TYBMS SEM :5 Finance : Wealth Management (Q.P. November 2022 with Solution)

Paper/Subject Code: 46009/Finance: Wealth Management 

TYBMS SEM :5 

Finance :

Wealth Management

(Q.P. November 2022 with Solution)

Note:

1) All questions are compulsory subject to internal choice.

2) Figures to the right indicate full marks.

3) Use of simple calculator is allowed

Q.1. (a) Multiple Choice Questions: (any 8)                    (08)

1) ________ defines as a relationship between an advisor and individual or a household.

(a) Wealth Management

(b) Investment Management.

(c) Financial Management

(d) Taxation Management

2) The yield curve is _______ when yields of all maturities are close to one another.

(a) Flat

(b) Upward sloping

(c) Downward sloping.

(d) Humped

3) The risk of loss in the purchasing power can be rise is known as _______.

(a) Longevity Risk

(b) Inflation Risk

(c) Reinvestment Risk

(d) Foreign Investment Risk

4) Interest on higher educational loan can be claimed for deduction under _______ 

(a) 80C

(b) 80D

(c) 80E

(d) 80U

5) ________ refers to annual return on investment.

(a) Credit

(b) Yield

(c) HLV

(d) Commission

6) Deduction for handicap dependent relative can be claimed under section _______

(a) Sec 80C

(b) Sec 80D

(c) Sec 80DD

(d) Sec 80U

7) HLV stands for _________.

(a) Human Life Volume

(b) Huge Life Value

(c) Human Life Value

(d) Human Life Venture

8) _______ insurance principle means both the insured and the insurer should have faith in each other.

(a) Principle of Contribution

(b) Principle of Indemnity

(c) Principle of utmost good faith

(d) None of the above

9) ________ is lesser than Nominal return.

(a) Real return

(b) Capital investment return

(c) Inflation Adjusted return

(d) Normal return

10) A ________ is one used to invest and disburse money in tax favour retirement plan.

(a) Non-qualified Annuity

(b) Qualified Annuity

(c) Lifetime Annuity

(d) Pure lifetime Annuity

(b) State whether the following statements are true or false: (any 7)            (07)

1) Long term capital loss cannot be set off against short term capital gain.

Ans: False

2) Insurance is a device to transfer the risk/ losses from the insured to the insurer.

Ans: True

3) Ratio analysis is an important technique of financial statement analysis.

Ans: True

4) Employee Provident fund is a retirement benefit applicable only to salaried employees.

Ans: True

5) Investment in infrastructure bonds can be claimed for deduction under section 80C.

Ans: False

6) Foreign Investment risk refers to the risk of loss that arises when investing in foreign countries. 

Ans: True

7) A Wealth Manager should not act as a Salesman but as an Advisor.

Ans: True

8) Stock is not a current asset,

Ans: False

9) Interest is the cost of owned money.

Ans: False

10) SIP stands for systematic interest plan.

Ans: False

Q.2.
(a) Explain the component of Wealth Management in brief.

Wealth management is a comprehensive financial advisory service that goes beyond simple investment advice. It's a holistic approach designed to help individuals, particularly high-net-worth individuals (HNWIs) and their families, manage, grow, and preserve their wealth over the long term.

Components of wealth management:

1. Financial Planning: This is the foundation. It involves understanding your current financial situation (income, expenses, assets, liabilities), setting clear short-term and long-term financial goals (e.g., retirement, child's education, buying a house), and creating a detailed roadmap to achieve them. It includes budgeting, cash flow management, and setting savings targets.

2. Investment Management/Portfolio Management: This core component focuses on building and managing a diversified investment portfolio tailored to your financial goals, risk tolerance, and time horizon. It involves strategic asset allocation (deciding how to divide investments among different asset classes like stocks, bonds, real estate, etc.), selecting specific investments, and continuously monitoring and rebalancing the portfolio to optimize returns and manage risk.

3. Tax Planning/Optimization: A crucial aspect of preserving wealth is minimizing tax liabilities. Wealth managers devise strategies to reduce your tax burden through various means, such as tax-efficient investments, maximizing deductions, managing capital gains and losses, and planning for estate taxes.

4. Estate Planning/Legacy Planning: This involves planning for the efficient and tax-effective transfer of your assets to your heirs or beneficiaries after your passing. It includes drafting wills, setting up trusts, establishing gifting strategies, and addressing concerns like business succession to ensure your legacy is preserved and passed on according to your wishes.

5. Risk Management and Insurance: Protecting your existing wealth is just as important as growing it. This component involves identifying potential financial risks (e.g., illness, disability, market fluctuations) and implementing strategies to mitigate them through appropriate insurance coverage (life insurance, health insurance, property insurance, etc.) and other contingency planning.

6. Retirement Planning: A significant part of long-term wealth management is ensuring a financially secure retirement. This involves calculating how much you'll need to save, choosing suitable retirement accounts, determining contribution methods, and planning withdrawal strategies to maintain your desired lifestyle in your non-working years.

7. Debt Management: While often associated with basic financial planning, for wealth management, it focuses on strategically managing high-interest debts to free up capital for investments and wealth creation.

8. Charitable Giving/Philanthropy: For many affluent individuals, incorporating charitable giving into their financial plan is important. Wealth managers can advise on tax-efficient ways to make donations and establish philanthropic legacies.

(b) What is Yield Curve? Explain the different types of Yield Curve.

A yield curve is a graphical representation that plots the interest rates (or "yields") of bonds with equal credit quality but different maturity dates. In simpler terms, it shows how much you can expect to earn by lending money for different periods of time.

The most commonly referred to yield curve is the U.S. Treasury yield curve, as U.S. Treasury bonds are considered to have virtually no credit risk and offer a wide range of maturities, making them a benchmark for other fixed-income securities.

Key elements of a yield curve:

• X-axis (horizontal): Represents the time to maturity (e.g., 3 months, 1 year, 5 years, 10 years, 30 years).
• Y-axis (vertical): Represents the annualized yield (interest rate) for that maturity.

The shape of the yield curve is a significant economic indicator because it reflects market expectations about future interest rates, inflation, and economic growth.

Types of Yield Curves:

There are three primary types of yield curves, each signaling different economic outlooks:

1. Normal (Upward-Sloping) Yield Curve:

   • Shape: Short-term yields are lower than long-term yields, causing the curve to slope upward from left to right.
   • Meaning: This is the most common and "normal" shape for the yield curve. It indicates that investors expect stronger economic growth, potentially leading to higher inflation and interest rates in the future. Investors demand higher compensation (yield) for locking up their money for longer periods due to the increased risk of inflation eroding their returns over time. This curve is typically seen during periods of economic expansion.

2. Inverted (Downward-Sloping) Yield Curve:

   • Shape: Short-term yields are higher than long-term yields, causing the curve to slope downward from left to right.
   • Meaning: This is an unusual and often concerning shape. An inverted yield curve suggests that investors expect interest rates to fall in the future, usually in response to an anticipated economic slowdown or recession. They might be willing to accept lower yields on long-term bonds because they believe short-term rates will decline even further. Historically, an inverted yield curve has been a reliable predictor of economic recessions in several countries, including the United States, often preceding them by 12 to 18 months.

3. Flat Yield Curve:

   • Shape: Short-term and long-term yields are very similar, resulting in a relatively flat line.
   • Meaning: A flat yield curve often indicates a transition period in the economy, either from a normal curve to an inverted one, or vice versa. It suggests uncertainty about the future direction of economic growth and interest rates. It can appear when the central bank is raising short-term rates (making them closer to long-term rates) or when long-term rates are falling due to concerns about the economic outlook.

Other variations you might hear about:

• Steep Yield Curve: This is a more pronounced version of a normal yield curve, where the difference between short-term and long-term yields is particularly wide. It often signals strong expectations of future economic growth and inflation.
• Humped Yield Curve: In this rare scenario, medium-term yields are higher than both short-term and long-term yields, creating a "hump" in the middle of the curve. It can sometimes indicate a slowing of economic growth.

OR

( c) Ms. Rupal is an individual submits the flowing information relevant for AY 2022-23 (15)

Find out the net taxable income of Ms. Rupal for AY 2022-23, applying the provisions of set off and carry forward of losses.

Particulars	Rs.
Income from Salary Income from House Property: Loss from Mira road House Income from Andheri House Income from Lonawala house	1,20,000   (85,000) 45,000 25,000
Income from Business Business I (Non-Speculative) Business II (Non-Speculative) Business III (Speculative)	54,000 (14,000) 25,000
Income from Long Term Capital Gains: Short term Capital Loss:	30,000 (20,000)
Income from Other sources: Interest on debentures Interest on Bank fixed deposits.	4,000 12,000

You are also informed that:

She spent Rs. 3,500 as collection towards interest on debentures allowed to be deducted u/s 57 as expenditure.

She has the following carry forward losses:

Speculative Business losses- Rs. 30,000 (AY 2020-21)

Long term Capital losses Rs. 45,000  (AY 2018-19)

Q.3.
(a) Discuss Functions of Insurance in brief.                    (08)

Insurance serves several crucial functions that provide financial security and stability to individuals, businesses, and the economy as a whole. These functions can be broadly categorized as primary and secondary:

Primary Functions:

• Protection/Security: This is the most fundamental function of insurance. It provides financial protection against potential future losses arising from specified risks. While insurance cannot prevent an event from happening, it can compensate for the financial consequences, helping individuals and businesses recover from misfortunes like accidents, illnesses, natural disasters, or theft.

• Certainty: Insurance transforms an uncertain financial loss into a certain, manageable expense (the premium). Individuals and businesses pay a small, known premium to gain certainty that a larger, unknown loss will be covered if the insured event occurs. This allows for better financial planning and reduces anxiety.

• Risk Sharing/Pooling: Insurance operates on the principle of collective risk-bearing. A large number of policyholders exposed to similar risks contribute premiums to a common fund. When a loss occurs to one or a few of these policyholders, the compensation is paid out from this pooled fund. This mechanism effectively distributes the financial burden of a loss among many, rather than leaving it to a single individual or entity.

Secondary Functions:

• Prevention of Loss: Insurance companies often engage in activities that promote loss prevention. They might offer incentives for adopting safety measures (e.g., lower premiums for installing fire alarms or security systems), conduct awareness campaigns, or support organizations dedicated to reducing risks (like the Loss Prevention Association of India). By encouraging loss prevention, insurers aim to reduce the frequency and severity of claims, benefiting both themselves and policyholders.

• Capital Formation/Investment: The large sums of premiums collected by insurance companies are not immediately paid out as claims. A significant portion of these funds is invested in various productive channels of the economy, such as infrastructure projects, government securities, and corporate bonds. This mobilizes savings and contributes to capital formation, stimulating economic growth and development.

• Enhancing Efficiency: By providing a safety net against financial losses, insurance allows individuals and businesses to focus their resources and efforts on productive activities without constant worry about potential setbacks. This peace of mind and reduced financial stress can lead to increased efficiency and innovation.

• Promoting Economic Progress: Insurance facilitates economic activity by enabling businesses to take calculated risks and expand their operations. Without insurance, the fear of catastrophic losses might deter entrepreneurs and investors from undertaking ventures that are essential for economic growth. Insurance also supports international trade by covering risks associated with cargo and foreign operations.

• Means of Savings and Investment (especially in life insurance): While primarily providing protection, certain types of insurance policies, particularly life insurance, also incorporate a savings or investment component. Policyholders can accumulate wealth over time, and these policies can serve as a disciplined way to save for future goals like retirement, education, or wealth creation.

• Social Security: Through various social insurance schemes and employee benefit programs, insurance plays a role in providing social security to people, offering assistance in times of sickness, old age, unemployment, or maternity, in addition to death benefits.

• Legal Requirements: In many instances, insurance is a legal requirement (e.g., motor insurance, workers' compensation insurance). This ensures that individuals and businesses have the financial capacity to cover potential liabilities, protecting third parties and promoting a safer society.

(b) What is Investment Planning? Discuss different types of Investment Risks.     (07)

Investment planning is a crucial component of overall financial planning. It's a systematic process of identifying your financial goals, assessing your current financial situation, determining your risk tolerance, and creating a strategy to allocate your money into various investment vehicles to achieve those goals within a specific timeframe.

In essence, it's about putting your money to work for you, rather than just letting it sit idle, with the aim of growing your wealth over time.

Key aspects of investment planning include:

• Defining Financial Goals: This involves clearly articulating what you want to achieve with your money, such as buying a house, funding a child's education, retirement planning, starting a business, or simply accumulating wealth. Goals should be SMART (Specific, Measurable, Achievable, Relevant, and Time-bound).

• Assessing Current Financial Situation: This step involves understanding your income, expenses, savings, existing investments, debts, and overall net worth. It helps determine how much you can realistically invest.

• Determining Risk Tolerance: This is a critical step, as it involves understanding how comfortable you are with potential fluctuations in the value of your investments, including the possibility of losing money. Factors like age, financial responsibilities, and emotional temperament play a role.

• Developing an Investment Strategy: Based on your goals, time horizon, and risk tolerance, you'll decide on an asset allocation strategy – how to distribute your investments across different asset classes like stocks, bonds, mutual funds, real estate, gold, etc.

• Selecting Investment Vehicles: Choosing specific investment products within your chosen asset classes (e.g., specific stocks, bond funds, mutual funds, or real estate properties).

• Implementation: Actually making the investments according to your plan.

• Monitoring and Reviewing: Regularly tracking the performance of your investments, reviewing your financial goals, and making adjustments to your plan as needed due to market changes, life events, or shifts in your financial situation.

Investment planning helps you make informed decisions, manage risk, optimize returns, and maintain financial discipline to stay on track towards your financial aspirations.

Different Types of Investment Risks

Investing inherently involves risk, which is the possibility that the actual return on an investment will differ from the expected return, including the potential for loss of principal. Understanding these risks is vital for making informed investment decisions and building a diversified portfolio. Here are some common types of investment risks:

1. Market Risk (Systematic Risk): This is the risk that the value of your investments will decline due to factors affecting the entire market or a broad segment of it, rather than specific companies or assets. It cannot be eliminated through diversification within the same market.

   • Examples: Economic recessions, geopolitical events, changes in interest rates, natural disasters, or major technological shifts.
   • Sub-types:
     • Equity Risk: The risk associated with the overall stock market's fluctuations.
     • Interest Rate Risk: The risk that changes in interest rates will negatively impact the value of fixed-income investments like bonds. When interest rates rise, the value of existing bonds with lower yields tends to fall.
     • Currency Risk (Exchange Rate Risk): The risk that movements in exchange rates will negatively affect the value of investments held in foreign currencies.
     • Commodity Risk: The risk that changes in the prices of commodities (like oil, gold, or agricultural products) will impact related investments.

2. Credit Risk (Default Risk): This is the risk that a borrower (e.g., a company or government) will be unable to make its promised interest payments or repay the principal on its debt obligations (like bonds).

   • Example: A company issuing a bond goes bankrupt and cannot repay bondholders.

3. Liquidity Risk: This is the risk that you won't be able to sell an investment quickly enough at a fair market price when you need to convert it into cash.

   • Example: Real estate is generally less liquid than publicly traded stocks, as it can take time to find a buyer. Some alternative investments may also have low liquidity.

4. Inflation Risk (Purchasing Power Risk): This is the risk that the returns on your investments will not keep pace with the rate of inflation, leading to a decrease in your purchasing power over time.

   • Example: If your investment earns 3% annually, but inflation is 5%, your real return is negative 2%, meaning your money buys less than before.

5. Reinvestment Risk: This is the risk that when the principal or income from an investment is received, it will have to be reinvested at a lower rate of return than the original investment. This is particularly relevant for fixed-income investments like bonds.

   • Example: A bond matures, and new bonds are being issued at a lower interest rate, forcing you to reinvest at a lower yield.

6. Concentration Risk: This arises when a significant portion of a portfolio is invested in a single asset, a single industry, or a small number of assets. If that specific investment or sector performs poorly, it can have a disproportionately large negative impact on the overall portfolio.

   • Example: Investing all your money in the stock of one company or in a single industry sector.

7. Business Risk (Specific/Unsystematic Risk): This is the risk associated with a particular company or industry's performance due to factors specific to that entity. This risk can often be mitigated through diversification across different companies and industries.

   • Example: A company's management makes poor decisions, a new competitor emerges, or a specific product line fails.

8. Political and Regulatory Risk: This refers to the risk that changes in government policies, laws, regulations, or political instability within a country can negatively impact the value of investments.

   • Example: New taxes on certain investments, changes in trade policies, or nationalization of industries.

9. Longevity Risk: This is the risk of outliving your savings and investments, particularly relevant for retirement planning. It's the concern that your financial resources may not be sufficient to support you throughout your entire lifespan.

OR

(c) Mr. Ballu purchased a house property for Rs. 10,00,000 on 10th September 1992. He made the following additions to it.                    (08)

Cost of construction of first floor in Financial Year 2004-05 is Rs. 4,00,000 Cost of construction of second floor in Financial Year 2008-09 is Rs. 6,00,000 Fair market value of property on April 1,2001 was Rs. 7,00,000.

She sold the property on 25th October, 2021 for 50,00,000. He paid a brokerage of Rs. 2,00,000 for the sale transaction.

The CII for financial year 2021-22 is 317, 2004-05 is 105, 2008-09 is 137 & 2001-02 is 100.

Compute the Capital gain of Mr. Ballu for the Assessment Year 2022-23.

(d) Following is the Balance Sheet of Nandu Ltd.

Balance Sheet

Liabilities	Amount	Assets	Amount
Equity share capital	2,50,000	Plant and Machinery	3,50,000
General Reserve	70,000	Furniture	2,50,000
14% Bank Loan	4,50,000	Cash and Bank	4,52,000
Outstanding expenses	30,000	Stock	1,00,000
10% Preference shares capital	92,000	Debtors	1,50,000
Creditors	3,60,000
Bank Overdraft	50,000
TOTAL	13,02,000	TOTAL	13,02,000

 From the above information calculate:

Liquid Ratio

Current Ratio

Debt Equity Ratio

Capital Gearing Ratio

OR

    

Q.4.

(a) What is TDS and when is it payable?

TDS stands for Tax Deducted at Source. It's a mechanism implemented by the Indian government under the Income Tax Act, 1961, to collect taxes at the very source of income.

The core idea is that a certain percentage of tax is deducted by the payer (deductor) at the time of making specific types of payments to the receiver (deductee). This deducted amount is then remitted to the government on behalf of the receiver. The receiver eventually gets credit for this TDS amount when they file their income tax return.

Characteristics of TDS:

• Advance Tax Collection: It's a form of advance tax payment, ensuring a steady flow of revenue to the government throughout the financial year.
• Preventing Tax Evasion: By deducting tax at the source, it reduces the chances of income going unreported and thus prevents tax evasion.
• Convenience: It simplifies tax collection for the government and ensures that a portion of the tax liability is met even before the income is fully received by the assessee.
• Applicability: TDS is applicable on various types of income, including but not limited to:
  • Salaries
  • Interest on bank deposits
  • Rent payments
  • Professional fees (e.g., to doctors, lawyers, consultants)
  • Commission and brokerage
  • Winnings from lotteries, crossword puzzles, or horse races
  • Payments to contractors
  • Purchase of goods (under certain conditions)
  • Certain cash withdrawals exceeding specified limits

The deductor (the person or entity deducting the tax) has a legal obligation to deposit the TDS amount to the government and file TDS returns by specific due dates.

• Monthly Payments: For TDS deducted during a given month (for most categories), the due date for depositing the tax to the government is generally the 7th of the subsequent month.
  • Example: TDS deducted in May 2025 must be deposited by June 7, 2025.
• Exception for March: For TDS deducted in the month of March, the due date is extended to April 30th of the next financial year. This extension is given to account for year-end closing activities.

• Government Deductors: Government deductors making payments through book entry (Treasury Challan) usually need to deposit the TDS on the same day of deduction, with the exception of March deductions, which are due by April 7th.

• Specific Sections (e.g., property sale, rent by individuals/HUFs): For TDS deducted under certain sections like Section 194-IA (TDS on sale of immovable property), Section 194-IB (TDS on rent by individuals/HUFs not subject to tax audit), and Section 194-IC (Payment under JDA), the deductor must furnish a challan-cum-statement (Form 26QB, 26QC, etc.) and deposit the tax within 30 days from the end of the month in which the TDS was deducted.

(b) Explain the difference between Active and Passive investment strategies.

	Active Investment Strategy	Passive Investment Strategy
Definition	An approach where fund managers actively make decisions to buy/sell securities to outperform the market.	An approach that aims to replicate a market index or benchmark with minimal trading.
Goal	To beat the market (generate alpha).	To match the market returns.
Management Style	Actively managed by fund managers or analysts.	Passively managed with little intervention.
Cost/Fees	Higher (due to research, trading, management fees).	Lower (minimal trading, no active management).
Research & Analysis	Involves deep research, forecasting, and market timing.	No need for detailed research or timing.
Research & Analysis	Involves deep research, forecasting, and market timing.	No need for detailed research or timing.
Flexibility	High – managers can shift strategies as market conditions change.	Low – limited to following the index composition.
Examples	Actively managed mutual funds, hedge funds, stock picking.	Index funds, ETFs (Exchange Traded Funds) tracking benchmarks.
Risk	Higher risk due to market timing and concentration.	Lower risk due to diversification and consistency.
Performance Potential	Potential to outperform the market, but also underperform.	Typically matches market returns over the long term.

 

OR

(c) Compute the taxable income and tax liabilities of Mr. Robot who is senior citizen for the assessment for the year 2022-23

Particulars.	Amt Rs.
Income from Business	7,25,000
Income from Salary	6,65,000
Interest on NSC	10,500
Interest paid on Higher Educational loan	1,71,500

His wife is dependent and handicap. Find out his taxable income and calculate his tax liability as per old slab for the assessment year 2022-23.

(d) Mr. Yogi is an assessee whose estimated tax liability is Rs. 18,00,000 and TDS paid is Rs. 1,20,000 during the previous year. Calculate the advance tax payable on the respective due dates.        (07) 

Q.5 (a) Explain financial objectives in retirement planning in brief.

Financial objectives in retirement planning revolve around ensuring a comfortable, secure, and dignified life after one stops working. Here's a brief explanation of the key objectives:

1. Maintain Desired Lifestyle: The primary goal is to ensure you can maintain a similar or desired standard of living in retirement as you enjoyed during your working years. This means having sufficient income to cover all your essential expenses (housing, food, healthcare, utilities) and discretionary expenses (travel, hobbies, entertainment).

2. Financial Independence/Autonomy: To avoid being a financial burden on family or relying on social welfare, a key objective is to achieve financial independence. This means having enough personal savings and investments to fund your retirement without external support.

3. Cover Healthcare Costs: Healthcare expenses tend to increase significantly with age. A critical objective is to have adequate funds set aside or proper insurance coverage to manage medical bills, long-term care needs, and other health-related expenditures without depleting your savings.

4. Combat Inflation: Inflation erodes the purchasing power of money over time. A crucial objective is to ensure your retirement corpus grows at a rate that outpaces inflation, so your money can buy the same amount of goods and services in the future as it does today.

5. Manage Longevity Risk: People are living longer. A key objective is to plan for a potentially long retirement, ensuring your savings last for your entire lifespan, even if you live well beyond average life expectancy.

6. Protect Against Unexpected Expenses: Life is unpredictable. Retirement planning aims to build an emergency fund or a buffer to cover unforeseen circumstances like home repairs, car breakdowns, or unexpected family needs, preventing these from derailing your long-term financial security.

7. Minimize Tax Burden: Strategic retirement planning aims to structure investments and withdrawals in a tax-efficient manner to minimize the amount of income lost to taxes, thereby maximizing the usable income in retirement.

8. Achieve Specific Retirement Dreams: Beyond basic living, many individuals have specific aspirations for retirement, such as extensive travel, pursuing a new hobby, starting a small business, or leaving a legacy. Financial planning helps quantify and plan for these specific goals.

(b) Discuss Post-Retirement Strategies in brief.

Post-retirement financial strategies shift from the accumulation phase to the distribution and preservation phase. The primary goal is to make your accumulated wealth last throughout your retirement while providing a steady income stream and protecting against various risks.

1. Develop a Sustainable Withdrawal Strategy: This is paramount. Instead of accumulating, you're now drawing down. Common strategies include:

   • The 4% Rule: A traditional guideline suggesting you can withdraw 4% of your initial retirement portfolio in the first year, then adjust for inflation annually. While a starting point, it's often debated and might need adjustments based on market conditions and individual circumstances.
   • Bucketing Strategy: Dividing your retirement corpus into "buckets" for short-term (cash for immediate expenses, 1-3 years), medium-term (less volatile investments for 3-10 years), and long-term (growth-oriented investments for 10+ years). You draw from the short-term bucket first, allowing the others to grow.
   • Dynamic Spending: Adjusting your spending based on market performance. You might reduce withdrawals in down markets to preserve capital and increase them in good years.

2. Optimize Investment Portfolio for Income and Preservation:

   • Shift to Income-Generating Assets: While some growth is still desired to combat inflation, the focus shifts to assets that provide regular income, such as:
     • Fixed Deposits (FDs): Safe and predictable income, especially popular in India (e.g., Senior Citizen Savings Scheme - SCSS, Post Office Monthly Income Scheme - POMIS).
     • Annuities: Contracts with insurance companies that provide a guaranteed stream of income for a set period or for life in exchange for a lump sum.
     • Dividend-Paying Stocks and Funds: Provide regular income from company profits.
     • Debt Mutual Funds and Bonds: Offer relatively stable returns and capital preservation.
     • Government Securities (G-Secs): Backed by the government, offering high safety.
     • Rental Income: From investment properties.
   • Maintain Diversification: Spreading investments across different asset classes and geographies to mitigate risk.
   • Review and Rebalance Regularly: Periodically assessing your portfolio and adjusting its asset allocation to align with your changing needs, risk tolerance, and market conditions. This might mean reducing equity exposure as you get older, or taking a bit more risk to counter inflation if your longevity is high.

3. Prioritize Cash Flow Management and Budgeting:

   • Create a Realistic Retirement Budget: Understand your essential (housing, healthcare, food) and discretionary (travel, hobbies) expenses.
   • Establish an Emergency Fund: Keep 6-12 months of living expenses in easily accessible liquid assets to handle unforeseen events without disrupting your long-term investments.
   • Minimize High-Interest Debt: Pay off or minimize debts to free up cash flow.

4. Manage Healthcare Costs:

   • Adequate Health Insurance: A non-negotiable for retirees, given rising medical expenses. Review and update policies regularly.
   • Plan for Long-Term Care: Consider the potential need for assisted living or nursing home care, which can be very expensive.

5. Focus on Tax Efficiency:

   • Strategic Withdrawals: Drawing from different accounts (tax-deferred, tax-free, taxable) in a specific order to minimize overall tax liability (e.g., leaving Roth accounts for later due to tax-free withdrawals).
   • Utilize Tax-Saving Schemes: Continuing to leverage schemes like SCSS, PMVVY (Pradhan Mantri Vaya Vandana Yojana), and National Pension System (NPS) if applicable and beneficial for tax breaks and regular income.

6. Consider Earned Income (Part-time Work): Many retirees choose to work part-time, not just for financial reasons but also for social engagement and mental stimulation. This can supplement income and reduce the strain on the retirement corpus.

7. Estate Planning Updates: Regularly review and update wills, trusts, and beneficiary designations to ensure your assets are distributed according to your wishes and to minimize potential estate taxes.

Q.5 Write Short Notes on (any three)                    (15)

1) National Pension Scheme (NPS)

The National Pension System (NPS) is a voluntary, market-linked, defined contribution retirement savings scheme in India, regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Launched by the Central Government, it aims to provide a sustainable solution for old-age income security to every citizen of India.

• Objective: To enable individuals to build a retirement corpus by making systematic contributions during their working life and receive a pension post-retirement.

• Voluntary and Flexible: While initially mandatory for new central government employees (since Jan 1, 2004, excluding armed forces), NPS is now open voluntarily to all Indian citizens (including NRIs and OCIs) aged between 18 and 70 years. Subscribers have flexibility in choosing their investment allocation among asset classes (Equity, Corporate Debt, Government Securities, and Alternative Investment Funds) and selecting a Pension Fund Manager (PFM).

• Market-Linked Returns: Unlike traditional provident funds with fixed interest rates, NPS investments are market-linked. The accumulated corpus grows over time based on the performance of the chosen assets, offering potentially higher returns.

• Two Account Types:
  • Tier-I Account: This is the primary, mandatory retirement account. Contributions are locked in until retirement (generally 60 years of age), with limited partial withdrawals allowed for specific purposes (like education, illness, house purchase) after a certain period.
  • Tier-II Account: This is a voluntary savings account that can only be opened if you have an active Tier-I account. It offers higher liquidity, allowing withdrawals at any time without the restrictions of Tier-I. However, contributions to Tier-II generally do not offer the same tax benefits as Tier-I.
• Tax Benefits: NPS offers attractive tax benefits under the Indian Income Tax Act, 1961:
  • Employee's Contribution: Eligible for deduction under Section 80CCD(1) within the overall limit of Section 80C (₹1.5 lakh).
  • Additional Deduction: An exclusive deduction of up to ₹50,000 is available under Section 80CCD(1B) for contributions to Tier-I, over and above the Section 80C limit.
  • Employer's Contribution: Employer's contribution (up to 10% of salary - Basic + DA, or 14% for Central Government employees) is deductible under Section 80CCD(2), over and above the ₹1.5 lakh limit of Section 80CCE.
  • Partial Withdrawals: Up to 25% of the subscriber's contribution from Tier-I is tax-exempt at the time of partial withdrawal for specific purposes.
  • Maturity/Exit: At the age of 60 (or superannuation), up to 60% of the accumulated corpus can be withdrawn as a lump sum, which is tax-free. The remaining minimum 40% must be used to purchase an annuity (regular pension plan) from a PFRDA-empanelled life insurance company. The annuity income received subsequently is taxable.
• Portability: NPS accounts are highly portable across jobs, sectors, and locations, as they are linked to a unique Permanent Retirement Account Number (PRAN) which remains with the subscriber for life.
• Low Cost: NPS is known for its very low administrative and fund management charges, making it a cost-efficient long-term savings instrument.

2) Requisites of a Valid Will

A "Will" (also known as a "testament") is a legal document that expresses a person's (the "testator's") wishes as to how their property (estate) is to be distributed after their death and specifies who will manage the estate until its final distribution. For a Will to be legally enforceable, it must meet certain requisites, which can vary slightly by jurisdiction, but generally include the following fundamental elements:

1. Legal Capacity/Testamentary Capacity:

   • Age: The testator must be of legal age to make a Will. In India, this is 18 years, as per the Indian Majority Act, 1875.
   • Sound Mind: The testator must be of sound mind and memory at the time of executing the Will. This means they must understand the nature of the act (that they are making a Will), the extent of their property, and who the natural beneficiaries of their property are. They should not be under any delusion, intoxication, or mental infirmity that impairs their judgment.

2. Voluntary Act (Free from Coercion, Fraud, or Undue Influence):

   • The Will must be made voluntarily, without any coercion, undue influence, fraud, or misrepresentation. The testator's decision must be their own free will, not dictated by others.

3. In Writing:

   • While some jurisdictions might recognize oral Wills (e.g., privileged Wills for soldiers in active service under specific circumstances), a standard Will, to be valid, must generally be in writing. This provides clear evidence of the testator's intentions.

4. Signature of the Testator:

   • The Will must be signed by the testator (or by another person in their presence and under their direction). The signature signifies the testator's approval of the contents of the Will. The signature should ideally be at the foot or end of the Will.

5. Attestation by Witnesses:

   • This is a crucial requirement in many jurisdictions (including India, under the Indian Succession Act, 1925, for most Wills). The Will must be attested by at least two or more competent witnesses.
   • Presence: The witnesses must have seen the testator sign or affix their mark to the Will, or have seen some other person sign the Will in the testator's presence and by their direction. They must also have received from the testator a personal acknowledgment of their signature or mark.
   • Mutual Presence: The witnesses must sign the Will in the presence of the testator. While witnesses need not sign in each other's presence in India, it is often good practice.
   • Competency: Witnesses must be mentally sound and of legal age. They generally should not be beneficiaries under the Will, as in some jurisdictions, a gift to an attesting witness (or their spouse) may be rendered void, although the Will itself remains valid.

6. Intention (Animus Testandi):

   • The testator must have the clear intention to make a legally binding disposition of their property upon death. The document must be intended to be their last Will and testament.

3) Deduction under Section 80C

Section 80C of the Income Tax Act, 1961, is a cornerstone of tax planning in India. It allows individual taxpayers and Hindu Undivided Families (HUFs) to reduce their taxable income by investing in specified financial instruments or incurring certain expenses. This deduction encourages savings and investments among taxpayers.

Here's a breakdown of the key aspects of Section 80C:

Maximum Deduction Limit: The maximum deduction allowed under Section 80C is ₹1.5 lakh (INR 150,000) in a financial year. This limit applies to the total of all eligible investments and expenses combined.

Who can claim it?

• Individuals: Both salaried and self-employed individuals, including Non-Resident Indians (NRIs).
• Hindu Undivided Families (HUFs).
• Companies, partnership firms, and LLPs are not eligible to claim deductions under Section 80C.

Eligible Investments and Expenses (Common Examples):

Section 80C covers a wide array of options, giving taxpayers flexibility in choosing investments that align with their financial goals:

• Life Insurance Premiums: Premiums paid for life insurance policies for self, spouse, or children. There are certain conditions regarding the premium amount relative to the sum assured for the maturity proceeds to be tax-free.
• Public Provident Fund (PPF): Contributions to a PPF account. This is a popular long-term, government-backed savings scheme that offers tax-free interest and maturity proceeds (EEE status - Exempt, Exempt, Exempt).
• Employee Provident Fund (EPF) / Voluntary Provident Fund (VPF): Employee's mandatory contribution to EPF and any additional voluntary contributions to VPF.
• Equity Linked Saving Schemes (ELSS): These are diversified equity mutual funds with a mandatory lock-in period of 3 years. They offer market-linked returns and are one of the most popular tax-saving options for those comfortable with equity market risk.
• National Savings Certificates (NSC): A fixed-income, government-backed savings scheme with a typical lock-in of 5 years.
• 5-Year Tax-Saving Fixed Deposits (FDs): Fixed deposits with banks or post offices that have a minimum lock-in period of 5 years. The interest earned on these FDs is usually taxable.
• Sukanya Samriddhi Yojana (SSY): A government-backed savings scheme specifically for the benefit of a girl child.
• Senior Citizens' Saving Scheme (SCSS): An investment option specifically for senior citizens, offering regular income and tax benefits.
• Principal Repayment of Home Loan: The portion of the EMI (Equated Monthly Installment) paid towards the principal amount of a home loan qualifies for deduction.
• Stamp Duty and Registration Charges: Paid on the purchase or construction of a new residential house property. This deduction can be claimed in the year the payment is made.
• Children's Tuition Fees: Tuition fees paid for the full-time education of up to two children at any university, college, school, or other educational institution situated in India.
• Unit Linked Insurance Plans (ULIPs): These are investment-cum-insurance products where a portion of the premium goes towards life cover and the rest is invested in market-linked funds.

4) Life cycle Model

The "Life Cycle Model" is a broad concept that applies across various disciplines to describe the progression of something through distinct stages from its inception to its conclusion. While the specifics of each stage vary greatly depending on the context, the underlying idea is that entities go through predictable phases that influence their characteristics, behavior, and optimal management strategies.

life cycle model is applied in different fields:

• Software Development Life Cycle (SDLC): In software engineering, the SDLC outlines the stages involved in developing, deploying, and maintaining software applications. Common phases include:

  • Planning/Requirements Gathering: Defining project goals, scope, and user needs.
  • Design: Creating the architecture and detailed design of the software.
  • Implementation/Coding: Writing the actual code.
  • Testing: Identifying and fixing bugs, ensuring quality.
  • Deployment: Releasing the software to users.
  • Maintenance: Ongoing support, updates, and improvements. Various SDLC models exist, like Waterfall, Agile, Spiral, etc., each with a different approach to sequencing and iterating through these phases.

• Product Life Cycle (PLC) in Marketing/Economics: This model describes the stages a product goes through from its introduction to the market until its eventual withdrawal. The stages typically are:

  • Introduction: Launching a new product, often with high costs and low sales.
  • Growth: Rapid increase in sales and market acceptance.
  • Maturity: Sales growth slows, competition intensifies, and the market becomes saturated.
  • Decline: Sales and profits fall as the product becomes obsolete or less appealing. Understanding the PLC helps businesses make strategic decisions regarding marketing, pricing, and product development.

• Financial Life Cycle in Personal Finance: This model views an individual's financial journey through different stages, with changing financial priorities and strategies at each stage:

  • Early Career/Accumulation Phase (Young Adulthood to Mid-Career): Focus on building an emergency fund, paying off debt (e.g., student loans), starting to invest, and potentially saving for a down payment on a home.
  • Mid-Career/Wealth Accumulation Phase (Mid-Career to Pre-Retirement): Emphasis on increasing income, maximizing retirement savings, investing for long-term growth, and potentially funding children's education.
  • Pre-Retirement/Transition Phase (Approaching Retirement): Shifting focus from aggressive growth to wealth preservation, reducing debt, and planning for income distribution in retirement.
  • Retirement/Distribution Phase (Post-Work Life): Living off accumulated wealth, managing income streams, and focusing on estate planning and healthcare costs. Financial advisors use this model to tailor advice and strategies to clients' evolving needs.

• Human Development Life Cycle (Psychology/Sociology): This refers to the progression of individuals through various developmental stages across their lifespan, encompassing physical, cognitive, social, and emotional changes. Theories like Erik Erikson's stages of psychosocial development are examples, outlining conflicts and tasks typical of different age groups from infancy to old age.

5) Health Insurance

Health insurance is a contract between an individual and an insurance provider, where the insurer agrees to pay for specified medical expenses in exchange for regular premium payments. In essence, it acts as a financial safety net, protecting individuals and families from the often exorbitant costs associated with healthcare services.

Features and Importance:

• Financial Protection: The primary function of health insurance is to provide financial coverage for medical treatments, including hospitalization, doctor consultations, diagnostic tests, surgeries, and sometimes even pre- and post-hospitalization expenses. This prevents medical emergencies from leading to significant financial strain or debt.
• Access to Quality Healthcare: With rising healthcare costs, having adequate health insurance ensures access to quality medical facilities and tre atments, allowing individuals to seek timely care without compromising on their health due to financial limitations.
• Types of Coverage: Health insurance policies come in various forms:
  • Individual Plans: Cover a single person.
  • Family Floater Plans: Cover multiple family members under a single policy, with a common sum insured that can be utilized by any member.
  • Senior Citizen Plans: Designed specifically for the elderly, often with higher premiums and specific benefits.
  • Critical Illness Plans: Provide a lump sum payout upon diagnosis of specific life-threatening diseases.
  • Top-up/Super Top-up Plans: Enhance existing basic health coverage by providing additional sum insured at a lower premium, especially useful for higher medical bills.
• Cashless Facility and Reimbursement: Most policies offer a cashless facility, where the insurer directly settles bills with network hospitals. Alternatively, policyholders can pay first and then claim reimbursement from the insurer.
• Tax Benefits: In many countries, including India, premiums paid for health insurance are eligible for tax deductions under specific sections of the income tax act (e.g., Section 80D in India), providing an additional incentive for individuals to secure coverage.
• Waiting Periods: Most policies have initial waiting periods for certain illnesses or pre-existing conditions, meaning coverage for these conditions begins only after a specified period has elapsed from policy inception.
• Preventive Care: Some modern health insurance policies also cover preventive health check-ups, encouraging proactive health management.