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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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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 friends 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 childs 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 (%) Time Deposit Fixed Deposit/ Recurring Deposit 7.50 8 Duration (years) 5 2-5

Post Office Time Deposit Scheme State Bank of India (SBI) Fixed Deposit Scheme
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National Savings Certificate (NSC) Public Provident Fund (PPF) Account ICICI Term Deposit Scheme Oriental Bank of Commerce (OBC) Recurring Deposit Scheme Nabards Bhavishya Nirman Bonds Oriental Bank of Commerce (OBC) Fixed Deposit Scheme
Compiled by the author

Recurring Deposit Recurring Deposit Fixed Deposit Recurring Deposit

8 8 8 9

6 15 4-5 Not less than 5

Bond Fixed Deposit

9.5 9

10 Not less than 5

Annexure I NAVs of HDFC Mutual Fund

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

59.4898 63.7144 59.339 52.3037 Contd...

August2008 September2008 October 2008 November 2008 December 2008 January 2009 February 2009 March 2009 April2009 May 2009
Note: At the inception of the fund, the par value is INR 10 Compiled by the author

58.1061 58.6318 45.3646 39.9359 35.6461 37.3913 35.2276 32.0125 39.3572 44.155

Exit

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