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ABC Wealth Advisors

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) joined 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 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

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 written from generalised experiences.

© 2009, IBSCDC.

No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the

permission of the copyright owner.

Ref.No.: FM0009

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ABC Wealth Advisors

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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%.

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.

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ABC Wealth Advisors

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 Net Asset Values (NAVs) of HDFC Mutual Fund Scheme (Annexure I). The major task

before John is to guide his clients in making efficient investment decisions.

Exhibit I

Various Investment Options

Compiled by the author

Investment Option Investment Type Interest Rate Duration

(%) (years)

Post Office Time Deposit Scheme Time Deposit 7.50 5

State Bank of India (SBI) Fixed Deposit/

Fixed Deposit Scheme Recurring Deposit 8 2–5

National Savings Certificate (NSC) Recurring Deposit 8 6

Public Provident Fund (PPF) Account Recurring Deposit 8 15

ICICI Term Deposit Scheme Fixed Deposit 8 4–5

Oriental Bank of Commerce (OBC)

Recurring Deposit Scheme Recurring Deposit 9 Not less than 5

Nabard’s Bhavishya Nirman Bonds Bond 9.5 10

Oriental Bank of Commerce (OBC)

Fixed Deposit Scheme Fixed Deposit 9 Not less than 5

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ABC Wealth Advisors

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Annexure I

NAVs of HDFC Mutual Fund

Month and Year of Investment NAV (in INR)

May 2006 51.9101

June 2006 36.842

July 2006 40.9813

August 2006 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

April 2007 49.355

May 2007 53.1501

June 2007 55.2344

July 2007 58.8726

August 2007 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

April 2008 59.4898

May 2008 63.7144

June 2008 59.339

July 2008 52.3037

Contd...

1

ABC Wealth Advisors

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) joined 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 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

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 written from generalised experiences.

© 2009, IBSCDC.

No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the

permission of the copyright owner.

Ref.No.: FM0009

kashish

Highlight

kashish

Highlight

kashish

Highlight

kashish

Highlight

kashish

Highlight

Page 2

ABC Wealth Advisors

2

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%.

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.

Page 3

3

ABC Wealth Advisors

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 Net Asset Values (NAVs) of HDFC Mutual Fund Scheme (Annexure I). The major task

before John is to guide his clients in making efficient investment decisions.

Exhibit I

Various Investment Options

Compiled by the author

Investment Option Investment Type Interest Rate Duration

(%) (years)

Post Office Time Deposit Scheme Time Deposit 7.50 5

State Bank of India (SBI) Fixed Deposit/

Fixed Deposit Scheme Recurring Deposit 8 2–5

National Savings Certificate (NSC) Recurring Deposit 8 6

Public Provident Fund (PPF) Account Recurring Deposit 8 15

ICICI Term Deposit Scheme Fixed Deposit 8 4–5

Oriental Bank of Commerce (OBC)

Recurring Deposit Scheme Recurring Deposit 9 Not less than 5

Nabard’s Bhavishya Nirman Bonds Bond 9.5 10

Oriental Bank of Commerce (OBC)

Fixed Deposit Scheme Fixed Deposit 9 Not less than 5

Page 4

ABC Wealth Advisors

4

Annexure I

NAVs of HDFC Mutual Fund

Month and Year of Investment NAV (in INR)

May 2006 51.9101

June 2006 36.842

July 2006 40.9813

August 2006 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

April 2007 49.355

May 2007 53.1501

June 2007 55.2344

July 2007 58.8726

August 2007 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

April 2008 59.4898

May 2008 63.7144

June 2008 59.339

July 2008 52.3037

Contd...