In Exam 5 the questions which scares everyone the most are either of educational goal or travel goal. Publishing some more questions for better preparation.
Question No.16 (Very important structure to get through in Exam 5)
Tax efficient strategy to accumulate funds and derisk with switches periodically
Strategy:
Funds are withdrawn closer to goal from Debt fund, while funds are switched from a Feeder Fund, generally Equity Fund systematically with tax efficiency in mind.
Goal:
As a tax efficient strategy to meet entire education expenses, a Debt Fund and an Equity Fund is started today with initial investment of Rs. 5,00,000 each. Different SIPs are also started immediately, in Debt Fund for 4 years and in Equity Fund for 10 years. Debt Fund is used to meet entire Basic Education expenses. The Debt Fund is also used to meet the yearly expenses of secondary education and higher education from lump sum amounts switched at certain intervals from the Equity Fund in the following manner: First; at age 8 to meet secondary education expenses from age 11 to 13; Second, at age 11 to meet the secondary education expenses from age 14 to 16; Third, at age 14 to meet the higher education expenses. The expenses due in a year are withdrawn in the beginning. What should be the amounts of monthly SIPs in Debt Fund and Equity Fund today?
Question No.17 (This concept was there in exam a year before, now reintroduced)
Accumulation for goal by investing in Inflation Indexed Bonds
Concept:
Conventional Bonds: The maturity value is the face value. The coupons are in the range 7% – 9% generally by a small margin over the expected inflation of the period of bonds.
Inflation Indexed Bonds: The maturity value is indexed to inflation. The coupons are small 1.4% – 1.5%, but are paid every year on the indexed face value.
In order to meet the goal of higher education of his son after 15 years, a person chooses to invest in two series of Inflation Indexed Bonds, each having a 10-year maturity period. One series is to be invested immediately and the other after 5 years. A sum of Rs. 10 lakh is invested in the first series, while the invested sum is increased to Rs. 15 lakh in the second series. The real coupon is 1.5% while average inflation over the entire period is estimated to be 5% p.a. The coupons to be received and the maturity proceeds of individual bond series are invested in risk free instruments at 6% p.a. till required for higher education. What would be the extent of accumulation for the higher education goal?
Question No.18
Accumulation through SIP and derisking by switching periodically for gradual utililization for goal
| Situation: | ||
| Holiday expenses coating today | 1,00,000 | Rs. p.a. |
| Cost escalation of holiday expenses | 7% | p.a. |
| Holiday expenses required annually after | 20 | years |
| Number of years for which holiday expenses required | 25 | years |
Strategy:
The goal being aspirational initially high risk is assumed by investing a fixed amount monthly in an aggressive asset allocation yielding 12% p.a. for 15 years. Beginning at the end of 16 years 30% of accumulated funds are switched to a defensive asset allocation yielding 8% p.a. every alternate year until full switch after 20 years. The holiday expenses are annually drawn from this defensive asset allocation.
What amount is required to be invested every month in the aggressive asset allocation starting immediately?
Download excel file for solution.
PVS (Prashant V Shah) 