FINANCIAL PLANNING

FOR
Mr. YOGESH MODY
 Three possible changes…
• Rate of return
–In other words, change the risk taking
ability
• Income/Saving
– Earn more OR save more to cover up
expenses
• Lifestyle
– Rationalize expenses i.e. reduce
standard of living
 Case
• Age : 44 years
Facts….
• Risk profile : Moderate risk taking ability
• Total current annual cash outflow: Rs 5.57 lakh
( incl. HH expenses, insurance commitment)
• Total current annual inflow : Rs 21.50 lakh
( incl. Personal, investment income)
• Expected annual increase in income : 12 %
• Expected retirement age : 60 years
• Estimate of annualized return
on the portfolio :12%
PRESENT FINANCIAL
POSITION
 Current status
• Direct Equity : Rs. 1.55 crore
– Axis Bank shares worth Rs. 1.1 crore.
• Mutual Funds:
– Equity oriented: 5 lakh
– Debt oriented: 20 lakh
• Real estate: 1.25 crores.
• Fixed Income: Rs. 24 lakh
– PPF – Rs. 13 lakh
– PF – Rs. 11 lakh
• Cash: Rs. 20 lakh ( S/B Ac )
• Loans: Nil
• Insurance: Rs. 24.5 lakh
 Direct Equity

• Axis Bank shares : Rs. 1.1 crore

– Corpus at the time of retirement: 8.95 crore.
• Other equity: Rs 45 lakh
– Corpus at the time of retirement: 3.66 crore.
• Total corpus at the time of retirement: Rs 12.61
crore
• Assumptions:
– Equity generates returns of 15% over a long-term.
– No addition to direct equity corpus in the coming years
 Mutual Funds
• Present corpus : 25 lakh
– Equity oriented: 5 lakh
– Debt oriented: 20 lakh
• Corpus at the time of retirement : Rs. 1.13 crore
• Rate of return on mutual funds :
– Equity oriented: 15%
– Debt oriented: 9%.
• Assumptions:
– Mutual Fund Corpus remains intact till the retirement time
and all the schemes are growth schemes.
 Provident Fund

• Present corpus: Rs. 13 lakh

• Rate of growth of corpus: 8.5% per annum
• Corpus at the time of retirement: Rs. 2.62 crore
• Assumption
– Individual’s contribution: 12% of salary
– Employer’s contribution: 12% of salary
 Public Provident Fund

• Present corpus: Rs. 11 lakh

• Rate of growth of corpus: 8.5% per annum
• Corpus at the time of retirement: Rs. 37 lakh
• Assumption
– The PPF corpus remains untouched
– No additional investment is made in PPF
from hereon
 Assumptions
• Equity returns have been estimated at 15% per annum for a long term.
• Fixed income returns have been estimated at 9% per annum for a long term.
• Inflation is estimated at 6% for a long term.
• Effective tax rate is assumed at 25%.
• 16 full working years are left.
• Life expectancy has been assumed at 90 years.
• Considering the return expectation of the client, the following asset allocation
is suggested for pre-retirement stage:

R e tu rn s b a s e d o n A s s e t A llo c a tio n
W e ighta ge E xp e c te d R e turn
E q uity 50% 15% 1 2 .0 0 %
F ixe d Inc o m e 50% 9%
PROJECTIONS
 CHILDREN’S FINANCIAL PLANNING
Amount required Time Horizon Amount in today's
Purpose (in Rs.) (in years) terms (in Rs.)
daughterEducation 400,000 5 298,903
daughterMarriage 1,000,000 9 591,898
sonEducation 800,000 8 501,930
sonMarriage 1,200,000 15 500,718

N ominal Amount R e al (Inflation-adjuste d) Amount

Amount to be Amount to be
inve ste d e ve ry Lumpsum Amount inve ste d e ve ry Lumpsum Amount
month to be inve ste d month to be inve ste d
daughterEducation 4,898 226,971 5,783 303,738
daughterMarriage 5,184 360,610 7,122 609,243
sonEducation 5,002 323,107 6,608 514,983
sonMarriage 2,402 219,236 4,247 525,411
Total 17486 1129923 23760 1953375
 Retirement
Planning Corpus required for Corpus required for
Corpus Corpus required for meeting expenses meeting expenses Corpus to be Total corpus to b
Net of income required if Corpus required meeting expenses from the 11th to the from the 21st to the invested in Corpus to be invested in equity
and entirely fundedif entirely funded for the coming ten 20th year through 30th year through equity for ten invested in equity at the time of
expenditure by Debt by Floaters years by debt debt debt years for twenty years retirement
399,655 8,627,627 11,308,242 3,028,484 1,635,083 802,198 2,437,281
428,471
-271,731
479,030
514,392
552,236 Rs. 86.27 lakh
592,730
636,052
Rs. 54.65 lakh
672,391
721,949
774,941 6,614,822
831,597
892,160
956,890
1,026,063
1,099,975
1,178,940
1,263,290
1,353,383
1,449,595
1,552,331 13,129,209
1,662,019
1,779,115
1,904,106
2,037,509
2,179,874
2,331,787
2,493,870
2,666,787
2,851,243
 Disposable
Cumulative Cumulative
Surplus
Cumulative Cumulative
Disposable Disposable Disposable Disposable Cumulative
Surplus Corpus (Fixed Corpus Corpus Disposable
(Floaters) Income) (MIPs) (Balanced) Corpus (Equity)
2,000,000 2,000,000 2,000,000 2,000,000 2,000,000
3,971,433 4,029,128 4,057,975 4,115,670 4,202,213
6,251,299 6,412,957 6,494,651 6,659,771 6,911,777
8,878,207 9,200,593 9,365,163 9,701,143 10,222,473
11,895,178 12,447,287 12,731,892 13,318,638 14,243,919
15,143,121 16,006,160 16,455,367 17,390,496 18,889,132
18,453,881 19,719,203 20,384,265 21,782,463 24,060,229
22,477,808 24,252,484 25,194,443 27,194,507 30,507,009
27,499,282 29,916,549 31,211,885 33,989,161 38,664,344
32,169,345 35,380,675 37,117,972 40,879,281 47,315,201
38,566,650 42,750,439 45,035,299 50,030,377 58,718,142
45,813,691 51,189,290 54,152,108 60,691,238 72,248,983
54,010,213 60,834,097 64,629,195 73,084,271 88,268,727
63,153,008 71,723,054 76,531,906 87,345,983 107,078,347
73,464,209 84,125,533 90,160,957 103,860,274 129,258,242
83,836,844 96,977,504 104,482,992 121,679,979 154,079,249
 Conclusion..
• Requirements at retirement:
– Rs. 86.27 crore if expenses totally financed by debt and
Rs. 1.13 crore if financed by Floaters
– Following staggered approach, the corpus requirement
becomes Rs. 54.65 lakh

• Corpus available at retirement (Total = Rs. 25.11

crore)
– Rs. 12.61 crore in Direct Equity
– Rs.1.13 crore in Mutual Funds
– Rs. 2.62 crore in Provident Fund & Rs. 0.37 crore
in PPF
– Rs.8.38 crore in disposable surplus account (most
conservative scenario of 100% investment in
floaters)
 Recommendations
• Post-retirement expenditure can be financed
entirely through debt or Floaters to avoid any
fluctuations/loss of capital

• The core equity corpus should be given

ample time to grow and then transferred to a
conservative MIP to meet short-term needs

• Diversification in the equity portfolio is a

must as 41% of the client’s portfolio is
constituted by Axis ESOPs.
 Recommendations
• Post-retirement extraordinary expense (child’s
marriage) can be either met through available
corpus or provision can be made for the same
at the time of retirement

• A prudent choice of asset classes, investment

instruments and stocks (in case of direct
equity) should be made for attaining maximum
possible gains and build up wealth rather than
keeping them in Saving Bank account.

• Insured to a lesser extent.