Case 085Fixed income and cash managementWarm up
A 68-year-old wants Rs 90,000 a month from Rs 1.5 crore split across bank deposits, a government savings scheme and a debt fund. Build the income plan and check whether it reaches the target.
1The situation
Dayanand Kamble is 68, retired, with no pension, and has Rs 1.5 crore of savings. He wants Rs 90,000 a month to live on, Rs 10.8 lakh a year, and wants to know exactly where each rupee comes from. He is willing to use three instruments: bank fixed deposits, a government-backed savings scheme for senior citizens, and a debt mutual fund with a systematic withdrawal plan.
Use illustrative figures and tell him to confirm each one: the senior scheme pays 8.2% a year, quarterly, on a maximum of Rs 30 lakh; senior citizen deposits pay 7.5%; the debt fund is assumed to earn 7% and he withdraws that much each year.
2Your task
How much goes where, what does it pay each month, and does it reach Rs 90,000?
Quick check
What share of Rs 1.5 crore does Rs 90,000 a month represent each year?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Before tax the plan pays about Rs 93,417 a month and clears Rs 90,000; after an illustrative 10% tax it pays about Rs 84,075 and falls short. Rs 30 lakh goes into the senior scheme, Rs 70 lakh into deposits and Rs 50 lakh into a debt fund with a withdrawal plan. Because Rs 90,000 is a 7.2% draw, nothing is reinvested, so the income will not keep up with prices; he should know that from day one.
Step 1What does Rs 90,000 a month ask of Rs 1.5 crore?
Put the need in the same units as the yields before choosing anything. Rs 90,000 a month is Rs 10.8 lakh a year, 7.2% of Rs 1.5 crore, which is roughly everything these instruments pay. A tenant who pays the full rent every month leaves the landlord nothing for repairs; here the income plan leaves nothing for tax or for prices rising. That is the constraint every other choice has to respect.
Step 2How do you fill the three sources, and in what order?
Fill the highest predictable payer first, up to its cap. The senior scheme takes the full Rs 30 lakh at an illustrative 8.2%, paying Rs 20,500 a month on average; deposits take Rs 70 lakh at 7.5%, Rs 43,750; and the debt fund takes Rs 50 lakh with a systematic withdrawal planAn instruction to a mutual fund to redeem a fixed amount on fixed dates, turning a holding into a regular payout. of 7%, Rs 29,167. The senior scheme pays quarterly, so the monthly figure is an average; stagger deposit payouts so cash arrives every month.
| Source | Rs lakh | Illustrative rate | Rs a year | Rs a month |
|---|---|---|---|---|
| Senior savings scheme | 30 | 8.2% | 246,000 | 20,500 |
| Bank deposits | 70 | 7.5% | 525,000 | 43,750 |
| Debt fund, withdrawal plan | 50 | 7.0% | 350,000 | 29,167 |
| Total | 150 | 7.47% | 1,121,000 | 93,417 |
Step 3Does it reach the target after tax and over time?
Before tax, yes, with about Rs 3,417 a month to spare. After an illustrative 10% of the income goes in tax, he receives about Rs 84,075, roughly Rs 5,925 short, and his actual tax depends on his slab and deductions, which he must confirm. Time is the second problem: every payout is fixed in rupees, and at 6% inflation Rs 90,000 in ten years buys what Rs 50,256 buys today. The honest answer is that the plan meets today's need before tax and nothing more.
Offer him the choices, each with its price. He can accept about Rs 84,000 a month; he can draw roughly Rs 6,000 a month of capital from the debt fund, which shrinks it slowly; or he can move part of the deposits into a small equity allocation for growth, accepting that its value will swing. What he cannot have is Rs 90,000 after tax, rising with prices, from Rs 1.5 crore of fixed income alone, and saying so now is better than discovering it in year five.
Where candidates lose it
Candidates add up the pre-tax income, see it clears Rs 90,000 and stop. Interest is taxable, and the question said check whether it reaches the target; the check has to be after tax.
The second miss is quoting the scheme's rate and limit as facts. They change, so state them as illustrative and tell the client to confirm, which is what the interviewer is listening for.
What the interviewer asks next
- His wife is 64. Could she also invest in the senior scheme, and what would that change?
- Interest rates fall by 1.5 points when his deposits mature in three years. What happens to the plan?
- How would you add a growth sleeve without making his monthly income unpredictable?
Company names and figures are illustrative.