Case Studies in Comprehensive Financial Advice: formula sheet

Key formulas

Net worth

Net worth = Total assets − Total liabilities

Snapshot at a date. Use current market value of assets, not purchase cost. Include the home as an asset and the home loan outstanding as a liability.

Surplus or deficit

Surplus = Total inflows − Total outflows

Over a period, usually a year or month. Outflows include expenses, EMIs, insurance premiums and investments only if you are measuring savings separately.

Savings rate

Savings rate = Savings ÷ Gross income × 100

Say which income base you use. Do not mix gross and take-home income.

Liquidity (emergency fund) ratio

Liquid assets ÷ Monthly essential expenses

Gives the months of expenses covered. A common rule of thumb is 3 to 6 months, which is a guideline, not a regulation.

Debt service ratio

Total monthly EMIs ÷ Monthly gross income × 100

Shows loan burden. Lower is safer. Thresholds vary, so use the one given in the question.

Risk rule

Recommended risk level ≤ lower of (risk tolerance, risk capacity)

If risk required is higher than this, revisit the goal rather than raising the risk.

Future value (lump sum)

FV = PV × (1 + r)^n

Use it to inflate today's cost to the goal date, or to grow an existing investment. r and n must use the same period (years with annual rate, months with monthly rate).

Present value (lump sum)

PV = FV ÷ (1 + r)^n

Use it to find how much is needed today for a future amount.

Future value of regular savings (end of period)

FV = PMT × [((1 + r)^n − 1) ÷ r]

Ordinary annuity. Payments are made at the end of each period.

Future value of regular savings (start of period)

FV (annuity due) = PMT × [((1 + r)^n − 1) ÷ r] × (1 + r)

Use when each payment is made at the start of the period.

Required saving per period

PMT = Shortfall × r ÷ [(1 + r)^n − 1]

The same annuity formula turned around. Shortfall is the target minus the future value of existing investments.

Present value of regular withdrawals

PV = PMT × [1 − (1 + r)^−n] ÷ r

Ordinary annuity. Gives the retirement corpus for level withdrawals made at the end of each period. For annuity due, multiply by (1 + r).

Real rate of return

Real rate = (1 + nominal rate) ÷ (1 + inflation rate) − 1

The simple difference (nominal − inflation) is only an approximation. Use the exact form when the options are close.

Periodic rate for monthly SIPs

Monthly rate = annual rate ÷ 12; n = years × 12

Use this when the case states the annual rate as a nominal rate with monthly compounding.

Portfolio weight

Weight of asset class = Value of asset class ÷ Total portfolio value × 100

Use current market values, not original cost, when checking drift for rebalancing.

Portfolio expected return

E(Rp) = Σ (wᵢ × E(Rᵢ))

Weights must add up to 100%. Multiply each weight by its expected return and add.

Rebalancing amount

Amount to move = Current value − (Target weight × Total portfolio value)

A positive result means sell that asset class. A negative result means buy.

Risk ceiling rule

Usable risk level = lower of risk capacity and risk tolerance

Risk required does not override a lower capacity or tolerance. Revisit the goal or time frame instead.

SAA vs TAA

SAA = long-term target mix; TAA = temporary, limited deviation from SAA

TAA is not a change in the client's risk profile.

Human life value (simple form)

HLV = PV of future annual (income − personal expenses − tax) over the remaining working years

Discount at an assumed rate. Often the discount rate is set against income growth. Uses only income, not existing assets.

Needs-based life cover

Cover required = (Outstanding liabilities + Goal funding needs + Income replacement needs) − (Existing liquid assets + Existing life cover)

Future needs should be stated in present value terms before they are added.

Present value of a level annual income

PV = Annual amount × [1 − (1 + r)^−n] ÷ r

Used for income replacement and HLV. Use the rate in the question.

Insurance gap

Gap = Required cover − Existing cover

If the gap is zero or negative, no extra cover is needed.

Term vs endowment rule

Term: pays only on death in the term. Endowment: pays on death or on survival to maturity.

Term has the lowest premium per rupee of cover.

Long-term capital gains on listed equity and equity-oriented MFs

Tax = 12.5% × (LTCG − ₹1,25,000), plus 4% cess

Applies when STT is paid and the holding period is more than 12 months, for transfers on or after 23 July 2024. The ₹1,25,000 exemption is for the whole year, across all such gains. No indexation.

Short-term capital gains on listed equity and equity-oriented MFs

Tax = 20% × STCG, plus 4% cess

Holding period 12 months or less, STT paid, for transfers on or after 23 July 2024.

Debt mutual funds (units bought on or after 1 April 2023)

Gain taxed at the client's slab rate

No long-term benefit, whatever the holding period. Check the fund's definition in the question.

Capital gain

Gain = Sale value − Cost of acquisition − Transfer expenses

Add indexation only where the question says the rule applies.

Section 80C (old regime)

Maximum deduction = ₹1,50,000

Covers EPF, PPF, ELSS, life insurance premium, tuition fees, and similar items. Not available in the new regime.

Section 80CCD(1B) (old regime)

Additional deduction up to ₹50,000 for own NPS contribution

Over and above the 80C limit.

Health cover premium, Section 80D (old regime)

Deduction up to ₹25,000 for self and family, with a higher limit for senior citizen cover

Check the age of the insured persons in the case.

Tax with cess

Total tax = Tax before cess × 1.04

Health and education cess is 4%. Add surcharge only if income is high and the question mentions it.

Will vs nomination

Will = decides final ownership of the testator's own assets | Nomination = lets the institution pay out safely

In most financial products the nominee is not automatically the final owner. Legal heirs or the will can override. Do not apply this blindly to insurance, which has its own rules.

Roles in a trust

Settlor creates → Trustee holds and manages → Beneficiary benefits

The trust deed sets the terms. Settlor and beneficiary can be the same person in some structures, but the three roles are tested separately.

Roles in a will

Testator makes → Executor administers → Legatee receives

A codicil amends a will. A later valid will revokes an earlier one if it says so or conflicts with it.

Intestate succession

No valid will → personal law of the deceased decides heirs

Shares may differ from client wishes, so this is a core reason to plan.

Takes effect timing

Will: on death | Living trust and gift: during life | Nomination: on death

Gifts and living trusts move assets earlier and can reduce probate dependence.

Fiduciary duty

Client's interest > adviser's interest

If a choice benefits the adviser at the client's cost, it is a breach.

Suitability test

Recommendation must match: goals + horizon + risk capacity + risk tolerance + needs

Fail any one element and the product is unsuitable for that client.

Conflict rule

Avoid where possible → otherwise disclose clearly and in writing

Disclosure is necessary but does not cure an unsuitable recommendation.

Adviser vs distributor

Adviser = fee from client; Distributor = commission from product provider

Same-client mixing of both roles is restricted under the regulations.

Returns claim

No guaranteed or assured returns

Any promise of assured returns in advice is a red flag.

Records

Risk profile + advice + rationale + client agreement must be documented

Documentation is how suitability is proved later.

Quick revision

• Follow the planning sequence: client facts, goals, analysis, recommendation, implementation, review.
• Risk profile has two sides: risk capacity (ability) and risk tolerance (willingness). Use the lower one when they conflict.
• Longer horizon allows more equity; short-term goals need low-volatility, liquid assets.
• Inflate goal costs to the goal date before finding the corpus.
• Do not mix real and nominal rates in one calculation.
• Insurance is for protection; do not treat it as the main investment for the client.
• Check for emergency fund and cover gaps before recommending risky investments.
• Compare options on post-tax returns, not headline returns.
• A will directs the distribution of assets; nominations alone may not settle ownership.
• Advice must be suitable, disclosed and free of undisclosed conflicts of interest.
• On 2-mark questions, a wrong answer costs 0.5 mark, so guess only after removing options.

Common mistakes

• Recommending products before gathering data and analysing the client's position. Fix: Recall the order: relationship, data, analysis, recommendation, implementation, review. Recommendation comes after analysis.
• Treating risk tolerance and risk capacity as the same thing. Fix: Tolerance is willingness (attitude). Capacity is ability (finances, horizon, dependants). Use the lower of the two.
• Using today's cost as the target instead of the inflated cost. Fix: Always do the inflation step first. If the goal date is in the future, the target is the future cost.
• Mixing annual rates with monthly periods. Fix: Either use annual rate with years, or divide the rate by 12 and multiply years by 12. Never mix the two.
• Allocating by risk required when it exceeds capacity or tolerance. Fix: Cap risk at the lower of capacity and tolerance. Suggest a longer horizon, higher savings or a lower goal instead.
• Treating tactical allocation as a new strategic mix. Fix: Remember SAA is the long-term anchor. TAA is a short-term, bounded tilt that is reversed.
• Using total income instead of income net of personal expenses in HLV. Fix: Deduct personal expenses and tax first, then discount the remainder.
• Forgetting to subtract existing life cover and assets in the needs method. Fix: Always finish with Required − Existing. Check the question for any policy already held.
• Applying 12.5% to the whole long-term equity gain. Fix: Subtract ₹1,25,000 from the total long-term gain first. If the gain is below this, the tax is nil.
• Recommending 80C investments to a client on the new regime. Fix: Check the regime first. If the new regime is chosen or cheaper, pick products on goal, risk and cost, not deduction.

Exam tips

• Questions often ask what the adviser should do first. Pick data gathering or clarifying scope over product selection.
• In risk questions, mark tolerance and capacity separately, then choose the lower. Most trap options pick the higher one.
• Check whether a figure is a stock (net worth, on a date) or a flow (cash flow, over a period).
• With negative marking on 2-mark caselet questions, skip a case option only if you cannot narrow it to two, since a wrong answer costs more there.
• Watch for qualitative facts hidden in the case, such as dependants, health or job stability, because they change capacity.
• Read the timing words closely: 'at the beginning of each year' and 'at the end of each year' lead to different answers, and the wrong option is always offered.
• Write the sequence on rough paper: future cost, future value of existing investments, shortfall, required saving. Most wrong answers skip one of these steps.
• In caselets, one case often carries several goals with different inflation rates and horizons. Tag each number to its goal before you calculate.