Basics of Wealth and Investment Management

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 RandomWalkDown 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
Investing ….

There are two times in a man’s life when he should
not speculate: when he can’t afford and when he
can.
MarkTwain, FollowingtheEquator

Speculation
Investors “speculate" every time they commit money to
something they don't understand.
Say you overhear your best friend’s 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.
Investing ….

Powerof 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 yourbreath Rs. Eleven Crores.
The power of compounding can be expressed using the
following time value of money expression
FV= (PV) * (1+k)^n
Investing ….

Powerof 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 powerof compounding.
Systematic Planning is an essential ingredient of a good
investment programme.
Investing ….

Powerof Compounding it works…
FMP S ensex Franklin India
Blue Chip
MF
Average
Years 6% 16% 27.9% 20.0%
0 100,000 100,000 100,000 100,000
1 106,000 116,000 127,900 120,000
2 112,360 134,560 163,584 144,000
3 119,102 156,090 209,224 172,800
4 126,248 181,064 267,598 207,360
5 133,823 210,034 342,257 248,832
10 179,085 441,144 1,171,401 619,174
15 239,656 926,552 4,009,204 1,540,702
20 320,714 1,946,076 13,721,794 3,833,760
25 429,187 4,087,424 46,963,841 9,539,622
30 574,349 8,584,988 160,737,176 23,737,631
35 768,609 18,031,407 550,134,722 59,066,823

Human Life Cycle – Disciplined Planning
IncomeIncome
AgeAgeBirth & EducationBirth & Education Earning YearsEarning Years RetirementRetirement
Phase IPhase I Phase IIPhase II Phase IIIPhase III
22 yrs22 yrs 60 yrs60 yrs
MarriageMarriage
Child birthChild birth
Child’s EducationChild’s Education
Child’s MarriageChild’s Marriage
HousingHousing
22 yrs22 yrs 38 yrs38 yrs Over25 - 30 yrsOver25 - 30 yrs
Having a Financial
Goal is primary to
starting a
Investment Plan.

Financial Planning is …
 To develop well defined goals
 Divide the goals into short term and long termgoals
 To lookat 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 risktolerance of the individual
 Design an asset allocation to meet the riskand
returns
 Modify the asset allocation based on any change in
needs orrisktolerance

Retirement Planning
 Assessment of current financial status
 Ascertain post retirement needs
 Determine what you need to save and how
 Find extra money forsavings

Tax Planning
 Incomes exempt from tax undersec. 10
 Deductions underchapterVI A foramounts utilised towards certain
purposes qualifies as deduction fromtotal income
 Splitting income by creating several entities such as HUF orTrust.
 Making gifts within specified limits
 Making investments which qualify forrebates
 Reducing taxable income by claiming expenses

Investing is like a long cartrip…
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?

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 volatility in the debt and equity markets
 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 Plannerwould provide…
 A comprehensive platformof tailormade 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

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
ortest match ? )
Determining Investment Style….

RiskTolerance
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 Xmay 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….

RiskTolerance
There are various degrees of risk across the investment spectrum,
from government savings bonds (carries only sovereign risk and
credit risk), which are considered risk-free 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.

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 don’t 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. Don’t invest any money in stocks that you will need in
the short term.


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.

Another time factor is :
When does the investorneed 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.

Investment Avenues
High
L
o
w
Don’t Invest here
RETURN
Equity
Index
Funds
Growth
Funds
R
I
S
K
Balance
Funds
Optimal
Aggressive
Stance
## the size of the circle denotes the level of liquidity
Low
RBI
Comp FD
P.O.
Income
Funds
GOI Sec
Liquid
Fund
Gilt
Funds
Sedate Zone Bank FD
H
i
g
h

Investment Products
 Stocks-offerdividend & capital appreciation.
 Bonds-offersafe return.
 Real estate-offers rent & capital appreciation.
 Precious metals-appreciate overtime and are a
hedge against uncertainties.
 Art work-appreciate overtime.
 Insurance-used as security against riskof
uncertainties.

Portfolio
Construction
- Matching investor profile
with investment options …

Asset Allocation
An asset allocation is a strategy
of dividing the portfolio among
various asset classes 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. It is an
organized and effective method of
diversification
Stocks
Bonds
Cash
The asset allocation for an investor depends on the investors
expectations of returns and the risk the investor is willing to
take.

Investments : Key Determinants
Security Selection 4.6%
Market Timing 1.8%
Other Factors 2.1%
 The most important determinant of portfolio return is
asset allocation .
Asset
Allocation
91.5%
Source: Brinson, Singer & Beebower
( 1991 )

Asset allocation
Asset Allocation encompasses the following:
 Selection of the asset classes
 Properblending of these asset classes in a portfolio
 Managing the asset mix overtime.

Lifecycle Investment Guide
Mid Twenties
10%
5%
20%
65%
REAL ESTATE
CASH
BONDS
STOCKS
Late Thirties to Early Forties
10%
5%
30%
55%
REAL ESTATE
CASH
BONDS
STOCKS
Mid Fifties
13%
5%
38%
44%
REAL ESTATE
CASH
BONDS
STOCKS
Late Sixties and beyond
15%
10%
50%
25%
REAL ESTATE
CASH
BONDS
STOCKS

Asset Allocation Principles
 Riskand return are related
 Riskdepends on the length of time one holds the
investment
 Rupee Cost Averaging can reduce the risks of
investing
 Risks that an investorcan take depends on the
investor’s 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 long-term 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 short-term 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 one’s 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

Evaluate Investment
Options…

Research YourInvestments
Once you know
HOW to invest.
It’s time to
figure out
where to put
your money.

Research YourInvestments
What do I need to
know?

Research YourInvestment
• Discover historical trends
• Perform financial analysis
• Compare with the peer group
• Obtain relevant economic news
• Forecast future performance
• View recommendations of the experts
To....

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 (σp) 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, σp tends to converge to ≈ 20%.

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%
Creating a Portfolio

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

Asset class characteristics
 The purpose of using various riskcategories in
portfolios is to reduce riskthrough diversification
thereby enhancing the risk/return ratio.
 The properallocation of assets in a portfolio begins
with determining the proportion of the total
portfolio to invest in each asset class.

Maximize returns, minimize risks

Risk/return characteristics of asset
classes
It is useful to calculate returns and measure riskfor
asset classes overvarious past intervals
 Helps to evaluate the behaviorof the asset class over
different economic cycles.
 May be taken as representative of the returns that
investors may have expected to earn overthe 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 riskmeasures can be
used to compare the relative performance behavior
across asset classes.

Asset class characteristics
Security Class Maturity of
security
Formof return Risk
Cash Equivalents Short Interest Low
Fixed Deposits Long Interest Medium
Govt Securities Long Interest Medium
Corporate Bonds Long Interest Medium
Preference Shares Perpetual Dividend Moderate
ly high
Equity Shares Perpetual Dividend and capital
gains
High

Tracking YourPortfolio
 Follow market trends
 Read the financial news
 Monitor your selected investments
 Share information with others
Follow the performance of your selections

Do’s and Don’ts
 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.
 Don’t be discouraged. An investment in your future is
worth the effort.
 Don’t buy what you don’t understand.

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
A B C
Investment A: no
return variation,
no risk
Investment B:
some return
variation, some
risk
Investment C:
wide return
variation, much
risk
4.0% 2.5%
6.00%
15%
-8%

Nature of Risk
 The more variable an investment’s 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

Breaking down sources of risk
Stand-alone risk= Market risk+ Firm-specific risk
 Market risk – portion of a security’s stand-alone risk that
cannot be eliminated through diversification. Measured by
beta.
 Firm-specific risk – portion of a security’s stand-alone risk
that can be eliminated through proper diversification.

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
 Standard Deviation:
Xi=Observation
µ= Mean
N = Total No. of observation
( )
2
1
N
i
i
X
N
µ
σ =
−
=
∑

Comparing Standard Deviations
Mean = 15.5
s = 3.338
11 12 13 14 15 16 17 18 19 20 21
11 12 13 14 15 16 17 18 19 20 21
Data B
Data A
Mean = 15.5
s = .9258
11 12 13 14 15 16 17 18 19 20
21
Mean = 15.5
s = 4.57
Data C
It can be seen from above that data sets with same means could
have widely different standard deviations depending on the
variance fromthe mean

What is the market riskpremium?
 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.

Riskand Return are related
Average Annual Return
(1926 – 97)
RiskIndex
Small company common
stocks
12.7% 33.9%
Common stocks in general 11.0% 20.3%
Long Termbonds 5.7% 8.7%
Treasury bills 3.8% 3.2%
Inflation Rate 3.1%
Source: Ibbotson Associates, Stocks, Bonds, Bills, and Inflation: 1997 Yearbook

Riskdepends on the length of time one
holds the investment
Range of Annual Returns on Com m on Stocks for Various
Tim e Periods, 1950-97
52.62%
23.92%
19.35%
17.52% 16.65%
13.10%
-26.47%
7.90%5.53%4.31%1.24%-2.36%
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
1 Year 5 Years 10 Years 15 Years 20 Years 25 Years
Maximum
Minimum

Sensex Returns Analysis -1979 to 2004
Equities deliversuperiorriskadjusted returns overthe long term
-50
-25
0
25
50
75
100
125
150
175
200
225
250
275
1 3 5 7 10 15
Tim e Horizon (years)
Returns(%)
Average Return (%)
Highest Return (%)
Lowest Return (%)

Market Timing is Dangerous…
The opportunity loss incurred when attempting to time the
market could be exceptionally high
Patience and discipline are required to avoid a wrong move
Annual Return of Sensex overlast 24 years
15.90%
5.54%
0.65% -16.93%
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
Always
Invested
Missed
10 best
Missed
20 best
Missed
72 best

Rupee Cost Averaging can reduce the risks
of investing-buy less when price is high &
more when price is low.
Period Investment
amount
Price perShare Qty of Shares
Purchased
1 Rs.150 Rs. 75 2
2 Rs.150 Rs.25 6
3 Rs.150 Rs.50 3
Total Cost Rs.450
Average Price Rs.50
Total Shares
owned
11
Weighted Average Cost: Rs. 40.91 ( 450 /11)

Measurement of Risk
 Risks can be classified as Systematic risks and Unsystematic risks.
Unsystematic risks:
These are risks that are unique to a firmorindustry. Factors such as
management capability, consumerpreferences, labour, etc.
contribute to unsystematic risks. Unsystematic risks are controllable
by nature and can be considerably reduced by sufficiently
diversifying one's portfolio.
Systematic risks:
These are risks associated with the economic, political, sociological
and othermacro-level changes. They affect the entire market as a
whole and cannot be controlled oreliminated merely by diversifying
one's portfolio.

What is Beta?
 The degree to which different portfolios are affected by
these systematic risks as compared to the effect on the
market as a whole, is different and is measured by Beta.
To put it differently, the systematic risks of various
securities differdue to theirrelationships with the
market. The Beta factordescribes the movement in a
stock's ora portfolio's returns in relation to that of the
market returns. Forall practical purposes, the market
returns are measured by the returns on the index (Nifty,
Mid-cap etc.), since the index is a good reflectorof the
market.

 Beta is calculated as :
where rameasures the rate of return of the asset, rp measures the rate of return of
the portfolio of which the asset is a part and Cov(ra,rp) is the covariance between
the rates of return. In the CAPMformulation, the portfolio is the market portfolio
that contains all risky assets, and so the rp terms in the formula are replaced by rm,
the rate of return of the market.
Beta is also referred to as financial elasticity orcorrelated relative volatility, and can
be referred to as a measure of the sensitivity of the asset's returns to market
returns, its non-diversifiable risk, its systematic riskormarket risk.
Covariance measures how two variables co-vary, and is given by :
Sum(x- mean(x)) (y-mean(y)) /N-1
Where, N denotes the total numberof observations.
In orderto calculate the beta of a portfolio, multiply the weightage of each stockin
the portfolio with its beta value to arrive at the weighted average beta of the
portfolio
Beta: Methodology /Formula

Understanding
Historical Trends is
the key to success in
Asset Allocation…

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.
Looking through the rearview mirror
makes the journey safer….

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 lower overall
investment risk.
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.

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.

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.

Risktolerance
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.

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.

Bearmarket
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.

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 funds with loads.

Capital gain/loss
The difference between the price at which an asset is sold and its
original purchase price (or "basis").
Long-termcapital 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-termcapital 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.

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.

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 open-ended.

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
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.
Returns
R i s k
Bank FDs / GOI Bonds
Short Term Plans
Hybrid Income Plans
Equity Plans

OPT 4 MORE - Asset Allocation based on
riskprofile
• 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 yourRiskProfile
 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 RiskProfile
 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 RiskProfile
 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 RiskProfile
 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.

Opt 4 More – Current Asset Allocation
Schem e Conse rv ativ e
A llocation (% )
1
Mode rate
A llocation (% )
2
A ggre ssiv e
A llocation (% )
3
Equity Plans
HSBC Equity Fund - - 10
Franklin India Bluechip - - 10
DSPML Opportunities Fund - 10 10
Reliance Vision Fund - 10 10
Prudential ICICI Power - 10 10
Sub Total - 30 50
Short Term Plans
Prudential ICICI Short Term Plan 10 10 10
Sub Total 10 10 10
Floating Rate Plans
Grindlays Floating Rate Fund - LT 15 10 10
Prudential ICICI Floating Rate Fund- LT 15 10 10
Sub Total 30 20 20
Long Term Bonds
GOI Savings Bonds - 8%(taxable) 20 10 10
Sub Total 20 10 10
Fixed Deposits
ICICI Bank Deposits 40 30 10
Sub Total 40 30 10
Grand Total 100 100 100

Opt 4 More – Performance
Actual Performance
Conse rv ativ e
A llocation (% )
Mode rate
A llocation (% )
A ggre ssiv e
A llocation (% )
One Year Returns 4.5% 17.6% 22.9%
Volatility 0.4% 7.8% 11.8%
Sharpe Ratio 0.0 1.7 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
An investor would have
lost 26% if he made a one
time investment in
March’00 as compared to
the SIP loss of 7.6%
Average cost – INR56.60
Month NAV S IP Units
Mar-00 70.87 1000 14
Apr-00 64.55 1000 30
May-00 56.79 1000 47
Jun-00 56.28 1000 65
Jul-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
Jan-01 52.28 1000 194
In a falling market, SIPresults in a betterdownside Protection

Rupee Cost Averaging…
Month NAV S IP Units
Mar-03 55.86 1000 18
Apr-03 53.84 1000 36
May-03 54.77 1000 55
Jun-03 60.86 1000 71
Jul-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
Jan-04 124.22 1000 150
Feb-04 120.38 1000 158
Mar-04 129.35 1000 166
In the backdrop of a sharp
rally , a SIP may under-
perform a single entry
strategy for a short period
of time.
Average cost – INR78.22

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….
Equity Fund
Value of Invested
Am ount
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

Equity Fund Return(% )
Reliance Growth Fund 77.9
DSPML Opportunities Fund 59.6
HSBC Equity Fund 72.0
Templeton India Growth 51.2
Pru-ICICI Power 50.6
Pru-ICICI Growth 36.2

Investing INR 1000 per month from January’97 to
December’04 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 (Ten YearSIP)

Examples (Five YearSIP)
Investing INR 1000 per month from January’99 to over
the last December’04 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

Basics of Wealth and Investment Management

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