Financial Planning For Mr. Yogesh Mody

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 Facts…. : 44 years

• Age : Moderate risk taking ability • Risk profile • 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) : 12 % • Expected annual increase in income : 60 years • Expected retirement age • 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 F ixe d Inc o m e

50% 50%

15% 9%

1 2 .0 0 %

PROJECTIONS

CHILDREN’S FINANCIAL PLANNING Purpose daughterEducation daughterMarriage sonEducation sonMarriage

daughterEducation daughterMarriage sonEducation sonMarriage Total

Amount required (in Rs.) 400,000 1,000,000 800,000 1,200,000

Time Horizon (in years) 5 9 8 15

Amount in today's terms (in Rs.) 298,903 591,898 501,930 500,718

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 4,898 226,971 5,783 303,738 5,184 360,610 7,122 609,243 5,002 323,107 6,608 514,983 2,402 219,236 4,247 525,411 17486 1129923 23760 1953375

Retirement Planning

Corpus required for Corpus Corpus required for meeting expenses Net of income required if Corpus required meeting expenses from the 11th to the and entirely fundedif entirely funded for the coming ten 20th year through expenditure by Debt by Floaters years by debt debt 399,655 428,471 -271,731 479,030 514,392 552,236 592,730 636,052 672,391 721,949 774,941 831,597 892,160 956,890 1,026,063 1,099,975 1,178,940 1,263,290 1,353,383 1,449,595 1,552,331 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

8,627,627

11,308,242

Corpus required for meeting expenses Corpus to be Total corpus to b from the 21st to the invested in Corpus to be invested in equity 30th year through equity for ten invested in equity at the time of debt years for twenty years retirement

3,028,484

1,635,083

Rs. 86.27 lakh

Rs. 54.65 lakh 6,614,822

13,129,209

802,198

2,437,281

Disposable Surplus Cumulative Cumulative Cumulative

Cumulative Disposable Surplus (Floaters) 2,000,000 3,971,433 6,251,299 8,878,207 11,895,178 15,143,121 18,453,881 22,477,808 27,499,282 32,169,345 38,566,650 45,813,691 54,010,213 63,153,008 73,464,209

Disposable Corpus (Fixed Income) 2,000,000 4,029,128 6,412,957 9,200,593 12,447,287 16,006,160 19,719,203 24,252,484 29,916,549 35,380,675 42,750,439 51,189,290 60,834,097 71,723,054 84,125,533

Disposable Corpus (MIPs) 2,000,000 4,057,975 6,494,651 9,365,163 12,731,892 16,455,367 20,384,265 25,194,443 31,211,885 37,117,972 45,035,299 54,152,108 64,629,195 76,531,906 90,160,957

Disposable Corpus (Balanced) 2,000,000 4,115,670 6,659,771 9,701,143 13,318,638 17,390,496 21,782,463 27,194,507 33,989,161 40,879,281 50,030,377 60,691,238 73,084,271 87,345,983 103,860,274

Cumulative Disposable Corpus (Equity) 2,000,000 4,202,213 6,911,777 10,222,473 14,243,919 18,889,132 24,060,229 30,507,009 38,664,344 47,315,201 58,718,142 72,248,983 88,268,727 107,078,347 129,258,242

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.