9B15N021

INVESTING IN A RETIREMENT PLAN

Jayasree Mangalagiri and N.V. SriRanga Prasad wrote this case solely to provide material for class discussion. The authors do not
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Copyright © 2015, Richard Ivey School of Business Foundation Version: 2015-11-09

Kamal Sanghi, aged 40, was looking for a pension plan as he wanted to retire within 10 to 12 years and
start his own consulting business. He would need a regular income at the time of retirement to offset the
uncertainties of his new firm. One morning in January 2013, he sought the advice of his friend, Vivek
Suri, a portfolio manager, about an investment plan to suit his retirement needs. Suri suggested that he
consider a sound investment plan and advised him to consult with one of his own financial advisors,
Manish Gupta, who could explain different investment plans in detail.

SUGGESTED INVESTMENT PLANS

Gupta called on Sanghi to get some information about his current income and his future requirements. He
gathered that Sanghi earned ₹1.2 million per annum,1 that his monthly expenses were ₹40,000 and that he
planned to retire at the age of 50 with a regular income to meet his monthly expenses. He offered four
investment plans for Sanghi to consider.

Plan I

This was a 10-year equity and bond investment plan consisting of 75 per cent equity and 25 per cent
bond. The expected return on equity was 16 per cent and on bond was 8 per cent. The return on equity
was linked to the market. If the market was favourable, the corpus2 fund accumulated would be three
times the contribution. In the worst conditions, the actual contribution would be the corpus fund. The
annuities would be 12 per cent of the corpus fund. The equity investment in large cap companies during
the recent past had been 9 per cent to 11.5 per cent. This was better than the bond returns. The mid cap
company returns were 15 per cent to 24 per cent, and for diversified equity the returns were 10 per cent to
17 per cent. The information on equity fund performance would provide a better understanding of the

1
₹ = INR = Indian rupee; ₹1 = US$0.18.
2
Corpus: accumulation of contribution and returns at the time of maturity.
Page 2 9B15N021

return on equity investment. All these funds were top ranked by the Credit Rating Information Services
India Ltd. (CRISIL).

Gupta first suggested four equity funds in large companies. The one-month returns were between 3.8 to
5.5 per cent; three-month returns were 5.6 to 8.8 per cent; six-month returns were 15.1 to 19.2 per cent;
one-year returns were the highest, between 22.1 to 31.1 per cent; two-year returns were the lowest, being
1.1 to 6.8 per cent; and the three-year returns were between 9 to 11.5 per cent (see Exhibit 1).

He also considered four equity funds in small and mid-cap companies. The one-month returns were
between 3.0 to 4.8 per cent; three-month returns were 8.1 to 14.3 per cent; six-month returns were 15.6 to
29.6 per cent; one-year returns were the highest, between 31.9 to 46.9 per cent; and two-year returns were
7.4 to 21.4 per cent. The returns for three years were between 15.5 to 24.1 per cent (see Exhibit 2).

The diversified equity consisted of seven funds. The one-month returns were between 2.2 to 6.6 per cent;
three-month returns were 5.0 to 12.4 per cent; six-month returns were 11.1 to 27.2 per cent; and one-year
returns were the highest, between 26.1 to 41.0 per cent. The two-year returns were between 2.9 to 12.3
per cent, and the three-year returns were between 9.5 to 17.7 per cent (see Exhibit 3).

Plan II

This was a ten-year equity and bond investment plan that triggered at 15 per cent for a stable investment
ratio of 75 per cent equity and 25 per cent bond. Expected return on equity was 16 per cent and on bond
was 8 per cent. The return on equity was linked to the market. If the market was favourable, the corpus
fund accumulated would be three times the contribution. In the worst conditions, 200 per cent of the
contribution would be the corpus fund. The annuities would be 12 per cent of the corpus fund. The unique
feature of this plan was that the composition of 75 per cent and 25 per cent equity-bond investment would
be maintained.

If the equity investment value came down due to a fall in the market price, the trigger would work once
the fall reached 15 per cent. The investment would move from debt to equity to maintain the 75 per cent
and 25 per cent equity-bond composition. The benefit of this plan was that there would always be 75 per
cent investment in equity. The difference was that in the first plan, if the market fell, more investment
would be in bonds, whose returns were 8 per cent. This would reduce the returns and accumulation of the
corpus fund, whereas the second plan would provide a cushion against such risk.

Plan III

This was a 10-year equity and bond investment plan of 50 per cent equity and 50 per cent bond. Expected
return on equity was 16 per cent and on bond was 8 per cent. The return on equity was linked to the
market. If the market was favourable, the corpus fund accumulated would be 250 per cent of the
contribution. In the worst conditions, the corpus fund would be 150 per cent of the contribution. The
annuities would be 10 per cent of the corpus fund.

Plan IV

This was a 10-year bond only investment plan. The accumulated corpus fund assured was 175 per cent.
The risk in this type of plan was that the payment of annuities would be based on the bond rate at the time
Page 3 9B15N021

of maturity. The three-year returns on long-term debt were 8 per cent to 9.8 per cent; for short-term debt,
it was 7 per cent to 8 per cent; and for ultra-short-term debt, it was 7 per cent to 8.6 per cent. The gilt
long-term securities returns were 8.6 per cent. So, on average one could expect a return of 8 per cent on
bond investment.

The long-term debt consisted of three funds. The one-month returns were 0.9 per cent; three-month
returns were 2.4 to 2.7 per cent; 6-month returns were 4.9 to 5.7 per cent; one-year returns were between
10.6 to 11.8 per cent; and two-year returns were between 10.3 to 11.3 per cent. The three-year returns
were between 8.3 to 9.8 per cent (see Exhibit 4).

The investment in short-term debt consisted of four funds. The one-month returns were between 0.6 to 0.7
per cent; three-month returns were 2.1 to 2.3 per cent; six-month returns were 4.7 to 5.2 per cent; one-
year returns were the highest, between 9.3 to 10.3 per cent; and two-year returns were between 9.2 to 10.0
per cent. The three-year returns were between 7.3 to 8.4 per cent (see Exhibit 5).

The investment in ultra-short-term debt was in six funds. The one-month returns were between 0.6 to 0.7
per cent; three-month returns were 2.1 to 2.2 per cent; six-month returns were 4.0 to 4.7 per cent; one-
year returns were 8.9 to 10.2 per cent; and two-year returns were between 8.7 to 10.0 per cent. The three-
year returns were between 7.6 to 8.6 per cent (see Exhibit 6).

The investment in gilt long-term debt consisted of two funds. The one-month returns were at 0.9 per cent;
three-month returns were 2.7 to 3.0 per cent; six-month returns were 4.1 to 5.3 per cent; one-year returns
were 12.3 to 14.1 per cent; and two-year returns were between 10.7 to 11.3 per cent. The three-year
returns were 8.6 per cent (see Exhibit 7).

MARKET ANALYSIS

Gupta explained to Sanghi the facts of bond and equity markets in India. To understand the bond market,
he covered interest rates, yields of treasury bills, government and non-government securities and Mumbai
Inter Bank Offer Rate (MIBOR) rates. To understand equity return and the risk associated with it, he
discussed daily stock returns, standard deviation, volatility and three-month, six-month and 12-month
returns.

The Bond Market

Interest Rate Trends

The call rates for 2004/2005 to 2011/2012 were between 3.24 and 8.12 per cent. The call rate was lowest
during 2009/2010. However, the rates started increasing from 2010/2011 onwards. The deposit interest
rates for one- to three-year terms were 5.25 to 9.25 per cent, for three- to five-year terms were 5.75 to
9.25 per cent and above five years were 6.25 to 9.25 per cent. However, the advance rates were between
8.25 to 16.75 per cent (see Exhibit 8).

Treasury Bills and Central Government Securities

Treasury bills from up to 30 days to more than 300 days showed a high yield of 8.14 to 8.20 per cent and
low yield of 8.02 to 8.16 per cent (see Exhibit 9).
Page 4 9B15N021

The central government securities for tenure from up to one year to above 15 years had a high yield of
7.97 to 8.38 per cent. The low yields for the same securities were between 7.95 to 8.37 per cent (see
Exhibit 10).

Non-government Securities

The non-government securities for tenure from up to one year to above 15 years showed a high yield of
8.44 to 10.28 per cent. The low yield was between 8.44 to 9.89 per cent (see Exhibit 11). The MIBOR
rates were between 8.09 and 8.73 per cent (see Exhibit 12).

On average, the market analysis showed that the bond rate would be around 8 per cent.

Equity Return

Trend Analysis of LIBOR

The London Interbank Offered Rate (LIBOR) had been on an increasing trend from 2005 to 2007 but
started declining in 2008 at the start of recession. The logic behind keeping the LIBOR low was to
discourage savings. This would leave people with more money to spend, and consumption levels would
go up. People would also think about alternative investment options. See Exhibits 13and 14.

However, the LIBOR’s declining trend did not have much of an impact on Indian interest rates.

Stock Returns and Volatility

Daily stock returns were positive from 2005 to 2013 except for 2008 and 2011. The returns were between
0.067 and 0.258. The standard deviation was highest in 2008 and 2009. Stock volatility was a natural log
of variance of daily market returns. The volatility was highest in 2008 and 2012 (see Exhibits 15 to 20).

The stock market returns for three months were negative for all years from 2005 to 2012 except 2006 and
2012. The six-month returns were positive for all years except 2008 and 2011. The 12-month return
during 2009 was 76.351 per cent, which was the highest of the observations. The returns were positive
except for 2008 and 2011 when they were negative.

SANGHI’S DECISION

Gupta’s conclusion was that the bond market was more or less stable around 8 per cent. The equity
market looked quite volatile, with 12-month returns between 16 and 76 per cent. The returns were
negative only during 2008 and 2011. Therefore, he suggested a bond and equity composition as ideal for
Sanghi’s needs. However, Sanghi was even more confused after the analysis and wondered which plan he
should choose.
Page 5 9B15N021

EXHIBIT 1: INVESTMENT IN EQUITY OF LARGE CAP COMPANIES (RANKED NO. 1 BY CRISIL)

Name of the fund NAV 1-month 3-month 6-month 1-year 2-year 3-year
(in ₹) returns returns returns returns returns returns
in % in % in % in % in % in %
Birla Sun Life Top 100 (Gr) 25.68 5.5 8.8 19.2 31.1 4.3 9.0
ICICI Pru Focused Blue-Chip 18.41 5.0 6.8 16.5 24.0 5.0 11.5
Equity (G)
L&T Equity Fund (G) 37.7 4.0 5.6 15.1 22.1 1.1 9.1
UTI Opportunities Fund (G) 31.99 3.8 6.6 15.2 25.2 6.8 11.5
Note: NAV = net asset value; G = growth.
Source: Money Control, “Best Debt Funds to Buy,” www.moneycontrol.com/mutual-funds/best-funds/debt.html, accessed
December 14, 2012.

EXHIBIT 2: INVESTMENT IN EQUITY OF SMALL AND MID CAP COMPANIES

(RANKED NO. 1 BY CRISIL)

Name of the fund NAV (in 1-month 3-month 6-month 1-year 2-year 3-year
₹) returns returns returns returns returns returns
in % in % in % in % in % in %
Birla Sun Life MNC Fund 258.08 3.0 8.4 15.6 35.1 10.7 17.3
(G)
HDFC Mid Cap 18.35 4.1 8.1 17.6 31.9 7.4 15.5
Opportunities (G)
IDFC Premier Equity — A 39.57 4.8 13.1 22.0 33.1 8.5 15.9
(G)
SBI Magnum Emerging 58.96 3.8 14.3 29.6 46.9 21.4 24.1
Business (G)
Source: Money Control, “Best Debt Funds to Buy,” www.moneycontrol.com/mutual-funds/best-funds/debt.html, accessed
December 14, 2012.

EXHIBIT 3: INVESTMENT IN DIVERSIFIED EQUITY (RANKED NO. 1 BY CRISIL)

Name of the fund NAV 1-month 3-month 6-month 1-year 2-year 3-year
(in ₹) returns returns returns returns returns returns
in % in % in % in % in % in %
Birla SL India Genext 31.36 6.6 12.4 27.2 40.2 12.3 17.7
(G)
Mirae Opportunities — 18.35 3.6 6.3 17.6 28.3 4.4 10.4
RP (G)
Quantum Long-term 24.66 2.2 5.5 15.8 26.1 2.9 11.2
Equity (G)
Reliance Equity 43.4 3.4 8.3 20.3 41.0 8.4 15.9
Opportunities — Retail
Plan (G)
UTI Equity Fund 62.02 4.3 7.0 16.5 27.5 4.7 9.5
(Growth)
UTI India Lifestyle Fund 13.89 4.1 7.3 15.8 27.9 8.1 13,0
(G)
UTI MNC Fund (G) 72.29 2.7 5.0 11.1 27.8 11.8 15.7
Note: MNC = multinational corporation.
Source: Money Control, “Best Debt Funds to Buy,” www.moneycontrol.com/mutual-funds/best-funds/debt.html, accessed
December 14, 2012.
Page 6 9B15N021

EXHIBIT 4: INVESTMENT IN LONG-TERM DEBT (RANKED NO. 1 BY CRISIL)

Name of the fund NAV 1-month 3-month 6-month 1-year 2-year 3-year
(in ₹) returns returns returns returns returns returns
in % in % in % in % in % in %
IDFC Dynamic Bond —IP B
13.46 0.9 2.7 5.3 10.8 11.1 8.5
(G)
SBI Dynamic Bond Fund (G) 14.17 0.9 2.4 4.9 10.6 11.3 9.8
SBI Magnum Income Fund 27.99 0.9 2.6 5.7 11.8 10.3 8.3

Note: IP = Institutional Plan; B = Bond.

Source: Money Control, “Best Debt Funds to Buy,” www.moneycontrol.com/mutual-funds/best-funds/debt.html, accessed
December 14, 2012.

EXHIBIT 5: INVESTMENT IN SHORT-TERM DEBT (RANKED NO. 1 BY CRISIL)

Name of the fund NAV (in 1-month 3-month 6-month 1-year 2-year 3-year
₹) returns returns returns returns returns returns
in % in % in % in % in % in %
Birla SL Short-term Fund
42.28 0.6 2.2 5.2 10.3 10.0 7.8
(G)
HDFC Short-term
12.39 0.7 2.3 4.7 10.0 9.6 -
Opportunities (G)
IDFC SSIF — STP Plan A
23.46 0.6 2.1 4.7 9.3 9.2 7.3
(G)
Religare Credit
12.94 0.7 2.1 4.7 10.3 9.9 8.4
Opportunities — IP (G)

Source: Money Control, “Best Debt Funds to Buy,” www.moneycontrol.com/mutual-funds/best-funds/debt.html, accessed

December 14, 2012.

EXHIBIT 6: INVESTMENT IN ULTRA-SHORT-TERM DEBT (RANKED NO. 1 BY CRISIL)

Name of the fund NAV 1-month 3-month 6-month 1-year 2-year 3-year
(in ₹) returns returns returns returns returns returns
in % in % in % in % in % in %
Birla SL Ultra Short Term —
136.86 0.7 2.1 4.6 9.9 9.5 8.2
IP
HDFC CMF — Treasury
24.56 0.6 1.8 4.0 8.9 8.7 7.6
Advantage(G)
ICICI Pru Flexi Income (G) 213.53 0.7 2.0 4.4 9.6 9.4 8.1
JM Money Manager Fund —
15.88 0.7 2.2 4.7 10.2 10.0 8.6
RP (G)
JM Money Manager Fund—
16.21 0.7 2.1 4.6 10.1 9.6 8.2
SPP (G)
UTI Treasury Advantage—
1544.07 0.7 2.1 4.5 9.7 9.5 8.2
Institutional (G)

Note: RP = regular plan; SPP = Super Plus Plan.

Source: Money Control, “Best Debt Funds to Buy,” www.moneycontrol.com/mutual-funds/best-funds/debt.html, accessed
December 14, 2012.
Page 7 9B15N021

EXHIBIT 7: INVESTMENT IN GILT LONG-TERM DEBT (RANKED NO. 1 BY CRISIL)

Name of the fund NAV 1-month 3-month 6-month 1-year 2-year 3-year
(in ₹) returns returns returns returns returns returns
in % in % in % in % in % in %
IDFC G Sec — 12.94 0.9 3.0 5.3 12.3 11.3 8.6
InvestmentPlan —IP B (G)
Kotak Gilt Investment Regular 39.32 0.9 2.7 4.1 14.1 10.7 8.6

Source: Money Control, “Best Debt Funds to Buy,” www.moneycontrol.com/mutual-funds/best-funds/debt.html, accessed

December 14, 2012.

EXHIBIT 8: INTEREST RATE TRENDS IN INDIA

Call Deposit Rate Deposit Rate Deposit Rate SBI Lending rate as
Year Rate 1 to 3 Years 3 to 5 Years Above 5 Years Advance prescribed by RBI
2004/05 4.65 5.25–5.75 5.75–6.25 6.25 10.25 10.25–11.00
2005/06 5.6 6.00–6.75 6.25–7.00 6.50–7.00 10.25 10.25–12.75
2006/07 7.22 6.75–8.50 7.75–9.50 7.75–8.50 12.25 12.25–14.75
2007/08 6.07 8.00–8.75 8.00–8.75 8.50–9.00 12.25 12.25–15.75
2008/09 7.06 8.00–8.75 8.00–8.50 7.75–8.50 12.25 11.50–16.75
2009/10 3.24 6.00–7.00 6.50–7.50 7.00–7.75 11.75 11.00–15.75
2010/11 5.75 8.25–9.00 8.25–8.75 8.50–8.75 8.25 8.25–9.50
2011/12 8.12 9.25 9.00–9.25 9.00–9.25 9.5 10.00–10.75

Source: Reserve Bank of India, “Database on Indian Economy,” http://dbie.rbi.org.in/DBIE/dbie.rbi?site=publications,

accessed November 30, 2012.

EXHIBIT 9: TREASURY BILLS RETURNS

Maturity High Yield Low Yield

0–30 days 8.19 8.14
30–60 days 8.18 8.16
60–90 days 8.14 8.12
90–120 days 8.17 8.15
120–180 days 8.20 8.16
180–240 days 8.17 8.13
240–300 days 8.14 8.11
>300 days 8.18 8.02

Source: National Stock Exchange of India, “Market Watch,” Wholesale Debt Market Review — Highlights for the Month of
November 2012, www.nseindia.com, accessed November 30, 2012.
Page 8 9B15N021

EXHIBIT 10: CENTRAL GOVERNMENT SECURITIES

Maturity High Yield Low Yield

0–1 yr 8.03 8.03
1–2 yr 7.97 7.97
2–3 yr 8.00 7.95
3–4 yr 8.02 8.02
4–5 yr 8.20 8.14
5–6 yr 8.26 8.23
6–7 yr 8.28 8.28
7–8 yr 8.26 8.18
8–9 yr 8.32 8.27
9–10 yr 8.23 8.17
10–11 yr – –
11–12 yr – –
12–13 yr 8.35 8.26
13–14 yr 8.34 8.27
14–15 yr 8.38 8.35
15 yrs & above 8.44 8.37

Source: National Stock Exchange of India, “Market Watch,” Wholesale Debt Market Review — Highlights for the Month of
November 2012, www.nseindia.com, accessed November 30, 2012.

EXHIBIT 11: NON-GOVERNMENT SECURITIES

Maturity High Yield Low Yield

0–1 yr 10.28 9.89
1–2 yr 8.9 8.78
2–3 yr 9.47 9.47
3–4 yr 9.24 9.20
4–5 yr 9.04 9.04
5–6 yr 8.81 8.77
6–7 yr 8.96 8.80
7–8 yr 8.95 8.90
8–9 yr 8.44 8.44
9–10 yr 9.41 9.37
10–11 yr 9.04 8.99
11–12 yr 9.00 8.9
12–13 yr 8.97 8.94
13–14 yr 8.97 8.94
14–15 yr 8.97 8,94
15 yrs & above – –

Source: National Stock Exchange of India, “Market Watch,” Wholesale Debt Market Review — Highlights for the Month of
November 2012, www.nseindia.com, accessed November 30, 2012.
Page 9 9B15N021

EXHIBIT 12: RECENT MIBOR RATES

Overnight 8.09
3 day 8.10
14 day 8.27
1 month 8.46
3 month 8.73

Source: National Stock Exchange of India, “Market Watch,” Wholesale Debt Market Review — Highlights for the Month of
November 2012, www.nseindia.com, accessed November 30, 2012.

EXHIBIT 13: TREND ANALYSIS OF LIBOR

Year 1 Month 3 Month 6 Month 12 Month
2005 3.459 3.635 3.839 4.092
2006 5.130 5.229 5.304 5.348
2007 5.250 5.297 5.253 5.126
2008 2.665 2.911 3.045 3.077
2009 0.334 0.692 1.21 1.573
2010 0.273 0.343 0.518 0.924
2011 0.233 0.337 0.507 0.828
2012 0.238 0.441 0.702 1.024

Source: FedPrimeRate.com, “Prime Interest Rate,” www.fedprimerate.com, accessed December 14, 2012.

EXHIBIT 14: TRENDS IN LIBOR

6
5
4 1 Month
3 3 Month
2 6 Month
12 Month
1
0
2005 2006 2007 2008 2009 2010 2011 2012
Source: Exhibit 13.

EXHIBIT 15: STOCK MARKET ANALYSIS

Year Returns in % Standard Deviation Volatility
2005 0.142 1.0776 0.150
2006 0.1669 1.624 0.970
2007 0.163 1.543 0.868
2008 –0.262 2.844 2.090
2009 0.258 2.221 1.596
2010 0.067 1.005 0.011
2011 –0.107 1.322 0.558
2012 0.094 0.933 2.442

Source: Calculated from daily closing Senex, Bombay Stock Exchange (BSE) Ltd.,
www.bseindia.com/sensexview/IndexArchive Data.aspx?expandable=3, accessed January 4, 2013.
Page 10 9B15N021

EXHIBIT 16: DAILY MARKET RETURNS IN PER CENT

0.3
Market…
0.2

0.1

0
20052006200720082009201020112012
-0.1

-0.2

-0.3

Source: Exhibit 15.

EXHIBIT 17: TREND ANALYSIS OF STOCK MARKET RETURNS, TABLE

Year 3-month returns in % 6-month returns in % 12-month returns in %

2005 –2.790 7.705 40.704
2006 20.126 12.983 46.823
2007 –6.241 5.080 45.51
2008 –22.94 –33.69 –52.478
2009 –1.97 46.35 76.351
2010 –0.176 0.81 16.803
2011 –5.43 –8.342 –24.834
2012 12.156 12.322 23.916

Source: Bombay Stock Exchange (BSE) Ltd., www.bseindia.com/sensexview/IndexArchive Data.aspx?expandable=3,

accessed January 4, 2013.

EXHIBIT 18: STANDARD DEVIATION OF MARKET RETURNS

3
2.5 Standard…

2
1.5
1
0.5
0
20052006200720082009201020112012

Source: Exhibit 15.

Page 11 9B15N021

EXHIBIT 19: VOLATILITY

Variance of Log n Returns

2.5

1.5
Volatility
1

0.5

0
2004 2006 2008 2010 2012 2014
Year

Source: Exhibit 15.

EXHIBIT 20: TREND ANALYSIS OF STOCK MARKET RETURNS, GRAPH

90
80
3 Month Returns in %
70
60 6 Month Returns in %
50
12 Month Returns in
40
%
30
20
10
0
2005 2006 2007 2008 2009 2010 2011 2012
-10
-20
-30
-40
-50
-60

Source: Exhibit 16.