M5 Final Module

Topic 4: Plan Preparation
Topic 4
Plan
preparation
Contents
Introduction
Learning outcomes
Required reading
Personal profile
Personal data
Financial Goals and Objectives
Assumptions
Planner’s Notes
General Design of the Financial Plan
The Format of the Plan
Summary and Recommendations

Recommendations
Schedule of Implementation
List of Prioritised Items
Employee Benefits
Cash Flow Analysis
Asset allocation and risk management

Selection of investment type
Selecting specific investment products
Basis of recommendations
Income Tax
Financial Position
Presenting recommendations and projections to the client
Capitan Need Analysis
The limitations of financial planning software
A summary
Suggested answers
Readings
Reading 4.1
Reading 4.2
Reading 4.3
Recommended Additional Reading:

“In the Wonderland of Investments” by Mr. A.N.Shanbag published by M/s. Popular
Prakashan Pvt. Ltd., every year after the passing of the Finance Act.
“Personal Investment and Tax Planning Year Book: Assessment year 2004-05”by N.J.
Yasaswi, published by “Vision books, New Delhi”.
Past issues of the magazine “Outlook Money”, previously called as “Intelligent Investor”,
which can be accessed from their website www.outlookmoney.com
Introduction
Now that we have gathered all the relevant data and undertaken a detailed client analysis, we
are in a position to begin detailed financial planning preparation for the client. The purpose of
this topic is to determine how funds for investment are best placed to suit the particular client.
Projections can be made to show how the financial planner’s recommendations will help
achieve the prospective client’s objectives, and these projections can become part of the
written financial plan document.
Learning outcomes
By studying this topic, you should be able to make informed responses to the following key
questions:
• How would you prepare and present a financial plan to your clients?
• How would you determine an asset allocation strategy to suit a client ’s risk portfolio?
• How can you select investment types to match the requirements of the specific
client?
• How can you select appropriate investment products for particular types of
investment?
• How would you determine and project the important aspects of a financial plan?
• In what ways can you present overviews, recommendations and projection to the
client in an informed and timely manner?
• What are the limitations in using financial planning software to develop a financial
plan?
Required reading
Readings
Reading 4.1 Donnelly’s Investing Times 1998, ‘Asset allocation: The key to achieving higher
returns’, no. 240, 30 September.
Reading 4.2 van Eyk Research 1997, Investment Outlook Report, van Eyk Research:
Investment Research and Advice, March, Sydney, pp.1 –25.
Reading 4.3 Pembroke, Godfrey 1997,Personal Financial Plan, Godfrey Pembroke Financial
Consultants Ltd, Melbourne.
Personal Profile
Personal Data
Mr.Vasant Kumar Joshi Mrs.Vidul;ata

Joshi
Age 59 years Age 57 years

Occupation Senior Engineer Housewife
BCD Pvt Ltd
Pune.
Children
Mr. Vijay Kumar Joshi Mrs. Vineeta Rao

Age 32 years Age 28 years
Occupation: Software Engineer Occupation: lecturer in Grad.
School
MNZ Company Malaysia
Singapore
Married, having a son. Married, having 2 children
Home
45, National Housing Soceity
Aundh, Pune
Ph: 2588 46 46.
Parents
Mr. Joshi Mrs.Joshi
Not Alive Father – 85
Mother - 82
DFP 6: Financial Plan Construction
GOALS & OBJECTIVES
Mr & Mrs.Joshi would like to:

1. Using the funds available for investment to:
 cover a substantial part of your expenditure needs with a guaranteed income;
 provide a source of funds which, with capital growth, will be available for
emergencies and which can be drawn from day-to-day for living expenses not met
by the guaranteed income;
 ensure funds are available for an overseas holiday and for updating vehicle, at the
point they wish to do these;
 ensure investments placed are at the conservative to moderate end of the risk
scale.
2. Keep taxation and complexities to a minimum.
3. Have an investment portfolio and financial plan that are easy to follow and easy to
manage on an ongoing basis.
4.Review estate planning needs.
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IDENTIFICATION OF ISSUES & PROBLEMS
• Based on the life insurance needs, what type of coverage should be purchased?
• What are the additional insurance policies to be purchased and how the additional
expenses on these will be met?
• How a comprehensive investment planning to be done which would involve minimum
management and generate adequate income with moderate risk-return trade-off?
• What strategies can be implemented to ensure minimum tax liability?
• What are the objectives with regard to the estate?

ASSUMPTIONS
• Calculations presented in this report do not assume any increase in the living
expenses.
• It is assumed that Mr.Joshi would retire at age 60 and will not take up any part / full
time employment after retirement.
• An inflation rate of 4% p.a is assumed. (An assumption required for making
projections of income and expenses beyond one year)
• Life Expectancy of Mrs. Joshi 80 years
• Life expectancy of Mr.Joshi is 78 years.
• The tax calculations assume that tax rates applicable for the assessment year 2004-
05 would be applicable in the subsequent year as well.
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Planner’s Notes
General design of the financial plan
Financial plan of Mr and Mrs.Joshi is designed by considering their lifestyle

and the desire to continue the hobbies that they currently pursue even after
their retirement. As they have no dependents and their risk tolerance is
moderate, we have recommended retaining investments in the equity and
further allocation of funds in real estates. This asset allocation strategy also
has potential to add to her income and positive tax implications. The
recommendations involve
1) building an asset base through gearing

2) building a capital base for a higher retirement benefits through deferred
annuity plans; and
3) reallocating assets to fetch regular retirement income.
If the economic outlook is good, the clients can maintain this asset allocation
strategy in the next five years but if the interest rates were to fall further, in
order to meet expenses, portfolio shuffling would become necessary.
In developing the sample planning case, we have considered only generic

types of investment vehicles and insurance products for giving
recommendations. The emphasis is on the process of planning rather than
specific planning strategies. Readers of this sample case may think of various
alternatives for achieving the financial goals and objectives of the client. What
is essential is adherence to financial planning process.
Limitation of space generally curtails illustrations of alternative financial

scenarios. There is no limit to the number of alternative scenarios. For
example, an illustration of a client’s financial position under various
circumstances such as disability, death, preponement of retirement age than
what has originally anticipated, sudden changes in the economic scenarios
projected, etc., can be added to a report as schedules. Generally, financial
planners prepare a main report giving important information and
recommendation and the same is supplemented through schedules and
projections.
The format of the case study
During our discussion with the clients, we determined that brief reports of
financial planning primarily showing the details of projected income and
expenses, investments and asset allocation strategy is expected by the
clients. In this report we are providing statement of income and expenditure,
Fund flow position and statement of investments along with investment
income. This covers a planning time span of approximately 2 years –
investment strategies from today till the date of retirement and projections of
income and expenses for a year from Mr.Joshi’s retirement. It has also been
agreed to oversee the implementation of the recommendations made in the

financial plan and review the plan at the end of one year.
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SUMMARY AND RECOMMENDATIONS
In the enclosed financial plan, which is the outcome of our discussions and detailed analysis
of your current financial profile, we have indicated several steps that you need to take to start
moving toward your overall financial objectives We summarise below our specific
recommendations for your overall financial planning. After this summary, we include a list of
prioritised items to indicate the ranking of the steps that you now need to take to fully
implement your financial decisions and monitor your actions.
Recommendations:
• Establish an investment programme designed to provide an investment portfolio by
second quarter of 2005. This portfolio is designed to have diversified investments in
real estate, mutual funds, fixed deposits, equity shares and also annuities. Take
advantage of market declines, for making fresh investments in shares and mutual
funds.
• Start the construction of first floor of your residence by arranging the housing loan
with a bank or housing finance company. The aim is to complete the construction
around the time of your retirement, preferably before the end of 2005. It will give you
the tax advantage while you are earning and after retirement and also augment your
income.
• Decide on the purchase of life insurance plan coupled with disability rider to take
care of your liability on housing loan in case of any death / disability.
• Initiate premium contribution to deferred annuity plan (like Jeevan Suraksha) to take
care of your present income tax as well as future financial needs.
• Purchase a home owners’ policy to take care of the risks associated.
• Liquidate the present company deposits and invest Rs.150000 for a five year period
in AA rated company deposits which gives an income of 9%.
• Retain your present equity portfolio which is expected to perform in the coming years
as the economy is doing well. In case of a market rally, you may think of booking
partial profits and reinvest the same at declines.
List of prioritized items
We reiterate our commitment that we will follow through your decisions in

implementing our suggestions and recommendations. We will also arrange
appointments, if necessary, for meeting the other professionals for the plan
implementation. To implement our recommendations, you should take steps
scheduled for the current year in the action list below:
Action list for Implementation of the financial plan

Action Required Time Frame Date completed

Approval for construction and
Getting the housing loan
Sanctioned from a bank 3-4 months
Purchase of life insurance policies 1-2 months
Purchase of home owner’s policy 1 month
Reinvestment of company deposits 15 days – 1 month
Reinvestment of bank deposits with in 15 days from

The date of maturity
Investment in regular income with in a fortnight from

Streams the receipt of retirement proceeds
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EMPLOYEE BENEFITS
As we have seen in Topic 3, Mr.Joshi, who is currently working in BDC Ltd is
to retire from his services in October 2005 and has approached you for
developing a financial plan that would take care of his retirement needs. An
active retirement is anticipated. As keen golfers, your clients will be spending
more time on the course. They also plan to combine travelling around the
country with playing at various golf courses.
Vidyulata Joshi is active and they both serve on various association
committees. In retirement, they expect to be taking even greater advantage
of the club’s facilities.
As a private sector employee, Mr.Joshi is eligible to receive Gratuity equalling
1 month’s salary for every completed year and part thereof of his service. The
medical benefits that he is receiving from his employer would continue after
the retirement. He is not eligible to receive any pension from his employer.
For drawing a financial plan, you need to estimate the amount of gratuity
receivable by your client on his retirement and also indicate the tax
exemptions, if any, and also calculate the likely tax liability on the money
receivable. This exercise would give you as well as your client an idea of the
net amount receivable and plan the investments suitable to your client needs.
The following table captures the retirement benefits receivable by your
client.
Case Study: Mr & Mrs.Joshi

Retirement Benefits (Projection)
Date of joining 10.7.1992
Date of retirement 31.10.2005
Service period 13 years and
3months
Gross salary
60000 p.m
Basic Salary
40000 p.m
Gratuity Receivable
(40000*14) = 532000
(1 month’s salary for every completed years
and part thereof of service)
Less: Exempt from tax
Balance 350000
182000
Vasant is in the highest tax bracket of 30% and he is liable to pay tax on the
balance amount in the previous year 2005-06. The tax liability of Mr.Vasant works
out to Rs. 54600/- The net amount (after tax) receivable is estimated at
Rs.4,77,400.
Risk Assessment & Asset allocation strategy
Once you have determined a prospective client ’s risk profile and appropriate financial
strategies, the next step is to determine the amount of exposure the prospective client should
have to the various investment markets (asset sectors). Some prospective clients, and
perhaps even some financial planners, might consider that it would be more appropriate to
place all their funds in the most appropriate investment market relative to the prospective
client ’s risk profile, objectives, and the current state of the economy and investment cycle.
For instance, if there was a young person who had no dependants, was highly paid and
unlikely to need Rs.1,00,000 available for investment for the next 5 years, why shouldn’t that
person place all their funds in the share market or an equity fund, which the financial planner
believed would be the best performing investment sector over that period?
There are many reasons why this would be inappropriate. Over time, so many things can
alter the client’s position: personal circumstances, economic circumstances and tax laws can
and do change. Therefore, you must understand the need to reduce investment risk by
diversifying the investment portfolio among the various asset sectors. Certainly, a young
person may have a preference for shares, and that too Information Technology shares, but
they should still diversify their portfolio.
Appraising factors which determine asset allocation

The extent of diversification among different asset sectors will be determined by:
• the client ’s risk profile;
• appropriate investment strategies for the client; and
• the economic outlook.
Client’s risk profile
As discussed in Topic 3, the client’s risk profile will be determined by such variables as age,
experience, resources and investment horizons. Generally, investment sectors which perform
well in the long term, like shares, tend to have more volatility (risk)in the shorter term. Lower
risk profile individuals, therefore, will tend to have more exposure to lower performing, but
less volatile sectors.
Appropriate investment strategies
Asset allocation will also be influenced by considering the most appropriate investment
strategies for each client. For instance, the need for income would require higher exposures
to cash and fixed interest funds. To reduce taxation, capital growth and dividend income from
shares might be targeted.
Reading
Reading 4.1 provides further information about asset allocation and
how it provides the key to achieving higher returns.
Economic outlook
The economic outlook may influence the level of exposure to each asset sector
recommended by the adviser, particularly when short-term strategies are considered. For
instance, if interest rates are on the decline, and income is required, a high exposure to fixed
interest investments may not be appropriate.
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Short-term (i.e. tactical) asset allocation strategies try to time the market for investment
decisions. This is indeed a difficult, if not impossible task. Also, the relevant transaction costs
associated with the short-term asset allocation moves may be quite high, negating any gains
from such moves.
However, planners should be focused on the long-term investment objectives of clients, and
recognise that economic and market conditions are most often cyclical and/or unpredictable.
The record of economists in predicting economic conditions attests to the dangers of moving
assets into and out of particular markets primarily based on market forecasts. Most evidence
suggests that, as a general rule, timing asset allocation moves into and out of markets
according to predicted market trends is an unsuccessful tactic for a planner to follow.
This is not to say that economic forecasts should be ignored, but that financial planners
should be very wary in considering that information, and keep a long- term (strategic)
approach to asset allocation in mind, to consider the target allocation, and to re-balance the
portfolio as appropriate.
Reading
A good example of economic analysis to determine asset allocations is
provided in Reading 4.2.This is the Investment Outlook Report by van
Eyk Research. That it is outdated and pertains to another market is
not important: its purpose is to provide you with a comparison with the
current situation, and shows you how much the market can change in
a relatively short period. Financial planners who subscribe to reports
of this kind are provided with extensive economic data and analysis,
which should assist them in determining the most appropriate asset
allocation for their prospective clients.
This reading is provided to the students only to familiarise with the
concepts and for application of the concepts as adapted to our
situations.
Linking strategies to asset sectors

The following table may be of assistance in guiding a novice financial planner when
considering asset allocation. The table indicates the relationship between strategies and
asset sectors.
Figure 4.1: Matching asset sectors to strategies
Strategies Cash Shares Fixed Income Property
Investments
Income 1 2 1 2
Capital Growth nil 1 3 2
Dividend 3 1 3 3
imputation
Medium to long 3 1 2 2
term
Short to medium 2 2 2 2
term
Risk averse 1 3 2 2
Key
1: Very good
2: Fair
3: Poor
Portfolio guidelines
Planners differ not only in the way in which risk profile is assessed but also in the number of
portfolios they make available for use by their advisers.
As we saw in Figure 3.4 of Topic 3, the prescriptive questionnaire used by one planner
produced six portfolios. In this section we look at another planner whose outline below
produces five portfolios.
Financial consultants, Godfrey Pembroke (1997), outline the following portfolio guidelines:
Five Benchmark portfolios should satisfy the investment needs of most clients.
The benchmark asset allocation is a long-term strategic allocation across various
asset classes based on historical returns and the outlook for those assets over at
least a 5-year time horizon.
The current guidelines provide a range within which a current asset allocation should
be structured. The ranges are provided to take account of shorter-term outlooks for
investment markets as well as to accommodate the particular circumstances of
individual clients.
The benchmark portfolios are constructed to satisfy the needs of clients with differing
attitudes to risk and reward and differing income requirements. The basic attributes
of each benchmark portfolio are summarised as follows:
Portfolio Cash Fixed Interest Shares Property
Aust Int’l Aust Int’l
Conservative
Current 25 45 0 15 0 15
Benchmark 20-30 40-50 0-5 10-20 0-5 10-20
Conservative Balanced
Current 20 40 0 20 0 20
Benchmark 15-25 35-45 0-5 15-25 0-5 15-25
Balanced
Current 10 15 5 35 10 25
Benchmark 5-15 10-20 0-5 30-40 10-20 20-30
Growth
Current 10 15 5 40 10 20
Benchmark 5-20 10-20 0-5 30-50 10-25 10-30
Aggressive Growth
Current 5 5 0 50 20 20
Benchmark 0-20 0-10 0-5 35-55 10-30 10-30
Conservative
This portfolio aims to produce a high level of secure income with a strong emphasis
on preservation of capital. The possibility of a negative total return over a one-year
period is low, although it may occur in a time of severe market downturns in more
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than one asset class. Capital growth on this portfolio is expected to be very modest
over the medium to long term.
Conservative balanced
This portfolio has a strong focus on secure income. There is also the expectation of a
modest level of capital growth over the medium to long term. The income stream is
relatively stable and provides some tax-effectiveness with its exposure to shares and
property. The possibility of a negative total return is relatively low, although it may
occur in times of severe market downturns in more than one asset class.
Balanced
This portfolio provides a balanced exposure to a range of asset classes, and aims to
produce an appropriate mix of both income and capital growth over the medium to
long term. Investors must be prepared to accept moderate fluctuations in the value of
the portfolio with negative total returns likely to occur, on average, at least once every
10 years. The income from this portfolio should be reasonably tax-effective because
of its exposure to shares and property.
Growth
This portfolio has an emphasis on growth in asset value rather than producing income
for expenditure requirements. However, it may still include high-yielding assets such
as shares and property. The relatively high exposure to shares and property will
mean frequent fluctuations in the value of the portfolio with negative total returns
likely to occur, on average, at least once very 5 to 7 years.
Aggressive growth
This portfolio aims to maximise total returns over a period of more than 5 years,
preferably closer to 10 years. It has a high exposure to growth assets such as shares
and property and it will experience considerable fluctuations in capital value in
response to changes in market conditions. Investors must be prepared to accept
these market fluctuations as the price which has to be paid for superior long-term
returns. The portfolio is likely, on average, to produce negative total returns at least
once every 5 years.
Source: Godfrey Pembroke 1997, Economic and Investment Review, Godfrey
Pembroke Ltd., Melbourne.
Looking at the guidelines that Godfrey Pembroke had given above, we can try to generate a
similar guideline without involving international investments
Portfolio Cash Fixed Interest Shares Property
Conservative 20–30 40–50 10–20 10–20
Conservative
15–25 35–45 15–25 15–25
Balanced
Balanced 5–15 40–50 40–50 5–`0
Growth 5–20 10–20 40–60 10–30
Aggressive
0–20 0–10 60–80 10–30
Growth
Portfolio analysis
Let us now look more closely at the out workings for the table above by defining some
associated terms.
Asset sectors
These are the sectors against which the client ’s overall investment is to be assessed and into
which the various investments have been, or are to be channelled, viz: cash, fixed interest,
shares, and property.
Asset allocation
For a particular risk profile, the asset allocation is the specific percentage recommended to be
invested in each asset sector. From the foregoing discussions and the adapted guideline
given in the table above, for example, the aggressive growth portfolio has the following asset
allocation:
Asset sector %
Cash 5
Fixed interest 5
Shares 70
Property 20
Strategic asset allocation (SAA)

Some planners establish what are known as strategic asset allocations. In this case, for a
particular risk profile, the given asset allocation remains unchanged and upon annual review
the portfolio would be reweighted back to the SAA by the adviser.
Tactical asset allocation (TAA)
For clients requiring reviews of their portfolios more frequently than yearly, a planner ’s
research team might make a recommendation, e.g. monthly, that the percentage exposure to
various asset sectors should be increased/reduced. It is as well to be aware of the broad
issues of SAA and TAA even if your planner treats them differently or employs different
terminology.
An SAA will suit most clients investing for the long term and reviewing annually, but if a client
wants to review and reweight their portfolio more regularly than annually, then a TAA
approach may be more appropriate. It would depend on agreement between adviser and
client in consideration of the time/expense required to administer a TAA system.
Defensive vs. growth asset balance
Each portfolio recommended includes a balance between conservative or defensive assets
such as cash and fixed interest on the one hand and growth assets, shares and property, on
the other.
Clearly, the higher the growth component, the higher the risk and expected return. From the
asset allocation information above, the defensive vs. growth asset balance for a growth
portfolio is 10%vs 90%and such a measure helps an adviser to appraise different portfolios.
Benchmark range
A benchmark range is the percentage of the investment between which a client’s funds
should be confined in each asset sector, e.g.(15-30)%.This gives the client confidence about
how their money is to be invested in any asset sector.
A fund manager may vary the amount invested within that range depending upon economic
and other factors.
From the guidelines that we have adapted from Godfrey Pembroke table, a benchmark range
for a growth investor would be:
Asset sector %
18
Cash (5-20)
Fixed interest (10-20)
Shares (40-60)
Property (10-30)
Benchmark ranges, while useful to be aware of, seldom take high priority in a plan and are
often not shown at all, appearing only in the CIB.
Risk and return
Included with a planner ’s risk profile asset allocation table, an indication will often be
provided of the minimum investment term for that particular asset allocation, as well as a
return objective.
Where there is a high percentage of defensive assets in a conservative portfolio, the
timeframe can be as short as one year because the risk is low and hence so also is the return
objective, which might be, for example,3%above inflation (i.e. real return).
In this case, the planner ’s research might also suggest that the likelihood of a negative return
is, for example,1 year in 17.
At the other end of the scale, an aggressive portfolio timeframe might be 7 years and the
likelihood of a negative return,1 year in 5,with an expected real return objective of, for
example,7%.
These charts may also provide other information such as past and forecasted returns, and are
therefore useful in establishing the risk/return relationship.
To this same end, a plan could include a table of historic asset sector returns and also a
graph illustrating how risk and return are related.
Planner Variation
It is worth reiterating that planners vary in the number of risk profile portfolios they employ,
and in the asset allocations they ascribe to those portfolios; hence they vary their asset
balances, and also their minimum investment terms and expected returns.
An illustration of the strategic asset allocation for another planner’s growth risk profile is:
Asset sector %
Cash 2
Fixed interest 13
Shares 70
Property 15
giving a defensive vs. growth asset balance of 15%vs.85%
Each planner’s asset allocation strategy is developed from external and internal research that
obviously differs depending upon its source.
Asset allocation variance
If a client has, for example, a growth risk profile then, as said, the asset allocation will be that
prescribed by the planner.
When advising the client, the financial planner recommends a risk profile, hence an asset
allocation, which leads to an expected level of risk and return.
When the planner then recommends particular strategies and products, the overall result
must ultimately show adherence of the implemented asset allocation to the original risk profile
asset allocation recommended. If not, then the client is going to experience more or less risk
and return than they expected, accepted and signed off on. A planner should avoid
recommending a Rolls Royce then delivering a VW!
The theory of establishing a risk profile asset allocation, therefore, is wasted unless it is
followed through in practice. If a client wants to take, for example, a balanced risk profile
outlook, you abrogate your responsibility putting them into another asset allocation.
The best way to establish whether your risk profile and after-implementation asset allocations
are compatible is to use a table. Usually they will vary, but even if not, it is still better to show
them.
If a growth portfolio had been recommended and was based upon the guidelines that we
adapted from Godfrey Pembroke chart, and your after-implementation asset allocation turned
out to be as shown, then the following variance would occur:
Asset allocation
Risk profile Implemented Asset Portfolio variance
Asset sector Asset allocation allocation
% % %
Cash 5.0 10.0 +5.0
Fixed interest 5.0 10.0 +5.0
Shares 70.0 65.0 -5.0
Property 20.0 15.0 -5.0
The variance column identifies the percentage by which the risk profile and implemented
asset allocations vary.
In your preliminary analysis you should have worked toward eliminating any significant
variances. Compatibility of the after-implementation asset allocation depends on your skill as
a financial planner. You cannot just identify the risk profile asset allocation then let the
implemented asset allocation fall where it may.
Theory must be married with practice.
The key to the expected risk/return outcome for a given portfolio is how closely you are able
to match these asset allocations. Normally, a 5%variance in any asset sector is considered
acceptable and likewise with the defensive vs. growth asset balance.
So, scrutiny of individual asset sectors above suggests acceptability because none vary by
more than 5%. However, the defensive v growth asset balance is 20%vs. 80% and should
have been 10%v 90%and requires correction.
If you are not careful, your recommended asset allocations can easily stray one or two risk
profile positions above or below what you carefully analysed their risk profile to be. Think of it
this way. If your client loses money and sues you and you are asked in court why you did not
implement what you recommended, what will you say?
When a variance occurs in asset sectors, defensive v growth asset balances, you must first of
all ask yourself whether you can correct the anomaly. If not, then you must include some
comment about it. The client is entitled to know why this situation has come about.
How do you propose that the implemented asset allocation will be brought in to line with the
recommended risk profile asset allocation? Will it be by excess growth in an asset sector
over time because savings are being progressively channelled into it; by sale of another asset
and reweighting of the portfolio, or other reasons? What is the timeframe over which this
reconciliation is achieved? Will reweighting upon annual review be the key?
Remember, research indicates that expected risk/return results for a given risk profile are
heavily influenced by close adherence to the diversification principles inherent in the
associated asset allocations.
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Diversification
Diversification of investment funds is a method of reducing investment risk and volatility. We
will look at diversification in Question 4.1.
Case study: A financial plan for Mr and Mrs Joshi

Question 4.1
From Topic 3 and your reading of the March ‘97 van Eyk report,
determine which of the five portfolios most closely accords with the
Joshi’ situation and identify their:
(a) risk profile including some brief notes as to why
(b) asset allocation
(c) defensive vs growth asset balance
(d) portfolio benchmark range.
Provision for non-core exposure

It is useful to distinguish between core and non-core exposure; that is, to allow for minimum
exposure in specific asset sectors to minimise risks and meet the client’s requirements, and
then invest the balance to complement the economic outlook.
For example, in the suggested answer for the range of asset allocation recommended for Mr
and Mrs Joshi, by summing the minimum levels of exposure it can be seen that some 80 per
cent of the portfolio is essentially fixed.
A good financial planner, providing an ongoing service, should be making recommendations
on the floating 20 per cent, depending on changing economic outlook.
‘Worst-case’ scenarios
You will have noticed in the van Eyk report (Reading 4.2,section 2.2) that the authors
provided a range of potential returns for each of the portfolios.
These different potential scenarios are useful when explaining risk situations and volatilities to
clients. You may also wish to paint a ‘worst-case ’ scenario to help explain investment risks to
prospective clients.

Diversification
Diversification provides a good deal of protection from risk. For instance,
consider how a fall of 40 per cent in the value of the share market could
affect you if your asset allocation was as follows:
Cash. Shares Fixed Interest Property
Before 3000 5000 2000 Nil
fall
After fall 3000 4000 2000 Nil
That is, shares decline by: 20% of 5000 = 1000, Cash and fixed interest
investments remain constant.
Therefore, percentage decline in total assets 10% i.e., 1,000
While you would not be happy about a decline of 10 per cent in your
portfolio, it would not be disastrous. It may be an acceptable level of risk
for you as a long-term investor, knowing that if a rise in the value of the
same magnitude occurred, there would be a 10 per cent increase in the
portfolio.
Question 4.2
In broad general terms, how do the following factors impact on the asset
allocation process for a particular client?
• client risk profile
• appropriate investment strategy
• the economic outlook
• diversification of funds
• provision for non-core exposure
• worst case scenarios.
The selection of investment type

The next step in the financial planning process is to select the type of investments to be
recommended to prospective clients. You will already be aware of the range of investments
available and the technical aspects of those recommendations. Remember that you have a
duty to prospective clients to explain why certain types of investments are chosen. It would
be potentially detrimental for you to assume that prospective clients understand how a
particular investment, for example a growth fund offered by a Mutual Fund, works, and the
implications of choosing such an investment.
Eight variables
A financial planner must be able to explain why a certain type of investment has been chosen
and why it is suitable for the prospective client. In matching a type of investment with a client,
you should consider the following variables:
1.Growth
What opportunity is there to achieve capital growth? How is it achieved? Historically, what
levels of growth have been achieved?
2.Income
Is this an income-only investment or is there opportunity for income and growth? When is the
income paid and how much can be expected?
3.Taxation
What are the taxation consequences with regard to capital gains, income tax, taxation of lump
sum retirement benefits, tax treatment of additional benefits under voluntary separation
schemes of employers, tax-deferred or tax-free income, for example?
4.Risk
How volatile is this investment type in the short, medium and long term?
5.Liquidity
How easily could the investment be turned into cash? How is this done?
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6.Manageability
Will this type of investment require infrequent or regular monitoring and review? How can this
be done? Are there switching options?
7.Asset allocation
Where does this investment type have its funds placed —cash, fixed interest, shares,
property or overseas, for example? What are the minimum and maximum levels of exposure?
8.Costs
What costs are associated with the investment —entry/exit fees, management fees, trustees,
administration costs, commissions?
Briefing the client about investment types

There is sometimes controversy regarding the recommendations which some financial
planners give to potential clients regarding the advantages of investing through mutual funds
over direct investments in assets such as shares and direct property. There are advantages
and disadvantages in both types of investments and these need to be considered and
discussed in detail with the client.
In Topic 3,we worked through a strategy recommendation for Mr and Mrs Joshi to include an
income stream. The strategy included discussion of the relevant investment variables
including income, taxation, social security and so on. Similar discussions could be provided
on each of the following investment types:
(i) money market fund
(ii) income fund
(iii) balanced fund
(iv) growth fund

Investment types
So that you are familiar with some of the more common types of managed
investments, we are including a brief description of each.
Money market fund
This type of investment places funds in the short-term money market. This
market trades short-term government and other securities. Most are discount
maturities where interest and the securities’ value are paid at maturity. The
money market funds we recommend for our clients all have 24-hour call
facilities, which allow the accounts to be used like a bank account for deposit
and withdrawal at any time. This is ideal to use as your first source of funds to
meet living expenses.
No capital growth is produced, but income is usually achieved at a higher rate
than bank deposit rates. Interest (income) may be expected to provide a positive
return of about 2 –3 per cent pa ahead of inflation in the long term. The income
is fully taxable. This is a highly secure form of investment and you can add and
withdraw funds at any time. The annual management fee would be charged to
cover all costs. These funds are useful so as to save you having to juggle term
deposits and bank deposits.
Income Funds
A mutual fund pools investors’ money to achieve economies of scale and
management efficiency. A trustee ensures the fund manager complies with the
trust deed for the benefit of unitholders —the investors.
An income fund concentrates primarily on less volatile cash and fixed interest
investments. It also provides some diversification amongst asset sectors to
achieve some tax-efficient growth. Typically, exposure of an income fund would
be 60 to 70 per cent in fixed income assets and the remaining in equities or
other growth securities.
This asset allocation generally provides a high level of income with some capital
growth.
In the long term, we would anticipate returns in the order of 3 –5 per cent pa
ahead of inflation.
Security of these funds is moderate to high in the longer term. Most of the funds
aim to provide positive returns on a yearly basis; however, negative returns can
occur over this (and shorter) periods. This is especially so in extreme market
conditions (e.g. when fixed interest markets fall into decline). The unit price is
therefore not guaranteed. Redemption of funds is usually available within 7
0days but can take up to 28 days.
Balanced funds
This is like a more aggressive income fund because balanced Funds tend to
seek exposure to longer-term growth assets. Thus, in the short run, they are
more volatile and are therefore best suited to medium-to long-term investors or
for funds, which may not be required for some time. Higher share exposure
usually means higher returns and greater tax efficiency. Costs and all else are
as for the income funds.
Returns for the balanced funds my company recommends can be expected to
be about 4 –6 per cent pa in the longer term; i.e. higher long-term returns when
compared to income funds. Typically, these funds would aim for equal exposure
to fixed income and growth assets in their portfolio.
Growth funds
The term growth fund is used to describe a Mutual fund which targets shares for
investment. Essentially, therefore, it is a vehicle into the share market, but one,
which provides the investor with plenty of information and diversification.
Seventy per cent or more of the funds in an equity fund will generally be
invested in the share market. The balance will be liquid funds.
In the past, long-term returns could be excellent while short-term returns can be
very volatile.
Since dividend income is not taxed in the hands of the recipient and long-term
capital gains enjoy a favourable tax treatment, these funds could be used as
part of long-term investment portfolios targeting tax-efficient income and capital
growth.
Advantages of mutual funds
While there will always be a place for direct investments (for wealthy individuals,
investors with special interests or ambition to self-manage, when there are
special opportunities to take advantage of, and so on), mutual funds make
sense for most investors who are inexperienced and, in any event, unable to
access necessary research information or to analyse that information.
Other advantages of professionally managed funds over direct investments are
as follows:
Cost efficiency —most stockbroking firms charge between 0.5 to 1 per cent for
every transaction made by a client (to buy, sell or switch). The buying and
selling price differences, transaction fees and stamp duty charges of a
24
professionally managed direct. share portfolio may exceed the total costs of an
average equity fund.
Diversification —even Rs.100 000 can ’t be spread very far when buying
shares direct. When using managed funds, even Rs.10 000 can be cost-
efficiently spread amongst investment sectors and within investment sectors.
Professional management —investors in mutual funds have professionals
working on their behalf. The investor does not need to worry about difficult
tenants, renegotiating rents, altering leases, taking up rights issues and so on.
Liquidity —investors in most mutual funds can access their funds within two
weeks.
Disadvantages of mutual funds
The following may be considered as disadvantages of mutual funds:
• Loss of personal control over decision-making —the fund manager
makes the decisions.
• Pooled funds mean investors do not own a particular asset.
• The fund manager and/or the fund ’s risk profile may change and
become unsuitable for the investor.
• Management fees and costs may be high.
• Returns may be lower than some direct investments.
Question 4.3
Why is it essential that such detailed accounts of investment types be
provided to the client?
INVESTMENTS
Selecting specific investment products

Basis of recommendations
Having decided on asset allocation and the selection of investment type, the next step in the
process is to nominate specific investment products for the prospective client.
As a starting point, you could use information provided by research houses, in which they
classify investments as recommended or approved by investment type. However, it is
ethically questionable whether the client’s needs will be served if you simply take such
recommendations and recommend them to the client without carefully considering each
investment product, researched on your own part.
Our society is becoming increasingly litigious, and professional, legal and also ethical
responsibilities need to be considered in these and other circumstances that relate to the
advice that we give clients. Therefore, you must investigate investments and investment
products further. It is more appropriate to use research houses and their software for two
main purposes:
1.to exclude inferior or unsuitable investment products so that the recommended or approved
list simply becomes the list of products which you can research in more depth; and
2.to gather, organise and present data and information to the client on the investments which
have been researched objectively.
Making projections
When selecting an investment type and specific product, you have to make a number of
projections about its future performance. Financial planners must be able to readily justify all
projections used in preparing a financial plan and to warn clients that projections are just that,
and that other outcomes are possible too.
Question 4.4
Design a brief checklist of issues to consider when you are making
projections about the future of recommended investment products.
Presenting recommendations and projections to

the client
It is crucial that clients understand the recommendations and projections described
previously. You will continue to analyse Mr and Mrs Joshi’s case study and this section
demonstrates one way in which these recommendations and projections may be presented to
clients. Please note that this case study is based on taxation and investment
environment during 2004-05.

Summary of investment recommendations
Income streams
Varishtha Pension Bima Yojana: You may be aware that, the Government of
India has asked L.I.C. of India to introduce a guaranteed return pension plan
for the senior citizens, under which the pensioner is guaranteed a pension
that provides a return of 9% p.a. subject to a maximum monthly pension of
Rs.2000/- p.m. per family. For this the pensioner would have to pay the
purchase price in a single go. Since, this is the scheme, which has the least
risk and the highest assured return while protecting the initial corpus, we
recommend that this scheme is availed of to the maximum permissible limit.
You will have to invest Rs.2,66,665 in this scheme and would be getting a
monthly pension of Rs.2000/- for the rest of the life of the person in whose
name it is purchased.
Post Office – Monthly Income Scheme: Secondly, the search for a
guaranteed regular income with a Government Guarantee while
simultaneously providing for a good yield leads us to the Monthly Income
Plan of the Government of India made available through the Post Offices.
Again, there are individual ceilings under this scheme, which restricts the
amount that can be invested at Rs.6,00,000/ either under a single investment
by spouses jointly, or Rs.3,00,000/- under individual names. This scheme
would provide a regular monthly income of Rs.4000/- together for both of you
and also provide a capital appreciation by a bonus payment of 10% of the
invested amount at the time of maturity of the scheme.
Immediate Annuity from Life Insurance Companies: Both the two
investments described above put together do not provide adequate monthly
income to cover the projected expenses. You are used to receiving a regular
income as salary and hence would naturally like to get an assured monthly
26
income, which would take care of a majority of their day-to-day expenses.

For this the best solution is an assured immediate annuity provided by Life
Insurance Companies. Now, under the immediate annuity schemes, insurers
do provide many pension options ranging from a fixed life annuity, a life
annuity which increases at a regular rate annually, life annuity guaranteed for
a certain period, say, 5,10,15 or 20 years, annuity with return of purchase
price on death of annuitant, and annuity payable during the lifetime of either
of the spouses, etc. In your case, since both of you are enjoying a very good
life expectancy, getting a reduced annuity for the same of a period guarantee
does not make an attractive option. Hence, we are recommending the
highest annuity that is provided by the life annuity option, to be purchased
separately on both your names to split income as well as ensuring payment
of annuity for the lifetime of each one of you.
Investment in property: One of the best ways to save income tax in the
current scenario is to invest in a residential building a sizeable sum that is
taken on borrowing as a Home Loan. Due to the intense competition in the
Home Loan market, as well as the Government’s moves in reducing the rate
of interest in the market through a host of measures, the home loans are
available at a very reasonable rate of interest of 7.5% today. Added to this is
the income tax benefit that can be derived on the repayment of loan and the
interest paid on borrowed capital for construction, purchase or extension of
residential property.
Hence, as a measure to reduce the tax liability both while in service as well
as after retirement, we recommend that you can go in for the construction of
a self-contained residential accommodation in the first floor of their family
house. This would give you a triple benefit: a) you can let the new
accommodation constructed to a small family on rent and there by earn an
attractive monthly income considering the fact that the house is in a prime
area attracting good rental value; b) the availability of a tenant in the house
would save you of many a botheration, when you would like to travel outside
the city, since the tenants can take care of the day to day maintenance of the
property like payment of taxes, keeping the surroundings clean and
protection of the property; and, c) income tax benefit. Both the interest paid
on the capital borrowed and the repayment of loan qualify for tax benefits
separately. While, the interest paid on borrowed capital can be used as loss
on housing property by setting it off against the rental income, the net loss
can be carried for ward to reduce the income from other sources, which
brings down the income chargeable to tax of the assessee. Also, the
repayment of loan is eligible for tax rebate under section 88 of the Income
Tax act.
Saving on Tax: We have recommended investment in regular income
investments so far and all of them would provide monthly income to both of
you. All the income that you would be receiving from the Senior Citizens’
Pension Plan (VPBY), Immediate Annuity as well as the rental income from
property are income chargeable to tax. Now, we have to think in terms of
saving on the tax liability, while at the same time earning a reasonably good
yield. For this we recommend a two-fold approach. One extending the
Public Provident Fund Account that is in the name of Mrs. Joshi. This would
mean that the account has to be kept operative with a regular investment of
at least Rs.500/- per annum. This account will earn interest at the rate fixed
by the Central Government from time to time. Currently the rate of interest is
8% tax free, which is quite attractive. Also, the account provides a facility to
withdraw an amount equal to the balance in the account at the end of the
fourth preceding financial year. This facility can be made use of in case of
the expenses in a year rising thereby creating a need for cash. In case of the
income in a year being more than the expenses and/or there is a liability of
tax then this account can come in handy as an approved investment option to
avail tax rebate under section 88 of the Income Tax Act.
Similarly, since you are enjoying a good life expectancy and likely to cross
the income tax threshold, we recommend buying a deferred annuity plan
immediately (without waiting for retirement) on both your names with an
annual premium outlay of Rs.10,000/- per person. We can choose the
deferred annuity policy (say, Jeevan Suraksha Plan offered by LIC of India)
to vest at the age of 65. The benefits are, during the period up to age 65, the
premium paid would be eligible for deduction from income chargeable to tax.
The policies would provide a regular income after vesting which would be
very useful after the age of 65, when the expenses could have increased due
to inflation as well as any deterioration in health. But the income when
received would be subject to tax. Because we are choosing a vesting age of
65, you would have become eligible for income tax concession as Senior
Citizens and hence the tax burden would ease because of that.
Yield on investment: After having done these, the next step is to invest with
an eye on the return receivable with a slightly higher risk involved. We can
think of shares and mutual fund investments, which are slightly more risky but
are capable of giving a higher return than Government Backed investments.
We can also think of Corporate Fixed Deposits giving a higher rate of interest
than banks. For this keeping the security of the investment in mind we have
to choose only such companies that enjoy a AAA rating or equivalent. Hence
we are recommending investments in Income Fund and Balanced Fund of a
renowned Mutual Fund. Considering the stage of life that you are in, we are
recommending a ‘conservative’ approach and hence not recommending a
Growth Fund investment.
Funds for emergencies (Liquidity needs): In order to be able to raise
resources required to meet emergencies or urgent expenses, some funds
have to be invested in such a way that they can be accessed at short notice
without loss to the funds. Hence, we are recommending keeping in some
money in the Bank Deposits with the facility of automatic conversion as Fixed
Deposit (like the Quantum Optima Deposits of ICICI Bank or Suvidha
accounts of Citibank, etc). These funds when remaining invested would earn
interest at Bank Fixed Deposits, while still being available for withdrawal
round the clock through ATMs.
We have also recommended that the following investments are retained and
used as a source of funds to meet emergencies and to supplement your
living expenses for the first few years. This will allow your other investment
funds to be invested more efficiently and for the longer term.
Investments retained
Equity shares Mrs. Joshi 1011420
Mutual Funds: Both
Balanced Funds 75000
Income Funds 50000
PPF (including the further
accretions) 155432
Note: The PPF account showed a balance of Rs.125,000 on the date of the
first interview. Interest @ 8% will be credited on 31 st march 2005. Also, for
the purpose of saving tax for the current year 2004-05, Mr. Joshi deposits
Rs.20,000/ in the account before 31st march 2005. Hence the balance
Rs.155432. You would have studied in the module on “investment planning”
that PPF accounts have a term of 15 years. This term of 15 years would
have normally ended on 15th May 2004. But for reasons described above,
the account is extended for another 5 years to start with.
Projections
28
[Whilst the answer to Question 4.1 indicated a particular asset allocation for
the Joshis’, this was based on strategy devised by a fund manager other than
your own and was intended to illustrate the divergence between planners.
In the following, research provided by your own dealer addresses the Joshis’
situation with a different asset allocation..]
The Financial statements and projections section of this report contains a
number of projections based on our understanding of your current investment
position. The Recommended investments section shows the recommended
portfolio, as it would look once in place. You may also note that total family
assets are detailed in the Financial statements and projections section of the
report.
Based on our investment recommendations, we have also provided a
projection of anticipated cash flows and income tax. As you can see from our
projections, we have produced a very effective taxation position.
Once in place, the total portfolio, including cash in the bank, will have an
asset allocation mix as follows:
Asset sector %
Cash & bank balances 4.99
Indian Fixed Interest 64.40
International Fixed Interest 0.00
Indian Equity shares 18.92
International shares 0.00
Mutual funds 2.34
Property 9.35
This mix should provide you with the level of diversity and spread to meet
your requirements for reduced risk but with some ability for capital growth
and protection from inflation.
Finally, we have provided projections of your financial position (with respect
to allocated income streams in the Investment cash flow summary in the
Financial statements and projections section).
Based on fairly conservative rates of projection, we have calculated that you
can meet your expenditure requirements with your investments and still
maintain the real value of your investments. This is demonstrated in the
Growth estimates section. That means that your investments should keep
pace with the projected rate of inflation and maintain their purchasing power.
Even after tax and the premium to be paid for the insurances that we have
recommended, you will be left with over Rs.388,000/- of combined income in
year 1 after retirement, against your estimated expenditure required of
Rs.240,000/.
This type of summary is useful in getting the general message and strategies across to the
prospective client; however, it does not contain sufficient detail to claim it covers all of the
necessary regulations. Some financial planners may want to include the extra necessary
detail in the main body of the plan. Otherwise, it can be included as appendices. The
following demonstrates one way of providing the detail.

Recommendations
Overview
To pursue the recommended financial and investment strategies and satisfy
your needs for flexibility and tax saving, hence we recommend investment in
• Infrastructure bonds
• RBI Tax Savings Bonds; and
• Mutual Funds
The first two investment avenues are selected mainly for the tax
advantages they offer. Investment in infrastructure bonds are for a period
of three years and are eligible for tax rebate under section 88 of Income
Tax Act. There are two types of these bonds issued by RBI – one
carrying tax free interest but at a lower rate of interest and the other
offering a higher return which is taxable. At present, tax free bonds carry
6.5% and taxable bonds 8%. Considering your estimated total income of
Mrs. Joshi and the income tax threshold limits, we have chosen tax free
bonds for investment.
Investing in a mutual fund scheme offers the following benefits:
• administrative simplicity
• investor choice from a host of open and close ended mutual fund
schemes
• Diversification
• Periodical portfolio review reports
• flexible options such as systematic investment / withdrawal,
reinvestment of dividend etc.
We will now continue with the recommendations section of the case study.
INSURANCE

Immediate annuities
Annuities have existed since the inception of life insurance. They are
sometimes regarded as ‘life insurance in reverse’, since the life insurance
companies provides an income for life (or for a set period of time) in
exchange for an initial lump sum of money. Security is provided through the
contractual obligation of the provider. The underlying portfolio may be
diversified.
As explained earlier, immediate annuities can provide a tax-effective method
of funding an income from a lump sum. While we pay the lump sum premium
required to purchase the annuity, the annuity instalment received every
month will be treated as income in the hands of the annuitants and subjected
to tax. But with the threshold for taxation at a reasonably high level and
expected to increase with the passing of the budget after elections, this can
be taken care of.
The amount of income received will depend on a number of factors,
including:
• your life expectancy calculated by the annuity provider based on the
age of vesting of the annuity
• the term of the annuity, based on the option that you choose
• the frequency of income payments
30
• whether the income will be constant or increasing

• the amount to be returned when the annuity contract expires (the
residual capital value, or RCV, as of now, insurers are allowing
refund of full purchase price on death of the annuitant)
• the expected earning rate of the annuity fund
Immediate annuities are generally medium-to long-term investments, and
thus suited to the conservative investor. Good health (and, hence, life
expectancy) is a major consideration before purchasing a lifetime annuity.
Investment recommended in this category:
Immediate Annuity (Jeevan Akshay from LIC of India)

Annuity owner Both Mr. and Mrs. Joshi
Type Life Annuity
Purchase price Rs.10,00, 000 each for both of you
Income Rs.6484 per month for Mr. Joshi
Rs.6217 per month for Mrs. Joshi
Term (years) Life
G ’teed (years) Nil
Residual value 0
Deferred Annuity
A Deferred annuity is the most effective way of building up a corpus for
providing a regular income after a certain chosen period of deferment.
Though you are already approaching the age of superannauation, we still
recommend this as a tool to save tax during the period of deferment and also
to supplement your regular income after the deferment period to meet
expected as well as unexpected increases in expenditure after the deferment
period. Under the current tax laws, contribution made towards approved
deferred annuity schemes are eligible for deduction from the income
chargeable to tax up to a maximum amount of Rs.10,000/- per annum u/s
80CCC(1). Hence we recommend that you start a deferred annuity
immediately, without waiting for the retirement date, as this would be helpful
in reducing the tax liability even during this year.
Investment recommended in this category:
Jeevan Suraksha Plan (Offered by LIC of India)
Annuity owner Both Vidyulatha and Vasanth Kumar
Premium Rs. 10,000 per annum
Deferment Period 6 years for Vasanth
8 years for Vidyulatha
Value of the policy
Type of Policy Participating (eligible for reversionary bonus

to be declared by LIC of India year to year)
Option for annuity Can be chosen at the time of vesting
depending upon needs and life expectancy
considerations
32
CASH FLOW
This section looks at various sources of income and list down the various expenses. In
case of a retiring / retired persons income may be generated from a variety of sources
viz.,
• Amount receivable from pension schemes
• Income from house / commercial property
• Income from investments such as dividends, interest etc.,
• Income from mutual fund investments and small savings schemes
• Miscellaneous income like inheritances, lottery etc.,
Various sources of income receivable can be listed down for the easy and ready
reference of the client. As the details involve various assumptions, it is advisable to
spend some time with the clients to explain the calculations.
Case Study: Mrs & Mr.Joshi
Statement of Income
Statement of income received
Income Received Mr.Joshi Mrs.Joshi

Rs. Rs.
Rent 84000 0
Varishta Pension Bima Yojana 0 24000
P.O.Monthly Income Scheme 24000 24000
Immediate Annuity 77800 74600
Infrastructure Bonds 1650 1650
RBI Savings Bond 13000
Mutual Funds:
Balanced Funds 3000
Income Funds 3000
Equity shares 31260
Company deposits 13500
Bank Deposits
a. Fixed Deposits@ 5.5% 5500 0
b. Savings Bank account linked to FD 0 7500
Gross Income 192950 195510
Your combined net income is 388460
As all this information is essential, please advise of any inaccuracies or omissions before
implementing the plan.
This section of the financial plan also examines the details of the charges (expenses) on
these incomes receivable by the clients. These expenses are generally grouped as
under:
• Living Expenses
• Life Insurance premiums and pension plan payments
• Other Insurance Premiums
• Housing loan & debt payments
• Investments
• Miscellaneous Expenses
• Taxes
The detailed analysis would show clearly whether the client would be in a position to
spare some amount for investment (this is possible if his income exceeds expenses) or
would be liquidating investments (when expenses are more than income received) to
make up the shortage.
Living Expenses and Other Expenses:

Living expenses do not include outlays for loan payments, insurance premiums, savings
and investments as well as taxes. Each of these heads is separately dealt with in detail in
this financial plan. In the analysis, it is assumed that living expenses are would be
Rs.20000 per month or Rs.240000 per annum. As we have stated in the assumption
there is no reduction in the living expenses and inflation of 4% p.a would inflate the
expenses under the head in future.
Life Insurance Premiums:

In topic 3, we have recommended the following additional insurance plans for Joshi
family:
• Endowment Assurance Policy maturing at age 75.
• Total and permanent disability cover added as a rider to the above policy.
We also recommend purchase of the following annuity plans:
Immediate Annuity Plans (Jeevan Akshay) for both Mr.Joshi and Mrs.Joshi.
Deferred Annuity Plan (Jeevan Suraksha for both Mr and Mrs.Joshi.
Note that the annual expenditure involved in the purchase of annuity plans listed above
are provided for in the financial plan. As the final decision on the purchase of life
insurance plans and the disability rider is not communicated to us on the date of drawing
up this financial plan, we have not assumed any expenses towards life insurance
premium in the plan. We will consider the inclusion of the same, if necessary, when the
plan is reviewed next year.
Other Insurance Premiums:

• Health Insurance: Individual mediclaim policy for the couple, if the existing
coverage offered under the group policy is not sufficient. As the decision on this is
not made by you, till the date of finalising the financial plan, the premium is not
included in the calculation of expenses. The same may be considered in the plan
review after a year’s time, if you decide positively on the matter.
• Home Owners’ policy, the likely premium payment is taken in to consideration
while preparing the financial plan.
Housing Loans & debt Payments:

Both Mr and Mrs. Joshi do not have any outstanding debts as can be seen from the
personal financial sheet. However, the plan recommends construction of additional
34
dwelling unit on the terrace of their house with a view to augmenting their income and
saving on tax liability. This construction activity will be financed through a bank loan,
which involves regular equated monthly instalments which are provided for in the financial
plan.
Investments:
Over a period of their working span, Mrs and Mr.Joshi have been making investments in small
saving schemes, equity shares, mutual funds and fixed deposits. A detailed analysis of existing
investments, additional investments of retirement benefits and investment income projections are
included in the financial plan.
Taxes:
Income from various heads are computed and appended to the financial plan. It is better
to estimate tax liability so that advance tax payments, if any, can be made in time. The
calculations shown in the financial plan are based on current tax rates.
We give below the details of expenses, grouped under the above major heads, of Mr and
Mrs.Joshi. These details are also included in the worksheet presented at the end of the
topic.
Statement of expenditure
Expenditure Total Annual
All living expenses 240000
EMI on house loan 103740
Insurance premium 33000
Premium for Deferred Annuity Plan 20000
Home Owners' Policy Premium (approx) 3500
Tax payable
Total expenses 400240
Note: As all this information is essential to the effective implementation of the

plan, please advise of any inaccuracies or omissions before implementing
the plan.
It is not necessary to detail every budget item, although all the information on
how the figure was arrived at should be clear on the client ’s file. It is
important to stipulate the figure used to allow the prospective client to
question it if he/she is concerned.
You would have noticed that income is not sufficient to meet the expenses in
the initial years because of housing loan payments. This shortfall is adjusted by
drawing money from investments as shown below:
Income Tax
Taxation is an important aspect of financial planning. You are well aware that
making taxation projection involves making appropriate assumptions,
providing explanation on the assumptions made and explaining in a lucid
way the calculation involved in the tax liability determination. Statements

showing the calculation of taxable income under various heads and the tax
liability would come handy. An example of a presentation is given below for
your easy understanding.

Statement of taxable income and tax payable
Taxable Income Mr.Joshi Mrs.Joshi

Rs. Rs.
Varishta Pension Bima Yojana 24000
P.O.Monthly Income Scheme 24000 24000
Immediate Annuity 77800 74600
Infrastructure Bonds
Annual Income 1650 1650
RBI Savings Bonds 13000
Mutual Funds:
Balanced Funds 3000
Income Funds 3000
Equity shares 31260
Bank Deposits
a. Savings Bank
b. Fixed Deposits @ 5.5% 5500
C. Savings Bank account linked to FD 7500
Gross Income 108950 195510
Profit / Loss on house property 23624
Deductions u/s 80CCC 10000 10000
Dividend income 31260
RBI Savings Bonds 13000
Gross Taxable Income 122574 141250
Deduction under chapter VI A
Deductions u/s 80L 12000 12000
Deduction u/s 80D 10000 10000
Taxable income 100574 129250
Tax payable 9115 14850
Tax Rebate U/s 88
Life insurance premium 17600 15400
Infrastructure bonds 30000 30000
PPF 0 10000
Principal repayment 20000
Tax rebate 9520 15080
Tax payable 0 0
36
Notes:
1. The profit on House Property is calculated as follows:
Computation of Loss / Profit on House Property

Property is let out
1 Annual value 84000
2 Interest paid on loans 35176
Sum equal to 30% of
3 Annual Value 25200
Loss / Profit 23624
2. The premium paid for the mediclaim policy both group as well as the individual
policies are eligible for deduction from taxable income up to a maximum of
Rs.10,000/- p.a., u/s 80D. This limit will stand increased to Rs.15,000/- in case of
senior citizens.
3. The income from the RBI savings bond is totally tax-free and hence not added in
computing the Income tax.
4. The rebate u/s 88 is calculated @ 20% of the contributions made to the various
investments as their income chargeable to tax is less than Rs.150,000/- in case of
this being more than Rs.150,000/- the same would come down to 15% of investments
made.
Most importantly, these calculations are only indicative, you should be up to date with
the changes in the income tax calculation rules or utilise the services of a tax planner,
who may be available in your office for final calculation before advising the client.
The previous statement uses many assumptions and therefore only gives an indication of
future tax. It is not intended to be an accurate assessment of your future tax liability.
You should recognise that even this simple summary of taxation position and income received
can be daunting for people not used to dealing with figures. The financial planner should
spend time going through the report with the prospective client.
FINANCIAL POSITION
Preparation of a statement showing the financial position of the client is yet another important
aspect of personal financial planning. Preparation of such a statement would help the planner
in knowing the client’s financial situation and resources and identify financial goals and
objectives. Once the process of data collection is over, the planner prepares two important
documents viz., cash flow statement indicating the current income and expenses and financial
position statement indicating the sources and uses of funds. Projected statements of cash
flow and financial position incorporating the recommendations are also included in the
financial plan prepared by the planner. These projected statements illustrate future financial
statements if certain activities are implemented under specified assumptions. When the plan
is taken up for review, these statements may be compared with actual statements to see if the
client’s financial plan was implemented in proper spirit.
The financial position statement shows the client’s wealth at a specified time. Financial
planners can choose from many different formats of financial position statements. Usually, the
companies show their fund position by grouping the items under ‘Sources’ (indicating the way
money is received) and ‘Applications’ (listing the various items on which funds are used). By
looking at this statement in two successive time periods, one would easily understand the
increase or decrease in the wealth of an individual.

(Recommendation With Projections)
The following summary shows where your money has come from how we
have recommended that it is applied and the investments that we have
recommended.
Source and application of funds
Source Rs.
Bank Fixed Deposits 120000
Shares 1011420
Mutual Funds 125000
PPF 155432
Gratuity (net of tax) 477400
Provident Fund 2799121
Leave Encashment benefits 206783
4970156
Application
Bank Deposits:
In the joint names of Mr &
a. Savings Bank 16639
Mrs. Joshi
b. Fixed Deposits for 3 years @ 5.5% 100000
Mrs. Joshi
Rs. 100000 in the name of
c. Savings Bank account linked to FD 150000 Mrs. Joshi & Rs.50000 in
Mr.Joshi's name
Equity shares 1011420
Mutual Funds:
Balanced Funds 75000
Income Funds 50000
Systematic withdrawal plans 0
Deposits with Grasim Inds Ltd 150000
Mrs. Joshi
Varishtha Pension Bima Yojana 266665 Mrs. Joshi
PPF 165432 10000 additional deposit
300000 each in both
P.O.Monthly Income Scheme 600000
accounts separately
1000000 each in both
Immediate Annuity from a L.I. Company 2000000
accounts separately
Annual Income 60000
Regular Income Bonds 200000
Gift for niece's marriage 25000

Gift forgrandson's birthday 50000
Foreign Trip 50000
4970156

Statement of expenditure
Expenditure Total Annual
All living expenses 240000
EMI on house loan 103740
38
Insurance premium 33000

Premium for Deferred Annuity Plan 20000
Tax payable 0
Home Owners' Policy Premium (approx) 3500
Total expenses 400240
Surplus
Net income 388460
Add: withdrawal from PPF account of Mrs. Joshi 15000
Total Income 403460
Less: Total Expenses 400240

Surplus 3220
Note: As all this information is essential to the effective implementation of the
plan, please advise of any inaccuracies or omissions before implementing
the plan.
Presenting Projections to the Clients
We will now provide an example of the types of financial statement and detailed projection
you should include. These could be arranged as appendices to keep the body of the plan
free of too much information.

Financial statements and projections
Original Investments
Est. Growth
Investment Details In name of Est. Amt. Income %
Bank Fixed Deposit Both 120000 6600 Nil

Equity shares
a. Maruti Udyog - 700 @ 543 Mrs. Joshi 380100 2100
b. ONGC - 40 @ 860 Mrs. Joshi 34400 1200
c. Petronet -1000 @ 25 Mrs. Joshi 25000 0
d. Power Trading Corp - 1100 @
58 Mrs. Joshi 63800 400
e. CMC - 100 @ 535 Mrs. Joshi 53500 770
f. Reliance Ind - 300 @ 565 Mrs. Joshi 169500 50
g. Infosys - 30 @ 5394 Mrs. Joshi 161820 15540
h. Hero honda -100 @ 495 Mrs. Joshi 49500 10000
I. Britannia - 120 @ 615 Mrs. Joshi 73800 1200
Mutual Funds Mr. Joshi 125000 8125
Company deposits both 75000 7125
Public Provident Fund Mrs. Joshi 125400
Total investments 1456820
Estimated annual income 53110
Your portfolio need to be reorganised by considering the investment

of your retirement benefits so as meet your retirement income needs.
Note: As this information has been used to produce your financial plan,
please advise of any inaccuracies or omissions before implementing the
plan.
It is important that you take every opportunity to ask the client to advise of any discrepancies
or problems with the data on which the recommendations are based. This also helps to
categorise the investment types.
Recommended investments
40
Mr. V.K. Joshi and Mrs. Vidyulata Joshi

Est.
Recommended Investments Amount Est. inv.
In name of. growth
Investment details Rs. income
%
Varishta Pension Bima Nil
Mrs. Joshi 266665 24000
Yojana
PPF Mrs. Joshi 10000
P.O.Monthly Income 10% on
Mr. Joshi 300000 24000 maturity
Scheme
10% on
Mrs. Joshi 300000 24000 maturity
Immediate Annuity Mr. Joshi 1000000 77800

Immediate Annuity Mrs. Joshi 1000000 74600
Annual Income Mr. Joshi 30000 1650 Nil
Annual Income Mrs. Joshi 30000 1650 Nil
RBI savings Bond Both 200000 13000 Nil
Bank Deposits
Savings Bank Both 16639
Fixed Deposits for 3
Mr. Joshi 100000 5500
years @ 5.5%
Savings Bank account
Mrs. Joshi 150000 7500
linked to FD
Company deposits Mrs. Joshi 150000 13500

Existing Investments
Retained
Equity shares Mrs. Joshi 1011420 31260
Mutual Funds: Both
Balanced Funds 75000 3000
Income Funds 50000 3000 Nil
Systematic withdrawal
0 0 Nil
plans
PPF 155432
Total Investments 4845156
Property (net of property
500000 84000
tax)
Total Assets 5345156
Estimated Income 388460
Note: As the overseas holiday and expenditure of Rs.75000/- are not investments
they are not included in recommended investments.
The recommended investments meet your retirement income needs of at least
Rs.2,40,000/ p.a., net of tax. The excess that we provide for would be able to take
care of any unexpected expenditure. Also, if need arises, you can withdraw money
from the PPF account, since it is already beyond 15 years.
Note:
• Estimated income and growth is based on the investment managers’

expectations and is therefore a guide only. These rates of return are
in no way guaranteed.
• *denotes existing investments retained in recommendations.
• The rates of return used are consistent with long-term achievements
of these funds.
It is important to advise the client that projections are not guaranteed —with growth
projections it is more appropriate to provide an indicative range of returns as no one can
accurately forecast the future.

Asset sector report
Asset sector Rs. %

Cash & bank balances 266637 4.99
Indian Fixed Interest 3442099 64.40
International Fixed Interest 0 0.00
Indian Equity shares 1011420 18.92
International shares 0 0.00
Mutual funds 125000 2.34
Property 500000 9.35
5345156 100
Note: These figures are illustrative only in this report.
Sector Spread - Current
4000000
3500000
3000000
2500000
Rs.
2000000
1500000
1000000
500000
0
st
es
ds
s
r ty
ce
re
ar
un
pe
te
n
sh
la
lf
o
In
Pr
ba
ua
ity
d
ut
xe
u
nk
Eq
M
Fi
ba
an
an
&
di
di
h
In
In
as
C
Asset Sector
Note: These estimates are based on the expected exposure to each sector by each
investment in the recommended portfolio. This will change over time.
The use of graphs helps simplify data for the prospective client and helps to break up the text,
thus improving presentation.
42
CAPITAL NEED ANALYSIS
Financial planning is made with certain financial objectives. These objectives should be
defined clearly and be measurable in money terms. For example, it is not enough to say "I
want to retire comfortably". Such an objective should be stated, as "I want to retire with the
ability to spend Rs. 2,00,000 annually, adjusted for inflation".
The basic aim of preparing a financial plan is to meet certain capital needs at a future date.
Unless the client is clear about the purpose of financial planning, your efforts would not result
in the desired benefits. Therefore, you should emphasise with your client the importance of
identifying his financial / capital needs. For example, a client may have one or more of the
following capital needs:
1. To retire at age 60 with an annual income of Rs.3,00,000. I am now 40 years of age
2. To completely pay off the housing loan by the time I retire 20 years later.
3. To pay for my five year old daughter’s college education that would cost me Rs.
1,50,000 per year for 4 years.
The first step is to clearly write down the capital needs. These needs are to be expressed in
terms of the amount required and the future date on which required as shown below:
Example Amount required When required
Number
1 Rs. 3,00,000 p.a. Each year beginning from the 20th year from now
and may be up to 40th year.
2 Rs. 5000 p.m. For the next 20 years
3 Rs. 1,50,000 p.a. Beginning from the 12th year from now till 16th year
from now.
It would be a better idea to prepare such a statement of financial goals covering as many
requirements as possible as this is the basis on which the financial plan would be prepared. If
the financial capability is found to be inadequate to meet all these goals then they have to be
prioritized.
Sometimes financial needs change with investor’s changing circumstances. The financial plan
is not static. It has to be reviewed from time to time to account for the changing
circumstances.
Assessing the capital needs:
The client’s capital needs depend on the age, stage in the career path, size of the family,
needs of the other family members, etc. Some of the needs can be identified with precision
while others can only be tentatively determined. There may be unanticipated needs as well for
which provisions have to be made. These needs may be generally classified as
(1) Retirement needs: A financial planner discusses two broad aspects retirement with
clients. One is determining the total amount of money that a client needs for
retirement and the second aspect is to advise clients on the options available. The
case study covered in this module primarily discusses the capital needs of a client, Mr
and Mrs.Joshi, who wants to plan for retirement. From the data collected and
analysed, it is necessary to calculate the required level of savings and investments
today and in future years to achieve the client’s retirement income. If savings are not
possible, whether depletion of investments is advisable, how long the capital would
last and the longevity of the clients are the factors to be borne in mind. You need to
encourage the clients to make a set of reasonable assumptions about future life
styles. This will serve as a basis for estimating the client’s minimum and maximum
retirement expectations. Basically, the financial planner looks at retirement needs in
three phases: accumulation, conservation and distribution, which are dealt in detail in
the module on retirement planning.
(2) Capital needs at death: Consider a single-earner family with young children and
dependent parents. The income available is limited. The primary need of the client is
to replace the bread winner’s income in case of premature death. Life policies, whole
life or term or endowment insurance is the solution suggested by the financial
planner, depending on the need. The main focus here is to suggest sufficient amount
of coverage by taking in to account the insurance need and the limited budget.
Take another illustration. A person who has retired or has got one /two years for
retirement with no financial liability would not have any life insurance or capital needs
of large extent. What he would like to provide for in his financial planning is certain
amount that would be required by his heirs to take care of funeral and related
expenses.
A middle aged man with housing loan and educational loan as liabilities on his
balance sheet would like to take a credit shield that would protect his survivors of
these liabilities in case of death. The financial planner has to assess, after a detailed
discussion with the client, the type of capital needs that may arise at the time of death
and suggest a suitable insurance / investment plan.
(3) Capital needs at disability: It is important for a financial planner to determine, from
the data collected, whether there is a need for income replacement protection for the
client in question. This need arises from the possibility of the loss of earnings during
the period of disability. At most ages, the probability of a serious, long-term disability
is considerably greater than the probability of death. Financial planner should
examine the benefits that are offered by the client’s employment in case of disability
and also study the individual insurance covers taken. After matching the capital
needs with available benefits, any additional source for the replacement of earnings
can be suggested for the client.
General and special capital needs: In addition to the above needs, there may be some
general and special needs of the clients which are to be provided for in the financial plan.
General needs would include the capital required to meet educational expenses of
children, construction of dwelling unit, medical expenses at old age, replacement /
purchase of capital goods like car, refrigerator, household furniture, washing machine
etc. or the capital needed to pursue the hobby like photography, golf etc.,. Special needs
of the clients would be the expenses required for taking care of the aged parents / adult
children till they get employment, providing venture capital for starting a business etc.,
The general and special needs vary with the clients and the financial planner, after a
careful analysis, should make suitable recommendations to take care of the needs of the
clients.
In the financial plan prepared, a separate section on capital need analysis may be
presented which would describe the needs for capital in the event of premature death or
disability of the client. At death, current life insurance proceeds are included in the
computation of cash flow to provide for current expenses and make investments for future
cash needs of survivors. In the case of disability, the amount of lumpsum / annual
payments provided by employer / insurance policies will be included in the computation of
cash flow and the analysis of possible need for additional capital.
Financial planner, in order to explain the capital needs, should prepare two reports viz.,
a)Capital Needs Report and b)Cash Flow Report. The former report details the overall capital
needed compared to available income and investments, the later report reflects detailed cash
44
needs in the next 5 years or 10 years and so on. Both reports provide important information
for evaluating the consequences of losing income and capital through disability / death.
Following is the example of a capital needs analysis of a middle aged entrepreneur
Case study: Capital Needs Analysis
Funds needed in next 5 years

Housing loan payments 120000
Medical expenses 50000
Living expenses 150000
Taxes 60000
Purchase of assets 400000
Other needs 50000
---------- 830000
Funds Available in next 5 years

Business Income 600000
Investment Income 250000
Other income 30000
---------- 880000
Funds available in excess of needs 50000
----------
Once this statement is prepared and explained to the clients, you can show him how these
surplus funds can be utilised for achieving the financial goals of the clients. Note that this
illustrative case deals with a scenario where client has a surplus money and his business
income take care of most of his needs. What if there is a sudden discontinuance of the
income (say by death / disability). Projections of needs and income by considering the capital
payments from insurance and other means should be included in a separate statement for the
clear understanding of the client. For example, this entrepreneur has taken an insurance
policy for Rs.25 lakhs which is receivable on his death. Then the financial planner may
prepare a capital need analysis considering this capital and show the sufficiency /
inadequacy of the capital. For instance, in our illustration, the financial planner may suggest
repayment of housing loans and reduction of living expenses. He may also suggest increase
the budget for medical or any other expenses depending on the need. He would also suggest
a fresh investment plan for parking the capital that is received.
The limitations of financial planning software

Computers and financial planning software are useful tools for a professional financial
planner. However, much of a financial planner ’s job is to develop a financial plan which is
not only technically accurate, but one with which the prospective clients will feel confident. It
needs to take account of the ambitions and objectives of the client —this means that there is
more than just mathematical statistical analysis involved. There is a need for such
quantitative analysis, but financial planners must be wary of relying too heavily on computers
and software.
Computers and software can also create problems, and these must be anticipated.
Potential problems include the following:
1.The software can be in error or out of date. Where financial planning software has
undetected errors, the clients in question could be presented with a totally inaccurate picture
of their future financial positions. Examples of this situation include:
• inappropriate earnings or indexation rates
• old or incorrect rates of taxation
2.The financial planner can input data incorrectly, as a result of either poor computer literacy
or recording errors.
3.The financial planner can become too reliant on the software and lose understanding of the
underlying technical issues.
4.The options for the client can be artificially narrowed by extensive reliance on software that
is less than comprehensive.
Good financial planners should know how to arrive at answers manually so that they can test
the accuracy of any models or projections being used. We have not discussed this issue in
detail but you should realise that incorrect software would not constitute an adequate defence
for a financial planner . On the contrary, it may be seen as an indictment of negligence on the
part of a planner.
Question 4.5
Devise a checklist for helping to verify output from a software
package which claims to produce financial plans.
You should use computers and the software provided throughout the industry, bearing with
these points in mind:
1.A computer can only provide the skeleton or framework for the plan; it is your responsibility
to ensure the final plan suits the client and their circumstances, needs and objectives.
2.You should not rely on the computer to dictate the most appropriate strategy; you should
decide on the strategy after careful analysis of any computer generated data as well as any
other qualitative or quantitative data you have collected.
3.You must always know how to derive the computer ’s answers manually to:
• ensure complete understanding of the output
• enable checking to be done on the accuracy of the computer input and output.
4.It is you who is held professionally and ethically responsible for advising your clients
appropriately.
5.It is essential that recommended investments are scrupulously analysed by you, regardless
of their appearance on an approved or recommended list.
Question 4.6
Discuss the implications of the following true cases of deficiencies in
financial planning software:
(a) projections of a superannuation benefit being based on
percentage contributions of salary, but salary increases being
projected at 8 per cent p.a., while real increases have averaged 4
per cent;
(b) incorrect software treating the pension received from the
superannuation scheme of the employer as fully taxable (without the
benefit of standard deduction);
(c) the code for an income fund being mixed with that of a growth
fund when entering a client ’s portfolio details in the electronic
monitoring system.
46
A summary
In this topic, we have concentrated on the manner in which funds for investment can best be
placed for particular clients. We have also developed further the case study that we began
earlier in this unit to demonstrate the essential features of plan preparation. Briefly, we have:
• considered the factors which determine asset allocation and link investment
strategies to particular asset sectors;
• demonstrated that diversification of investment funds contributes to reducing risk and
volatility;
• demonstrated the relationship between type of investment and variables such as
capital growth, income, taxation, risk, liquidity, manageability, asset allocation and
costs —and how these variables can be explained to the client;
• established the basis on which investment recommendations are made;
• outlined the importance of client-centred management in the preparation of the
particular financial plan; and
• reviewed the limitations of computer-generated planning and financial planning
software.
Suggested answers
Question 4.1
(a) As Question 3.1 suggests, more information is required before a positive risk profile
determination could be made, but a preliminary determination might suggest that the Joshis
are ‘conservative’ due to their present position, age, experience, financial objectives, amount
of resources, requirement for security of income, nominal interest in growth, interest in a
pension, and guaranteed income.
(b)Asset allocation
Asset sector (%)
Cash 20
Fixed interest 40
International fixed interest 0
Shares 20
International shares 0
Property 20
(c) 60%vs 40%

(d) Portfolio benchmark range
Cash (15-25)%
Fixed interest (35-45)%
International fixed interest (0-5)%
Domestic shares (15-25)%
International shares (0-5)%
Property (15-25)%
Question 4.2
The factors listed are interdependent. We must never lose sight of the fact that the endpoint
for our financial plan is satisfaction of the client ’s financial needs and objectives.
However, in general terms, we must consider the client’s risk profile to ensure the appropriate
mix of secure and more adventurous investments. The investment strategy must take into
account the client ’s need for income against growth, the timing of that income, taxation
exposure, social security considerations, etc. Diversification is crucial from a risk-reduction
point of view. Once the client’s minimum exposure requirements in specific assets are
determined, the non-core exposure can then be related to the current economic outlook.
‘What if ’ analysis ((worst-case scenarios, etc.) should be applied to each asset sector and the
aggregate outcome to ensure that we have considered all possible eventualities.
Question 4.3
48
Though there are no direct regulations governing the recommendations of financial planners,
as on today, on issues relating to full disclosure to the client, etc, it is only expected that such
regulatory mechanisms would evolve with the passage of time. Apart from complying with
such regulations, there is an obvious need for the client to feel satisfied that the
recommendations are appropriate. A good knowledge of the recommended products and
their relation to the variables of income, growth, taxation, etc. will assist the client to evaluate
the proposals you make and build confidence. Such presentations are also a marketing tool
for you —the client will appreciate the professional presentation of his/her plan and will
hopefully recommend your services to friends and relatives.
Question 4.4
A checklist to meet professional requirements when making investment product projections
could include the following:
Checklist of the issues
Have you:
1. ensured that clients are aware of all qualifications applying to the advice and the
implications of such advice?
2. maintained office procedures to ensure data is current and reflects current market
information?
3. avoided extravagant performance claims?
4. not claimed to be giving independent advice unless there is, in fact, no connection between
the financial planner and the product?
5. disclosed any commercial relationship or pecuniary interest with any institution (this could
avoid claims of deceptive conduct)?
6. limited disclaimers to certain stipulated areas rather than blanket exclusions?
7. projected long-term return rates for investment products rather than short-term ones?
8. notified the client of all costs and taxes and accounted for these factors in calculations?
9. mentioned and allowed for the impact of inflation?.
Question 4.5
Some of the items to include in your checklist:
1.Determine whether the information contained in the software is up to date; for example, by
maintaining a current list of rates and thresholds.
2.Determine whether the appropriate data such as taxation rates, indexation rates, earning
rates, etc., are being entered correctly.
3.Assess whether the financial planner using the package has the necessary skills to
understand the financial planning implications of the technical number crunching being
undertaken by the computer.
4.Investigate whether the options for the client are being artificially narrowed by less than
comprehensive software.
Question 4.6
(a) The potential future superannuation benefit would be exaggerated and unrealistically
computed. Such a lack of competence shown by a financial planner would damage clients’
confidence.
(b) Incorrect net and real returns would be calculated. These would be a loss of opportunity
cost as projections would be misleading.
Subsequent advice and decisions based on the incorrect data would be inappropriate.
(c) The client ’s objectives to generate a certain income would not be achieved. These would
be a loss of opportunity cost. The cost of administrative and corrective actions would have to
be taken into account. Lack of due care and diligence on the part of the financial planner,
who has not ensured that adequate controls are in place to detect input error, could be
claimed by the client.
50

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Topic 4: Plan Preparation

Summary and Recommendations

Cash Flow Analysis

Asset allocation and risk management

Presenting recommendations and projections to the client

Capitan Need Analysis

The limitations of financial planning software

Recommended Additional Reading:

Mr.Vasant Kumar Joshi Mrs.Vidul;ata

Age 59 years Age 57 years

Mr. Vijay Kumar Joshi Mrs. Vineeta Rao

GOALS & OBJECTIVES

Mr & Mrs.Joshi would like to:

 cover a substantial part of your expenditure needs with a guaranteed income;

by the guaranteed income;

point they wish to do these;

2. Keep taxation and complexities to a minimum.

manage on an ongoing basis.

4.Review estate planning needs.

IDENTIFICATION OF ISSUES & PROBLEMS

expenses on these will be met?

• How a comprehensive investment planning to be done which would involve minimum

management and generate adequate income with moderate risk-return trade-off?

• What strategies can be implemented to ensure minimum tax liability?

• What are the objectives with regard to the estate?

time employment after retirement.

• An inflation rate of 4% p.a is assumed. (An assumption required for making

projections of income and expenses beyond one year)

• Life Expectancy of Mrs. Joshi 80 years

• Life expectancy of Mr.Joshi is 78 years.

05 would be applicable in the subsequent year as well.

Financial plan of Mr and Mrs.Joshi is designed by considering their lifestyle

1) building an asset base through gearing

In developing the sample planning case, we have considered only generic

Limitation of space generally curtails illustrations of alternative financial

The format of the case study

agreed to oversee the implementation of the recommendations made in the

SUMMARY AND RECOMMENDATIONS

List of prioritized items

We reiterate our commitment that we will follow through your decisions in

Action list for Implementation of the financial plan

Action Required Time Frame Date completed

Purchase of life insurance policies 1-2 months

Purchase of home owner’s policy 1 month

Reinvestment of company deposits 15 days – 1 month

Reinvestment of bank deposits with in 15 days from

Investment in regular income with in a fortnight from

Case Study: Mr & Mrs.Joshi

Risk Assessment & Asset allocation strategy

Appraising factors which determine asset allocation

Linking strategies to asset sectors

Growth 5–20 10–20 40–60 10–30

Strategic asset allocation (SAA)

Case study: A financial plan for Mr and Mrs Joshi

Provision for non-core exposure

Case study: A financial plan for Mr and Mrs Joshi

The selection of investment type

Briefing the client about investment types

Case study: A financial plan for Mr and Mrs Joshi

Selecting specific investment products

Presenting recommendations and projections to

Case study: A financial plan for Mr and Mrs Joshi

income, which would take care of a majority of their day-to-day expenses.