A Birthday of Worries

SUMMARY
This case study is about Mr. Bharath, who is 40 now, is
planning for his retirement. He currently holds Rs.10,00,000
in his direct equity portfolio; Rs.10,00,000 in his NPS account
and Rs.10,00,000 in Sovereign Gold Bonds. He is going to
rebalance his direct equity and SGB portfolio every year on
his birthday to restore 50:50 Allocation. He has opted for
50% equity and 50% debt plan for NPS. He wants to keep
contributing Rs. 1,50,000 to his NPS account every year one
day before his birthday every year till the age of 60. This will
continue to be in the proportion of 50% in equity fund and
50% in debt fund.
At the age of 60, he plans to re-evaluate his asset allocation.
He intends to sell the entire corpus of his sovereign gold
bond, which is going to be tax exempt. He also wants to
withdraw 60% of his total NPS corpus which will be fully tax
exempt. 40% of the total NPS corpus will be used by him to
purchase annuity. The post-tax annuity returns are going to
be 6% and the annuity will continue as long as he lives. He
requires Rs. 10,00,000 per annum in today’s terms and
annual inflation expectation is 5% per annum for the next 40
years. Mr. Bharath’s health remains good and he and his
doctor expect him to live till the age of 80.
What is the meaning of an equity
portfolio?

 An equity portfolio consists of all the stock market

investments made by the investor. The Securities and
Exchange Commission (SEC), as expressed in the
Securities Act of 1933 and the Exchange Act of 1934,
governs certain companies who offer publicly-traded
stocks through trading facilities to the investors. These
shares represent their ownership in the businesses, the
money invested by the traders is used to fund the
growth of the organization.

What is Bond?
A bond is a fixed-income instrument that represents a
loan made by an investor to a borrower (typically
corporate or governmental). A bond could be thought
of as an I.O.U. between the lender and borrower that
includes the details of the loan and its payments.
Bonds are used by companies, municipalities, states,
and sovereign governments to finance projects and
operations. Owners of bonds are debtholders, or
creditors, of the issuer.
Bond details include the end date when the principal of
the loan is due to be paid to the bond owner and
usually include the terms for variable or fixed interest
payments made by the borrower.
What is National Pension System (NPS)?
The National Pension System (NPS) has emerged as a
popular choice among Indians seeking to secure their
financial future post-retirement. In part this popularity
is due to the tax-saving benefits it offers, another reason
for this popularity is because of the flexibility it offers
in terms of how your money gets invested.
NPS not only gives you the option of multiple asset
classes (Equities, Corporate Debt, Government Bonds,
and Alternative Investment Funds), it also lets you
decide what proportion of investments are to be
allocated towards each asset class. While having
choices when investing is definitely beneficial, it is easy
to get confused when faced with so many choices.

What Are Sovereign Gold Bonds?

Sovereign gold bonds or SBGs are gold bonds issued by
the Reserve Bank of India (RBI) on behalf of the
Government of India. The gold in this bond is sold on a
per unit basis such that every unit derives its value from
underlying one gram gold with 999 purity. The cost is
calculated by taking an average of closing prices of
gold for the latest three working days preceding the
subscription period.
What Is an Annuity?
The term "annuity" refers to an insurance contract
issued and distributed by financial institutions with the
intention of paying out invested funds in a fixed income
stream in the future. Investors invest in or purchase
annuities with monthly premiums or lump-sum
payments. The holding institution issues a stream of
payments in the future for a specified period of time or
for the remainder of the annuitant's life. Annuities are
mainly used for retirement purposes and help
individuals address the risk of outliving their savings.
Exhibit I
Investment Percentage
100%

80%

60%

40%

20%

0%
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
-20%

-40%

-60%

Equity Bond SGB