Nism XB Short Notes & Case Studies

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INVT ADVISER LEVEL 2

SUMS & SHORT NOTES
NISM INVESTMENT ADVISER XB LEVEL 2 -V IMPORTANT

CASE STUIDES
EXCEL / FORMULA / MATHEMATICAL CALCULATIONS
IMP – THE STUDENT IS EXPECTED TO HAVE GOOD KNOWLEDGE OF MS EXCEL / OPEN OFFICE
FOR DOING THE CALCULATIONS
[Summary of Nism book ie. the Short Notes 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
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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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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
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

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Substituting in Excel we get –
The sum accumulated will be Rs. 81,93,799
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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

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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
= (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 –
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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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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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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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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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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
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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.
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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
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.
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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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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
c. It will be advisable for Shreya to pay off the personal loan which will bring
d. It will be advisable for Shreya to pay off the personal loan which will bring
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%
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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
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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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:
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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.
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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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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

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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
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 :

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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

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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.
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.
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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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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.
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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)

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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.
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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%

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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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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

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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
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 :

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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 :

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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)
*************
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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

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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
***********
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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
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
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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
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 -
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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.
************
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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.
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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

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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%
**********
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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 3 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 2 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
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Answer – c - Rs 979080. The amount accumulated in the equity fund will exceed
the goal value to buy Rs. 152174 at the end of 2 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

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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% / 2
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
==============
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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

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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
***********
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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.
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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.
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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.
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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.
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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.
************
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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

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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

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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)
************
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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:
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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.
***********
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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.
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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.
************
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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

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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.

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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.
NISM SERIES X B
SUMS & SHORT NOTES
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)
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:

NISM SERIES X B
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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%
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.
NISM SERIES X B
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NISM SERIES X B
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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

NISM SERIES X B
SUMS & SHORT NOTES
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:
************
NISM SERIES X B
SUMS & SHORT NOTES
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
NISM SERIES X B
SUMS & SHORT NOTES
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.
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))
NISM SERIES X B
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NISM SERIES X B
SUMS & SHORT NOTES
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.
NISM SERIES X B
SUMS & SHORT NOTES
The balance at the end is 4097 which can be considered as near zero in the
context of this solution.
NISM SERIES X B
SUMS & SHORT NOTES
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.
=============
NISM SERIES X B
SUMS & SHORT NOTES
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.
NISM SERIES X B
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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.
NISM SERIES X B
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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

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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 –

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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
NISM SERIES X B
SUMS & SHORT NOTES
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%)
NISM SERIES X B
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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. 36500

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
Answer – a - Corpus Required : Rs. 3.87 crores, Monthly sum : Rs. 36500
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.

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Using the PV function in Excel :
So, retirement corpus required is close to 3.87 Crores. Now let’s find the future
value (FV) of the provident fund.
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FV of the provident fund is close to 2.5 Crores. Now we can find the monthly
investment required for the difference amount of 1.37 Crores (3.87 Crores – 2.5
Crores)
So, the additional monthly investment required for the corpus is close to
Rs.36500 per month.
NISM SERIES X B
SUMS & SHORT NOTES
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.
NISM SERIES X B
SUMS & SHORT NOTES
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)
============
NISM SERIES X B
SUMS & SHORT NOTES
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.

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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.
NISM SERIES X B
SUMS & SHORT NOTES
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.
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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.
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SUMS & SHORT NOTES
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.
NISM SERIES X B
SUMS & SHORT NOTES
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%

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SUMS & SHORT NOTES
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.
NISM SERIES X B
SUMS & SHORT NOTES
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

NISM SERIES X B
SUMS & SHORT NOTES
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.

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SUMS & SHORT NOTES
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 :

NISM SERIES X B
SUMS & SHORT NOTES
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 :
NISM SERIES X B
SUMS & SHORT NOTES
Therefore, Rs 17600 will be the monthly investment required.
=============
NISM SERIES X B
SUMS & SHORT NOTES
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.

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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.
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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.
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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
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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.
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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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SHORT NOTES - SUMMARY OF NISM XB BOOK BY

NISMTOP500
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
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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.
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.
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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
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
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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 becreated. 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.
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.
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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
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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.
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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 from
and 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.
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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.
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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.
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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.
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
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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.
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.
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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.
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])

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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
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.
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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
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.
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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.
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.
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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.
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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.
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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 andnot
the extinguishment of the capital asset as such.
Conversion of asset into stock-in-trade: When a person converts or treats his capitalasset
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’.
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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.
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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.
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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.
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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.
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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.
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.
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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.
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.
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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.
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.
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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.
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.
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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.
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.
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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.
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.
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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.
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
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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.
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 head capital 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
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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.
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.
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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.
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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.
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.
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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 enforceable or 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.
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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.
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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.
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.
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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.
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.
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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.
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.
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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
(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.
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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
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
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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.
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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
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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:
• 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
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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 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.
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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.
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.
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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.
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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
yieldinginstruments.
• May be willing to invest a small portion in risky assets if it is likely to be
better forthe longer term.
Moderate Investors
• May have some experience of investment, including investing in risky

assets suchas 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
generatinglong 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.
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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
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Nism XB Short Notes & Case Studies

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NISM SERIES X B

INVT ADVISER LEVEL 2

NISM INVESTMENT ADVISER XB LEVEL 2 -V IMPORTANT

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.

Q 2. Govind is of 30 years and he has planned to retire at the age of 55 years.

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

We get PV = Rs 1,59,77,940 = Rs 1.59 crores. The exiting insurance cover of Rs

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

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 = 500000*1.9487 = 974358

OR it can be calculated in Excel as under :

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

Answer Explanation - A Will supersedes a nomination. But the company or

Answer – c. Megha is entitled to the amount as it was made through a valid

Answer Explanation - If a will is registered, all subsequent Wills or amendments

Answer – b - Mr. Srinivas should have gifted the investment/amount to her so

Answer Explanation - A gift deed is a highly efficient way of transferring

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

Answer – D – All of the above

Answer Explanation - According to Section 59 of the Indian Succession Act,