments comes down from 180 to 133, thus bringing down the term from 15 years
to close to 11 years (133/12 = 11.08)
CASE STUDIES
Q 27. Mr. Pranav is a 35-year-old and works for a reputed private company. His monthly
income is Rs. 1,00,000 and his monthly expenses are Rs. 40,000.
As a good saving habit, Mr. Pranav is regularly investing Rs. 10,000 pm by SIP in a Blue Chip
Equity Fund for the last 5 years.
To upgrade himself, he plans to do a one-year course after two years. The cost of the
course will be Rs. 8 lakhs and he plans to use the money saved in the blue chip equity fund
to finance this course.
Mr. Pranav is also planning to buy a house. The down payment to buy the house is ready
and for the balance amount, he plans to take a 15-year loan of Rs. 50 Lakhs. The EMI for
this works out to be Rs. 45871. As the EMI outgo is quite large, Mr. Pranav is worried if he
will be able to pay his regular monthly household expenses after paying the EMI. Luckily,
Mr. Pranav has received Rs. 10 lakhs from his father but he is unsure if he should use this
money to buy the house or make investments for future use.
As Mr. Pranav is the only earning member of his family, he feels he should get adequate
insurance. He wants to retire at 60 and will need to fund his expenses for 30 years in
retirement. As per his calculations, the expenses in retirement will be 70% of his current
expenses.
Answer the following questions based on the above data.

CASE STUDIES
Q 27.1 Mr. Pranav plans to do a upgradation course. Suggest how should he plan his
investments for it?
(Return Trends: Long term equity returns can be 12% Low duration debt funds returns at
7%. Inflation is expected be at 6%)
a. As the equity markets can be volatile, Mr. Pranav should shift the money from the
blue-chip equity fund to a low duration fund. No additional investment will be
required.
b. As the equity markets can be volatile, Mr. Pranav should move the money from blue
chip equity fund to a low duration debt fund. He should also continue to invest Rs.
10,000 pm in the low duration debt fund
c. Mr. Pranav is facing a savings crunch. So, he should move his investment of blue-chip
equity fund to another equity fund which is earning 15% pa for two years. No
additional investment will be required as 15% pa returns will cover up the costs
d. Mr. Pranav is facing a savings crunch. So, he should continue his investments in the
blue-chip equity fund and also make additional investments of Rs. 5000 pm for 2
more years so that he can cover the shortfall
Answer: a : As the equity markets can be volatile, Mr. Pranav should shift the money from
the blue chip equity fund to a low duration fund. No additional investment will be required.
CASE STUDIES
We know that, Mr. Pranav has saved Rs. 10000 p.m. The savings duration is 5 years = 5 x 12
months = 60 months
As mentioned, the equity fund has provided a return of 12% pa. Monthly return = 12%/12
Let’s find out the amount accumulated using FV function in Excel :
Mr. Pranav has accumulated Rs. 8,16,696.
The cost of the course is Rs 8 lakhs
Therefore, the accumulation is already enough to fulfill the goal. Mr. Pranav can now shift
this money to the debt fund to protect his funds from equity markets volatility.
CASE STUDIES
Q27.2 Asset allocation is a process in which funds are allocated to various assets keeping in
mind the investor’s profile and goals. What asset allocation will you suggest for Mr. Pranav
given the above financial information and goals?
a. Mr. Pranav should invest 70% in Equities, 20% in Debt, 5% in Gold and balance 5% can be
kept in cash.
b. Mr. Pranav should invest 50% in Equities, 20% in Debt, 5% in Gold and balance 25% can
be kept in cash.
c. Mr. Pranav should invest 30% in Equities, 30% in Debt, 30% in Gold and balance 10% can
be kept in cash
d. Mr. Pranav should invest 10% in Equities, 50% in Debt, 20% in Gold and balance 10% can
be kept in cash
Answer : a : Mr. Pranav should invest 70% in Equities, 20% in Debt, 5% in Gold and balance
5% can be kept in cash
Mr. Pranav is young and does not have any immediate liquidity needs. He can invest for the
long term and for long term, equities usually give the best returns. Therefore, Mr. Pranav
should allocate the maximum possible for equity investments.
CASE STUDIES
Q27.3 – Mr. Pranav has received Rs. 10 lakhs from his father. Suggest which will be the
best use of this money considering his financial condition and house purchase needs?
a. As per the current EMI, the Debt : Income Ratio will be quiet high at 45% and it
will put a pressure on household’s income. Mr. Pranav should use this Rs. 10
lakhs to reduce the loan. This will free Rs. 7800 per month and this amount can
be used for household’s expenses or savings.
b. As per the current EMI, the Debt : Income Ratio will be quiet high at 45% and it
will put a pressure on household’s income. Mr. Pranav should use this Rs. 10
lakhs to reduce the loan. This will free Rs. 9200 per month and this amount can
be used for household’s expenses or savings.
c. As per the current EMI, the Debt to Expense Replacement Ratio will be of 2.07.
This indicates a low return for Mr. Pranav from house investment. He should
therefore use the Rs. 10 lakhs to reduce the home loan. This will improve the
return by Rs. 7800
d. As per the current EMI, the Debt to Expense Replacement Ratio will be of 2.07.
This indicates a low return for Mr. Pranav from house investment. He should
therefore use the Rs. 10 lakhs to reduce the home loan. This will improve the
return by Rs. 9200
Answer : b : As per the current EMI, the Debt : Income Ratio will be quiet high at 45% and it
will put a pressure on household’s income. Mr. Pranav should use this Rs. 10 lakhs to
reduce the loan. This will free Rs. 9200 per month and this amount can be used for
household’s expenses or savings.
CASE STUDIES
As per current EMI, Current Debt to Income Ratio = 45871/100000 = 45%
& Debt to Expense Replacement Ratio = 45871/40000 = 1.15
Let’s analyze what will happen if Mr. Pranav uses Rs. 10 Lakhs (his father’s gift) for the
house purchase.
For this we need to find the loan terms first. We have the EMI (Rs 45871), Loan Amount (Rs.
50 lakhs) and Tenure (15 years or 180 months) but not the Interest Rate. Let’s find the
interest rate first using the Rate function in Excel.
Interest per month = 0.61%

CASE STUDIES
Thus, the annual interest on loan is 0.61%*12 = 7.3%
Now let’s see what happens to the EMI amount if loan of a lesser amount is taken by using
the Rs. 10 Lakhs towards the house.
Using the PMT function in Excel : Monthly Rate = 7.3%/12, Tenure = 180 months, Loan
amount Rs 50 lakhs less Rs 10 lakhs = Rs 40 Lakhs
The new EMI turns out to be much lower at 36627 which is Rs 9244 lesser than the original
EMI. So Option ‘b’ is closest correct option we have.
CASE STUDIES
Mr. Pranav is a 35-year-old and works for a good private company. His monthly income is Rs. 1,00,000 and his
monthly expenses are Rs. 40,000.
As a good saving habit, Mr. Pranav is regularly investing Rs. 10,000 pm by SIP in a good Blue Chip Equity Fund for the
last 5 years.
To upgrade himself, he plans to do a one-year course after two years. The cost of the course will be Rs. 8 lakhs and
he plans to use the money saved in the blue chip equity fund to finance this course. He will also have to take a break
from his work to do this course.
Mr. Pranav is planning to buy a house. The down payment to buy the house is ready and for the balance amount, he
plans to take a 15-year loan of Rs. 50 Lakhs. The EMI for this works out to be Rs. 45871. As the EMI outgo is quite
large, Mr. Pranav is worried if he will be able to pay his regular monthly household expenses after paying the EMI.
Luckily, Mr. Pranav has received Rs. 10 lakhs from his father and he is unsure if he should use this money to buy the
house or make investments for future use.
As Mr. Pranav is the only earning member of his family, he feels he should get adequate insurance. He wants to
retire at 60 and will need to fund his expenses for 30 years in retirement. As per his calculations, the expenses in
retirement will be 70% of his current expenses.
(Return Trends: Long term equity returns can be 12% and a conservative estimate is 8%. Low duration debt funds
returns at 7%. Inflation is expected be at 6%)
Q 27.4 Calculate the insurance cover which Mr. Pranav would have to take to protect the
income for his wife? (Consider Inflation at 6% and investment returns at 8%)
a. Rs 3.34 crores
b. Rs 1.40 crores
c. Rs 2.37 crores
d. Rs 5.21 crores
Answer : c : Rs 2.4 crores

CASE STUDIES
Since only income protection is asked, we need to calculate PV for Rs. 1200000 p.a.
(100000*12) inflating at 6% with an investment rate of 8%
Real rate of Return is used for rate.
Real Rate = (Investment Rate-Inflation Rate)/(1+Inflation Rate)
= 8% – 6% / 1 + 6% = 2%/1.06%
Using the PV function in Excel :
Rate = 2%/1.06%
Years = 25 ( He is 35 years less retirement age of 60 years)
PMT = Rs 1200000
We get Rs. 2.37 crores.

CASE STUDIES
Q 27.5 Calculate the retirement corpus that Mr. Pranav should accumulate. Also calculate
the monthly savings required to achieve it? (Inflation is at 6%)
a. Retirement Corpus : Rs 2.5 crores, Monthly Savings Required : Rs 11200
b. Retirement Corpus : Rs 3.3 crores, Monthly Savings Required : Rs 17600
c. Retirement Corpus : Rs 1.1 crores, Monthly Savings Required : Rs 6500
d. Retirement Corpus : Rs 1.72 crores, Monthly Savings Required : Rs 8800
Answer: b : Retirement Corpus : Rs 3.3 crores, Monthly Savings Required : Rs 17600
First let’s find the retirement corpus required.
His current monthly expenses are Rs. 40,000. Inflation is 6% and Retirement is after 25
years.
Inflated expense at retirement = 40000 * (1.06^25) = 171674
But only 70% of this will be required, thus the monthly expense in first year of retirement =
70% * 172304 = 120172
So Rs. 120172 will be the monthly expenses.
Using PV function in Excel, we can find the Retirement Corpus :

CASE STUDIES
Therefore Rs 3.30 crores will be the retirement corpus which is required to be accumulated.
Now we can find the monthly investment required with this information using the PMT
function in Excel :
CASE STUDIES
Therefore, Rs 17600 will be the monthly investment required.

CASE STUDIES
Q 28. Mr. Mahendra is having a financially satisfactory career and has well planned his
investments. Mr. Mahendra wants to safeguard his children against any losses etc. he may
suffer financially. He wants that their education and other needs are well looked after.
He had made a will many years ago but now has forgotten about it. Some days ago his
father had died and had left no will behind. Due to this there were many complications and
this made Mr. Mahendra realise the importance of Will and Estate Planning.
One complication of his father dying intestate (ie. without a will) was that the investments
of his father in mutual funds etc. were released to the nominees and not to the legal heir.
Mr. Mahendra is the legal heir and is facing issues in getting the possession of the
inheritance.
Mr. Mahendra has a sister who wants some money to start a business. He has decided to
gift some amount to his sister but in a good tax efficient way.
Also Mr. Mahendra wants to make a donation in his will to some good charitable cause.
Answer the below questions based on the above data.

CASE STUDIES
Q 28.1 By which way can Mr. Mahendra now write a new will?
a. He has to approach the court to cancel his old will as he has no records of that old
will
b. He can write a new will and mention in the new will that all the previous wills are
being revoked
c. He can put a codicil and describe in that on how he wants to distribute his assets
d. He can sue a succession certificate to distribute his assets to his legal heirs
Answer – b - He can write a new will and mention in the new will that all the previous
wills are being revoked
Answer Explanation - When one makes a new will, all the old wills made by him become
redundant.
To be on the safer side, he should make a new will and mention in the will that this will
revokes all previous wills.
CASE STUDIES
Q 28.2 Identify the tax implication of Mr. Mahendra giving money to his sister as a gift?
a. As gifting between blood relatives is non-taxable, no tax will have to be paid by Mr.
Mahendra or his sister
b. Mr. Mahendra will have to pay regular tax as applicable to him on the amount given
as gift
c. Mr. Mahendra has to structure the gift as non-revocable to avoid the gift tax
d. There will be no tax on Mr. Mahendra but his sister will have to pay tax
Answer – a - As gifting between blood relatives is non-taxable, no tax will have to be paid
by Mr. Mahendra or his sister
Answer Explanation : Gift among family members due to love or care is one of the common
ways to transfer property among family members. Grandparents gifting immovable
property to grandchildren or parents gifting to their children are common. This mode of
property transfer does not have tax implications when it is within blood relatives.
CASE STUDIES
Q 28.3 Mr. Mahendra wants to leave a bequest to charity in his will. Is this valid under the
Indian laws?
a. Its valid only if is making a bequest out of his own earnings and not inherited
property
b. Its valid only if Mr. Mahendra registers the will within 6 months of its execution
c. Its valid only if the bequest Mr. Mahendra does not exceed 7.5% of the estate
d. Its valid only if the bequest does not exceed 10% of the estate
Answer – b - Its valid only if Mr. Mahendra registers the will within 6 months of its
execution
Answer Explanation : Any bequeath to a religious or charitable institute can take effecting
only when certain conditions are met . These conditions are:
1. The Will has been executed

2. The will has been deposited (registered) with the sub registrar within six month of it
execution
3. The testator has to survive for a period of 2 months starting from the month in which
the Will is executed
CASE STUDIES
Q 28.4 In which way can Mr. Mahendra make sure that the assets he has earmarked for his
children’s needs are received by his children and used effectively?
a. Mr. Mahendra should create a trust and transfer the assets to the trust. He should
make his children the beneficiaries
b. Mr. Mahendra should write will in favour of his children so that the assets are
transferred to them
c. Mr. Mahendra should add his children with guardian as joint holders in the assets
d. Any of the above
Answer – d – Any of the above
Answer Explanation : All the above ways are effective to protect the assets for his children’s
needs.
CASE STUDIES
Q 28.5 Mr. Mahendra is the legal heir to his fathers investments. In which way can he get
the possession, as his father has died with a will?
a. As there is no will nor any joint holder, the nominees will legally get the possession
b. As the investments were given to the nominees, it is a legal discharge and Mr.
Mahendra cannot fight against it
c. Mr. Mahendra should obtain a succession certificate and claim the legal ownership
d. Mr. Mahendra should obtain a probate to establish his rights
Answer – c - Mr. Mahendra should obtain a succession certificate and claim the legal
ownership
Answer Explanation : When a person dies intestate (i.e. without making a Will), the legal
heirs have to apply to the civil court for obtaining a succession certificate which shall be
issued in accordance with the laws of succession applicable to the deceased.
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CASE STUDIES
SHORT NOTES - SUMMARY OF NISM XB BOOK BY PASS4SURE
Module 7: Risk Management and Insurance Planning
I. Basics of Insurance
Need for Insurance
Insurance is a basic form of risk management which provides protection against the loss of the economic
benefits that can be enjoyed from assets. Insurance enables risk transfer from the beneficiary (Insured) to
the insurance company (Insurer), which undertakes to indemnify the insured for the financial loss suffered.
Requirements of an Insurable risk

• Large Number of exposure units
• Insurable Interest
• Accidental and unintentional
• Determinable and Measurable
• No prospect of gain or profit
• Chance of loss must be calculable
• Premium be economically feasible
Fundamental Principles of Insurance

• Utmost good faith (Uberrimae Fidei)
• Insurable interest
Concepts in Insurance
• Indemnity Insurance
• Benefit Insurance
• Subrogation
• Contribution
• Co-Pay
• Deductible
• Other Concepts: Cashless claim payment, Nominee & Legal Heirs
Role of Insurance in Personal Finance

Insurance removes the risks to the income of a household from situations such as loss of income, reduction
in income or an unplanned and unexpected charge on income which will upset the personal financial
situation of the household. Insurance can be used to protect the income so that the financial goals are not at risk.
CASE STUDIES
Prioritizing insurance needs and investment needs

Insurance comes before Investments.
Investing through Insurance

Insurance is also seen as a way to save and invest. Some insurance policies include a saving component
along with the risk protection. The premium collected will be higher, with one portion assigned for risk
protection and the other for the saving component.
The primary job of any insurance company is to provide risk coverage not investment products. There are
other entities that specialize in providing investment products. Even if an insurance cum investment
product is being considered, it can be evaluated as an insurance product that also has investment elements
in it.
Role of Insurance Adviser
Identify Insurance Need: Insurance is primarily a tool for protection from financial loss. Identifying
insurance needs therefore requires identifying all those situations that can result in a loss of income or an
unexpected charge on income. The type of insurance required depends upon the age and stage in the life
of the individual.
Estimate the insurance coverage: This includes estimate the amount of insurance required, the tenure for
which it is required, find the most suitable product, optimize the insurance coverage and monitor it.
Regulations pertaining to Insurance
Parameters Direct Insurance Insurance Agent Corporate Insurance

Broker Agent
Who he Represents The client Insurance Company Insurance Company(ies)
Can work with Multiple Insurance Single Insurance Corporate Agent

Companies company in each line (composite) can work with
of business – Life, a maximum of three life
general and health insurers, three general
insurance companies and
three health Insurance
companies
Can Charge Fees to the Client Get commissions from Get commissions from the
and get commission the Insurance Insurance Company(ies)
from the Insurance Company
Company
CASE STUDIES
The regulations given in the workbook cover the following areas, please go through them to understand
them better:
• Health Insurance
• Unit linked Insurance Products (ULIPs)
• Regulatory aspects for insurance intermediaries
• Regulations for Insurance Intermediaries under IRDAI Regulations
• Do’s and Don’ts under SEBI (IA) Regulations
Chapter 2: Life Insurance Products

Life Insurance Products
Elements of life Insurance Products

• Death Cover
• Survival benefits
An insurance contract has the following several elements, the key ones are as follows:
• Insured
• Term of the contract
• Sum assured
• Payment of sum assured
• Premium payable
• Bonus
• Guaranteed bonus
• Revisionary Bonus
Life Insurance Needs Analysis
Estimate the life insurance coverage

Income Replacement Method: The first step is to calculate the current value of the income
required to be provided for the dependents. The next step will calculate the corpus required that
will generate the income required. For this the applicable rate will be the rate adjusted for
inflation and expected rate of return from the investment of the corpus. To this, the values of any
other obligations or needs are added to come to the total funds required to meet needs. The
values of the existing investments are deducted to arrive at the corpus that needs to be created.
This will be the insurance amount.
Need based approach: This method takes into consideration the current income to be replaced,
the adjusted rate, period over which the income has to be generated, the corpus required,
additional loan outstanding and the already available insurance.
CASE STUDIES
Types of Life Insurance Products
Term Insurance: Term insurance is a pure risk cover product. It pays a benefit only if the policy holder dies
during the period for which one is insured. Term life insurance provides for life insurance coverage for a
specified term of years for a specified premium.
Term Insurance with return of premiums: Several variants of term policies are available in the market such
as a term policy with return of premium (which then becomes an Investment cum Insurance policy). In this
variant, normally the premium is much higher than a regular term policy and the difference is invested by
the Insurance company to provide for the return of premium at the end of the term.
Endowment: Endowment is an investment cum insurance plan with the same premium being paid every
year. If the insured person survives the tenure of the plan the insurance company returns the investment
portion of the premium with returns realized on them.
Whole Life insurance: Whole Life insurance policies are investment cum insurance policies that provide life
insurance cover for the entire life of the insured person or upto an upper age limit specified by the insurer,
whichever is earlier, provided the premiums are paid as contracted.
Unit-Linked Insurance: Unit-linked insurance policies allow the insured to decide on the kind of portfolio
(mix of asset classes, such as debt and equity) that the insurer should maintain for the savings portion.
Mortgage Insurance: This is a special kind of insurance policy, where the sum assured keeps going down
with time. This is suitable when the insurance policy is taken to cover a housing loan, which will keep
reducing with loan repayments.
Facilities available under life insurance policies
• Loan against insurance policies

• Nomination and change of nomination
• Policy assignment
Benefits/ Limitation and Provisions when insurance taken from multiple companies
Life Insurance premiums are telescopic which means that the premiums do not go up in the same
proportion as the sum assured. A larger sum assured can be insured for a lower rate of premium per
thousand of sum assured and hence it makes sense to buy policies from the same company.
Insurance proposal form should list all existing insurance policies and any pending proposals for life
insurance with any other Insurance company. This enables the Insurance Company to take an informed
view of the possible amount of risk cover being sought by the Insured vis-à-vis the Insured’s financial for
standing and need Insurance
CASE STUDIES
Criteria to evaluate various life insurance product
• Online versus Offline Term Plans

• Traditional life insurance policy or unit-linked plans
• Investment linked insurance plans or pure term insurance
• Online insurance plans and offline insurance plans
Chapter 3: Non-life Insurance Products
Non-Life Insurance
Non-Life insurance provides risk cover from loss or destruction of assets created and to provide for
unexpected, large expenses that can be a drain on the available income of the individual.
Elements of Non-Life Insurance Products
• Sum Insured
• Term of the insurance
• Premium Payable
• Deductible
• No Claim Bonus
Types of Non-Life Insurance Products
Property Insurance: Property insurance provides protection against most risks to property such as fire,
theft etc. Property insurance generally means insuring the structure and the contents of the building
against natural and man-made disasters.
Health Insurance policy: Health insurance policies reimburse the medical expenses incurred for the policy
holder and identified family members who are covered under the policy. This policy provides for
reimbursement of hospitalization or domiciliary treatment expenses for illness or accidental injury up to
the sum insured under the policy.
Motor Insurance: Under this insurance, the company indemnifies the insured in the event of accident
caused by, or arising out of the use of the motor vehicle, anywhere in India against all sums including
claimants cost and expenses which the insured shall become legally liable.
Personal Accident Insurance: This type of policy provides that if the insured shall sustain any bodily injury
resulting solely and directly from accident caused by external violent and visible means, then the company
shall pay to the insured or his legal personal representative, as the case may be, the sum defined in the
policy.
Critical illness insurance: This policy provides for a lump sum benefit to be paid if the insured contracts
certain specified diseases.
CASE STUDIES
Overseas Travel Insurance: Travel insurance provides medical, financial and other assistance in case of an
emergency during international travel.
Liability Insurance: The purpose of liability insurance is to provide indemnity in respect of damages payable
under law for personal injury to third parties or damage to their property. This legal liability may arise
under common law on the basis of negligence or under statutory law on no fault basis i.e. when there is no
negligence.
Fidelity insurance: A Fidelity Insurance policy covers losses sustained by the employer as a result of an act
of forgery, fraud or dishonesty from an employee.
Directors and Officers insurance: The Directors & Officers Liability Insurance policy insures members of the
board of directors, the management and employee performing a supervisory or managerial role in a
company against personal liability and defense costs incurred from claims alleging them to have
committed a wrongful act in the line of their duties for the company.
Keyman Insurance: Keyman Insurance is a life insurance policy that a company purchases to cover itself in
case of the loss of life of a key executive. The company is the beneficiary of the plan and pays the insurance
policy premiums.
Benefits/ Limitations and provisions when insurance is taken from multiple companies
Multiple policies for indemnity policies such as Health Insurance Policies make very little sense as the total
claim amount cannot exceed the sum insured on all policies put together. It is the choice of the Insured
person to choose from which company o get her claim fromand normally she should choose the employer
policy first. The chosen Insurer has no option to apply the contribution clause where the claim amount
is less than the sum Insured in the chosen policy. However, if the amount of claim exceeds the sum
insured under the chosen policy, the Insured person can choose another policy(ies) under which the claim
can be made. In such cases the claim is settled by the chosen Insurers by applying the Contribution
provisions.
Top up Policy V/s Super Top up Policy: The difference between the two types of plan is in how the
threshold limit is applied. In a Top up plan the threshold limit is applied for every claim whereas in a super
top up plan the threshold limit is applied on the total of all hospitalization claims for the year.
CASE STUDIES
Module 8: Retirement Planning
Chapter 4: Retirement planning basics

Need of Retirement Planning
Retirement Planning pose a critical role for an individual due to increase in life expectancy. Life
expectancy is referred to the number of years an individual is expected to live and is dependent on various
factors such as health condition, scientific advancements etc.
Financial goals and Retirement
Generally when people plan their financial goals they often mix retirement goal with other financial goals.
Children education, retirement, buying a house or a car, etc. all such goals are planned simultaneously.
Though all of these goals are important for any individual, there’s a difference in meeting retirement goal
than any other goals.
Retirement Planning
The retirement goal has certain features that are unique to it. It is the goal with the longest accumulation
and distribution periods and requires the largest corpus. Though the income required to meet expenses in
retirement can be defined with certainty only close to the time of transition to retirement, the
accumulation of the corpus has to be done from the beginning of an individual’s working years.
The steps involved in retirement planning process are as follows:
• Determine expenses in retirement

• Determine income requirements in retirement
• Time horizon: Years to retirement, Life expectancy
• Determining the retirement corpus
Impact of Inflation: Inflation is a general rise in prices of goods and services over a period of time. Over
time, as the cost of goods and services increase, the value of one unit of money will go down and the
same amount of money will not be able to purchase as much as it could have earlier i.e. last month or last
year. Inflation eats away the purchasing power of money over time.
The Expected Rate of Return: While estimating the corpus required to generate the retirement, it has to
be kept in mind that this corpus will be invested to earn a return both at the time of accumulation and at
the time of distribution, and this return will contribute towards the corpus that will be used to provide
the income in retirement. The rate of inflation and the expected rate of return on investments act in
opposite directions on the amount of retirement corpus required.
CASE STUDIES
Estimating Retirement Corpus
Replacement Ratio Method: Here it is assumed that the standard of living remains same as just before one
enters the retirement phase. Thus assumption of standard of living becomes an important factor in
estimating the retirement income.
Expense Protection Method: This method defines retirement Income based on expenses in retirement.
Many people using this method keep a detailed monthly budget. Tracking expenses enables them to have
a reasonable understanding of what it will cost to retire.
Employee benefits and superannuation benefits
Superannuation is a pension program created by a company for the benefit of its employees. It is also
referred to as a company pension plan. Funds deposited in a superannuation account will grow, typically
without any tax implications, until retirement or withdrawal.
Chapter 5: Retirement Products
Accumulation related products
Employees Provident Fund: EPF (Employees’ Provident Fund), also referred to as PF (Provident Fund), is a
mandatory savings cum retirement scheme for employees of an eligible organization. This fund is intended
to be a retirement corpus.
As per the EPF norm, the employees must contribute 12% of their basic pay plus dearness allowance every
month. A matching amount is contributed by the employer as well. The amount deposited in EPF accounts
earns interest on an annual basis.
Voluntary Provident Fund: Persons covered under the Employee Provident Fund (EPF) can choose to
contribute over and above the mandatory 12 percent of the basic and dearness allowance, to their EPF
account under the Voluntary Provident Fund. There will be no employer contribution to match any
contribution made by the employee under the VPF.
The contributions will be invested in the EPF account of the employee. Like the primary account, the
investments will be predominantly in debt investments, particularly government securities.
Public Provident Fund: The PPF is a long term saving product that can be used to accumulate funds for
retirement and other goals. It can be opened with prescribed banks and post offices. It is a voluntary
savings product.
Gratuity: Gratuity is given by the employer to his/her employee for the services rendered by him/her
during the period of employment. It is usually paid at the time of retirement but can be paid earlier,
provided certain conditions are met. A person is eligible to receive gratuity only if he has completed
minimum 5 years of continuous service with an organisation. However, it can be paid before the
completion of five years at the death of an employee or if he has become disabled due to an accident or
disease.
CASE STUDIES
Superannuation Benefit: The existing mandatory retirement benefits are very often found to be
insufficient to meet the income replacement required at retirement. Employers provide superannuation
plans to augment the benefits available by contributing to a superannuation fund. The company has to
appoint trustees to administer the scheme and get the scheme approved by the Commissioner of Income
Tax.
National Pension System: National Pension System is a social security initiative by the Central
Government. This pension scheme is open to employees from the public and private sectors and even the
unorganised sectors except those from the armed forces. NPS is also open to all Indian citizens on a
voluntary basis. The scheme encourages people to invest in a pension account at regular intervals during
the course of their employment. After retirement, the subscribers can take out a certain percentage of the
corpus.
Atal Pension Yojna: Atal Pension Yojana is a pension scheme introduced by the Government of India in
2015-16. It was implemented with an objective to provide pension benefits to individuals in the
unorganized sector. This scheme is regulated and controlled by the Pension Fund Regulatory and
Development Authority (PFRDA). It is an extension of the recognized National Pension System (NPS) and
replaces the previously institutionalized Swavalamban Pension Yojana. All accounts that were opened in
the first year of the scheme, i.e. in 2015, were eligible for co-contributions from the Indian government for
5 years.
These accumulation related products have been covered extensively and in detail in the NISM workbook. Students are
requested to go through it if they don’t know any of it.
Retirement Plans from Mutual Funds and Insurance companies
Insurance companies have pension plans and annuity products which cater to financial requirements for
retirement years. The pension plans are deferred product where one needs to pay premium till a specified
age which is deductible under section 80C and based on the corpus accumulated one can receive pension.
Most insurance companies and mutual funds companies’ offer products specific to retirement.
Portfolio created by an Investment Adviser
While creating a retirement portfolio for their clients an investment adviser has to take into consideration
the key factors such as liquidity, security, estimated returns, resistance to inflation, taxes and social
security. Clients approaching retirement may have different investment philosophy based on experience
they would have gone through. The final creation of the portfolio will depend on the factors discussed
above. The long term portfolio can be invested in Equity, Debt, Gold or any other asset classes appropriate
for the investor.
Distribution Related Products
In the accumulation stage of retirement the corpus required is created out of the savings and investments
made over the working years. In the retirement years this corpus is used to generate income to meet
expenses. The products that are suitable will be those which generate periodic income, where the returns
are adequate for the investor’s needs and have lower risk to income and principal invested.
CASE STUDIES
Annuity
An annuity, in general term, is a fixed stream of payment for life term or for a pre-defined period. An
annuity contract is a life insurance policy in which the annuity provider (insurer) agrees to pay the
purchaser of annuity (annuitant) a series of regular payments for a fixed period or over someone’s lifetime.
Deferred Annuity: It is an annuity under which periodic benefits are scheduled to begin after a specified
period i.e. more than 12 months after the date on which annuity is purchased. The date on which annuity
is scheduled to begin is often specified in the insurance contract.
Immediate Annuity: It’s an annuity under which annuity benefits are scheduled to begin on immediate
period after the date on which annuity is purchased. In general the annuity payments in these types of
annuities begin within 12 months after its purchase.
Systematic Withdrawal Plans (SWP) from mutual funds
Systematic withdrawal plan is specifically beneficially for generating regular income for meeting retirement
needs. Retirees need a regular income source to meet their monthly expenses. With the help of SWP, the
timing and frequency of withdrawals can be set-up based on their monthly requirements. This ensures the
funds are available at the right time and thus goals are not delayed due to any cash crunch.
Laddering of Bonds or Fixed Deposits
One of the effective strategies to create a good retirement income is laddering strategy. Here, instead of
buying securities that is scheduled to become due during the same year one purchases bonds or FDs that
are staggering at different dates i.e. maturing at different dates.
Pradhan Mantri Vaya Vandana Yojana (PMVVY)
The Government of India has launched the Pradhan Mantri Vaya Vandana Yojana (PMVYY) in 2017 to
provide pension benefits for citizens from private sector. The scheme is operated by LIC of India. This is a
10-year scheme. The minimum pension is Rs.1000 per month and the maximum is Rs. 10,000 per month or
Rs.1,20,000 per year. For the minimum monthly pension of Rs.1000/month the purchase price or
investment required is Rs. 1,50,000 and for the maximum monthly pension of Rs. 10,000 the investment
required is Rs.15,00,000.
Reverse Mortgage
Rental income from real estate held provide a source of income that is adjusted for inflation. In periods of
inflation, which pushes up costs, rental income also rises, thereby giving income that is adequate to meet
expenses. The income also has the advantages of being periodic and known in advance, so that the
investor can plan and use the income to meet their expenses.
CASE STUDIES
Chapter 6: Miscellaneous aspects of Retirement Planning
Advisor’s role in Retirement Planning
Investment advisers can play an important role in planning for retirement of their clients. They understand
their clients financial goals and know when the client will need savings and on what they will be spending.
While creating a detailed financial plan, the adviser will have a clear understanding of the financial assets
that are accumulated, as well as other resources
Calculations for Retirement Planning
Retirement corpus required: A person generally gets concerned when he/she sees the high amount of
retirement corpus required for their golden years. Sometimes what they ask is beyond their means. But
one should take into consideration that retirement living is always based on ones existing lifestyle which
he/she builds.
For calculating Retirement Corpus Present Value Formula in excel is used
Formula: =PV(rate, nper, pmt, [fv], [type])
For calculating monthly savings required to reach the corpus, PMT function in excel has been used.
Formula: =PMT(rate, nper, pv, [fv], [type])
Criteria to evaluate various retirement benefit products
People often make mistake in selecting appropriate products for their retirement which they have to shun
later on. This impacts the retirement corpus they want to create through that product. It is important that
any retirement benefit products should be evaluated on various parameters, before investing, to check its
suitability to meet the end objectives.
Pre-retirement
• Cost
• Return
• Risk
• Tax efficiency
At Retirement
• Inflation
• Capital Protection
CASE STUDIES
MODULE 9: TAXATION
Chapter 7: Concepts in Taxation
Key concepts
Any particular financial year for which one wants to calculate the tax liability is termed as previous year for
the purposes of Income tax Act.
The financial year following relevant previous year is called the Assessment Year (‘AY’).
Person: Section 2(31) of the Act defines person to include the following:
• Individual
• Hindu undivided family (HUF)
• Company
• Partnership firm
• Association of Person (AOP) or Body of Individual (BOI), whether incorporated or not
• Local authority
• Artificial juridical person, not falling within any of the above categories.
Section 2(7) of the Income-tax Act defines the term assessee as the person who is liable for payment of
taxes or any other sum of money under the Act.
A deemed assessee is a person who is assessable in respect of income or loss of any other person, such as
representative assessee, legal representative, an agent of a non- resident.
Section 2(24) of the Income Tax Act provides an inclusive definition of Income. There are many clauses in
the above mentioned section 2(24). The more relevant are:
- Dividend
- Capital gains
- Gifts received from a non-relative. Any movable or immovable property received at
below the market price as per theprovisions of section 56
- Certain perquisites arising out of employment
CASE STUDIES
Residential status
An assessee can be categorized into following residential status during the previous year:
a) Resident in India
b) Non-Resident in India
A resident individual and HUF are further sub-classified into the following status:
a) Resident and Ordinarily Resident
b) Resident but Not-ordinarily Resident
Residential status of a company
Indian Company: An Indian Company means a company formed and registered under the Companies Act.
Indian companies are always treated as resident in India. Even if an Indian company is a subsidiary of a
foreign company or it is controlled from a place located outside India, the Indian company is considered as
resident in India. An Indian company can never be a non- resident person.
Foreign Company: A foreign company is treated as resident in India if during the relevant previous year its
Place of Effective Management (‘POEM’) is in India.9
Five Heads of Income
• Income from Salary

• Income from House Property
• Profits and Gains from Business and Profession
• Income from Capital gains
• Income from Other Sources
Set off and Carry forward of Losses
Loss under the head Capital Gains: Capital losses can be of two types – Short-term Capital Loss and Long-
term Capital Loss. Though both the losses are computed under the same head of income, yet distinct
provisions have been prescribed for set-off of these losses. Both the losses are computed and disclosed
separately in the Income-tax Returns.
Loss under the head profits and gains of business or profession: Income-tax Act provides distinct
provisions for set-off and carry forward of speculative loss and non-speculative loss. Loss from speculative
transactions can be set-off only against profit from speculative transactions. Whereas, the normal business
loss can be set-off from any income other than salary and income from gambling activities .
Losses under the head ‘income from house property’: Loss from one house property can be set off against
income from another house property during the same year.
CASE STUDIES
Loss under the head other sources: The loss under the head other sources can be set-off against any
income under any head except income from gambling activities. However, if loss under the head other
sources cannot be set-off in the current year due to inadequacy of income under other heads then the
same shall not be allowed to be carried forward to subsequent years.
Deductions under Chapter VI-A
In computing the total income, certain deductions are allowed from the gross total income. These
deductions are allowed to encourage saving habits in individuals and pursue institutions to take part in
social activities. These deductions are prescribed in Chapter-VIA of the Income-tax Act.
Round trip financing includes any arrangement in which, through a series of transactions:
funds are transferred among the parties to the arrangement; and such transactions do not have any
substantial commercial purpose other than obtaining the tax benefit.
Chapter 8: Capital Gains

Section 45 of the Income Tax Act states that any gains arising from transfer of a capital asset shall be
chargeable under the head ‘capital gains’ in the previous year when transfer takes place. The important
constituents under this head are – capital asset, transfer, sale consideration, cost of acquisition and the
date of purchase and transfer.
Capital Asset
As per Section 2(14) of the Income-tax Act, capital asset means:

a. Property of any kind, held by an assessee, whether or not connected with his business or
profession;
b. Any securities held by a Foreign Institutional Investor (FII) which has invested in such securities
in accordance with the SEBI Regulations.18
c. Any unit linked insurance policy to which exemption under clause (10D) of section 10 does not
apply on account of the applicability of the fourth and fifth proviso thereof.
The following assets have been excluded from the definition of capital assets.
• Stock-in-trade
• Personal Effects
• Agricultural Land in India
• Bonds
Types of Capital Asset
In general, a capital asset is deemed as ‘short-term’ if it is held by an assessee for a period of not
more than 36 months, immediately preceding the date of its transfer. Similarly, a capital asset is
considered as ‘long-term’ if it is held by an assessee for a period of more than 36 months, immediately
preceding the date of its transfer.
This general rule has a few exceptions where in an asset, held for not more than 12 months or 24 months,
are treated as short-term capital asset. These exceptions are explained in workbook in detail.
CASE STUDIES
Overview of holding periods of capital assets
Holding should be more than the following period to be

Nature of Security treated as long term capital asset
Listed Securities Unlisted Securities
Equity Shares 12 months 24 months
Units of Equity Oriented 12 months 12 months
Funds
Units of UTI 12 months 12 months
Units of Business Trust 36 months 36 months
Other Units 36 months 36 months
Preference Shares 12 months 24 months
Debentures 12 months 36 months
Government Securities 12 months 36 months
Zero coupon bonds 12 months 12 months
Other Bonds 12 months 36 months
Immovable property (Land 24 months
and building both)
Any other asset 36 months
Calculating Period of Holding: The period of holding of a capital asset is calculated from the date of its
purchase or acquisition till the date of its transfer. However, in certain cases, the period of holding of a
capital asset is determined in accordance with special provisions.
Transfer
The expression ‘transfer’ of property connotes the passing of a property or rights in a property from one
person to another. The meaning of transfer has been defined under Section 2(47) of the Income-tax Act. It
includes various means by which the property may be passed from one person to another which would get
covered under the definition of ‘transfer’.
Sale of asset: The word ‘sale’ construes a transaction voluntarily entered into between two persons,
commonly known as the buyer and seller, by which the buyer acquires property of the seller for an agreed
consideration, commonly known as ‘price’.
Exchange of asset: Under Section 118 of the Transfer of Property Act, 1882, ‘exchange’ is defined to mean
when two persons mutually transfer the ownership of one thing for the ownership of another thing,
either thing or both things being money only.
Relinquishment of asset: The word ‘relinquishment’ has not been defined in the Act. A relinquishment is
said to have taken place when the owner withdraws himself from the property and abandons his/her
rights thereto.
CASE STUDIES
Extinguishment of rights: The word ‘extinguishment’ has also not been defined in the Act. It refers to the
case where rights of a person to the capital asset have extinguished and not the extinguishment of the
capital asset as such.
Conversion of asset into stock-in-trade: When a person converts or treats his capital asset as stock-in-
trade of a business, such conversion is considered as a transfer of capital asset during the previous year in
which such conversation took place.
Maturity or redemption of zero-coupon bonds: Redemption or maturity of zero-coupon bond, issued by

any infrastructure capital company or infrastructure capital fund will be treated as transfer.
Indirect transfer: Transfer includes transfer of shares or interest in a foreign company or entity which
derives its value substantially from the assets, located in India. Such transaction shall fall under the
definition of transfer even if it takes place between non- resident persons or entity.
Computation of Capital Gains from Transfers
Any profit or gain arising from transfer of a capital asset is taxable on accrual basis during the previous
year in which such transfer takes place. The mechanism for computation of capital gain from transfer of a
short-term capital asset is different from the one applicable in case of long-term capital asset, due to
availability of benefit of indexation in the later in most cases.
Indexed cost of acquisition
In order to nullify the effect of inflation while calculating capital gains, the Income tax Act provides a
facility to the tax payer in the form of Indexation. A Cost Inflation Index (CII) is notified by the Central
Board of Direct Taxes every year.
The Indexed Cost of acquisition shall be calculated in a two-step process. The first step is to calculate the
cost of acquisition of capital asset. In the second step, such cost of acquisition is multiplied by the CII of
the year in which capital asset is transferred and divided by CII of the year in which asset is first held by
the assessee or CII of 2001-02, whichever is later.
Chapter 9: Income from other sources
Any income, which is not exempt from tax and has to be included in the total income, shall be
chargeable to tax under the head ‘Income from other sources’, if it is not chargeable to income-tax under
other four heads of income, i.e. Salaries, Income from House Property, Profits and Gains from business or
profession and Capital gains. However, there are certain incomes which are always taxable under the head
‘income from other sources’.
CASE STUDIES
Income taxable under the head ‘income from other sources’ shall be computed in the following manner:
Nature of Income Amount

1. Dividend Income xxx
2. Winning from lotteries, etc. xxx
3. Employees’ contribution towards staff welfare scheme** xxx
4. Interest on securities** xxx
5. Rental income of machinery, plant or furniture** xxx
6. Composite rental income from letting out of plant, machinery, xxx
furniture and building**
7. Sum received under Keyman insurance policy++ xxx
8. Deemed Income of a closely held company xxx
9. Interest on compensation or enhanced compensation xxx
10. Advance money received in the course of negotiations for transfer of xxx
a capital asset which has been forfeited
11. Deemed Income in certain cases xxx
12. Compensation on termination of employment or modification of xxx
terms of employment
13. Any other income not taxable under any other head xxx
Less: Attributable expenses (xxx)

Income from other sources xxx
Gift of Securities
Where any person receives a movable property (i.e. other than immovable property) from any person
without consideration or for inadequate consideration than the fair market value of such property is
chargeable to tax in the hands of the recipient as income from other sources. However, no tax shall be
charged if the aggregate amount of difference between the fair market value of properties received
during the year and the amount of consideration paid in respect thereof does not exceed Rs. 50,000. The
movable property, for this provision, shall include shares and securities.
Chapter 10: Taxation of Debt Products
Debt instruments are used by many entities to raise funds from the market. Debt instruments are similar to
giving a loan to the issuing entity by the investor. The person holding the debt instrument of an entity
would not hold any voting power or dividend claim. However, he is entitled to receive interest and
redemption value at the time of maturity from the entity.
CASE STUDIES
Sources of Income from Debt Products
• Interest Income
• Capital Gains
Types of Debt Products
Coupon Bonds
Bonds are generally issued and redeemed at face value and carry interest which is paid to the investor over
the tenure of the Bond. Thus, the principal features of a bond are maturity (i.e., tenure), coupon (i.e.,
interest), and principal (i.e., face value). In many cases, the name of the bond itself conveys the key features
of a bond.
Zero Coupon Bonds and Deep Discount Bonds
Zero-Coupon Bonds (ZCBs) are also known as Zero Interest Debentures. As the name suggests, ZCBs do not
carry any coupon. Thus, no interest is paid on such bonds. A zero- coupon bond is issued at a discount to the
investors and redeemed at face value at the time of maturity. Therefore, the difference between the face
value of the bond and the issue price is in nature of the capital gains.
A Deep Discount Bond (DDB) is a form of ZCB. It is issued at a deep/ steep discount over its face value. DDBs
are being issued by the public financial institutions in India like SIDBI, IDBI, ICICI and so on.
Convertible Bonds
This type of bond allows the bond-holder to convert their bonds into equity shares of the issuing
corporation, on pre-specified terms. At the time of issue of the bond, the indenture specifies the conversion
ratio and the conversion price. The conversion ratio refers to the number of equity shares, which will be
issued in exchange for the bond that is being converted. The conversion price is the resulting price when the
conversion ratio is applied to the value of the bond, at the time of conversion. Bonds can be fully converted,
such that they are fully redeemed on the date of conversion.
Commercial Papers
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.
CP, as a privately placed instrument, was introduced in India in 1990 to enable highly rated corporate
borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to
investors.
CASE STUDIES
Government Securities
A Government Security (G-Sec) is a tradable instrument issued by the Central Government or the State
Governments. It acknowledges the Government’s debt obligation. Securities which are issued for short term
(i.e., with a maturity of less than 1 year) are usually called as treasury bills or cash management bills.
Whereas, long term securities i.e., Government securities with a maturity of 1 year or more, are called
Government bonds or dated securities. In India, the Central Government issues both, treasury bills and
bonds or dated securities while the State Governments issue only bonds or dated securities, which are called
as State Development Loans (SDLs).
Types of Government Securities
• Cash Management Bills

• Treasury Bills
• Dated Government Securities
• State Development Loans
Mutual Funds
Mutual Funds are the funds which collect money from the investor and invest the same in the capital
market. Mutual Funds invest in a variety of instruments such as equity, debt, bonds, etc.
Types of Mutual Funds
Equity Oriented Funds: These funds invest majorly in shares of companies. They allow investors to
participate in the equity market. Though categorized as high risk, these schemes also have a high return
potential in the long run.
Debt Oriented Funds: These funds invest in debt securities, or interest-bearing instruments like
government securities, bonds, debentures, etc. These funds provide low return but considered as safe for
investment as compared to equity funds.
Money Market Funds or Liquid Funds: These funds invest in liquid instruments such as Treasury Bills and
Commercial Papers, etc. having high liquidity. These funds are suitable for conservative investors who want
to invest their surplus funds over a short-term for a reasonable return.
Balanced or Hybrid Funds: These funds invest in all kinds of assets, that is, equity, debt and money market
instruments. Some funds invest their major portion into the equity and the lesser in the debts whereas
some opt for the other way around based on their needs for return and risk appetite.
CASE STUDIES
Masala Bonds
Rupee Denominated Bonds (RDBs) or Masala Bonds are an innovative type of bonds, which are linked to
Rupee but issued to overseas investors. Masala Bonds were first issued by the International Finance
Corporation (IFC) in London to increase the foreign investment in India. IFC is a member of the World Bank
which invests in sustainable private enterprises in developing countries. IFC named the Bond as ‘Masala’ to
reflect the spiciness and culture of India. As Masala bond is issued and denominated in Indian currency, it
protects Indian Company from currency risk and instead transfers the risk of currency fluctuation to
investors buying these bonds.
Foreign Currency Convertible Bonds
A Foreign Currency Convertible Bond (FCCB) is a quasi-debt instrument which is issued by any corporate
entity, international agency or sovereign state to the investors all over the world. They are denominated in
any freely convertible foreign currency.
FCCBs represent equity-linked debt security which can be converted into shares or into depository
receipts. The investors of FCCBs have an option to convert it into equity normally in accordance with pre-
determined formula and sometimes also at a pre- determined exchange rate. The investor also has the
option to retain the bond. The FCCBs, due to their convertibility nature, offers a privilege to the issuer of
lower interest cost than that of the similar non-convertible debt instrument.
Financial Securities
Pass-Through Certificates (also known as ‘Securitised Debt Instruments’) are debt securities which are
created from a select pool of assets, mainly, debt or receivables of an enterprise.
Various terms which are important to understand the process of issuance of Securitised Debt Instruments
are defined in the said regulations as follows:
• Orignator
• Asset Pool
• Securisation
• Special Purpose Distinct Entity (SPV)
• Investor
Security Receipt is defined under clause of section 2 of SARFAESI Act. It means a receipt or other security
issued by a trust set up by an Asset Reconstruction Company to any Qualified Buyer pursuant to a scheme,
evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the
financial asset involved in securitization.
ARCs are created to manage and recover Non-performing Assets (NPAs) of Banks and Financial Institutions.
Essentially, ARC functions as a specialized financial entity which isolates NPAs from the balance sheets of
Bank/financial institutions and facilitates the later to concentrate on normal banking activities.
CASE STUDIES
Various terms which are important to understand in the context of security receipt are defined in the
SARFAESI Act as follows:
• Asset Reconstruction
• Orignator
• Asset Reconstruction Company
• Securitisation
• Qualified Buyer
Taxation of Non-residents
Non-residents are generally exposed to double taxation due to tax liability in two or more countries. In
order to avoid this, the countries all over the world, including India, have entered into DTAAs with other
countries. Accordingly, where a non-resident is eligible for treaty benefits, he will be taxed at a rate
mentioned in the relevant DTAA or the Income Tax Act, whichever is more beneficial to him.
Earlier, non-residents who later on settle down in India used to face a typical issue of double taxation in
case of their overseas retirement funds. At present the withdrawal from such funds may be taxed on
receipt basis in such foreign countries, while on accrual basis in India.
Chapter 11: Taxation of Equity Products
The equity market, often called a stock market or share market, is a place where shares of companies or
entities are traded. The market allows sellers and buyers to deal with equity shares and other securities on
the same platform. Equity share represents the ownership of a person in the company.
Sources of Income
Dividend Income: Dividend usually refers to the distribution of profits by a company to its shareholders.
The dividend is paid by a company out of its profits.
Capital Gains: Any profit or gain arising from the sale of a 'capital asset' is chargeable to tax as a capital
gain.
Charges & Taxes
Brokerage is charged by the share broker who maintains the share trading account of the investor.
The securities transaction tax is a tax levied on sale/purchase of securities (other than debt securities or
debt mutual fund) through stock exchanges.
Stamp duty is levied for transferring shares and securities from one person to another.
Exchange charges is the charge that is levied by the stock exchanges of India.
CASE STUDIES
SEBI Turnover Charges of Rs. 10 per crore is levied by SEBI for regulating the markets. This charge is levied
on both sides of transaction, i.e., while buying and selling.
Depositories levy a charge plus GST (irrespective of quantity) for this facility on the day the securities are
debited from DEMAT Account. These are called DP Charges
Goods and Services Tax (GST) is levied on the amount of brokerage, exchange transaction charges and
clearing charges.
ADR/GDR
An American depositary receipt (ADR) is a US dollar-denominated stock that trades in the United States
and represents equity ownership in a non-US company. Shares of many non-US companies trade on US
stock exchanges through ADRs, which denominated and as well as pay dividends in US dollars and may be
traded like regular shares of stock.
GDRs have access usually to Euro market and US market. The US portion of GDRs to be listed on US
exchanges to comply with SEC requirements and the European portion have to be complied with EU
directive. Listing of GDR may take place in international stock exchanges such as London Stock Exchange,
New York Stock Exchange, American Stock Exchange, NASDAQ, Luxemburg Stock Exchange etc.
Terminologies for Taxation of Mutual Funds
Equity Oriented Fund means a fund which invests the investible funds in the equity shares of domestic
companies to the extent of more than 65% of the total proceeds of such fund.
Fund of Funds (FoF), as the name suggests, is a mutual fund scheme that invests in other schemes of
mutual funds.
Equity Linked Saving Scheme (ELSS) is a category of mutual funds that encourage long- term equity
investments. Through the ELSS, the Government sought to improve equity participation by allowing tax-
deductible investment in equity-based mutual funds.
SIP (Systematic Investment Plan) is a mutual fund tool and is one of the easiest ways through which any
common man can enter the stock market.
Systematic Withdrawal Plan (SWP) is used to redeem the investment from a mutual fund scheme in a
phased manner.
Systematic Transfer Plan (STP) allows the investor to transfer amount from one scheme to another
scheme of the same mutual fund house.
CASE STUDIES
Terminologies for Taxation of Derivatives
A ‘future’ is a contract for buying or selling underlying security or index or commodity, on a future date, at
a price specified today, and entered into through a formal mechanism on an exchange.
An ‘option’ is a contract that gives the right, but not an obligation, to buy or sell the underlying security or
index on or before a specified date, at a stated price.
Call option which gives the right but not an obligation to buy an asset by a certain date for a certain price;
Put option gives the right but not an obligation to sell an asset by a certain date for a certain price.
Forward Contracts is a contract between two parties, wherein settlement takes place on a specified date
in future at an agreed price.
Swaps are private agreements between parties to exchange cash flows in the future according to a pre-
arranged formula.
Currency derivatives are exchange-based futures and options contracts that allow hedging against
currency movements.
Interest Rate Derivative is a financial derivative contract whose value is derived from one or more
benchmark interest rates, price, interest rate instruments, or interest rate indexes.
Commodity derivative is a contract to buy or sell a commodity at a preset price for delivery on a future
date.
Nature of Derivative Income
The gains or losses arising from trading in F&O are always taxable under the head 'Profits and Gains from
Business or Profession'. The Income-tax Act classifies the business income into 'speculative' and 'non-
speculative'. Though Income arising from speculative transactions are taxable under the head PGBP, yet
they are treated differently and rigorously from non-speculative business income. Any loss arising from
speculative transaction could be set-off only from speculative income.
Dividend Stripping
Dividend stripping is an attempt to reduce the tax liability by an investor who invests in securities and units,
shortly before the record date and getting a dividend/income, and exiting after the record date at a price
lower than the price at which such securities/units were purchased and incurring a short-term capital loss.
The strategy behind dividend stripping is a two- way strategy wherein investor gets tax free
dividend/income on one hand and on the other hand he incurs short-term capital loss on sale which is
allowed to be set off and carry forward against any other capital gain. Record date is the date fixed by a
company or mutual funds for entitlement of holders of securities or units to receive dividend or other
income.
CASE STUDIES
Bonus Stripping
Similar to dividend stripping, ‘Bonus Stripping’ is a practice where a person buys units of mutual fund just
before the record date to get bonus units on basis of such holding and sells the original units after the
record date at a price lower than the price at which units were purchased and incurring a short-term capital
loss.
Chapter 12: Taxation of other Products
Taxation of Employees Stock Option Plan (ESOP)
Employee Stock Option Plans (ESOPs) are given to retain brilliant employees and to acknowledge their
proven contribution to the company. Whenever ESOPs are issued, employees get the right to purchase a
certain number of securities of the employer- company at a discounted price (i.e., less than the market
price of such shares). It allows employees to have a stake in the company, which ensures higher loyalty and
motivation for the employees to work. The option provided under this scheme confers a right but not an
obligation on the employee.
Such an option to purchase shares can be exercised only after the vesting period. Such vesting period is the
time period an employee must wait to get the right to buy those specified number of shares. Upon vesting
of options, employees can exercise the options to acquire shares by paying the pre-determined exercise
price.
Sovereign Gold Bonds (SGBs)
Sovereign Gold Bonds (SGBs) are government securities, which are denominated in grams of gold. They
are substitutes for holding physical gold. Investors have to pay the issueprice in cash, and the bonds will
be redeemed in cash on maturity. Reserve Bank of India issues the bond on behalf of the Government of
India. The quantity of gold for which the investor pays is protected, as investor receives the market price of
gold on redemption.
The SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are
eliminated. Investors are assured of the market value of gold at the time of maturity and periodical
interest. SGB is free from issues like making charges and purity in the case of gold in jewellery form. The
bonds are held in the books of the RBI or in Demat form eliminating the risk of loss of scrip, etc.
National Pension System (NPS)
National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme designed to
enable the subscribers to make optimum decisions regarding their future through systematic savings during
their working life. It is administered and regulated by Pension Fund Regulatory and Development Authority
(PFRDA). NPS seeks to inculcate the habit of saving for retirement amongst the citizens. It is an attempt
towards finding a sustainable solution to the problem of providing adequate retirement income to every
citizen of India.
CASE STUDIES
Under NPS account, two types of accounts – Tier I & II are provided (NRI’s can open only Tier-I Account). It
is mandatory for a subscriber of NPS to open Tier I account and make contribution therein every financial
year. However, the opening of Tier II account and making contribution therein is at the option of the
subscriber.
Real Estate Investment Trust (REIT)
REITs invest in the majority of real estate property types, which includes offices, apartment buildings,
warehouses, retail centres, medical facilities, data centres, cell towers, infrastructure and hotels. Most
REITs focus on a particular property type, but some hold multiple types of properties in their portfolios.
REITs allow investors to invest in portfolios of real estate assets the same way they invest in shares or a
mutual fund or exchange-traded fund (ETF).
Structure of REITs
The structure of REITs is similar to that of a mutual fund wherein sponsor (generally real estate developers)
sets up the REITs to collect money from the general public for investing on their behalf in income-
generating real estate properties.
Sponsor means any individual or a body corporate who sets up the REIT by making an application in this
behalf to the SEBI.
Special Purpose Vehicle means a company or LLP in which REIT holds 50% or more of the equity share
capital or interest.
REIT means a trust which is registered under SEBI (Real Estate Investment Trusts) Regulations, 2014.
Unit-holder is a person who makes investment in REIT and in return gets the units of such REITs.
Infrastructure Investment Trust (InVIT)
InVITs invest in infrastructure projects which include roads, bridges, ports, airports, metros, electricity
generation, transmission or distribution, telecommunication services, telecommunication towers, special
economic zones, etc.
InVITs are registered with SEBI under SEBI (INFRASTRUCTURE INVESTMENT TRUSTS) Regulations, 2014. The
structure of InVITs is very much similar to that of a REIT.
Alternative Investment Funds (AIFs)
Alternative Investment Fund (AIF) means any fund established or incorporated in India, as a privately pooled
investment vehicle, to collect funds from sophisticated investors, whether Indian or foreign, for investing in
accordance with a defined investment policy for the benefit of its investors. However, it does not include
mutual funds, collective investment fund or any other fund for which there are separate regulations of SEBI.
CASE STUDIES
Exchange Traded Funds (ETFs)
Exchange-Traded Funds (ETFs) are like Mutual Funds that track an index (i.e., NIFTY/SENSEX), or a commodity
(Gold) or a basket of assets like an index fund. However, unlike regular Mutual Funds, ETFs are listed on
exchange and trade like a stock, thus experiencing price changes throughout the day as it is bought and sold.
ETFs include
• Gold ETFs
• Index ETFs
Set-off and carry forward of losses
Any losses arising in the hands of the investment fund under the head ‘Profits and gains arising from
business or profession’ shall be allowed to carry forward and not to be passed to its unit-holders.
Chapter 13: Tax provisions for Special cases
Taxation of Bonus Shares
The tax treatment of bonus issue depends upon whether the shares are held as stock-in- trade or as a capital
asset. If they are held as capital assets, any profit or gain arising from the transfer of such shares are taxable
as capital gains. If shares are held as stock-in-trade, the gain or loss arising therefrom is taxable under the
head profits and gains from business and profession. If the bonus shares are held as stock in trade, gains
arising at the time of transfer of such bonus shares shall be taxable under the head PGBP.
Taxation on Share Split or Consolidation of Shares
The process of dividing the outstanding shares into further smaller shares is known as a stock split. A stock
split or stock divide increases the number of shares in a company. If a company declares a stock split, the
number of shares of that company increases, but the market cap remains the same. The share consolidation
is a process conducted by the company with the intention to reduce its number of shares. In case of listed
company, it reduces the number of shares trading on the stock exchange.
No tax will be levied at the time of splitting or consolidation of shares though there is no specific exemption
provided for this purpose under section 47. Tax implications will arise only at the time of sale of such
converted shares.
Taxation of Buyback of Shares
‘Buy-back’ of shares mean the purchase by a company of its own shares in accordance with the provisions of
any law for the time being in force relating to companies.
CASE STUDIES
Taxation of Companies in Liquidation
The term ‘liquidation’ and ‘winding up’ are used interchangeably. In general terms, winding refers to the
process of ending the business of the company while liquidation means selling assets of the company and
the term dissolution means official extinction of the corporate person.
In case of liquidation of a company, the assets remaining after payment of all liabilities of the companies are
distributed among the equity shareholders. The tax liability then differs for the company and the investor.
Taxation of Rights Issue
A rights issue is a way of raising additional capital, wherein, instead of going to the public, the company gives
its existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings.
The existing shareholders are given a right to acquire shares of the company at a price, which in most
practical instances, is lower than the actual market price. There is an option with the shareholder either to
purchase the shares at a given price or renounce his right in favor of some other investor and collect a fee
from him for this purpose.
Any right available to a shareholder to subscribe to shares or any other security of a company is treated as
‘capital asset’ under Income-tax Act. Capital gains will arise in the hands of the shareholder who renounces
his right in favour of any other person. Gains and tax thereon shall be calculated in accordance with the
following provisions.
Taxation in case of Mergers & Acquisitions
The term merger and acquisition is not specifically defined under the Income-tax Act. In general sense,
merger is the voluntary fusion of two companies either by closing the existing companies and making a new
one or by one company absorbing the other company. Quite often term amalgamation is interchangeably
used with mergers.
If the shares acquired in the amalgamated co. are held as capital asset, the profits from its transfer shall be
taxable under the head capital gains. On the other hands, if such shares are held as stock-in-trade, the
profit or losses arising from the transfer shall be taxable under the head profits and gains from business or
profession.
Taxation in case of Stock Lending and Borrowing
Stock Lending and Borrowing (‘SLB’) is a system wherein a person can lend his securities to a borrower
through approved intermediary for a specified period with the condition that the borrower would return
equivalent securities of the same type or class at the end of the specified period along with all the
corporate benefits which have accrued on securities (e.g. dividend) during the period of borrowing.
The benefit of SLB for lender is that it provides incremental return on an idle portfolio. A person holding
shares of a company with an intent to hold them for long-term may earn additional return in form of
lending fees by lending such shares to borrower for short- term.
CASE STUDIES
Lenders can earn additional income from the idle portfolio held as they receive a certain fee to lend the
stock, depending upon the demand and time value. The borrower purchases the stocks with the objective
of selling them. Hence, any gains or losses arising to the borrower from the sale of such shares shall be
taxable under the headcapital gains or PGBP, as the case may be.
Taxation in case of conversion of Preference Shares into Equity Shares
Section 47(xb) provides that any transfer by way of conversion of preference shares of a company into
equity shares of that company would not amount to transfer. However, when a person subsequently sells
equity shares, the cost of acquisition thereof shall be the same as that of the preference share. Further, the
period of holding of equity shares shall be reckoned from the date of acquisition of the preference shares.
Cost inflation Index (CII)
Cost inflation Index (CII) is the inflation rate used to bring the cost of goods to in line with the increased
prices in the market. Under Income-tax Act, it is used to compute the indexed cost of acquisition and
indexed cost of improvement of a long-term capital asset. CII for every year is notified through an official
gazette each year.
Chapter 14: Basics of Estate Planning
Estate Planning can be defined as a process that deals with the accumulation, conservation and
distribution of an estate. The overall purpose of estate planning is to develop a plan that will enhance and
maintain the financial security of Individuals and their families.
Anyone who holds a property and wishes that on his death the property should be transferred to specific
heirs and in a specific manner needs estate planning. The financial security for their family is the objective
of estate planning. Estate planning is not only about distributing assets. There are lot many issues due to
which estate planning needs attention.
Estate Planning Goals
The objectives of estate planning are manifold. First and foremost, a proper estate planning ensures
distribution and preservation of one’s legacy with minimal disputes. If one has not prepared its estate plan
then there are more chances of unsatisfactory distribution by some legal heirs.
Estate Planning & Succession Planning
Estate planning is misconceived to be equivalent to succession planning. These two are business which
takes effect within one’s lifetime. For long term continuity and success of one’s business, it has to be
transferred to the next generation when one decides to quit.
CASE STUDIES
An estate can be under three categories:
1. Gross Estate: The gross estate comprises items which determine one’s net worth. Real estate properties
(House, Land etc.), bank accounts, investments, businesses, retirement account such as NPS, life insurance
etc.
2. Residue Estate: This is an individual personal estate property. This will include car, jewellery, furniture,
clothes, and any other item found at one’s home. Any investment not mentioned in y
our will or allocated in the trust will form the part of residue estate. Lastly, any outstanding payments at
the time of death are a part of residue estate.
3. Estate Debt: This includes all debt and obligations owed to others. Housing loan, car loan, credit card
payments, business outstanding is a part completely distinct with different objectives. A succession
planning is planning for one’s of estate debt. Tax liabilities of any form or any legal cases are also a part of
estate debt.
Succession Certificate: When a person dies intestate (i.e. without making a Will), the legal heirs have to
apply to the civil court for obtaining a succession certificate which shall be issued in accordance with the
laws of succession applicable to the deceased.
Elements of Estate Planning
Will is the document which specifies who will inherit one’s assets and in what manner.
Trusts are legal arrangements that hold assets on behalf of a beneficiary or beneficiaries.
Power of Attorney is a legal arrangement where an individual designates someone to manage one’s
finances in case an individual becomes incapacitated or is not in a position to do so.
A living Will is an advance directive written primarily for physicians. There may be life situations like one is
terminally ill, seriously injured, in a coma, in the late stages of dementia or near the end of life.
Nomination and Beneficiary Designations: This is not really a component of an estate plan but important
for completing the estate plan. Appointing nominees are important for smooth transfer of your financial
assets after your demise. The rights of nominee are limited to holding the assets as a custodian till it is
transferred to the right legal heirs.
Applicable Laws
The Hindu Succession Act, 1956
The Hindu Succession Act, 1956 extends to whole of India except the State of Jammu and Kashmir. The
succession of property of a Hindu, who dies intestate (after coming into force of this Act), is governed by
the provisions of this Act.
CASE STUDIES
In the Hindu Succession Act, Sections 8 to 13 lay down the general rules for succession when a Hindu male dies
intestate. Section 8 lays down the rules about the succession of property of a Hindu male who dies intestate after re-
commencement of the Act.
Muslim Personal Law
The Law of Succession among Muslims is combination of four sources: The holy Quran, The Sunna, The
Ijma, The Qiya
There are 2 types of heirs recognized by Muslim law
1. Sharers - are the ones who are entitled to a certain share of the deceasedproperty.
2. Residuary – are the ones who take up the share in the property that are left over after sharers
have taken their part.
3.
Married Women’s Property Act, 1874
Married Women’s Property Act, 1874 was enacted to protect the properties of woman against the
creditors. Under this Act, all the properties of a woman get insulated from all the other court attachments
or any income tax department attachments that the husband has run up. This Act applies to any woman
who at the time of her marriage professed the Hindu, Muhammadan, Buddhist, Sikh or Jain religion, or
whose husband, at the time of such marriage, professed any of those religions. The state government has
powers to exempt from operations of all or any of the provisions of this Act, the members of any race, sect
or tribe or part of a race, sect or tribe, to whom it may consider it impossible or inexpedient to apply such
provisions.
Mutation
Mutation is a process whereby a property is transferred from ones person’s name to another. In practice,
this is done by alteration or substituting a name of a person with another in revenue records showing the
right of title to the property.
Mutation of property is a state matter and therefore is carried out as per the state specified laws. The
records are then maintained to prove the rightful owner of the property. There is another objective to it.
Since state or central government has to collect taxes on properties, the records of the revenue
department have to show the rightful owner so that tax liabilities can be fixed.
CASE STUDIES
Chapter 15: Tools for Estate Planning
Estate planning tools can be classified as those that take effect during the life of a person and after death of
a person are some which should be used within one’s lifetime while some of the tools benefit the family
post death.
After the death of the individual

• Will
• Nomination
During the lifetime of the individual:

• Family Settlement
• Trust or Joint Holding
• Gift
• Power of Attorney
• Mutation
Will is defined in Section 2(h) of the Indian Succession Act 1925 to mean the “legal declaration of the
intention of the testator with respect to his property, which he desires to be carried into effect after his
death.”
The person making the will is the testator, and his rights extend to what are legally his own. The will comes
into effect only after the death of the testator.
The person who is named in a will to receive a portion of the deceased person’s estate is known as a
legatee. The person named in the will to administer the estate of the deceased person is termed as an
Executor.
Types of will
Conditional or Contingent Will: A will may be expressed to take effect only in the event of happening of
some contingency or condition and if in case the contingency did not happen or the condition fails the will
is not legally enforceableor probate.
Joint and Mutual Will: A joint will is a will made by two or more persons. In Indian law, a joint will is a valid
will. A joint will is recognized as two wills and is intended to take effect after the death of both the
testators.
CASE STUDIES
Duplicate Will: A duplicate will is a copy of the Will kept with the testator. But the will has to be duly
signed and attested. The duplicate will generally lies with the executor or trustee.
Holograph Will: A holograph Will is a will entirely in the handwriting of the testator. It is considered to be a
good will if it is completely handwritten by the testator.
Concurrent Will: In general there should be only one Will left by the testator, but sometimes the testator
may write two wills –one relating to his property in one country and other relating to his property in other
country.
Sham Will: If a document is deliberately executed with all due formalities purporting to be a Will, it will be
anullity if it is proved that the testator did not have any intention of any testamentary operations but some
collateral object.
Privileged and unprivileged Will: Mostly the will has to be made in writing. But there are situations where
this may not be possible. The best example is a soldier during his engagement in the actual warfare or
airmen so engaged or a mariner at sea may pronounce his Will by or mouth before 2 witnesses. The will so
pronounced by such persons are called privileged will. All others which are not privileged wills, are called
unprivileged will.
Registration of Wills: Registration of Will has been dealt under Section 17 of the Registration Act 1908. The
section does not mention compulsory registration of documents pertaining to will. Section 18 of the Act
mentions that registration of Will is an optional process. Thus, the law does not provide any reference to
compulsory registration and so a non–registered Will is considered to be a genuine will.
Revocation of Will: A will by nature is revocable. A man’s act or deed cannot make a Will irrevocable.
Section 62 of the Indian Succession Act deals with revocation of will. As per the law, a will can be altered or
revoked by the testator at any time when he is competent to dispose property through Will.
Codicil: A Codicil is a supplementary document to a will. Through a codicil, the testator can make minor
alterations in his Will. As per section 2 (b) of the Indian Succession Act, “Codicil” means any instrument
made in relation to a Will and explaining, altering or adding to its disposition and shall be formed to be part
of the Will. The codicil has to be executed and attested just as the Will. A codicil is not an independent
document. When alterations are considerable then a fresh Will revoking the earlier will should be written.
The codicil can be endorsed on the original will or may be written as a separate document.
Succession Certificate: The succession certificate is required in absence of a Will to establish the legal
character of heir who lays a claim on the property of the deceased. But a succession certificate does not
determine the right, title and interest of a deceased person to any property. Hence mere issuance of
succession certificate does not give right of succession to the property in which the legal heir has laid a
claim.
Role of the executor
An executor is a person appointed by the testator of the Will. Section 2(c) of the Indian Succession Act
defines executor to be a person to whom the execution of the last will of the deceased person, is by the
testator’s appointment, and is confided.
CASE STUDIES
All persons capable of executing a Will can be executors. Family/Friends/Relatives or even a company can
be appointed as executor of the Will. A beneficiary can also be named as an executor of the Will.
By law there is no restriction on number of executors a testator may appoint in the Will. However, the
courts do not grant probate to more than four executors.
If there is no executor appointed in the Will then the court grants Letter of Administration to the agent or
attorney of the principal.
Probate Process
Probate is defined in section 2 (f) of the Indian Succession Act to mean the copy of a will certified under the
seal of a court or competent jurisdiction.
To put it simply, it is a legal process where a certificate from the court establishes the legal character of the
person to whom the grant is made.
A is probate is given only to the executor appointed in the Will.
Gifts, Joint Holding and Nominations
A gift is a transfer of movable or immovable property made voluntarily and without consideration. The
person making the gift is called donor; the person receiving the gift is called the donee. Any person capable
of making a contract can make a gift. A gift is usually an irrevocable transfer, but it can however be revoked
if the donee agrees to do so.
Joint holding means the property is held by more than one person and can be accessed by such joint
holders subject to the mode of operations. The operation of a joint account can be done ‘jointly’, where all
joint holders have to approve all transactions, or on ‘either of survivor’, or ‘anyone or survivor’ basis.
Nomination is the right conferred upon the holder of an investment product to appoint the person
entitled to receive the monies in case of the death. A nomination is seen as a formal bequest authorized by
the holder of the asset, though in the event of a dispute the nominee’s position is reduced to being the
trustee of the bequest, the final owners being decided according to the applicable laws of succession.
Family Settlement
A family settlement is an instrument used to achieve peace and harmony in the family when there is a
dispute or rival claims to property that can lead to a long drawn out litigation. The dispute must be
between members of the same family and a settlement entered must be between persons having title,
claim or interest in the property. It must be entered into voluntarily and in good faith and with the purpose
of accomplishing tranquility and accord in the family.
An intra-family transfer is a transfer from one family member to another family member without the
assets actually being sold.
CASE STUDIES
Here are common forms of property transfer among family members:
• Joint Ownership
• Gifting
• Will/Inheritance
Forms of Family Business Ownership
• Owner/operator
• Partnership
• Distributed
• Nested Model
• Public
Valuation of Family Business
Valuation of business can be quite challenging. Following methods are used to value a family business:
• Capitalization of earnings
• Projected Earnings
• Market Approach
• Net Asset Value
Joint Tenancy and Tenancy in Common
In this form of ownership, the joint tenants have a right of survivorship. What this means is that post
demise of the owner the interest of the deceased joint tenant will pass on to the survivor. The tenant-in-
common has an undivided share and interest in the property. There is an equal right to possession of
whole property but no tenant in common has a right to possess any part exclusively. The tenant in
common has complete ownership to deal with his share of the property as he deems fit.
Asset Protection
Any individual or business can run a risk of creditors making a claim on their assets. Asset protection are
set if strategies, techniques and laws that are used to protect assets of individuals and business form such
risk. A debtor who owns significant personal assets may choose to use asset protection to shield his/her
assets in case of a payment default.
There is no one fit formula for deriving the asset protection strategies. Based on one’s requirement the
strategy is prepared for keeping the asset protected from any claim.
CASE STUDIES
Trust-Characteristics and Regulations
Indian Trust Act, 1882
The Indian Trust Act, 1882 is the governing law of the Trust in India and is quite an acceptable law even
internationally. One of the great characteristic of a trust model is that it hides the real owner from any
public glare and he can still operate it with ease.
Classification of Trust
Revocable Trust: A trust is said to be revocable when it is created by a non-testamentary instrument or

orally and a power of revocation has been expressly reserved by the settlor. A trust created by a debtor for
the benefit of his creditors who are not parties to the convenience and to whom the fact of its execution is
not communicated.
Irrevocable Trust: Contrary to revocable trust, an irrevocable trust is one in which the terms of the trust
cannot be amended or revised until the terms or purposes of the trust have been completed.
Simple Trust: In a simple trust, the property is vested in one person upon trust for the benefit of another,
and the nature of the trust neither being nor prescribed by the settlor is left to the construction of the law.
In these kinds of trusts, the trustees have no active duties to perform. However, the beneficiaries have the
right to be put in actual possession of the property and the right to call upon the trustee to execute
conveyances of the trust property.
Specific Trust: A Specific trust is formed for the execution of some special purpose and the trustee is not a
mere depository of the estate, but is required to exert himself in the execution of the settlors’ intention.
Oral and written trust: A trust may be declared either orally or through an instrument in writing. A trust
can be declared orally only where movable properties have to be settled. Such trusts are created by
transferring the possession of the property with a direction to be held under a trust. But if immovable
properties are to be settled then a written trust deed is required.
Characteristics of trust
A discretionary trust is a trust where the trustees have full discretion over the application of income and
corpus of the trust to the benefit of the beneficiaries.
A determinate trust or a specific trust is one where beneficiary or beneficiaries are clearly specified in the
trust deed along with their specific or ascertained share in the property and income of the trust.
Types of a family trust
Public and Private Trust
A public trust is one which is constituted wholly or partially for the benefit of public at large.
A private trust will come into existence when the settlor (owner of the property) with an intention to
transfer the property to certain individuals (beneficiaries) instead vest the property with other persons
CASE STUDIES
(trustees) who are made responsible for transferring the benefits for the property to the beneficiaries.
Public cum Private Trust
A public cum private trust is a trust where part of the income may be applied for public purpose and a part
may go to private person or persons. Such trust in respect of the portion of income going to private person
is assessable as private trust and not exempted from income tax.
Parties to Trust
• Author or Settlor of Trust: The person who settles certain property upon trust for the benefit of the
beneficiary is known as author or settlor of the trust.
• Trustee: The person in charge of managing the trust, who can be the same person who created the
trust, is called a trustee.
• Beneficiary: He is a person for whose benefit the confidence is reposed by the settlor and accepted
by the trustee. The beneficiary is entitled to receive the benefits of the income and principal of the
trust.
Trust perpetuities
The trust cannot be perpetual. The Indian law restricts the perpetuity period within which gifts in a trust
must vest, or the period during which trust income can be accumulated. No transfer of property can
operate to create an interest which is to take effect after the lifetime of a person living at the date of such
transfer, and the minority of some person who comes in existence at the expiration of that period, and to
whom the interest created is to belong when he or she reaches 18 years of age.
Offshore Trust
These are types of trust which are formed outside India and under the laws of other countries.
These have similar trust structures like others with three or more participants viz the author, the
trustees and the beneficiaries. Any of the three principal protagonists can be based out of different
country.
Distributable Net Income (DNI) = Taxable income - Capital Gains + Tax Exemption
When there is a capital loss then it is actually added to the above formula replacing capital gains. In
order to calculate the taxable income, you need to add the interest income, dividends, and capital
gains, then subtract any fees and tax exemptions. Unlike the DNI calculation, capital gains are
added in the taxable income formula while capital losses are subtracted.
Powers of Attorney
A Power of Attorney (POA) is an instrument by which a person may formally authorize another person to
act on his behalf or as his agent on all matter or for a specific transaction or particular types of
transactions. There are two parties to a POA – Donor and the Donee. Both the parties to the POA should
CASE STUDIES
have attained majority, be of sound mind and competent to contract. A power of attorney is usually in
the form of deed sometimes under a seal as necessaryfor certain purpose.
Parties to Power of Attorney

There are 2 parties to Power of Attorney
1. Donor
2. Donee
Types of PoA
A power of attorney can be classified into three forms
1. General Power of Attorney

2. Special Power of Attorney
3. Special Power of attorney for registration
General power of attorney

In this document the authorization of power to the agent is broad. The agent entitled to act generally, or in
more than one transaction.
Special power of attorney

Here the mandate authorization is narrow. The agent is restricted to act only for specific/particular matters
or transaction for the principal. The authority of the agent expires on the completion of the transaction.
Special power of attorney for Registration

A document of attorney which authorizes the attorney to present a document for registration in case of a
document executed by the principal but not registered by him is known as Special Power of Attorney for
registration.
Revocation
A principal has right to cancel power of attorney whenever he wants to do so. There are certain conditions
laid down in Sec 201 of the Indian Contract Act, 1872 for revocation of power of attorney.
Limits of PoA holder
1. The agent cannot make decision outside the terms of the legal document. In doing so
he/she can be held liable for any fraud or negligence.
2. The agent cannot make changes in the document or hand over the control to someone
else who has not been designated in the POA.
3. The agent loses the control once the principal dies.
CASE STUDIES
Chapter 16: Basics of Behavioural Finance
Behavioral Finance is the study of the way in which psychology influences the behavior of market
participants, both at the individual and group level, and the subsequent effect on the financial markets. It
is a part of Behavioural Economics which deals in biases and cognitive errors affecting the investing
behaviour.
Standard finance theories and models are based on certain assumptions. The key assumptions are:
o Investors are rational
o Investors are risk averse
o Investors are self-interested utility maximizer
o Investors update their belief as new information comes in
o Investors have access to all available information
How do individuals make decision?
As discussed above the process of decision making as envisaged under standard finance theories and the
way investors make decision in reality is different. Investors do not act like rational actors as suggested
under standard finance theory. They show limits to rationality.
• Bounded Rationality
Bounded Rationality, therefore, is the cognitive limitation of mind where in absence of time or complete
information, decision making favours satisficing solution (satisficing is combination of satisfactory and
sufficient) instead of an optimal (or maximising) one. It is important to note here that bounded rationality
is not irrational decision making, but rational decision making under certain boundary conditions.
• Prospect Theory
Premises of Prospect Theory are choices are evaluated relative to a reference point (which is their well-
being); People are risk-averse about gains (realizing it early) but risk seeking about losses (holding to them
longer) and Monetary losses hurt more than monetary gains
Categorization of Biases
Emotional Bias
At the time of decision making, individual’s feeling or emotions occur spontaneously which is a result of
deep-rooted personal experiences. It is important to note here that emotional bias does not mean making
errors. On the contrary, it has an underlying of being protective and taking suitable and comfortable
decision for oneself. Some emotional Biases are:
CASE STUDIES
• Loss Aversion Bias

• Stereo Typing Bias
• Overconfidence Bias
• Endowment Bias
• Status Quo Bias
Cognitive Errors
Cognitive errors are statistical, information-processing or memory errors that cause a person to deviate
from rational behaviour. Cognitive errors result from reasoning based on faulty thinking whereas
emotional biases result from reasoning influenced by feelings. Depending on thumb rules instead of doing
exact calculations, is an example of cognitive bias. People are less likely to make cognitive errors if they
remain vigilant. Unlike emotional bias, cognitive biases can be considered as short-cut approach to
decision making where one avoids going through the pains of analysing and evaluating options. Examples
are:
• Mental Accounting
• Framing
• Anchoring
• Choice Paralysis
Fusion Investing
Fusion investing, integrate traditional and behavioural paradigms to create investment strategies. It
attempts to combines fundamental analysis with behavioural finance. On one hand, fundamental style of
investing suggests that stock price is discounted value of future cash flows. Further, all the company
related information is fully reflected in the stock price. But on the other hand, we observe volatile stock
prices in short-term, which show that short-term price is influenced by collective behaviour of investors or
traders.
Behavioural Finance explains Market Anomalies
Market anomaly, in simple terms, is departure of stock price from its expected value given its
fundamentals. A market anomaly may be present if a change in the price of an asset or security cannot be
explained by the current relevant information known in the market or to the release of new information
into the market. Empirical research show that the actual returns deviate from the expected return as
required by Capital Asset Pricing Model (CAPM) or other asset pricing models. These gaps are referred as
anomalies. Anomalies appear, disappear and reappear quite randomly. It is expected that such anomalies
disappear as others would try to profitably exploit them. While some anomalies do disappear, there are
others, which persist for much longer period.
Historically, bubbles have often emerged during structural change in productivity. Bubbles typically begin
with a justifiable rise in asset price (due to new product, new idea, disruption etc.) given rise in productivity
or prosperity. Such productivity or prosperity changes expectations about future. Early investors, in such
CASE STUDIES
themes, make very high returns which start attracting new investors. Cheap borrowing costs fuel bubbles
as more and more new buyers chase the asset. Bubble phase takes share prices to unrealistic levels and
analysts come out with ‘new age’ theories to justify such prices.
Some of the potential reasons for such bubbles are:
• Liquidity
• Celebrity Status
• Momentum
• Illusion of Control
Chapter 17: Behavioural Finance in Practice
People react differently to the stress and strain of modern life. Some people over eat, some people over-
exercise or oversleep and some people go on a shopping spree when they are emotionally charged. This
behaviour initially provides a good feeling leading to relief from stress and allowing the person to escape
the immediate pressure. In moderation such behaviour is good to take the sting out of the emotional
stress. But normally such behaviour will rarely stay moderate and will invariably lead to more stress in the
future as the economic impact of the behaviour kicks in.
Retail Therapy
Retail therapy is referred to as a situation where a person goes on a shopping or buying binge in order to
reduce the stress. This situation can be tackled by undertaking some specific steps.
Too many and too frequent transactions
Humans have an action bias or the need to do something whereas investing requires long term consistency
and long years of patience. The action bias combined with other biases induces clients to have too
frequent and too many transactions which has the impact of turning an investment activity into a trading
activity.
Chasing past performance
Some investors simply invest in last year’s winners – whether it be asset classes or specific security within
an asset class. Most asset classes have a cycle of growth and decline and there is an inevitable reversal to
the mean. Investing based on past performance is like driving a car by looking in the rear view mirror. It is
bound to crash at some point or the other.
CASE STUDIES
Home country bias
Most Investors prefer to invest in the securities available in their home countries due to familiarity with the
markets and the companies involved as well as the regulatory environment. The benefits of diversification
which come from investing into asset classes which do not move in tandem with the local securities is thus
denied to them.
Buying Insurance for Tax Saving
The only cure for this bias to buy insurance purely for the sake of tax saving is to highlight the need for
adequate pure insurance products and the poor returns from investment cum insurance products as
compared to equivalent investments combined with pure insurance plans.
Too much diversification or highly concentrated portfolio
The Adviser has a vital role to play in finding the golden mean for an appropriately diversified investment
portfolio for the client based on the clients risk profile, available resources and time frame for goals.
The impact of framing on risk tolerance questions
Different investors react differently to specific triggers. A specific client would prefer knowing what can be
gained by following a specific investment pattern whereas another client would like to know what is lost by
not following it. In both cases the Investment adviser is justifying the recommended investment pattern
but the framing is very important if the client has to be convinced.
Overconfidence and dilution in risk management
Based on overconfidence arising from the bet that materialised, the client may be tempted to overinvest in
an asset class or security and modify the existing asset allocation. In times like this, the Investment
Adviser’s influence can stand between the client and her big mistake.
CASE STUDIES
Chapter 18: Risk Profiling for Investors
Factor Influence on Risk Appetite
Family Information
• Earning Members Risk appetite increases as the number of earning

members increases.
• Dependent Members Risk appetite decreases as the number of

dependent member increases.
• Life expectancy Risk appetite is higher when life expectancy is

longer.
Personal Information
Age Lower the age, higher the risk that can be taken.
Employability Well qualified and multi-skilled professionals can

afford to take more risk.
Nature of Job Those with steady jobs are better positioned to

take risk.
Knowledge about markets A person who is better informed about markets is

in a better position to take market risks, than
someone who is ignorant about them.
Psyche Daring and adventurous people are better

positioned mentally, to accept the downsides that
come with risk.
Financial Information
Capital base Higher the capital base, better the ability to

financially take the downsides that come with risk.
Regularity of Income People earning regular income can take more risk
than those with unpredictable income streams.
CASE STUDIES
Classification of Investors
Conservative Investors
• Do not like to take risk with their investments, typically new to risky instruments.
• Prefer to keep their money in bank accounts or invest in safe income yielding
instruments.
• May be willing to invest a small portion in risky assets if it is likely to be better for the
longer term.
Moderate Investors
• May have some experience of investment, including investing in risky assets such as
equities.
• Understand that they have to take investment risks in order to meet their long-term
goals.
• Are likely to be willing to take risk with a part of their available assets.
Aggressive Investors
• Are experienced investors, who have used a range of investment products in thepast,
and who may take an active approach to managing their investments.
• Willing to take on investment risk and understand that this is crucial to generating long
term return.
• Willing to take risk with a significant portion of their assets.
Strategic Asset Allocation is allocation aligned to the financial goals of the individual. It considers
the returns required from the portfolio to achieve the goals, given the time horizon available for
the corpus to be created and the risk profile of the individual.
Tactical Asset Allocation is the decision that comes out of calls on the likely behaviour of the
market. An investor who decides to go overweight on equities i.e. take higher exposure to
equities, because of expectations of buoyancy in industry and share markets, is taking a tactical
asset allocation call.
Dynamic Asset Allocation uses pre-defined models to allocate assets among different asset
classes. Triggers for reallocation may be defined in terms of asset class valuations or portfolio
performance. Dynamic asset allocation removes the subjective element from asset allocation
decisions.
CASE STUDIES
Chapter 19: Comparison of products across categories
Performance data for various Investment products is now widely available. In some cases it is mandated by
SEBI such as for Mutual Funds and Portfolio Management Services. There are many information
aggregators who collect this mandatorily disclosed data and provide value added services for comparison
across various schemes. This information is easily available on various websites. In many cases it is
absolutely free though some value added services may be on paid basis.
Please go through the detailed product comparisons given in the NISM Workbook. These comparisons are
between :
Equity Linked Savings Scheme (ELSS) V/s. Other Tax Saving Instrument
Mutual Funds V/s Portfolio Management Services V/s AIF Category 3
Mutual Funds V/s Unit Linked Insurance Plans (ULIP)
Actively managed equity mutual funds V/s Index funds
Direct Equity V/s Equity Funds
Exchange Traded Funds (ETFs) V/s Index Funds
Physical Gold V/s Gold Funds V/s Gold ETFs V/s Sovereign Gold bonds
Real Estate V/s REITs V/s INVITs
Debt Instruments V/s Debt Funds V/s Fixed Maturity Plan V/s Bank Fixed Deposit
Index Futures V/s Index Options V/s Index Funds
Gold Futures V/s Gold ETFs
Company Deposits V/s Debentures (if both are offered by the same company)
Market linked vs. Non-market-linked retirement accumulation products
Critical Illness Policy V/s Critical Illness Rider
Personal Accident Insurance V/s Life Insurance
****************
PLEASE SEND YOUR FEEDBACK / QUERIES TO INFO@PASS4SURE.IN
WE WISH YOU THE BEST FOR YOUR EXAMS
TEAM PASS4SURE

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r

NISM SERIES X B – INVESTMENT ADVISER (LEVEL 2)

NISM XB CASE STUDY QUESTIONS BASED ON

EXCEL / FORMULA / MATHEMATICAL CALCULATIONS

Answer – b - Rs. 15,16,068

We have to use the PMT function in Excel

The Rate of return is 7.6%

The time period ( Nper ) – is 22 years

Future Value ( FV ) is Rs. 8,00,00,000

Present Value (PV) is Zero.

In Excel, click on ‘Formulas’ – ‘Financial’ - ‘PMT’ in Excel as under :

Substituting the values, we get –

The answer is Rs 15,16,068.

Time period (Nper) is 25 years ( 55 years – 30 years)

Present Value (PV) is Rs 12,00,000

Using Future Value (FV) function in Excel –

75% of this is Rs 97,51,235

Answer – b - Rs. 81,93,799

We have to use the Future Value – FV function in Excel

The Rate is 10% yearly. So the monthly rate will be 10% / 12

The period is 10 years. In months it will be 10*12 = 120

Pmt – Monthly Investment = Rs 40,000

Substituting in Excel we get –

The sum accumulated will be Rs. 81,93,799

a. Rs. 1.76 crores

Answer – Rs. 1.39 crores

First we should know the Real rate of Return

Real Rate of Return = (1 + Nominal Rate / 1 + Inflation Rate) – 1

The nominal rate ie. the investment rate of return = 8%

Inflation rate = 6% = 6/100 = 0.06

Substituting in the above formula

= (1+ 0.08 / 1 + 0.06) – 1

Years to retirement = 20 = 240 months

Salary per month = Rs. 80,000

We have to use the PV (Present Value) function in MS Excel.

Open MS Excel and choose – ‘Formulas’ - ‘FINANCIAL’ – PV as shown below :

Substituting the above values in this –

Interest Rate = 1.89%/12

Period = Nper = 240 months

Salary per month = Rs 80000

Liquid Assets : 20%

a. 52.56 : 23 : 7.51 : 17.09

Answer – d- 54.16 : 19.16 : 9 : 17.66

Answer Explanation: Sometimes multiple health insurance policies cannot be avoided as

a. Rs. 18.53 Lakhs

Answer – d- Rs. 16.90 Lakhs

Dimple requires Rs. 5 lakhs inflated at 10% in years 6 and 7 respectively.

Let’s find out the inflated costs first.

Inflation is at 10% = 0.1

Formula = Amount * (1+Interest) ^Time period

Inflated cost in year 6 = 500000 * (1.1)^6

Inflated cost in year 7 = 500000 * (1.1)^7

OR it can be calculated in Excel as under :

Thus, Rs. 16.90 Lakhs have to be shifted to debt funds.

Q8.5 - On what grounds can the Will of Mr. Srinivas be challenged?

Answer – D – All of the above

a) Testamentary capacity and sound mind

c) Free from undue influence/fraud/coercion

The interest cost is 8% per year = 8%/12 per month

The period pending is 10 years = 10*12 = 120 months

Outstanding amount is Rs 32 Lakhs

In Excel, Click on Formula - Financial – PMT and substitute as under :