The weekend 9th Feb 2020 saw some progress on Mr. Arora’s plans for Simran’s (fondly called Guddi) wedding. The prospective groom and his family had visited their home. The children and families are in principle interested in the alliance. Mr Arora expects atleast the ‘Roka’ (engagement) to take place in 2020 and the marriage either in 2020 or 2021 depending on discussions between the families and opinion of Simran and her

The weekend 9th Feb 2020 saw some progress on Mr. Arora’s plans for Simran’s (fondly called Guddi) wedding. The prospective groom and his family had visited their home. The children and families are in principle interested in the alliance. Mr Arora expects atleast the ‘Roka’ (engagement) to take place in 2020 and the marriage either in 2020 or 2021 depending on discussions between the families and opinion of Simran and her prospective groom. However, he wants to first recheck on his finances and has called for a meeting with his financial advisor and old friend Mr. Rastogi.

Both Mr Arora and Mr Rastogi were colleagues in Department of Transport, Haryana Government. Mr Arora left his government job in 2010 to start ‘Milan Travels’, a local travel agency based out of Punjabi Bagh Delhi. He primarily provides logistics solution to the government departments. Since he has several friends in the government offices at Delhi and Gurgaon, he does need too much marketing efforts to win contracts. Long term relationships are key to his business. He is always busy at work with his fleet of 20 vehicles.

Mr Arora (aged 54) has two children – Simran (26) and Akash (20). Simran works at a local boutique where she does not earn too much currently. She graduated in history from Delhi University and later did a course in Fashion Designing from Amity University. Since parents wanted to get her married she couldn’t go for the job opportunities far from home. Akash is still studing mechanical engineering at Noida. His spouse (Mrs. Arora) is a housewife. She helps him with the business whenever called for by Mr Arora for specific tasks such as purchase of new vehicles, social visits to friends or employees etc.

Mr Arora currently has ball park figures of the requirement of finances for the wedding. His guess is that the wedding should require 40-50 lakhs. He does not want to cut any corners. The jewellery has already been taken care of. His budget estimate includes additional 2 lakhs for jewellery. Mr Arora has been prepared for his daughter’s education and wedding since she was a toddler. Infact, at the persuation of Mr. Rustogi (his then colleague) he started monthly savings since 1996. His first investments were a group of mutual fund SIPs (Systematic investment Plans) and Bank RDs (Recurring deposits). Of these an RD of Rs. 1500 and two SIPs – Rs. 1000 to Franklin India Bluechip fund and Rs. 1000 to Franklin India Prima Fund were earmarked for his daughter. Over the years while the monthly savings changed he kept the allocation rate same between RDs and mutual funds. When RDs matured, he transferred the maturity to a fixed deposit and continued with a new RD. Whenever, he changed the fund for new SIP allocation, he left the funds already invested in the existing schemes. The only withdrawals he did was to fund Simran’s Fashion Designing course. He withdrew 5 lakhs in 2014 for this purpose. After the withdrawals he was left with a guilty feeling as he believed that he could have arranged the funds from elsewhere. The current state of the funds earmarked for Simran are given in Exhibit 1.

Mr Arora would like to give these as a gift to his daughter. Especially so because a property he had purchased in Noida to gift to her is stuck midway. He wants to meet Mr. Rustogi to seek his advice on creating such allocation from his remaining portfolio given in Exhibit 2. The family liabilities and family’s important goals are provided in Exhibit 3 and Exhibit 4 respectively.

Questions:

  • For the goals of his daughter’s education and marriage, assume that the quantum of monthly saving for this goal was increased by 10% every 3 years (starting 1996 and ending 2020). Further assume that the deposit rates he would be able to get average 7% during this period and the returns on equity funds 12% per annum with a standard deviation of 14%:
    • What is the nature of asset allocation did Mr Arora start with. If he leaves the investments untouched till 2020 what would be the likely corpus in his hands. Comment on this type of asset allocation.
    • Mr. Rustogi advises him to have an asset allocation of 50% debt and 50% equity for this fund and hence to rebalance every 3 years. What is the likely corpus he would have generated.
    • How will your calculations change if you incorporate taxation. Consider that the investments were done with Mrs. Arora as guardian and a tax rate of 20% is applicable for her.
  • Mr Arora mandates Mr Rustogi to arrange Rs. 50 lakhs from his portfolio. At worst he may dip into maximum 50% of FD from portfolio earmarked for Simran. He is not to touch the equity portion. Provide a solution to Rustogi.
  • Mr Arora would like to retire when he is 60. After solving (2) above review the portfolio from this light and suggest changes (if any). Your review should encompass: The asset allocation, individual assets, instruments etc.

Take any assumptions that may be necessary and clearly state the same.

Exhibit 1:

Funds For Simran

Sl No.

Asset

Details

Amount (in Lakhs)

Remarks

1

FD-1 PNB

7.6

Some withdrawal done earlier. Maturity 2020: Rs. 9.75

2

FD-2 PNB

10

Maturity 2021: Rs. 12.25

3

RD 1 -PNB

7.65

4

Franklin India Bluechip Fund

9.3

5

Franklin India Prima Fund

6.25

6

HDFC Equity Fund

7.5

7

Reliance Growth Fund

3.25

8

SBI Pharma

1.76

9

Mirae Asset India Equity Fund

1.84

10

Axis Bluechip Fund

1.1

SIP of 20k per month running

Exhibit 2: Mr Arora’s Family Portfolio (Mrs & Mr Arora together)

Sl No.

Asset

Details

Invested Value  (in Lakhs)

Current Value (In lakhs)

Remarks

Fixed Deposits

1

FD-1 PNB

Maturity – 2022

5

Mrs. Arora – first holder

2

FD-2 PNB

Maturity – 2021

5

Mrs. Arora – first holder

3

FD-3 HDFC Ltd

Maturity – 2020

10

Mr. Arora – first holder

4

FD-4 HDFC Bank

Maturity – 2020

10

Under lien, as arrangement for vehicle finance for Milan Travels

Equity

Shares held

All in Jt names, children are  nominees

5

Reliance Industries

100

6

SBI

2000

7

Maruti Suzuki

1000

8

Amtek auto

1000

9

DLF

200

Exhibit 2 ….Contd.

Mutual Funds

MF last reviewed and rebalanced by Rustogi : Jan 2020

10

ICICI Prudential Equity & Debt Fund

10

11

Mirae Asset Hybrid Equity Fund

10

12

Axis Bluechip Fund

10

13

ICICI Prudential Bluechip Fund

10

14

HDFC Mid-Cap Opportunities Fund

10

15

L&T Emerging Businesses Fund

10

16

HDFC Small Cap Fund

10

17

Motilal Oswal Multicap 35 Fund

10

18

Kotak Standard Multicap Fund

10

19

Bank Accounts

Savings Bank

5.9

20

Milan Travel’s Bank A/c

2.5

21

Milan Travel’s OD account

-0.75

Land and Property

22

Land Manesar

3000 sq ft

6

23

Noida Flat

1550 sq ft

20

Expected delivery 2017, includes 10 lakhs from home loan

24

Punjabi Bagh Flat

1700 sq ft

150

Ancestral, currently residing

25

Panchkula Flat

1400 sq ft

35

26

Gurgaon Flat

1400 sq ft

60

On Rent: Rs. 25k per month

Others

27

Milan Travels

50% each held by Mr Arora and Mrs Arora. Valuation unknown

28

Hyundai Creta

Purchased 2018

10

29

Gold

100

Excluding what is kept for Simran’s wedding

Exhibit 3:  Mr Arora’s Family Liabilities (Mrs & Mr Arora together)

Sl No.

Asset

Details

1

HDFC Ltd

10

total sanctioned 25

2

HDFC Bank

31

Guarantor to vehicle finance

3

Mr Shambhu

2

Short term to be repaid in 2 months

Exhibit 4:  Family’s Goals

1

Akash Education

Complete Btech and then MBA

2

Simran’s Marriage

3

Trip to Canada

2021 or after Simran’s Roka

4

Retirement to be planned

5

A luxury car  – Merc or Audi for Milan Travels

Not finalised

Reference no: EM132069492

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