8/23/12 IBS Case Studies

IBS
Gurgaon

Date: 23/08/2012 Time: 15:12:42

FM0009

IBS Case Development Center

ABC Wealth Advisors

This case study was written by Swapna Pragada (Research Associate), IBSCDC and D. Satish
(Professor of Finance), IBS, Hyderabad. It is intended to be used as the basis for class discussion
rather than to illustrate either effective or ineffective handling of a management situation. The case
was compiled from published sources.

License to use for IBS Gurgaon

Sem-I, Class of 2014

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Ó 2009, IBS Case Development Center. All rights reserved.

To order copies, call +91-08417-236667/68 or write to IBS Case Development Center, IFHE Campus,
Donthanapally, Sankarapally Road, Hyderabad 501 504, Andhra Pradesh, India or email:
info@ibscdc.org

www.ibscdc.org

FM0009

ABC Wealth Advisors

“A bird in hand is worth two in the bush”, is a famous adage applicable
aptly to the concept of time value of money. Value of money today is more
than the value of money tomorrow. One would opt to invest money today, as
there would be substantial return for it in the future. It is also because the
value for money in the present is more than its future value. As such, everyone
considers the time value of money for making investment decisions. Recently,
many consulting firms came into being to advise people on the best investment
options. One such firm is ABC Wealth Advisors, a wealth management and
personal financial planning firm that advises on various investment options,
taking into account the time value of money.

ABC Wealth Advisors: Client Portfolio

ABC Wealth Advisors has many departments of which one is the personal
finance-planning department. It advises its clients on various ways of investing
their money in order to maximise their returns and save for future
needs/expenditures. John Hardy (John) j oined the department 3 years ago as
a consultant and is now the head of the department. As per his daily routine,
he checks out his appointments diary the previous evening to analyse different
clients’ needs and be ready with appropriate solutions when he meets the
clients personally, the next day. The client list for one particular day is as
follows:

The first client who has an appointment with John is Anirudh, a college
student. He had won a prize amount of INR 10,000 in a quiz competition. He
wants to invest the amount for a period of 5 years so that he can use the

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amount from the investment for joining a computer course. He wants to know
the amount he would receive at the end of the tenure in order to meet his
expenses.

Akhil is the next client on the list. He is working with a BPO. He is

expecting that he would receive INR 2,500 as an increment every year. He
wants to invest INR 2,500 every year for a period of 6 years so that he can
receive INR 18,000 at the end of the tenure. He wants to know the interest
rate at which he should invest in order to meet his criterion.

Jones is the third person on the client list. Jones had just started his career.
Expecting that his salary would increase at a certain rate every year, he
worked out his savings on an average. He wants to invest INR 36,000 per
year for the first 4 years, INR 48,000 per year for the next 5 years and INR
60,000 per year for 6 years thereafter. He wants to know how much he
would be able to earn after 15 years in order to make a real estate investment
at that time.

The next client on the list is Frank. He is working as a sales executive in an

MNC. He received sales incentives of INR 5,000. He wants to invest the
amount in any deep discount bond. He wants to know the interest rate he
would be paid for the investment.

Surya is the fifth client, scheduled to meet John. Surya is going to retire
after 6 months. He is expected to receive a sum of INR 40,000 on
retirement. He wants know if it is better to take the lump sum amount or opt
for an annual pension of INR 10,000 as long as he lives. The life expectancy
of Surya is 20 more years and the interest rate on the pension scheme is 9%.

Rohan is the sixth client on the list. Rohan had invested in his friend’s
business and receieved a share of INR 1 lakh (0.1 million) out of the profit.
He wants to deposit the money in a bank for a period of 5 years. He wants to
know how much money he can draw every year so that there would be no
balance left at the end of the period.

James is the next client scheduled to meet John. He has a piece of land and
expects to receive a certain rate of return every year. After working out his
returns, he wants to invest INR 10,000 at the end of the first year, INR
15,000 at the end of the second year and INR 20,000 each year from the
third year to the fifth year. He wants to know the present value of the stream
of investment.

Varun, the next client, is about to retire and he wants to receive pension
every year. He expects to receive INR 12,000 per year for 8 years and INR
48,000 per year thereafter. He wants to know the present value of the
income stream if the discount rate is 10%.

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Vishal is the next client who has an appointment with John. He is a

university student. He had received INR 20,000 as a part of the scholarship.
He wants to invest the money in any bond instrument for a period of 10 years.
He wants to know the amount he would receive from the investment.

The tenth person on the client list is Ravinder. He is scheduled to retire

after 14 years. He wants to invest in a retirement plan that would give him a
perpetual annual income of INR 30,000 from the beginning of the 15th year.
So, he wants to know the amount he should invest now so as to meet his
criterion.

Amit the next client, who would meet John, is an employee in a software
company. He received a bonus of INR 25,000. He wants to invest the
amount for a period of 7 years. He wants to know the end amount of the
investment. He also wants to know the worth of his investment at the end of
the tenure, keeping the inflation rate of 5% in view.

David is the next client on the client list. He needs an amount of INR
15,000 at the beginning of each year from the 10th to 14th year in order to
meet his child’s educational expenses. He wants to know the amount he
should invest at the end of each year from the 1st to 5th year from now at an
interest rate of 8%.

Sujit is the last client to meet John. He wants to know if it is advisable to

invest in a mutual fund scheme on a Systematic Investment Plan (SIP) basis or
deposit his amount in a recurring deposit scheme for a period of 3 years. He
wants to invest INR 1,000 every month. He wants to know the value of the
investment, if a person had invested in a mutual fund 3 years ago.

After going through all the clients ’ details, John analysed the various
options, which can be chosen for making investments (Exhibit I). For
investment in the deep discount bond, John considered IDBI deep discount
bond which would give a maturity value of INR 2 lakh (INR 0.2 million) for
an investment of INR 5,300 for a period of 25 years. To make an investment
in mutual fund scheme, he analysed the NetAsset Values (NAVs) ofHDFC
Mutual Fund Scheme (Annexure I). The majortask before John is to guide his
clients in making efficient investment decisions.

Exhibit I

Various Investment Options

Investment Option Investment Type Interest Rate Duration
(%) (years)

Post Office Time Deposit Time Deposit 7.50 5

Scheme
State Bank of India (SBI) Fixed Fixed Deposit/ 8 2-5
Deposit Scheme Recurring
Deposit
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National Savings Certificate Recurring Deposit 8 6

(NSC)

Public Provident Fund (PPF) Recurring Deposit 8 15

Account
ICICI Term Deposit Scheme Fixed Deposit 8 4-5

Oriental Bank of Commerce Recurring Deposit 9 Not less than 5

(OBC) Recurring Deposit
Scheme
Nabard’s Bhavishya Nirman Bond 9.5 10
Bonds
Oriental Bank of Commerce Fixed Deposit 9 Not less than 5
(OBC) Fixed Deposit Scheme
Compiled by the author

Annexure I

NAVs of HDFC Mutual Fund

Month and Year of NAV (in INR)
Investment
May 2006 51.9101
June 2006 36.842
July2006 40.9813
August2006 42.5981
September 2006 47.475
October 2006 48.6142
November 2006 51.7745
December 2006 54.0606
January 2007 53.7199
February 2007 55.7486
March 2007 48.8455
April2007 49.355
May2007 53.1501
June 2007 55.2344
July2007 58.8726
August2007 60.643
September 2007 61.3966
October 2007 65.2109
November 2007 71.5012
December 2007 75.4613
January 2008 78.6222
February 2008 66.227
March 2008 62.3267
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April2008 59.4898
May 2008 63.7144
June 2008 59.339
July2008 52.3037
Contd...

August2008 58.1061

September2008 58.6318
October 2008 45.3646
November 2008 39.9359
December 2008 35.6461
January 2009 37.3913
February 2009 35.2276
March 2009 32.0125
April2009 39.3572
May 2009 44.155
Note: At the inception of the fund, the par value is INR 10

Compiled by the author

Exit

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