CASE STUDY: GURPREET: ONLY ANSWERS

Q 1) You have advised Mr. Gurpreet to buy an additional life insurance to replace his 70% of household expenses
inflation adjusted and all his liabilities in case of he dies today for the family. Calculate additional insurance required
by him. (Post death corpus will be invested in Risk free instruments)

Household expenses p.m 140000

inflation 5.50%
Risk free rate 6.50%
Real rate 0.009478673 0.000786478
Current age 43
retirement age 60

Insurance required Rs. 1,84,78,492.14

Existing insurance 10000000
Additional Rs. 84,78,492.14

Q2). Gurpreet’s father bought a house on 1/4/1980 for Rs.5, 00,000 and did renovation expenses of Rs.1, 00,000 on
dated 1/1/1981. He constructed one floor dated 5/3/1990 costed him Rs.2,00,000. Gurpreet inherited a house on the
death of his father on dated 7/5/2002 Gurpreet has received an attractive offer for a house Rs.50,00,000/‐ from a
Real estate broker. (Note: Fair value of a house on 1/4/1981 was Rs.8, 00,000/‐, Fair value of a house on dated
7/5/2002 was Rs.23, 00,000 and brokerage expense will be 2% of the sales price) Gurpreet wants to know the tax
liability on assessment year 14-15

FVC 5000000
Less: brokerage 100000
NVC 4900000
Less: ICOA 7512000
Less: ICOI 1091860.465
LTCL -3703860.465
Tax liability NIL

3) Gurpreet stays in a rented apartment in Mumbai. He pays rent Rs.50,000/- per month. He wants to know taxable
part of HRA for AY 2012-13.

HRA received 500000

Less: lower of Salary 4300000
Actual recievd 500000
Rent paid-10% of salary 170000
50% of salary 2150000 170000
Taxable HRA 330000

4. Gurpreet has decided to buy a spacious ready possession 3BHK apartment in a posh locality of his native place at
chandigadh on immediate basis. He has already received an attractive offer from a housing finance company. (Loan
amount Rs.60,00,000, Term 15 year, Fix interest for 1st year 10.5% loan will be sanctioned by 5/4/13 and EMI payable
end of the month) He will rent out a house wef 1/5/13 for Rs.20,000/‐ month for one term (11 months)

with upward revision in rent of 10% if agreement renews for next term. (Std. Rent value: Rs.18, 000, Municipal rent
value: Rs.19, 000 and fair value rent: Rs.20, 500 per month, Municipal tax paid in advance Rs.20, 000/‐ for FY13‐14)
Gurpreet wants to know that Income from let out house Property in AY 2014‐15

Municipal Value 228000 EMI on loan Rs. 66,323.94

Fair Rent 246000 AMRT
Expected rent 246000 PM1 1
Standard rent 216000 PM2 12
RLV 216000 ɛInt 621779.1814
Actual rent p.a. 240000
240000
Less: Vacancy Loss 20000
GAV 220000
Less: Municipal taxes 20000
NAV 200000
Less: Deduction
Standard deduction 60000
Interest on loan 621779.1814
Loss from HP -481779.1814

5. Gurpreet has two bonds: Gurpreet expects an investment return of 10% p.a. and is expected to increase in near
future. Which Bond should he sell?

Bond Face Value Coupon Balance Current Market

Maturity Value
Period
A 100000 9.75% 2 93400
B 50000 9.50% 5 49000
Desired Yield 10% 7.142857143
Bond A Bond B
Calculating PV of Bond 99,566 49,052
Actual Yield 13.74% 10.03%
He Should Sell Bond B

7) Gurpreet wants to retire at age of 60 years. He wants an inflation adjusted monthly annuity equivalent 80% of his
current monthly household expenses till the expected life span of him.

He will extend his PPF A/C when it matures for two consecutive terms of five years each and would invest maximum
permissible amount every year in the beginning of the financial year. Extended PPF maturity value will be invested in
Risk free instruments till retirement. (Assume that on 1/12/11, PPF interest rate revised to 8.6% and maximum
investment limit revised to Rs.1,00,000. Gurpreet will take a benefit and invests another Rs.30,000/- on
5/12/2011.On 1/4/2012 further rates are revised to 8.8% till 31/3/2015 and thereafter rates will be 9% till extended
maturity of PPF A/C)

In addition, Gurpreet would immediately invest 10% of his basic salary each year in a balanced mutual fund till
retirement and move his extended PPF maturity in this scheme. (Note: Expected annual growth in basic salary will be
12% per annum)

Gurpreet wants to know that the surplus/shortfall in the required retirement corpus with above proposed
investments. (Assume that the post retirement entire corpus will be invested in risk free instruments)
 Current age 43
retirement age 60 17
life expectancy 85
Current expense p.m. 140000
inflation 5.50%
Risk free rate 6.50%
real rate 0.95% 0.000786478
Exps at 60 Rs. 2,78,297.84
Corpus Rs. 7,44,03,532.52

Investment in balanced fund

balanced fund rate 9%
Expected growth rate 12%
Basic salary 3400000
Invest 10% of basic sal 340000
FV of growing annuity 28768618.08

PPF
Current balance as on 31/3/2013 787000
No. of years to mature 6
2 years extns. 10
Fv of PPF as on 31/3/2015 Rs. 11,58,780.93
FV of PPF as on 31/3/2029 Rs. 67,08,421.17 2029
2015
Reinvested PPF maturity in Balanced fund 14
Rs. 73,12,179.07

Total funds Rs. 3,60,80,797.16

Shortfall Rs. 3,83,22,735.36

8) Gurpreet wants to set aside lumpsum funds for the boarding school expenses of the both children from a bank
A/C. For this purpose, how much amount should he invest today if he is thinking to invest in a portfolio of 40% Equity
MF and 60% Balanced MF. (Assume that the boarding school expenses are expected to escalate @ 7.5% p.a.)
 Goal
FV PV Equity debt total
amount
0 1030000 1030000
Rs. Rs. Rs.
1 1107250 1008424.408
4,03,369.76 6,05,054.64 10,08,424.41
Rs. Rs. Rs.
2 1190293.75 987300.7638
3,94,920.31 5,92,380.46 9,87,300.76
Rs. Rs. Rs.
3 1279565.781 966619.6002
3,86,647.84 5,79,971.76 9,66,619.60
Weighted
average 9.8
return
total
Rs.
investment
29,62,344.77
amount

9) You have suggested to set aside 10% of his equity MF portfolio for the purpose of his abroad trip.

In addition, you have advised to start monthly investments today in a ratio of 50%: 50% in balanced fund and debt
fund for seven years. At the beginning of 8th year, new investment allocation will be in ratio of 30%: 70% and
portfolio to be rebalanced in line with new asset allocation for balance term. Calculate monthly investment required
for 10 years.

Current cost 1000000

Inflation 5.50%
fv of goal Rs. 17,08,144.46

Equity MF portfolio 2647000

10% of portfolio 264700
fv of equity portfolio Rs. 7,51,594.74

Shortfall Rs. 9,56,549.72

let us assume rs. 100 is invested

Balanced 9% 0.007207323
Debt 7% 0.005654145
Balanced Debt total
Fv after 7 years Rs. 5,785.83 Rs. 5,387.26 Rs. 11,173.09

Rs.
Fv after 3 years Rs. 5,577.73 Rs. 17,960.84
12,383.11

SIP Rs. 5,325.75

10) Gurpreet wants to set aside lumpsum fund today in a debt fund for geet’s higher education ( higher education
will commence from Age 18). Assume that cost of higher education is expected to grow @ rate of 10% per

annum. Calculate how much fund he has to keep aside today in debt fund?
 Current age of Geet 14 Age Goal Amount NPV
14 0
15 1
16 2
17 3
18 4 Rs. 1,46,410.00 Rs. 1,11,695.49
19 5 Rs. 1,61,051.00 Rs. 1,14,827.14
20 6 Rs. 1,77,156.10 Rs. 1,18,046.59
21 7 Rs. 1,94,871.71 Rs. 1,21,356.31

Rs.
Total investment
4,65,925.52

11) Gurpreet wants Rs.25,00,000/- (current price) for Geet’s marriage. For that you have advised to earmark 20% of
the equity share portfolio and in addition to start monthly investment in existing gold ETF for 10 years.

You have further advised that after 10 years that all investments will be transferred to risk free instruments till geet’s
marriage. (Assume marriage expenses expected to increase 8% per annum) Calculate monthly SIP required in Gold
ETF

Current age 14
Marriage age 25
current cost 2500000
fv of goal amount Rs. 58,29,097.49

Equity investment 518400

fv of equity fund Rs. 14,71,955.84

Existing Gold ETF 321000

fv of gold ETF Rs. 6,61,591.13
11th year ₹ 22,72,227.52
Shortfall Rs. 35,56,869.97

Let us assume SIP be Rs. 100

fv after 10 years Rs. 17,658.56
Reinvested in risk free
Rs. 18,806.36
instrument

SIP Rs. 18,913.12

 15) Gurpreet’s equity mutual fund investments consist of four different funds, the performance of this fund are as
follows.

Name of Fund 5 yrs CAGR return Standard Deviation (5 yrs) Beta

A 18% 23% 1.3

B 15% 18% 1.1

C 10% 16% 0.75

D 13% 10% 0.9

He wants to know that the return of this equity mf is smart investments or result of excess risk. How would you rank
above funds on Jension’s alpha and which one fund you will suggest to exit and invest based on Alpha?

A B C D
CAPM (β (Rm-Rf) + Rf) 21.45% 15.85% 9.13% 12.35%
Jenson Measure = Rp – [Rf + β (
0.000%
Rm-Rf)]

17. Gurpreet proposes to buy a under construction house in an upcoming housing project in

suburban Mumbai worth Rs.75,00,000/‐ today. He proposes to make the down payment

Rs.15,00,000 immediately. The balance amount is to be paid in installments to builder.

15% of the balance amount on 1/6/2011

30% of the balance amount on 1/9/2011

30% of the balance amount on 1/12/2011

And balance amount on 1/3/2012

He has received an attractive offer from housing finance co @ 10.5% PA fix rate for 15 years

disbursable as per scheduled agreed with the builder.

Note: Assume that he has received the house possession on 31/3/2012 from builder.

Calculate how much interest deduction allowed on borrowed capital as per income tax act

in the AY 2012‐13 to Gurpreet in case of let out property?

Int deduction
Rs.
Current year (13-14) 614804.4144 EMI
67,112.74
Pre construction
Rs. 83,943.95 AMRT
interest
PM1 1
Total Interest Rs.
PM2 12
deduction 6,98,748.36
ɛInt 614804.4144
 0 9949
Dates Loan amount EMI Interest total
01/06/2011 900000 Rs. 9,948.59 Rs. 7,875.00 Rs. 23,625.00
loan o/s as on 1/9/2011
PM1 1
PM2 3
Bal 893724.6385
01/09/2011 2693724.639 Rs. 29,985.48 Rs. 23,570.09 Rs. 70,710.27
loan o/s as on
1/12/2011
PM1 1
PM2 3
Bal 2674309.574
Rs.
01/12/2011 4474309.574 Rs. 50,167.84 Rs. 39,150.21
1,17,450.63
loan o/s as on 1/3/2012
PM1 1
PM2 3
Bal 4440966.632
Rs.
01/12/2011 5940966.632 Rs. 67,112.74 Rs. 51,983.46
2,07,933.83
Pre-construction Rs.
interest 4,19,719.73
Deduction amount Rs. 83,943.95

18. Gurpreet wants to know that immediate monthly investment required for 15 years in balance fund to build his
retirement corpus. He wants annuity only for 15 years and after that he will do reverse mortgage on his house. Post
retirement he wants to invest in 7.5% yielding instruments.

inflation 5.50%
annuity 7.50%
real rate 0.018957346 0.001566
Current exps pm 140000
Exps at 60 Rs. 3,47,872.30
Rs.
corpus for 15 yrs
5,46,13,136.49

Rs.
PV of corpus by 2 yrs
4,59,66,784.35

Let us assume investment amt Rs.

100

FV after 15 yrs Rs. 36,928.10

SIP Rs. 1,24,476.43

19. Gurpreet invested in 10 years ABC bond in Aug’05. (Coupon rate 8.75% compounded

Semi-annually and Face value Rs.1000). Current price of a bond is Rs.975/‐ after coupon

Payment received. He wants to know that if he sell bond today what will be his tax liability

In AY 2012‐13.

Long term capital

-2500
loss
Taxed
Income from other
8750 as per
sources
tax slab

20. Gurpreet has booked a flat with a builder worth Rs. 75,00,000. He will make a down

payment of Rs. 5,00,000 and the balance will be taken as loan at 10.5%p.a. fixed rate of

interest with monthly reducing balance and tenor is 15 years. The flat is under construction

and is due to complete on 1.4.2012 when Gurpreet will get the possession. The first

instalment needs to be given on 1.4.2011 with 15% of the total loan amount and EMI starts

from 1.5.2011. The second installment of 30% of the loan will be paid on 1.9.2011, the third

of 30% will be paid on 1.12.2011 and the balance will paid on 1.4.2012 with the possession.

Gurpeet wants to know how much deduction he can claim under section 24 and section 80c

for the FY2011‐12? Same as Q.17 (only figures are different)

21. Corporate bonds (issued on 1st January’10) of Face Value 1,000 and carrying an interest rate of 8% which is paid
on every 31stDecember are maturing at par on 31st December 2015. The current market value is Rs. 1,062. What is
the internal rate of return?

Date amount
01/01/2010 -1000
31/12/2010 80
31/12/2011 80
31/12/2012 80
01/04/2013 1062
XIRR 9.188%

24. Gurpreet wants to invest Rs. 99 lakh received from the redemption of the investments in the name of his wife in
a Balanced MF for the higher education of his children at the age of 18. He would make his first withdrawal at the
beginning of the financial year when they turn 18. The cost of escalation of Geet's fashion designing course escalates
at 9% p.a. He would withdraw the amount 1 year prior to the requirement and invest in a Liquid scheme. He wants to
know if this amount would be sufficient or not.
 amount to be
NPV in balanced
invested in liquid
Current age of Geet 14 Age Goal Amount fund
fund
14 0 Rs. 1,03,317.54
15 1 Rs. 1,03,317.54
16 2 Rs. 1,03,317.54
17 3 Rs. 1,33,799.20 Rs. 1,03,317.54
Rs.
18 4 Rs. 1,45,841.13
1,41,158.16
Rs.
19 5 Rs. 1,58,966.84
1,53,862.40
Rs.
20 6 Rs. 1,73,273.85
1,67,710.01
Rs.
21 7
1,82,803.91
Rs.
Total investment
4,13,270.14

25. After analyzing the financial data of Gurpreet you advise him to go for additional life insurance. He tells you that
in case of his untimely death he would like to maintain the same lifestyle for his children till their age of 25, he adds
that he consumes 15% of the total expenses on self. Also, he would like to have Rs.50,00,000( for Roshan's higher
education at 18 years of age. Also, he wants Rs. 25,00,000 for Geet's marriage at her age of 25. The proceeds are
invested in a fund yielding 8.5%. What will be the life insurance amount needed.

Expenses till child's age of 25 Rs. 14,26,762.67

FV for Roshan's higher ed. Rs. 61,94,123.25
PV for Roshan's higher ed. Rs. 44,69,520.05
FV for Geet's marriage Rs. 45,05,231.01
FV for Geet's marriage Rs. 18,36,495.82
Total insurance required Rs. 77,32,778.54
Existing cover 10000000
Rs. -
Additional required
22,67,221.46

26. Gurpreet wants to accumulate funds for the retirement through his PPF A/C. He will invest the maximum
permissible amount every year in the beginning of the financial year till its maturity and also in the 2 extended blocks
of 5 years each. He will make additional deposit of Rs.30,000 on 2nd Jan 2012. He will invest maturity proceeds in to
risk free instruments till retirement. He wants to know corpus available at retirement.

PPF maturity amt after 2 extensions Rs. 64,87,015.16

in risk free instruments Rs. 69,08,671.14

27. Gurpreet wants to take a trip abroad with his children when he attains 53 years of age. He wants to accumulate
funds for the same through investing monthly SIP 100% Equity for 5 years, beginning of 6th he will rebalance fund as
per new asset allocation 50% E - 50% Debt fund for 3 years and beginning of 9th year, he will redeem all the corpus
and invest in to risk free for balance years. (Note: the cost of trip escalates at 9%) He wants to monthly SIP required
today for five years?
 Cost of trip Rs. 23,67,363.67
SIP assumption to be Rs. 100
Fund value after 5 years Rs. 7,911.55
6-8 years Equity Debt
Allocation 50% 50%
Amt rebalanced Rs. 3,955.78 Rs. 3,955.78
Fv Rs. 5,410.04 Rs. 4,846.00

9 & 10th year in liquid Rs. 11,632.65

SIP Rs. 20,351.02

32. Gurpreet (Case Study B): Gurpreet wants to know approx. Maturity value and return on investment of an
Endowment Insurance plan. Assume Company has declared reversionary bonus of Rs.55/1000 SA Per year for first
five years, Rs.60/1000 SA per year for next five years, Rs.50/1000 for the remaining term and also declared terminal
bonus of Rs.325/1000 SA.

Premium paid Rs. 80,333.00

Maturity benefits
Sum assured Rs. 20,00,000.00
Reversionary Bonus
1st 5 years Rs. 5,50,000.00
next 5 years Rs. 6,00,000.00
remaining 5 years Rs. 5,00,000.00
Terminal Bonus Rs. 6,50,000.00
Total Rs. 43,00,000.00

Maturity Vaule Rs. 43,00,000.00

Return on investment 14.76%
33. To fund Roshan’s higher education after 4 years Gurpreet will take a loan of 50 lakhs then. He will also need to
buy a house in USA worth 80 lakhs now escalating @ 2.5% p.a. You advise him to invest 99 lakhs from his savings
account into an instrument yielding 5% over and above the risk free return and also do a SIP in same instrument.
What is the additional SIP he will have to do to achieve the goal ?(Goal: Send Roshan for Higher Education abroad.
The estimated outlay is Rs.1.3 crore then for 5 years) (Assumption: Risk-free Instrument- 6.5%; Inflation – 5.5%)

Education Goal required then 13000000

Loan 5000000
Balance to be planned for 8000000
Cost of House today 8000000
Escalation rate 2.50%
FV of House required 88,30,503
Total amount required after 4 years 1,68,30,503

PV of Saving Account 9900000

Investment 5% above risk-free return 11.50%

Amount of SIP -25,306
34. You advise Gurpreet to save Rs.7000 every month, in Equity, Balanced and Debt funds in the ratio of 40:40:20. The
investment has to be increased every two years by 20%. What would be the total amount accumulated for Geet’s
Marriage after 11 years? (Assumption: Equity – 11%; Balanced - 9%; Debt – 7%; Liquid – 5.5%; Inflation – 5.5%)

Ratio 40 40 20
No of yrs Equity Balanced Debt SIP Amount
11% 9% 7%

2 2800 2800 1400 7000

FV after 2 yrs 75,053 73,602 36,081

2 3360 3360 1680 8400

FV after 4 yrs 1,82,536 1,75,770 84,606

2 4032 4032 2016 10080

FV after 6 yrs 1,82,536 1,75,770 84,606

2 4838.4 4838.4 2419.2 12096

FV after 8 yrs 1,82,536 1,75,770 84,606

2 5806.08 5806.08 2903.04 14515.2

FV after 10 yrs 3,80,532 3,61,454 1,71,683

1 6967.296 6967.296 3483.648 17418.24

FV after 11 yrs 5,10,901 4,81,615 2,27,073

TOTAL 12,19,589

35. Gurpreet wants to plan for a world tour at the age 53. Current cost of the trip is 10 lakhs. He is going to allocate
some portion of his MF Equity Portfolio for the same. He is going to withdraw 40% two years prior the trip and 20%
one year prior the trip and invest them separately in liquid MF Scheme for utilizing the maturity amount for the trip.
What is the initial amount allocated from the MF Portfolio? (Assumption: Equity – 11%; Balanced - 9%; Debt – 7%;
Liquid – 5.5%; Inflation – 5.5%)

Current cost of World Tour 1000000

Present Age 43
World tour at 53
Inflation 5.50%
FV Reqd for World Tour 17,08,144

Liquid MF rate 5.50%

Eq MF rate 11%
Assume Intital Investment of Eq
100
MF
First withdrawal after 8 yrs 8
FV after 8 yrs in Eq MF 230 No. of yrs FV
Savings in Liquid
40% transferred to Liquid MF 92 2 2,30,46,29,95,215
MF
Balance in Eq MF 138
More No. of yrs saving in Eq MF 1
FV after 9 yrs in Eq MF 153
Savings in Liquid
20% transferred to Liquid MF 31 1 15,34,853
MF
Balance in Eq MF 123

More No. of yrs saving in Eq MF 1

FV after 10 yrs
FV after 10 yrs in Eq MF 136 2,30,46,45,30,068
in Liquid Fund

Total Investment in Liquid fund After 10

2,30,46,45,30,068
yrs

Thus,
Initial Inv 100
Total Inv Value After 10 years 2,30,46,45,30,068
Required for World Tour 17,08,144
Thus initial investment 0