Investment details and analysis of Mr. Richard Smith's case

Investment details of Mr. Smith

The investment portfolio of Mr Smith covers the following avenues:

►  Investment in bank FDs – Rs. 1,00,000/-

►  Investment in stock and shares – Rs. 2,00,000/-

►  Investment in post office savings schemes EPF / PPF / NSC totaling Rs. 1,82,000/-

Asset classification of Mr. Smith

Mr. Smith’s asset portfolio includes :

►  A residential house property costing Rs. 26,00,000/-

►  Purchase of a car whose current market value Rs. 7,00,000/-

►  Jewellery for his wife costing Rs. 2,50,000/-

►  He is maintaining a bank balance of nearly Rs. 1,00,000/- in his account. The collective outstanding liability on his car loan and housing loan is Rs. 18,00,000/-

Insurance details of Mr Smith

►  He had taken an Insurance plan with a 20 year money back plan worth Rs. 2,00,000/- when he was 30 years. The annual premium is Rs. 18,059/-

Analysis of Mr. Smith’s position

►  Mr. Smith’s annual expenses are Rs. 14,30,059/- and after meeting his annual savings Rs. 2 lakhs, he is left with a cash of Rs. 1,19,941/- per annum. 

[Rs. 17,50,000 – (Rs. 14,30,059/ +Rs. 2,00,000/-)]

►  Mr Smith pays Rs. 60,000/- per month as EMI towards his loans. Hence, his current liquidity position is not in a very good shape as any event that temporarily hampers his monthly earnings can prove disastrous.

►  Though he has invested in many long term assets, he is having only Rs. 1,00,000/- as balance in his bank account.

►  He has only taken an insurance policy for Rs. 2,00,000/-. Under the present circumstances he is underinsured and needs to revise his insurance plan.


Recommendations for him follows here.

Investment Case Study

Mr. Richard Smith (36 years) is working with a multinational company for the last 6 years. His family includes his wife - Mrs. Annie Smith and son ( Justin ) aged 3 years. He has approached a financial planner for comprehensive financial planning assistance so that he is able to achieve his financial goals.

The client's stated financial goals :

•  To have adequate savings worth Rs. 20 lakhs for building his son's career after approximately 20 years.
•  To accumulate Rs. 30 lakhs ( approximately ) to maintain decent lifestyle after retirement. He wants to retire after 12-15 years when he would have attained an age of 50 years nearly.

Client's Information  : 

Mr. Smith's annual income is :Rs. 17.5 lakhs. A statement of his annual cash outflows is given below :

Details	Amt ( Rs. )
Mortgage payments ( EMI )	4,20,000
Car loan payments ( EMI )	3,00,000
Insurance Premium	18,059
House maintenance and water	18,000
Tax	1,50,000
Food & Grocery	30,000
Transportation ( 2 cars )	1,50,000
Clothing / Personal care	50,000
Medical / Dental Care	30,000
Utilities ( telephone + electricity )	78,000
Misc. (maids etc.)	36,000
Entertainment / Gift	50,000
Vacation	1,00,000
Total	14,30,059

In addition to the above expenses, he also contributes nearly Rs. 2,00,000 towards his savings in provident funds and fixed deposits annually.

His investment details and analysis of his case follows here.

Plan to accomplish

Any kind of financial planning exercise essentially begins and ends with the user. It is a systematic process of identifying and recommending various investments avenues which will help realize his / her goals.

All of us work for money. But how many of us make money work for us? Making money work for us is perhaps one of the most important pillars of the personal financial planning process. Actually, making money work for you is not that hard task, provided sound financial and investment advice is taken. A blend of the different investment avenues can actually provide the right investment mix which can play an important role in providing a suitable financial buffer for later years. However, there can be no tailor made approach to get this benefit. The so called investment mix will differ from person to person and is actually function of a number of variables like income levels, marital status, investment outlook, levels of expenses, standard of living etc. Hence, it is very difficult to evolve a standard doctrine to effective financial and investment planning. At the most, a few standard gospels may be given.

To put the process of financial planning into the right perspective, we will have discussion on the same in later posts following with the help of a case. This case will highlight yet another dimension to the personal financial planning process.

The Case Study follows here. 

Double your income - Advice on how to double your income.

More Guiding Principles

The third principle should be consistency and time value. A critical and an assured need like a child’s education cannot be matched with high risk investments. The assumptions of the plan need to be based on a lower but more secured rate of compounding to create wealth. To leverage on the time value benefits, an individual needs to commence the process of planning for the child future preferably the moment the child is born.

So you have to focus on all critical aspects of planning your child’s future. Today the biggest investment that a parent needs to make on their children is a high quality of education. There is no escaping the fact that costs have risen sharply and the days of subsidized education is history. The best way to give your child a secured future is to invest in their education by following the basic guiding principles discussed earlier. Let us put our best foot forward.

Guiding principles for your children’s future

The first guiding principle should be that of adequate insurance. Any long-term plan needs to necessarily leverage on future resources. At the same time it needs to ensure that the process of planning your children’s future does not get endangered in the event of any exigency. This necessitates that the person whose resources are being leveraged in the plan, is adequately insured so that the plan continues smoothly even in his / her absence. It needs to be remembered that the overall resources net of liabilities should be sufficient to fund the plan. 

The second guiding principle revolves around structuring of the plan. With the rising costs of education, the requirement of funds not only arises earlier but also arises more periodically. The cash flows from the children’s plan should be structured in a way that either there are a series of regular cash flow from the investments or the plan has an inbuilt borrowing facility which can be drawn upon.