Wealth

Management

Saving &Investing

Investing .
What is investing?
An investment operation is one which, upon thorough
analysis promises safety of principal and an adequate
return. Operations not meeting these requirements are
Speculative
- Benjamin Graham The Intelligent Investor
Investing is the act of seeking value at least sufficient to
justify the amount paid. Consciously paying more in the
hope that it can soon be sold for a still higher price
should be labeled as speculation
- Warren Buffet The Making of An American
Capitalist

Investing .
What is investing?
Investing is a method of purchasing assets to gain profit
in the form of reasonably predictable income (dividend,
interest or rentals) and / or appreciation over the long
term
- Burton G Malkiel A Random Walk Down Wall
Street
Investing is a Act of faith, a willingness to postpone
present consumption and save for the future. We entrust
our capital to corporate stewards in the faith at least
with the hope that their efforts will generate high rates
of return on our investments
- John C. Bogle Common Sense on Mutual Funds

Speculation

Investing .
Speculation
Investors speculate" every time they commit money to
something they don't understand.
Say you overhear your best friends uncle talking about
a company called Frontier Industries at a cocktail party.
"This thing is surely going to go through the roof in the
next few months," he says. If you call your broker the
first thing the next morning to place an order for 100
shares, you've just speculated.

Investing .
Speculation
Do you know what Frontier Industries does?
Are you familiar with its competition?
What were its earnings last year / last quarter?
There are a lot of questions one should ask about a
company before investing in a "hot" stock. There's nothing
too hot about losing money in such speculative
investments because the investor didn't take the time to
understand what he was investing in.

Investing .
Speculation
Speculation can be compared to a lottery jackpot,
wherein the odds of winning are abysmally low. Depending
on the lottery it may be 1 in 7 million, or 1 in 18 million, or
somewhere in between. The chances of dying from flesh
eating bacteria (1 in a million) are far higher than that of
winning a jackpot.
Remember: Every rupee that is used for speculation and
lost is not working for the investor over the long-term to
create wealth.
Speculation promises to give everything one wants right
now but rarely delivers; patience almost guarantees those
goals down the road through the power of compounding.

Power of
Compounding

Investing .
Power of Compounding?
If you leave a small portfolio invested, its value will
mushroom over time through the miracle of
compounding. As you earn investment returns, your
returns begin to gain returns as well, allowing you to turn
a measly investment into thousands of rupees if you
leave it invested long enough.The more money you save
and invest today, the more you'll have in the future.
An amount of Rs. 100,000 which compounds @
15% after 50 years is worth, hold your breath Rs.
Eleven Crores.
The power of compounding can be expressed
using the following time value of money
expression
FV= (PV) *(1+k)^n

Investing .
Power of Compounding?
FV = future value
PV = present value
K = rate of compounding
n = no. of years

Real wealth, the stuff of dreams, is in fact created

almost magically through the most mundane and
commonplace principles: patience, time, and the
power of compounding.
Systematic Planning is an essential ingredient of a
good investment programme.

Power of Compounding it
worksFMP
Sensex
Franklin India
Years
0
1
2
3
4
5
10
15
20
25
30
35

6%
100,000
106,000
112,360
119,102
126,248
133,823
179,085
239,656
320,714
429,187
574,349
768,609

16%
100,000
116,000
134,560
156,090
181,064
210,034
441,144
926,552
1,946,076
4,087,424
8,584,988
18,031,407

Blue Chip
27.9%
100,000
127,900
163,584
209,224
267,598
342,257
1,171,401
4,009,204
13,721,794
46,963,841
160,737,176
550,134,722

MF
Average
20.0%
100,000
120,000
144,000
172,800
207,360
248,832
619,174
1,540,702
3,833,760
9,539,622
23,737,631
59,066,823

Planning & Setting

Goals

There are two times in a mans life

when he should not speculate: when he
cant afford and when he can.

Mark Twain, Following the Equator

Guidelines to tailoring a Lifecycle

Investment Plan

Specific needs require dedicated

specific assets.
Recognize your tolerance for risk.
Persistent savings in regular amounts,
no matter how small, pays off

Human Life Cycle Disciplined

Phase I
Phase II
Phase III
Planning
Income
Childs Marriage
Childs Education

Having a
Financial Goal is
primary to
starting a
Investment
Plan.

Housing

Child birth
Marriage
38 yrs

22 yrs

Birth & Education

22 yrs

Over 25 - 30 yrs

Earning Years

Retirement Age

60 yrs

Determining
Investment Style

Determining Investment Style.

Investment style can be compared to batting styles
of different batsmen in a game of cricket.
A swinger-for-sixes & fours - takes big risks for big gains.
Slow & steady - hitting singles and doubles.
A spectator sitting in the stands, chatting with his
companions and occasionally cheering his home team on.

There are two major variables in figuring out ones

investment style the risk tolerance ( can you
afford to get out ? ) and
amount of time the
investor can dedicate to investing ( One day or test
match ? )

Determining - Investment
Style.

Risk Tolerance
How comfortable will you be seeing your investment
decrease in the near term while waiting for it to increase
over the long term?
How comfortable will you be to invest in something in
which the price changes every day - sometimes adversely.
An investor X may be very comfortable with a
downside of 25% in an investment whereas Investor
Y could shy away from any downside in his
investments.

Determining - Investment
Style.
Risk Tolerance

There are various degrees of risk across the investment

spectrum, from government savings bonds (carries only
sovereign risk and credit risk), which are considered riskfree as they are guaranteed by the government, to
equities, commodities and options, where one can lose
significant amount of the invested money.
Remember : Though GOI savings bonds and bank
fixed deposits are the safest, the safest road isn't
always the best one.

Determining Investment Style.

The important thing to remember about stocks, though,
is that an investor doesn't lose anything until he sells
them.
What if you invested when the market was at a high,
then comes a big crash?
If you dont panic and sell during a crash ( eg May
2006 when the Sensex fell from 12000 to 9000 ),
you would have done quite nicely as the market
rebounded subsequently ( Sensex rose to 15000 in
Aug 2007 ! ).
Golden rule - when one is investing in the stock
market, think long-term. Dont invest any money in
stocks that you will need in the short term.

Determining Investment Style.

The Second Factor Time .
How much time do you want to/are able to spend on
investing?
How active do you want to be in the management of
money?
If an investor wants to spend 15 minutes a year on
investing, then maybe one should consider using Passive
Strategies.
If one is planning to set out eight hours a week, then you
should consider researching companies and pouring over
financial statements to pick individual stocks.

Determining - Investment
Style.

Another time factor is :

When does the investor need the money (time

horizon) ?
Whether the money is needed next week or in a hundred
years will dramatically affect what investment vehicle to
use.
Caution - Although stocks deliver great long-term
returns, the returns over periods of three years or
less can be downright scary.
Hence setting investment goals, planning the outlay
of investment amount and time horizon
and
making appropriate investment choices in line with
investor profiles is essential for the success of any
investment programme.

Financial Planning is

To develop well defined goals

Divide the goals into short term and long
term goals
To look at the current income, expenses
and savings
To map out well defined strategies to
turn the dreams into reality

Steps in Financial Planning

Identifying the investment objectives

Investment Objectives needs and
requirements
Determine the required returns to meet the
financial objectives
Determine the risk tolerance of the individual
Design an asset allocation to meet the risk
and returns
Modify the asset allocation based on any
change in needs or risk tolerance

Planning and Setting Goals.

Investing is like a long car trip
A lot of planning needs to go into it.
How long is the trip? (What is the investors "time
horizon"?)
What should one pack? (What type of investments will
the investor make?)
How much petrol is required for the trip? (How much
money will the investor need to invest to reach his
goals?)
Will the trip require a stop over along the way? (Does the
investor have short-term financial needs?)
How long is the stay? (Will the investor need to live off
the investment in later years?)

Planning and Setting Goals.

Running out of gas, stopping frequently to visit restrooms,
and driving without sleep can ruin the trip. So can saving
too little money or investing erratically
An investor must answer the following questions before he
can successfully set about the savings / investing journey:

What are the investors goals?

Is the investment for retirement? A down payment on a
house?
Child's education? A second home? .

How much money can the investor devote to a regular

investing plan?

Planning and Setting Goals.

Ask some more pointed questions:
How much will college cost (at the time the child needs
to go)?
How much yearly income is reasonable for retirement?
The more specific the investor can be, the more likely he is
to set and achieve reasonable goals.
Once the investor has a rough idea of how much
money he will need and how much time he has to
get there. He can start to think about what
investment vehicles might be right for him and
what kind of returns he can reasonably expect. He
needs to understand his investment style in order
to match it with the various available investment
choices.

Financial Planning Increasing

complexity

Indian markets opening up

Increased

markets

volatility in the debt and equity

Investment Options available with the

individuals are increasing
Equities,

Bonds, Mutual Funds, Derivatives,

real estate
There are now around 30 mutual funds in
India offering 400schemes

Investment options expected to increase

going forward
Commodities

trading, forex

Tax Planning requires an expert

Financial Planner would

A comprehensive platform of tailor made

provide

services
Customised strategies and product
application
The highest quality in advise
Confidentiality
Single Point contact and personalized service
An experienced Investment Advisor
Resources and capabilities to ensure timely
and accurate execution

Investment Products

Stocks-offer dividend & capital

appreciation.
Bonds-offer safe return.
Real estate-offers rent & capital
appreciation.
Precious metals-appreciate over time and
are a hedge against uncertainties.
Art work-appreciate over time.
Insurance-used as security against risk of
uncertainties.

Disciplined Investment Planning

Derivatives &
Equity Mutual
Funds
Income Funds &
Real Estate

Aggressive
Assets

Serious Assets

GOI Relief
Bonds
Bank Fixed
Deposits

Sacred Assets

Investment Avenues
H
i
g
h

R
I
S
K

Dont Invest here

Growth
Funds

Gilt
Funds

Income
Funds

Liquid
Fund

Sedate Zone

Bank FD

Index
Balance Funds
Funds

Aggressive
Stance
High

RETURN

Low

Equity

Comp FD

P.O.

GOI Sec

Optimal
RBI

L
o
w

## the size of the circle denotes the level of liquidity

Investments : Key Determinants

The most important determinant of portfolio

return is asset allocation .
Security Selection 4.6%
Market Timing 1.8%
Other Factors 2.1%
Asset
Allocation
91.5%
Source: Brinson, Singer &
Beebower
( 1991 )

What is Asset Allocation?

Asset allocation refers to the strategy of
dividing your total investment portfolio among
various asset classes, such as stocks, bonds
and money market securities. Essentially,
asset allocation is an organized and effective
method of diversification

Asset allocation
Asset Allocation encompasses the
following:
Selection of the asset classes
Proper blending of these asset classes in a
portfolio
Managing the asset mix over time.

Lifecycle Investment Guide

Late Thirties to Early Forties

Mid Twenties

10%
5%
20%
65%

10%
5%

REAL ESTATE
CA SH
BONDS

30%

STOCKS

5%

REAL ESTATE

STOCKS

15%

25%

10%

CASH

38%

BONDS

Late Sixties and beyond

13%
44%

CA SH

55%

Mid Fifties

REA L ESTA TE

REAL ESTATE
CASH

BONDS

BONDS

STOCKS

STOCKS

50%

Asset Allocation Principles

Risk and return are related

Risk depends on the length of time one
holds the investment
Rupee Cost Averaging can reduce the
risks of investing
Risks that an investor can take depends
on the investors capacity to take risks
and his attitude to take risks.

Asset Allocation drivers

Asset allocation must take into account 2

factors:
Time horizon: the number of years you have
to invest
Risk tolerance: your ability or willingness
to endure short-term declines in the value of
your investments as you pursue your longterm investment goal

Asset Allocation Styles-Strategic

Asset Allocation

Strategic asset allocation is a method that

establishes and adheres to what is called a
'base policy mix'. This is a proportional mix of
assets based on expected rates of return for
each asset class
E.g. If stocks have historically returned 10%
per annum and bonds have returned 5% per
annum, a mix of 50% stocks and 50% bonds
would be expected to return 7.5% per year

Asset Allocation Styles-Tactical

Asset Allocation

In the short term, the investor may

occasionally engage in tactical deviations from
the mix in order to capitalize on unusual or
exceptional investment opportunities
This flexibility adds a component of market
timing to the portfolio, allowing investors to
participate in economic conditions that are
more favourable for the performance of one
asset class than for others

Asset Allocation Styles-Tactical

Asset Allocation

Tactical asset allocation can be described as a

moderately active strategy, since the overall
strategic asset mix is returned to when desired
short-term profits are achieved
This demands some discipline from the
investor or portfolio manager, as he or she
must first be able to recognize when shortterm opportunities have run their course, and
then rebalance the portfolio to the long-term
asset position

Asset Allocation Styles-Dynamic

Asset Allocation

Dynamic asset allocation is when the mix of

assets is constantly adjusted as markets rise
and fall and the economy strengthens and
weakens
E.g. In a dynamic portfolio, if the stock market
is showing weakness, stocks are sold in
anticipation of further decreases in stock
values, and if the market is strong, stocks are
purchased in anticipation of continued market
gains

Which Asset Allocation style is

best ?

Asset allocation can be an active process in varying

degrees or strictly passive in nature.
Choice of a precise asset allocation strategy or a
combination of different strategies depends on ones goals,
age and risk tolerance
These are only general guidelines on how investors may
use asset allocation as a part of their core strategies
Allocation approaches involving anticipating and reacting to
market movements require a great deal of expertise and
talent in using particular tools for timing these movements.
Accurately timing the market is next to impossible, so make
sure your strategy isn't too vulnerable to unforeseeable
errors

Asset class characteristics

The purpose of using various risk

categories in portfolios is to reduce risk
through diversification thereby
enhancing the risk/return ratio.

The proper allocation of assets in a

portfolio begins with determining the
proportion of the total portfolio to invest
in each asset class.

Risk / return characteristics of

asset classes

It is useful to calculate returns and measure

risk for asset classes over various past
intervals
Helps

to evaluate the behavior of the asset

class over different economic cycles.
May be taken as representative of the returns
that investors may have expected to earn over
the period.
May in turn be useful in establishing
benchmarks as to what returns investors
might be expecting to earn in future.
Availability of realized return and risk
measures can be used to compare the relative
performance behavior across asset classes.

Asset class characteristics

Security Class

Maturity
of
security

Form of return

Risk

Cash Equivalents

Short

Discount

Low

Fixed Income / US
govt

Long

Coupon

Mediu
m

Municipal

Long

Coupon

Mediu
m

Corporate

Long

Coupon

Mediu
m

Preferred Stock

Perpetual

Dividend

Modera
tely
high

Common Stock

Perpetual

Dividend and
capital gains

High

Maximize returns, minimize

risks

Understanding
Risk & Returns

Investment returns
The rate of return on an investment can be calculated as
follows:
(Amount received Amount invested)

Return =

_________________________________
Amount invested

For example, if Rs.1,000 is invested and Rs.1,100 is

returned after one year, the rate of return for this
investment is:
(Rs.1,100 Rs.1,000) / Rs.1,000 = 10%.
In case if we adjust the return obtained from above for
inflation we arrive at the real return in the investment

Return Variability
15%
6.00%
4.0%

2.5%

C
-8%

Investment A: no
return variation,
no risk

Investment B:
some return
variation, some
risk

Investment C:
wide return
variation, much
risk

Nature of Risk

The more variable an investments return, the greater

its risk
A highly variable return could lead to investment losses
if the investment needs to be sold
However, the longer the investment is held, the greater
the chances of earning the long-run rate of return

What is investment risk?

Investment risk is related to the probability of earning

a low or negative actual return.

The greater the chance of lower than expected or

negative returns, the riskier the investment.

Two types of investment risk

Stand-alone risk
Portfolio risk

Standard Deviation

In investments risk is measured in terms of standard

deviation
Most important measure of variation
Shows variation about the mean
Has the same units as the original data
N

Standard Deviation:

Xi=Observation
= Mean
N = Total No. of observation

i 1

Xi
N

Comparing Standard Deviations

Data A
11 12 13
20 21
Data B
11 12 13
20 21

14

14

15

15

16

16

17

17

18

18

19

19

Mean =
15.5
s = 3.338

Mean =
15.5
s = .9258

Data C
Mean =
15.5
s = 4.57

11 12 13 14 15 16 17 18
19 20 21
It can be seen from above that data sets with
same means could have widely different standard
deviations depending on the variance from the
mean

Breaking down sources of risk

Stand-alone risk = Market risk + Firm-specific risk

Market risk portion of a securitys stand-alone risk

that cannot be eliminated through diversification.
Measured by beta.

Firm-specific risk portion of a securitys standalone risk that can be eliminated through proper
diversification.

What is the market risk

premium?

Additional return over the risk-free rate needed to

compensate investors for assuming an average
amount of risk.
Its size depends on the perceived risk of the stock
market and investors degree of risk aversion.
Varies from year to year, but most estimates suggest
that it ranges between 4% and 8% per year.
The difference between the return on a risky
asset and less risky asset, which serves as
compensation for investors to hold riskier
securities is known as Risk premium. The risk
premium is one of the basis for any asset
allocation decision.

Risk and Return are related

Average Annual
Return (1926 97)

Risk Index

Small company
common stocks

12.7%

33.9%

Common stocks in
general

11.0%

20.3%

Long Term bonds

5.7%

8.7%

US Treasury bills

3.8%

3.2%

Inflation Rate

3.1%

Source: Ibbotson Associates, Stocks, Bonds, Bills, and Inflation: 1997 Yearbook

Risk depends on the length of

time
one holds the investment
Range of Annual Returns on Common Stocks for Various
Time Periods, 1950-97
60.00%

52.62%

50.00%
40.00%
30.00%

23.92%
19.35%

20.00%

17.52%

16.65%
13.10%

10.00%
0.00%
-10.00%

1 Year

5-2.36%
Years

1.24%

10 Years

4.31%

15 Years

5.53%

20 Years

7.90%

25 Years

-20.00%
-30.00%
-40.00%

Maximum
-26.47%

Minimum

Returns (%)

Sensex Returns Analysis -1979

to 2004
275
250
225
200
175
150
125
100
75
50
25
0
-25
-50

Average Return (%)

Highest Return (%)
Lowest Return (%)

10

15

Time Horizon (years)

Equities deliver superior risk adjusted

returns over the long term

Market Timing is Dangerous

Annual Return of Sensex over last 24 years
20.00%

15.90%

15.00%
5.54%

10.00%

0.65%

5.00%

-16.93%

0.00%
-5.00%
-10.00%
-15.00%
-20.00%

Always
Invested

Missed
10 best

Missed
20 best

Missed
72 best

The opportunity loss incurred when attempting to

time the market could be exceptionally high
Patience and discipline are required to avoid a
wrong move

Rupee Cost Averaging can reduce

the risks of investing-buy less
when price is high & more when
price is low.
Period

Investment
amount

Price per
Share

Qty of Shares
Purchased

Rs.150

Rs. 75

Rs.150

Rs.25

Rs.150

Rs.50

Total Cost

Rs.450

Average Price

Rs.50

Total Shares
owned
Weighted Average Cost: Rs. 40.91 ( 450 / 11)

11

Understanding
Historical Trends is
the key to success in
Asset Allocation

Looking through the rear view

mirror makes the journey

safer
.
Investing is
a lot of numbers. One needs to get used to that, and
quickly.

An investor can see exactly what he needs to get to his destination,

and can be accountable to himself along the way.
Bonds and stocks are the two major asset classes that have been
used by investors over the past century.
Knowing the total returns on each of these, and their associated
volatility, is crucial to deciding where an investor should put his
money.

India attracts international

attention.
..
The BRICs Report projections
Focuses

on 4 largest developing economies:

Brazil, Russia, India and China over the next 50
years
In less than 40 years, the BRICs economies
together would be larger than the G6
Indias economy would be the 3 rd largest in
30 years (behind US and China)
India has the potential to show fastest growth
over the next 30 to 50 years (above 5%)
Per capita income (USD) could rise to 35 times
the current levels by 2050

Drivers of the Indian Equity

Market Pockets of
Resilient
Consensus on
economy
capable of
relatively high
GDP growth

exceptionally
high growth

Growing
consumer
class that is
acquiring
critical mass

Infrastructure
Spend

Sustained
growth in FDI
and foreign
portfolio
investment

economic
reform despite
political
change

World class
market
infrastructure
and
regulations

Corporate
sector set to
invest in
capacity
additions

Changing Demographics of India

100%

6.7%

7.0%

7.5%

8.0%

8.4%

8.9%

45.9%

47.9%

50.7%

53.1%

54.4%

55.0%

45.1%

41.8%

38.9%

37.2%

36.0%

90%
80%
70%
60%
50%
40%
30%
20%

47.5%

10%
0%
FY1996

FY2001
0-19 years

Source : Smith Barney Research

FY2006

FY2010

20-59 years

FY2013

FY2016

60 years & above

Consumption Demand
Translation

Household sector Savings

Pattern
Mutual Funds

2.2%

Shares

1.5%

Est. total stock of

savings
USD 1,500 bn

10.0%

Gold

20.0%

Bank Deposits

27.0%

Insurance / PF / SSS

39.3%

Others
0%

5%

10%

15%

20%

25%

30%

35%

40%

Others include physical assets like real estate.

In US mutual funds constitute about 50% of the overall

savings stock .. Miles to go despite favourable tax regime
Source : NCAER, 2002

Understanding
Investor Behaviour

Investor Behaviour
Success in investing doesnt
correlate with IQ once you are above
the level of 25. Once you have
ordinary intelligence, what you need
is the temperament to control the
urges that get other people into
trouble in investing.
- Warren Buffet

Behavioural Finance-aspects of
investor behaviour

Equities is the preferred asset class due to

its superior returns.
Investors behave differently when they
become part of the market ( herd mentality )
Behavioural anomalies distort our thinking
and make us take decisions against our
financial interest.

Behavioural Finance-classical
economic theory v/s
behavioural economic theory
If I say I found a worn out Rs 100 while
walking down a busy road, the classical
economists would call it impossible
because the markets being efficient, one
among the many people using that road
would have anyway found it.
But in reality, it can happen..which
proves that markets are imperfect.

Behavioural Finance explains why

we

Hold on to stocks that are crashing.

Sell stocks that are rising.
Ridiculously overvalue and undervalue stocks.
Buy stocks that have peaked in a rally just
before the price declines.
Take desperate risks and gamble wildly when our
stocks fall.
Avoid taking reasonable risk of buying promising
stocks unless there is assured profit
Never find the right price to buy or sell stocks.
Prefer fixed income over stocks.
Buy when we have to sell & vice versa.
Buy or sell because others are doing so.

Behavioural Finance

Seeks to bridge the gap between economics &

psychology; between how we make decisions &
how we should make decisions.
Creates investment strategies that capitalises on
irrational investor behaviour.
Seeks to identify market conditions in which
investors are likely to overreact or underreact to
new information.
Invest or disinvest in securities before most
investors recognise their error.
Benefits from a reversal of fall or rise when the
reversal happens.

Fallacies in Investor Behaviour

Loss aversion fallacy :
Scenario 1: you have Rs.1000 and two options.
a) Guaranteed profit of Rs.500
b) Flip a coin; heads you gain Rs 1000,
tails
you gain nothing
Scenario 2: you have Rs 2000 and two options.
a) Guaranteed loss of Rs.500
b) Flip a coin; tails you lose Rs.1000,
heads
you lose nothing.
Which option will you choose in each scenario ?

Fallacies in Investor Behaviour

Loss aversion fallacy :
In scenario 1 you are more likely to choose option
a because it has an assured profit of Rs.500
v/s a probable uncertain profit of Rs.1000.
In scenario 2 you are more likely to choose option
b because you wanted to avoid an assured
loss v/s an uncertain zero loss possibility.
In scenario 2 you were willing to take a greater
risk to avoid an assured loss.

Impact of Loss Aversion

Fear of losing drives investors towards fixed

income securities, particularly after a major
market crash, when actually good stocks are
available at attractive valuations.
Early profit booking and aversion towards
booking loss, instead of riding profits & cutting
losses makes overall returns low to negative.
Madness induced by pain of loss makes
investors take bigger risks and lose more.
Tax aversion seeing tax as a loss. In fact tax is
related to profit, and you save tax when you
make a loss.

Fallacies in Investor Behaviour

Sunk Cost Fallacy :
Scenario 1:
You have complimentary tickets for a Filmfare
awards night. On the evening of the program,
traffic is disrupted due to floods. You have a
long distance to travel. Would you go for the
function?
Scenario 2:
You have bought a ticket for the same program
for Rs.1500, and the same situation happens.
Would you go?

Fallacies in Investor Behaviour

Sunk Cost Fallacy :
Most people would go for the show if they paid for
the ticket, but avoid it if was complimentary.
Actually this distinction does not make sense, as the
money for the ticket is already spent. Whether
you go or not the money will not come back.
We must rather look at the additional risk of braving
the floods, and additional costs in case the car is
damaged, and we fall sick. The danger posed by
floods is same whether the tickets were paid for or
were free.

Impact of Sunk Cost Fallacy

Buying more when the stock price falls even when

the fall is due to fundamental weakness, thinking
that average cost of purchase will be lower.
Spending more money on repairs instead of
replacing an asset, because you have already
spent heavily on repairs, so you want to use it.
Spending money on unviable projects, because
already lot of money is spent on it.
Eating beyond your capacity, because you paid a
lot for the buffet dinner, disregarding your health.

Tax
Planning

Incomes exempt from tax under sec. 10

Deductions under chapter VI A for amounts utilised
towards certain purposes qualifies as deduction from total
income
Splitting income by creating several entities such as HUF
or Trust.
Making gifts within specified limits
Making investments which qualify for rebates
Reducing taxable income by claiming expenses

Retirement
Planning

Assessment of current financial status

Ascertain post retirement needs

Determine what you need to save and how

Find extra money for savings

Nature of
Insurance

Sharing of risk
Insurance is a device to share the
financial losses which might befall on an
individual or his family on the happening
of a specified event. The event may be
death in case of life insurance, fire in fire
insurance etc. If insured the loss arising
from these events will be shared by all
insured in the form of premium.

Why Insurance

What if our children disown us when we retire ?

What if we have an accident ? What will happen
to our loved ones, till they are financially
independent.
Insurance is a risk management tool to provide
financial protection against unforeseen events. It
also provides tax benefits.

Non-life v/s life insurance

In life insurance, the purpose is not to make good the
financial loss suffered. The insurer promises to pay a fixed
sum on the happening of an event ( either death or expiry
of term). If the event or the contingency takes place, the
payment falls due if the policy is valid and in force at the
time of the event.
In other insurance contracts, the contingency such as fire
or the marine perils etc., may or may not occur. So, if the
contingency occurs, payment is made, otherwise no
amount is given to the policy-holder.

How much Insurance

Avoid being under-insured or over insured
Ideally life cover = annual household
income * 7
10%-15% of annual income should go
towards insurance.

Mutual Funds
It pools money of several investors and
invests this in stocks, bonds, money
market instruments and other types of
securities.
Buying a mutual fund is like buying a
small slice of a big pizza. The owner of a
mutual fund unit gets a proportional
share of the funds gains, losses, income
and expenses.

Each mutual fund has a specific

stated objective
Fund Objective
Equity (Growth)

What the fund will invest in

Only in stocks

Debt (Income)
securities

Only in fixed-income

Money Market (incl Gilt)

Short-term money market

instruments

(incl.govt.securities)
Balanced
in

Partly in stocks and partly

in fixed-income securities, in
order to maintain a 'balance'
returns and risk

Types of Mutual Funds-by

management style
In terms of fund management, mutual funds can be broadly
classified into two categories: actively managed funds and
passively managed better known as index funds.
In an actively managed fund, the fund manager uses his
expertise and skills to select stocks across sectors and
market segments. The sole intention of actively managed
funds is to identify the best investment opportunities and
exploit it in order to generate superior returns, and in the
process outperform the benchmark index.
On the contrary, index funds are aligned to a particular
benchmark index like the Nifty or Sensex. They attempt to
mirror the performance of the designated benchmark
index, by investing only in the stocks of the index with the
corresponding allocations.

Types of Mutual Funds-by structure

Open-ended Funds : An open-end fund is one that is

available for subscription all through the year. These do
not have a fixed maturity. Investors can conveniently buy
and sell units at Net Asset Value ("NAV") related prices.
The key feature of open-end schemes is liquidity.

Closed-ended Funds : has a stipulated maturity period

generally ranging from 3 to 15 years. Open for
subscription only during a specified period. Investors can
invest in the scheme at the time of the initial public issue
and thereafter they can buy or sell the units of the
scheme on the stock exchanges where they are listed. In
order to provide an exit route to the investors, some
close-ended funds give an option of selling back the units
to the Mutual Fund through periodic repurchase at NAV
related prices. SEBI Regulations stipulate that at least
one of the two exit routes is provided to the investor.

Interval Funds Interval funds combine the features of openended and close-ended schemes. They are open for sale
or redemption during pre-determined intervals at NAV
related prices.

Types of Mutual Funds-by

investment objective

Growth Funds : Aims to provide capital appreciation over the

medium to long- term. Normally invest a majority of their
corpus in equities. Ideal for investors having a long-term
outlook seeking long term growth.
Income Funds :Aims to provide regular and steady income to
investors. Generally invest in fixed income securities such as
bonds, corporate debentures and Government securities. Ideal
for capital stability and regular income.
Balanced Funds : Aims to provide both growth and regular
income. Such schemes periodically distribute a part of their
earning and invest both in equities and fixed income securities
in the proportion indicated in their offer documents. In a rising
stock market, the NAV of these schemes may not normally keep
pace, or fall equally when the market falls. Ideal for investors
looking for a combination of income and moderate growth.
Money Market Funds : Aims to provide easy liquidity, preservation
of capital and moderate income. Generally invest in safer shortterm instruments such as treasury bills, certificates of deposit,
commercial paper and inter-bank call money. Returns on these
schemes may fluctuate depending upon the interest rates
prevailing in the market. Ideal for Corporate and individual
investors as a means to park their surplus funds for short
periods.

Types of Mutual Funds-other schemes

Tax Saving Schemes : Offer tax rebates to the investors under specific
provisions of the Indian Income Tax laws as the Government offers tax
incentives for investment in specified avenues. Investments made in Equity
Linked Savings Schemes (ELSS) and Pension Schemes are allowed as
deduction u/s 88 of the Income Tax Act, 1961. The Act also provides
opportunities to investors to save capital gains u/s 54EA and 54EB by
investing in Mutual Funds.

Industry Specific Schemes : Invest only in the industries specified in the offer
document. The investment of these funds is limited to specific industries
like InfoTech, FMCG, Pharmaceuticals etc.

Index Schemes : Attempt to replicate the performance of a particular index

such as the BSE Sensex or the NSE 50.

Sectoral Schemes : Invest exclusively in a specified industry or a group of

industries or various segments such as 'A' Group shares or initial public
offerings.

Benefits of Mutual Fund investment

Professional Management : MFs provide services of experienced and skilled professionals.

Diversification : MFs invest in a number of companies across a broad cross-section of

industries and sectors. This reduces risk because seldom do all stocks decline at the
same time and in the same proportion. You achieve this with far less money than you
can do on your own.

Convenient Administration : Investing in a MF reduces paperwork and helps you avoid many
problems. Saves time and money.

Return Potential : Over a medium to long-term, MFs have the potential to provide a higher
return as they invest in a diversified basket of selected securities.

Low Costs: MFs are a relatively less expensive way to invest compared to directly
investing in the capital markets because the benefits of scale in brokerage, custodial
and other fees translate into lower costs for investors.

Liquidity : In open-end schemes, the investor gets the money back promptly at net asset
value related prices from the MF. In closed-end schemes, the units can be sold on a
stock exchange at the prevailing market price or the investor can avail of the facility of
direct repurchase at NAV related prices by the MF.

Benefits of Mutual Fund investment

Transparency : You get regular information on the value of your investment in addition to
disclosure on the specific investments made by your scheme, the proportion invested in
each class of assets and the fund manager's investment strategy and outlook.

Flexibility: Through features such as regular investment plans, regular withdrawal plans
and dividend reinvestment plans, you can systematically invest or withdraw funds
according to your needs and convenience.

Affordability: Investors individually may lack sufficient funds to invest in high-grade

stocks. A mutual fund because of its large corpus allows even a small investor to take
the benefit of its investment strategy.

Choice of Schemes: MFs offer a family of schemes to suit your varying needs over a
lifetime.

Well Regulated: All MFs are registered with SEBI and they function within the provisions of
strict regulations designed to protect the interests of investors.

Investing in index funds is relatively less cumbersome. Here, the two

most important points which investors have to look out for are the
expense ratio and the tracking error (i.e., the difference between
the returns clocked by the benchmark index and index funds).
On the other hand, actively managed funds have to capitalise on
the opportunities in the market to generate superior returns. Thus,
in the process they employ more resources (more analysts/fund
managers) and in turn charge higher expenses than index funds.
In the Indian context, the mutual funds segment is dominated by
actively managed funds. Index funds occupy a much smaller share
of the market. This is because Indian stock markets, being in a
developing phase, still offer enough investment opportunities that if
identified earlier on can outperform the benchmark index over the
long-term (3-5 years). So well-managed actively managed funds
have done a reasonable job of going one up over the index over the
long-term.

What is an exchange-traded fund (ETF)

An exchange-traded fund is open-ended index fund
that can also be traded on the stock exchange. The
fund attempts to combine the advantages of an
open-ended fund with that of a close-ended fund.
This means that unlike open-ended funds, an
investor can exit from an ETF by selling his units on
the stock exchange during trading hours.

To which index can an ETF be linked

An ETF can be linked to any popular index like
the BSE Sensex, S&P CNX Nifty, BSE 100.
The Nifty BeES (an ETF launched by
Benchmark AMC) is linked to the S&P CNX
Nifty. (NSE Code - NIFTYBEES)

Open-Ended Schemes
Mutual fund schemes that continuously offer
new units to the public are called openended schemes. They offer units for sale
without specifying any duration for
redemption.
Closed-End Schemes
A mutual fund scheme in which the
investors commit their money for a
particular period.

 Expense Ratio
A mutual fund's operating expenses,
expressed as a percentage of its average
net assets. Mutual funds with lower
expense ratios are able to distribute a
higher percentage of their total returns
to their shareholders.

Entry Load
The commission charged at the time of
buying the fund. It is also called front-end
load.
Exit Load
The commission or charge paid when an
investor exits from a mutual fund. They are
basically imposed to discourage
withdrawals.

Sharpe Ratio
The Sharpe ratio is calculated using standard deviation and
excess return to determine reward per unit of risk.
First, the average monthly return of the risk free security
is subtracted from the fund's average monthly return.
The difference in total return represents the fund's excess
return beyond that of the risk-free investment.
An arithmetic annualized excess return is then calculated
by multiplying this monthly return by 12.
To show a relationship between excess return and risk, this
number is then divided by the standard deviation of the
fund's annualized excess returns. The higher the Sharpe
ratio, the better the fund's historical risk-adjusted
performance.

Calculation of NAV
NAV is simply the net value of Assets divided by the number
of units outstanding.
Asset value is equal to Sum of market value of
shares/debentures + Liquid assets/cash held, if any
+ Dividends/interest accrued - Amount due on
unpaid assets - Expenses accrued.
Expenses including management fees, custody
charges etc. are calculated on a daily basis.

Evaluate Investment
Options

Research Your Investments

Once you
know HOW to
invest.

Its time to
figure out
where to put
your money.

Research Your Investments

What do I need
to know?

Research Your Investment

To....

Discover historical trends

Perform financial analysis
Compare with the peer group
Obtain relevant economic news
Forecast future performance
View recommendations of the experts

Portfolio
Construction
- Matching investor profile
with investment options

Asset Allocation
An asset allocation is a group
of assets held together so as
to obtain the desired portfolio
characteristics to suit distinct
investor profiles.
Bonds, Stocks and Cash
equivalents are the most
commonly used asset classes
in any asset allocation.

Cas
h

Stocks

Bonds

The asset allocation for an investor depends on the

investors expectations of
returns and the risk the
investor is willing to take.

Asset Allocation
Let us now create a portfolio of a stock A and a bond B.
Stock A is expected to deliver a return of 20% per annum
with a volatility of 25% and bond B is expected to deliver
a return 6% per annum with a volatility of 5%.
In case if we allocate the assets in equal proportion 50%
in A and 50% in B than the resultant portfolio is expected
to deliver a return of
(0.5)*20% + (0.5)*6% = 13.0% with an approximate
volatility of 15%

Asset Allocation
Now if we change the allocation to 25% in A and 75% in B
than the resultant portfolio is expected to deliver a return
of
(0.25)*20% + (0.75)*6% = 9.5% with an approximate
volatility of 10%
It can be observed from the above that as one changes
the asset allocation the returns as well as the risk profile
of the portfolio changes considerably. Hence asset
allocation is an investment portfolio technique that aims
to balance risk and create diversification by dividing
assets among major categories such as cash, debt and
equity based on the risk profile and financial needs of the
investor

Creating a portfolio:
Once the asset allocation decision has been made the
second step is to select individual securities and build a
portfolios for each of the asset class under consideration.
The process begins with selecting securities from the
investment options in the assets class and adding the
selected securities to form a portfolio
The

standard deviation (p) of a portfolio decreases as

securities are added, because they would not be perfectly
correlated with the existing portfolio.

Expected

return of the portfolio would remain relatively

constant
Eventually

the diversification benefits of adding more

securities dissipates (after about 10 securities). For
example in large equity portfolios, p tends to converge
to 20%.

Creating a portfolio:
Illustrating diversification effects of a
equity stocks portfolio
p (%)
35

Company-Specific Risk
Stand-Alone Risk, p

20
Market Risk
0

10

20

30

40

2,000+

# Stocks in Portfolio

Tracking Your Portfolio

Follow the performance of your selections

Follow market trends

Read the financial news
Monitor your selected investments
Share information with others

Dos and Donts

Do keep informed of your investments once

you purchase them.
Do understand the advise of experts before you
take it.
Do invest for the long term.
Dont be discouraged. An investment in your
future is worth the effort.
Dont buy what you dont understand.

Investment
Terminology

Investing terminology .
Asset
Anything that has monetary value. Typical personal assets
include stocks, real estate, jewelry, art, cars, and bank
accounts.
Asset allocation
Dividing investment dollars among various asset classes,
typically among cash investments, bonds, and stocks.
Asset classes
The three major asset classes are cash (also called cash
reserves, money market instruments, etc.), bonds, and
stocks.
Diversification
Investing in separate asset classes (stocks, bonds, cash)
and/or stocks of different companies in an attempt to

Investing terminology .
Portfolio
All the securities held by an individual, institution, or
mutual fund.
Compounding
When an investment generates earnings on reinvested
earnings.
Capital appreciation
One of the two components of total return, capital
appreciation is how much the underlying value of a
security has increased. If you bought a stock at Rs.10 per
share and it has risen to Rs.13, you have enjoyed a 30%
return or appreciation on the original capital you invested.
Dividend yield is the other component of total return.

Investing terminology .
Dividend
A share of a company's earnings paid to each stockholder.
Dividend yield
The annual percentage rate of return paid in dividends on
a share of stock. To figure out the dividend yield (or just
"yield"), divide the annual dividend by the current share
price of the stock.
Inflation
A rise in the prices of goods and services.
Real return
The inflation-adjusted returns of an investment.

Investing terminology .
Risk-adjusted return
A measure of how much risk a portfolio has employed to
earn its returns.
Unrealized capital gain/loss
An increase (or decrease) in the value of a stock or other
security that is not "realized" because the security has
not yet been sold for a gain or loss.
Annualize
To make a period of less than a year apply to a full year to
facilitate comparative analysis.
Volatility
The degree of movement in the price of a stock or other
security.

Investing terminology .
Risk tolerance
The measurement of an investor's willingness to suffer a
decline (or repeated declines) in the value of investments
while waiting and hoping for them to increase in value.
Standard Deviation
A measure of variation about the mean
Beta
A measure of the relative volatility of a stock or other
security as compared to the volatility of the entire market
(usually measured by the S&P 500 index). A beta above
1.0 shows greater volatility than the overall market, and a
beta below 1.0 is less volatile.

Investing terminology .
Broker
One who sells financial products. Whether in insurance,
real estate, or stocks, most brokers work under
compensation structures that are at direct odds with the
best interests of their clients. When using a broker, you
should always find out how he or she is compensated.
Order
A request from a client to a broker to buy or sell stock,
either at the market price or at a specific price.
Bear
A person with a generally pessimistic market outlook or a
pessimistic view on a sector or specific stock.

Investing terminology .
Bear market
When the overall market loses value over an extended
period of time.
Bull
A person with a positive or optimistic outlook for the
general market, a market segment or industry, or for
particular stocks
Bull market
A market that has been gaining value over a prolonged
period.

Investing terminology .
Buy-and-hold
A strategy that employs buying shares of companies with
the intention of keeping those holdings for a long time,
preferably indefinitely, and participating in the long-term
success of being a partial owner of the business
underlying the stock.
Market timing
An investment strategy based on predicting short-term
price changes in securities, which is virtually impossible
to do.
Churn
Churning is unconscious or conscious overtrading by a
broker in a customer's account. Since brokers are most
often compensated by the number of transactions made
on a customer's behalf, there is temptation to trade too
frequently, whether that's in stocks, bonds, or mutual

Investing terminology .
Capital gain/loss
The difference between the price at which an asset is sold
and its original purchase price (or "basis").
Long-term capital gain
A profit on the sale of stock, mutual fund shares, or other
securities that have been held for more than one year.
Taxes owed on long-term capital gains are lower than
those on short-term capital gains.
Short-term capital gain
A profit on the sale of a security that has been held for
one year or less. Short-term capital gains are taxed as
ordinary income.

Investing terminology .
Bond
An interest bearing or discounted debt security issued by
corporations and governments. Bonds are essentially
loans by the investor to the issuer in return for interest
payments.
Common stock
A security representing partial ownership in a public or
private corporation.
Blue-chip stocks
Really good, large companies -- often INDEX components
-- that have been around long enough to have a solid
history of rewarding shareholders.

Investing terminology .
Index
An unmanaged selection of securities whose collective
performance is used as a standard to measure investment
results.
Mutual fund
The pooled cash of many unitholders that is invested
according to a stated objective, as defined by the fund's
prospectus.
Open-end fund
A mutual fund that has an unlimited number of units
available for purchase. Most mutual funds are openended.

Investing terminology .
Net asset value (NAV)
The net asset value is the price of each unit of a mutual
fund. It is calculated by subtracting the fund's liabilities
from its total assets, and dividing that figure by the
number of units outstanding. The NAV is the amount of
money that an investor would receive for each unit if the
mutual fund sold all of its assets, paid off all of its
outstanding debts, and distributed the proceeds to unit
holders.

OPT 4 MORE - Asset Allocation

based
on risk profile
OPT 4 MORE is a asset allocation product based on the risk
profile of the investor.

Asset allocation is a disciplined, long-term financial strategy

for investing money into various asset classes based on the
investment goals, time horizon, and risk tolerance.

Asset Allocation is an investment portfolio technique that

aims to balance risk and create diversification by dividing
assets among major categories such as cash, debt and equity
based on the risk profile and financial needs of the investor

Know your Risk Profile

Risk profiling is a well-established scientific and robust

way of profiling risk among investors

Research has established clear relationships between

demographic

attributes

of

investors

and

their

investment risk appetite

OPT 4 MORE has a detailed client profiling form

which would help the client in under standing his risk
profile. This helps the investor to invest in the right
asset allocation based on his needs.

Conservative Risk Profile

This profile is suitable for investors who prefer to

preserve capital and do not intend to taking any
exposure to high risk investments. This investment
profile aims to obtain marginally higher return
predominantly through bank fixed deposits and a mix of
debt schemes and does not invest in equity or related
instruments.

Moderate Risk Profile

This profile is suitable for investors who are willing to

take an exposure of upto 30% in higher risk investments
like equity related products with a medium term horizon
in mind. This moderate equity exposure is to enhance
the returns on the portfolio.

Aggressive Risk Profile

This profile is suitable for aggressive investors who are

willing to invest upto 50% of their portfolio in equity
related products and clearly are well informed about the
potential downside that could arise in case of a sharp
fall in the markets. Over the long term period of upto 5
years this portfolio has the potential to outperform and
deliver above average returns.

Returns

What is OPT 4 MORE ?

Equity Plans

Hybrid Income Plans

Short Term Plans
Bank FDs / GOI Bonds

Risk

OPT 4 More is a tool to identify the risk return profile of an

individual and suggests investments in a basket of Short
term & Hybrid MF Income Plans, Equity MF and sacred
assets like Bank FD and GOI bonds to suit each profile.

Opt 4 More Current Asset

Allocation
Scheme

Equity Plans
HSBC Equity Fund
Franklin India Bluechip
DSPML Opportunities Fund
Reliance Vision Fund
Prudential ICICI Power
Sub Total
Short Term Plans
Prudential ICICI Short Term Plan
Sub Total
Floating Rate Plans
Grindlays Floating Rate Fund - LT
Prudential ICICI Floating Rate Fund- LT
Sub Total
Long Term Bonds
GOI Savings Bonds - 8%(taxable)
Sub Total
Fixed Deposits
ICICI Bank Deposits
Sub Total
Grand Total

Conservative
Moderate
Aggressive
Allocation (%) Allocation (%) Allocation (%)
1
2
3

10
10
10
30

10
10
10
10
10
50

10
10

10
10

10
10

15
15
30

10
10

10
10

20

20

20
20

10
10

10
10

40
40
100

30
30
100

10
10
100

Opt 4 More Performance

Actual
Performance
One Year Returns
Volatility
Sharpe Ratio

Conservative
Moderate
Aggressive
Allocation (%) Allocation (%) Allocation (%)
4.5%
17.6%
22.9%
0.4%
0.0

7.8%
1.7

11.8%
1.6

What is Systematic
Investment Planning
(SIP) ?

Systematic Investment
Planning (SIP)

Disciplined way of investing fixed amount at a

regular frequency. A time tested investment
approach

Reduces the market risk by using the concept

of rupee cost of averaging

Allows power of compounding help create

wealth over a long term

Disciplined investing in equity funds over

longer time frames helps generate
superior returns

Rupee Cost Averaging

In a falling market, SIP results in a better downside
Protection
Month

NAV

SIP

Units

Mar-00

70.87

1000

14

Apr-00

64.55

1000

30

May-00

56.79

1000

47

J un-00

56.28

1000

65

J ul-00

61.66

1000

81

Aug-00

53.99

1000

100

Sep-00

58.72

1000

117

Oct-00

51.63

1000

136

Nov-00

49.72

1000

156

Dec-00

53.01

1000

175

J an-01

52.28

1000

194

Average cost INR 56.60

An investor would have

lost 26% if he made
a one time investment
in
March00
as
compared to the SIP
loss of 7.6%

Rupee Cost Averaging

Month

NAV

SIP

Units

Mar-03

55.86

1000

18

Apr-03

53.84

1000

36

May-03

54.77

1000

55

J un-03

60.86

1000

71

J ul-03

67.31

1000

86

Aug-03

73.91

1000

100

Sep-03

84.70

1000

111

Oct-03

87.62

1000

123

Nov-03

100.83

1000

133

Dec-03

106.23

1000

142

J an-04

124.22

1000

150

Feb-04

120.38

1000

158

Mar-04

129.35

1000

166

Average cost INR 78.22

In the backdrop of a
sharp rally , a SIP may
under- perform a single
entry strategy for a
short period of time.

Systematic Investment
Planning (SIP)

The value of INR 1000 invested every month

for the last 2 year period in a systematic
investments plan in the following equity
funds would be.
Value of Invested
Amount
Equity Fund
Reliance Growth Fund
46,280
DSPML Opportunities Fund
40,570
HSBC Equity Fund
38,072
Templeton India Growth
38,050
Prudential ICICI Power
37,860
Prudential ICICI Growth
33,680

Systematic Investment
Planning (SIP)
Equity Fund
Reliance Growth Fund
DSPML Opportunities Fund
HSBC Equity Fund
Templeton India Growth
Pru-ICICI Power
Pru-ICICI Growth

Return(%)
77.9
59.6
72.0
51.2
50.6
36.2

Examples (Ten Year SIP)

Investing INR 1000 per month from January97 to
December04 in Franklin India Bluechip Fund
would have generated return of 36% over the the
past eight years
A Savings corpus of INR 4.24 lakhs could have
been built in eight years by saving INR 1000 per
month through an SIP in an equity fund by
investing INR 96,000

Examples (Five Year SIP)

Investing INR 1000 per month from January99 to
over the last December04 in Pru-ICICI Power
would have generated return of 37% p.a. over
the last five years
A Savings corpus of INR 1.46 lakhs could have
been built over a five year time period by saving
INR 1000 per month through an SIP in an equity
fund by investing a sum of INR 60,000