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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Evaluating the Financial Position of Clients

Caselet: Mr. Suresh Menon, 40, has annual gross income of ₹18,00,000. Annual savings are ₹3,60,000, of which ₹1,80,000 goes to long-term investments and the rest to a recurring bank deposit. His monthly non-discretionary expenses are ₹60,000 and he holds liquid assets of ₹3,00,000. Annual EMI outgo is ₹4,32,000. He wants to know whether he meets a benchmark of at least 6 months of emergency cover and an EMI-to-gross-income ratio of at most 30%. Which conclusion is correct?

Emergency cover is ₹3,00,000 divided by ₹60,000, which is 5 months and short of the 6-month benchmark. The EMI ratio is ₹4,32,000 divided by ₹18,00,000, which is 24%, within the 30% ceiling. So he fails one test and passes the other.

  1. AEmergency cover is 5 months, below benchmark; EMI ratio is 24%, within benchmarkCorrect
  2. BEmergency cover is 5 months, below benchmark; EMI ratio is 24%, also below benchmark so he must reduce it
  3. CEmergency cover is 6 months, meeting benchmark; EMI ratio is 24%
  4. DEmergency cover is 5 months, below benchmark; EMI ratio is 20%, within benchmark

Explanation

Emergency cover = 3,00,000/60,000 = 5 months, below the 6-month benchmark. EMI ratio = 4,32,000/18,00,000 = 24%, which is at most 30% so it is within the limit. The second option wrongly treats a lower-than-limit ratio as a breach. The 20% option mis-computes the ratio and the 6-month option mis-computes cover.

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