A

REPORT ON
CONTEMPORARY
ISSUE

“PORTFOLIO MANAGEMENT”

Submitted in partial fulfillment for the

Award of degree of
Master of Business Administration

Submitted By: Submitted To:

NIRMAL YADAV
SHILPIKHANDELWAL
MBA 2th SEM H.O.D. {MBA
DEPTT.}

APEX INSTITUTE OF ENGINEERING & TECHNOLOGY

 SITAPURA, JAIPUR

2009-2011

ACKNOWLEDGEMENT

It gives me immense pleasure to present the REPORT on

CONTEMPORARY

ISSUE ON “PORTFOLIO MANAGEMENT”. I would like to thank Mrs

SHILPI KHANDELWAL. their efforts and providing the

necessary guiding steps in completing the project in a standard form.

I sincerely thank the efforts without whose efforts this report would not have

been completed in the desired manner and within the time duration.

SIGNATURE

Nirmal Yadav

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Table of Contents

Abstract.......................................................................................................................4
Introduction ................................................................................................................5
• Limitations of the Study..............................................................................5
Understanding Portfolio Management........................................................................5
• Need for Portfolio Management..................................................................7
• Scope of Portfolio Management..................................................................9
• Fundamentals of Portfolio Management...................................................12
• Practice of Portfolio Management.............................................................15
Financial Products....................................................................................................19
• Mutual Funds.............................................................................................25
• ...............................................................................................................25
• Mutual Fund Operation Flow Chart......................................................25
• Mutual Funds Industry in India.............................................................29
• Types of mutual funds...........................................................................35
• Open-end Fund......................................................................................35
• Equity Funds..........................................................................................36
• Funds of Funds......................................................................................37
• Stocks ........................................................................................................37
• Trading.......................................................................................................38
• Bombay Stock Exchange (BSE) ...............................................................39
• Life Insurance............................................................................................45
• Life Insurance Products ........................................................................46
• Market Share of Life Insurers................................................................49
• Life Insurer................................................................................................51
• 2004-2005..................................................................................................51
• 2005-2006..................................................................................................51
• Private Sector.............................................................................................51

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 • 2,233,075...................................................................................................51
• 3,871,410...................................................................................................51
• LIC.............................................................................................................51
• 23,978,213.................................................................................................51
• 31,590,707.................................................................................................51
• Total...........................................................................................................51
• 26,211,198.................................................................................................51
• 35,462,117.................................................................................................51
Other Investment Products.......................................................................................51
Model Portfolios.......................................................................................................56
Client Portfolios .......................................................................................................60
References ................................................................................................................66
Annexure I................................................................................................................67

Abstract
The term asset management is often used to refer to the investment
management of collective investments, whilst the more generic fund
management may refer to all forms of institutional investment as well as
management of investments for private investors.

Investment managers who specialize in advisory management on behalf of

private investors may often refer to their services as wealth management or
portfolio management often within the context of so-called "private banking".

The provision of 'portfolio management services' (PMS), includes the

following elements:

• Financial analysis
• Asset selection
• Stock selection
• Plan implementation and
• Ongoing monitoring of investments
Investment management is a large and important global industry in its own
right responsible for managing of trillions of dollars. Coming under the remit
of financial services many of the world’s largest companies are at least in
part investment managers and employ staff to create billions in investment
income.

Investment avenues of Portfolio Management include:

4
  Equity
 Mutual Funds
 Insurance
 Commodity
 Real Estate
 IPO
In private banking, a high-net-worth individual (HNI) is a person with a high
net worth. Typically these individuals have investable assets (financial
assets not including first piece of real estate) in excess of Rs. 50 lacs.
Ultra HNI’s, individuals or families have at least Rs. 2 crores in investable
assets. Most global banks, such as Credit Suisse or UBS, have a separate
Business Unit with designated teams consisting of client advisors and
product specialists exclusively for HNI’s & Ultra HNI’s. Because of their
extreme high net worth, these clients are often considered to have semi-
institutional or institutional like characteristics.

Portfolios of HNI clients are analyzed in detail to understand their investment

patterns.

Introduction
This project aims to identify & study Investment Portfolios of High Net-Worth
Individuals (HNI’s) in detail. This will enable me to understand their
investment needs in order to maximize their returns.

The various aspects of their investments are analyzed in detail. This project
will also facilitate me to succeed in my career.

Limitations of the Study

I may face the following limitations:

• Time Constraints
• Vast Knowledge of the subject required

Understanding Portfolio Management

India is truly on a high. As the line between people, places and preferences
begin to blur to include a new global reality; stereotypes about India and
Indian culture are beginning to break, to form a mosaic of intriguing patterns.
A new India has now taken shape. With an economy that has been growing
at a sustained rate of 8.5% in the past few years, rising foreign exchange

5
reserves and a booming capital market, India now boasts of having more
billionaires than China. This is a land where people dare to dream and have
a story to tell. India is fast emerging as the preferred destination for business
in the field of the service sector, manufacturing, information technology,
telecommunications and infrastructure and of course, financial services.

The Indian stock markets are scaling new heights and the upward
movement seems unstoppable. The capital market is at the peak of its
performance and it makes investors happier than before. This eventually
brings us to the simple understanding that it is time to manage one’s wealth
before markets start taking reversionary trends, which some call the
correction phase. If one focuses on the global trends of wealth creation, both
on an individual as well as on an institutional basis, the common
observations only lead to a positive outlook that gives a clear picture about
the expected robust wealth creation in the developed and developing
economies across the globe.

The portfolio (wealth) management market is the fastest growing market in

the financial services segment of the Indian industry. It is growing at
approximately 25% annually. Today, the wealth management market is
specifically designed for HNIs. As people become wealthier, managing
wealth will become more complex and intricate. Instances in the past have
confirmed that rich people often fail to manage their wealth properly,
prompting organizations, like private banks, to manage their wealth for them.

The major growth drivers of the increasing wealth of these HNIs are a
speedy economic growth worldwide and a bullish stock market, along with
strong stock market capitalization. During the past couple of years, stock
markets worldwide have witnessed record high indices. The economic
fundamentals also seem to be buoyant for the future with the world GDP
growth at 5.3% during 2006, according to the economic Intelligence Unit
(EIU) report.

The dictionary meaning of wealth management states: “A comprehensive

service to optimize, protect and manage the financial well being of an
individual, family or corporation.” The definition thus covers advice on loans,
investments, insurance, etc. giving a broad picture of how investors should
best deploy their financial resources. A broader description may include tax
advice, estate planning, business planning, charity foundations and other
financial needs.

In other words, wealth management is the co-ordination of a client’s

investment, tax, estate, debt strategies into a comprehensive plan to achieve
his personal goals. It can be defined as a professional service that combines

6
financial or investment advice, accounting or tax services and legal or estate
planning.
Clients have their own financial goals and it is the task of the wealth
manager or financial planner to help them achieve these goals.

After the dot-com bubble bust, there was a sharp decline of the indices in
the stock markets worldwide and a number of investors lost their hard
earned money. Subsequently, the investors realized that they had made a
mistake by investing in poor financial instruments. It was at this time that
services of financial planners emerged. Financial institutions too began
looking for new ways to earn profits, as the stock market bust reduced their
profit margins as well. The necessity and desire on both sides; i.e. the
consumer and supplier side, resulted in a new profession called financial
advisors or finance managers.
It is widely believed that financial planning and wealth management are the
same, however, even if they may be associated with each other, it is not so.
Financial planning is to know one’s financial situation and determine one’s
goals and plans. Financial planning is a continuous activity for achieving the
objective of the organization. In financial planning, the plan is reviewed
regularly and the performances measured at regular intervals, so that the
company can achieve its goals. On the other hand, wealth management is
only coordinating a client’s investment, tax and real estate plans and making
a specific plan to achieve the individual’s personal financial goals. As far as
an individual is concerned, planning for future earnings according to his
current financial position is wealth management. In case of wealth
management, there are wider varieties of options of investments, such as
venture capital, hedge funds, insurance, etc. while financial planning
consists of services of financial institutions which can be provided to
individual clients.

Need for Portfolio Management

Planning for retirement, saving for children’s education, arranging enough

liquidity to buy a house or property, inclination to maximize the returns on
investment are some of the reasons why people spend less than they earn.
Managing wealth is not only restricted to regular investment and savings, but
also concerned with housing finance, mortgages, financial planning for
unmarried children, solutions for asset management after demise, legal
arrangement of will and healthcare planning. Thus, the functions of a wealth
manager are evolving and taking a new shape to perform various roles and
responsibilities for managing the wealth of their clients.

An article in a journal called ‘Portfolio Organizer’ by T S Ramakrishna,

reported that wealth management is meant to “help clients get a complete

7
perspective of their wealth”. A similar view is expressed in a report by
Schwab Institutional, which claims that wealth management is a “holistic
approach that seeks to co-ordinate high net-worth investors’ needs over
their lifetime with the needs of their families”. Based on these definitions, it is
quite reasonable to wonder just how wealth management differs from
comprehensive financial planning.
The Schwab International report also notes that wealth managers get
involved in aspects of their clients’ lives that other financial advisors might
not consider appropriate. Obviously, knowledge besides finance and
investing is essential if one is to function effectively as a wealth manager. In
recent years, financial advisors of all types have come to recognize that the
role of psychology plays an important role in providing financial services to
clients.

As the number of high net worth individuals has continued to rise in the
major economies around the world, so has the demand for wealth
management services. The private wealth market is a growing one for
financial institutions and firms of advisors able to offer wealth management
services that meet the demanding requirements of wealthy investors.

Increasingly, high net worth individuals look for diversification in their

investments to obtain the returns they need to protect and grow their wealth.
To draw up the investment strategies their private wealth customers require,
wealth management professionals need access to comprehensive coverage
of the global financial markets and to the news which affects them. They
look for services that enable them to find and filter information quickly and
build personalized displays. They also seek purpose-built tools and models
to help them analyze instruments, sectors, funds, indices or economic
conditions and test the level of risk versus return of proposed investments.
To perform, wealth management professionals need advanced portfolio
management systems that allow them to analyze their private wealth
customers' portfolios, value them in a range of currencies and measure
performance. Wealth management professionals want portfolio management
systems that automate administrative functions so that they can spend more
time developing good relationships with private wealth customers. Effective
portfolio management systems enable wealth management professionals to
generate customized reports for customers and colleagues. They also give
private wealth customers the means to access their own accounts directly so
they can view their portfolio valuation, transaction history or cash position.

Proponents of wealth management stress that successful practitioners must

know their clients’ values, lifestyle, ambitions and priorities. Wealth
managers, like other financial planners tend to equate client happiness with
the accumulation, management and growth of financial wealth. Affluent
individuals often need sophisticated advice and strategic guidance to

8
capitalize on opportunities to preserve, grow and transfer their wealth. In
addition, a desire exists within wealthy families to simplify the management
of multigenerational needs and lessen the profound emotional impact of
wealth on family members. Financial service professionals can best serve
the interests of clients by helping them achieve a balance between the
pursuit of wealth and the use of wealth in ways that can maximize
happiness. Successfully implementing a financial strategy depends upon
how well a wealth manager knows his client and how strong the advisor-
client relationship is. Wealth advisors who can bridge the gap between
wealth satisfaction and the client’s financial goals can create a deeper and
longer lasting advisor-client relationship.

Scope of Portfolio Management

Just like the Indian stock market, the wealth management industry in the
country is on a remarkable growth path. In India, there has been a significant
growth in income and wealth levels over the past few years. Financial
intermediaries have begun to recognize the importance of wealth
management as a profitable business. India, an emerging economy and a
part of the BRIC nations, has a large proportion of younger population (less

9
than 15 years). The percentage of population in the age group of 15-64 is
expected to increase to 65.5% by 2010. As the economy & GDP grows, the
scope for the growth of the wealth management business becomes huge.

The graph below shows India’s GDP growth rate for the past 9 years.

The number of High Net-Worth Individuals (HNIs) as well as the size of the
middle class in India has also been increasing at an impressive rate. A
recent study showed that there are over a hundred thousand HNIs in India.
According to the Asia-Pacific Wealth Report published by Merrill Lynch &
Capgemini, the number of HNIs in India at the end of 2006 grew by 20.5%,
which makes India the second fastest growing population of HNIs in the
Asia-Pacific Region. All these figures definitely augur well for wealth
managers across the country.

In India, there is a noticeable shift of mindset as well. From a generation of

‘savers’, we are slowly, but surely transforming into a generation of
‘investors’. A long-drawn process, to achieve a smooth transition, wealth
managers, private bankers and financial planners have to play a very
significant role. The job of a wealth manager would be to identify and create
an optimum portfolio with a right balance for the client and to convey in
unequivocal terms that they have no interest in selling any particular
financial product to them.
Investment areas in India normally include equities, derivative instruments,
mutual funds, bonds, and of late, commodities. Today, the suite of wealth
management products is expanding into many areas, including insurance,
art, real estate, jewellery advisory, etc. The estimates of the market size vary

10
from Rs. 20,000 crore to Rs. 200,000 crore. The wide range is on account of
the fact that there are various definitions for the wealth management service
and the entry level of wealth to be a wealth management customer varies
from bank to bank, from Rs. 500,000 to Rs. 5 crore.

The table below shows the number of HNIs in the world, segmented by
region, in 2006

HNIs (more than $1 million, in 2006)

Region Number of HNIs Percentage of Regional

Population

Global 9,500,000 0.15%

North America 3,200,000 0.62%

Europe 2,900,000 0.41%

Asia-Pacific 2,600,000 0.06%

Latin America 400,000 0.07%

Middle East 300,000 unknown

Africa 100,000 0.01%

The main players in the wealth management services industry include

HSBC, Standard Chartered, Citibank, BNP Paribas, ICICI Bank, HDFC
Bank, Kotak Mahindra Bank, ABN-Amro Bank, etc., apart from a host of
brokers including DSP Merrill Lynch, JP Morgan, Edelweiss Capital,
Indiabulls, India Infoline, etc.

The world of wealth management services is growing from strength to

strength and banks and other major players are focusing on the affluent
population of society. However, wealth management is still in its infancy.

11
Today, India and China are considered to be economic powerhouses of the
world.
With continuous corporate earnings, individual disposable incomes are on
an exponential growth. This has resulted in the growing number of HNIs in
our country in line with the global phenomenon. The direct outcome of this
soaring growth of the population of HNIs is the increasing interest shown by
banks and other financial institutions in managing the wealth of these
people.

Wealth managers are a much sought after bunch, with their ability to set a
trend and provide investment advice to their clients before the crowd gets
there. There is an immediate need for such wealth management
professionals in the country. This new industry is therefore becoming one of
the most exciting and rewarding professions today.

Fundamentals of Portfolio Management

Managing wealth is a business. Wealth management is an integrated plan

utilizing an array of capabilities that encompass planning, investment
management, trust services and private banking. In other words, wealth
management is a professional service, which is a combination of financial
and investment advices, accounting and tax services, estate management
and administration, succession planning and legal planning, for a fee. The
management of wealth is a vibrant process. Wealth gives rise to uncommon
challenges as well as unique opportunities. Market ripples, portfolio swings,
changes in tax and estate laws make the task of managing the clients’
investments more difficult. Investing in long term investment plans is not as
simple as delivering the wealth to banks or fixed deposits. Investments are
affected by a host of factors like interest rates, inflation, economic
developments, political issues, etc.

Wealth management services are provided by banks, professional trust

companies, financial service providers and brokers. Wealth managers in
India are involved in managing assets of HNIs, NRIs, FIIs, Overseas
Corporate Bodies and Indian Corporates. Today, wealth management
service companies are also providing various financial services like portfolio
management services, securities trading which include online trading in
equities and derivatives, custodial services, service for distribution of
financial products like mutual funds, PPF, postal savings, government
securities and other investment products, insurance products, both life and
general insurance. Besides these, the institutional clients offer merchant
banking services which include private equity, venture capital and loan
syndication.

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The Cycle of Wealth

Most individuals and families go through a series of financial events during

their lives. As they pass each of these stages, their financial strategies need
to change to reflect their evolving needs and financial circumstances. These
different stages are known as the Cycle of Wealth. It is important to gain an
insight and understanding of the cycle of wealth and how each phase has a
profound impact on one's fortunes. The wealth cycle is commonly known to
consist of four pillars - creation, enhancement, preservation and distribution.
• Wealth Creation, also known as ‘start-up’, is the first pillar of the
cycle. It plays a vital role in forming the base for the wealth
accumulation process. Wealth creators are individuals who are in the
early stages of their professional career; generally between 25 & 45;
and tend to have larger financial responsibilities such as mortgages
and credit purchases. Their liabilities tend to be higher than their
income. Financial decisions tend to be mostly short term and they
often adopt the characteristic of an aggressive investor, seeking
ways to maximize the returns on their assets.

• Once wealth is established and created, these individuals; by now in

their mid to late career life; would shift their focus to Wealth
Enhancement. The primary objective of this cycle is to multiply or
enhance the returns on the accumulated assets with lower risks or
better capital protection. This is where, with proper asset allocation,
they are able to determine areas of financial interest and investment
products that suit them in order to generate more income. Managing
the acquired wealth is also crucial at this stage, taking into account
tax considerations and debt management.

• Wealth Preservation starts when one has built up a substantial

amount of wealth. The key strategy is to ensure that wealth is well
managed with protection being the key objective. At this stage, the
portfolio is managed with greater focus to generate income, while
minimizing risk. Many times, individuals or families fail to anticipate
and prepare for this cycle. They focus on accumulating wealth only to
lose almost everything in the end as a result of not having proper
wealth management structure.

• Finally, the Wealth Distribution phase is where one ensures that

one's assets or wealth and even business are transferred or
distributed in the most optimal way and according to one's wishes.
This is also a stage most individuals and families often ignore. Estate

13
 and succession plans should be put in place well in advance to
ensure that the family wealth and the reins of the family business are
handed over to the following generations in an orderly manner. It is
every individual's dream to have financial freedom at retirement or at
the very least, most hope to be free from any debt obligation. This is
achievable if one were to diligently practice the management of
wealth cycle accordingly.

The Cycle of Wealth may also get disturbed due to possible but uncertain
factors in an individual life. In any given year, some families will either be
above or below their typical or average incomes because of some transitory
economic factors, such as, no earning or partial earning due to training
programs, unemployment or business setbacks, timeout from work for family
responsibilities or leisure, irregular or fluctuating incomes characteristic of
certain occupations, etc.

In essence, one needs to understand that, the key to success in using the
wealth cycle, is to know what steps to take and in what order.

Advantages of Portfolio Management

Some of the advantages of portfolio management include:

• Investors would not want to spend much of their valuable time,

• Investors can do away with enduring complicated transactions and

voluminous paperwork,

• It is a better way to manage wealth,

• It provides proper planning of estate or investment of assets based on

personal criteria and financial goals,

• It is the most efficient and profitable use of one’s wealth.

Like newly-wed couples understand each other’s behaviours in pursuit of a

better relationship between them; in the same way, wealth managers and
their clients need to interact with each other to understand each others
requirements better. Wealth management services are like partnering the
investments, their behaviours and psychology. Wealth management should
deliver multi-goal based advice integrated with the customer’s integrated
information. This ability facilitates the customer to be as involved in the
planning procedure as desired, and the investment manager can guide and
advice the customer whenever the need arises.

14
Wealth managers should be familiar with certain focus areas of building a
strong relationship with his client, which are:

• Work on building a lasting, rewarding relationship with every

customer,
• Show commitment to build quality relationships with the customers,
• Assume to provide complete transparency and openness in
managing wealth,
• Maintain consistency in stated investment plan and strategy.

An advisor should be a symbol of integrity. The trust that an investor puts on

the wealth advisor is unconditional. High levels of ethics are required from
the advisor to keep the client’s interest on top of the agenda and sustain
independence and impartiality. The advisor’s opinion and advice should be
honest. Most of the advisors have a professional edge and they work in
tandem with the standards of their respective institutions. Each professional
institution has its own set of codes, rules, ethics and standards which help
the advisor in serving the clients most appropriately.

Wealth management has emerged as a leading trend in the world due to the
confluence of multiple factors, including recent stock market performance,
consumer demands and a shift in the regulatory and legal landscape.
Regardless of some factors being unique to a particular region, the delivery
of a wealth management engagement by establishing deep relations through
providing financial planning, asset management and supporting financial
solutions holds great promise as a business deliverable in any environment
that generates high average revenue per client from an affluent client base.

Practice of Portfolio Management

In today’s fast changing and highly competitive financial markets, it is quite

difficult to earn an impressive rate of return on personal investments that
arise out of the funds saved by an ordinary individual. The quantum usually
is not comparable to the amount invested by large players such as the
corporate houses. One need not compare their investment returns with the
big leaders in the market; rather they need to judiciously plan before
investing. Thus, there is a need to plan the personal investments with care
and intelligence and to pay attention to the mode of pursuit. As individuals,
we are less aware of the risks associated with the investment avenues we
select for investment. However, skilled wealth managers, as trained
professionals, can clearly grasp the criteria for any investment decision.

15
The future is unpredictable and the active management of an investor’s
private wealth is of utmost importance to ensure the well being of himself
and his family. This takes a lot of valuable time and requires special
expertise to manage a portfolio. Just as one would seek out professionals
such as doctors and lawyers to provide them with guidance in their special
areas of expertise, wealth managers provide the professionalism necessary
for the protection and growth of an individual’s assets. However, as we have
seen, the definition of wealth management goes much further than just
providing assistance in the management of wealth. It includes advice in
areas such as tax and inheritance planning, as well as providing assistance
in areas of estate planning, insurance advice and wealth creation. The
wealth management profession is all about becoming the client’s personal,
trusted, professional advisor and providing him with financial solutions
tailored to his needs.

Adam Smith, the father of Economics, in his book ‘Wealth of Nations’, stated
that the wealth of a nation is not the commodities or resource reserves it
has; it exists in the productive knowledge of its people. The ability to make
use of these reserves productively may be said to be the true source of a
nation’s wealth. Broadly, the creation of wealth is based on the knowledge or
the ability to convert the reserves into productive purposes. Mathematically,
we can determine wealth by using a simple formula: Asset – Liabilities = Net
Worth and that net worth of the individual is wealth. Wealth can be created
through different methods, such as by creating a savings account, by
investing in fixed deposits, mutual funds, stocks, bonds or real estate,
having a retirement plan, etc. Investing in a savings scheme will give specific
returns, whereas investing in the stock market will bring high returns, but
with added risk. Similarly, investing in real estate has proved to be a high
wealth creator in the past few years. The present scenario of wealth
management in India is totally different from that which prevailed five years
ago, when the Indian rich class used to send its money offshore to escape
being taxed. Now India’s economic growth has forced them to bring their
money back to India and invest here for better returns.
Most of the wealthy are engaged in business to preserve their wealth for
future generations. Today, investors are also investing openly in IPOs.
Many foreign banks and financial institutions are coming to India with a
variety of financial products and techniques that deal with wealth
management. It seems wealth managers in India will become a busier lot in
the years to come and their role in managing their clients’ wealth will
become more challenging and demanding.

The basic idea of wealth management is to help the individual investors get
a complete perspective on their wealth. A wealth manager is more objective.
The challenge for wealth managers today is to achieve the right balance of
investments in their clients’ portfolio, so as to help them realize their

16
pecuniary ambitions. He first analyses one’s portfolio, finds out the long and
short term goals of the investor and decided on the asset mix that will fetch
the best desired returns given the investor’s risk profile.

Portfolio Manager

A portfolio manager has to focus on three things:

1. Wealth Accumulation – the client’s wealth should grow,

2. Wealth Preservation – the client’s wealth should be well protected,

and

3. Wealth Transfer – smooth transfer of client’s assets to his legal heirs

with minimum cost.

While making an investment decision, a wealth manager must remember the

following four major parameters:

a) Safety:

The amount we invest must remain safe. Investment is not speculation or

gambling, rather it is an intelligent move of postponement of present
consumption of funds with an objective of having an increased amount in
hand available on a future date of consumption.

b) Returns:

The returns on any investment are directly correlated with the amount of risk
involved in that investment. The higher the risk, the higher are the returns.

c) Liquidity:

The ready availability of funds is called liquidity. One should see that the
money is available to us as and when needed. Besides being safe and
profitable, an investment must also have a fair degree of liquidity.

d) Value Appreciation:

If we are investing in assets other than those with fixed income, one must
check for appreciation in the value of the asset. This provides a hedge
against inflation. Investment in gold, real estate, equity shares, art, etc. must
be analyzed from this viewpoint.

17
Thus, intelligence is not only in getting higher returns but also in striking the
right balance between risk, returns, liquidity and value appreciation.

Portfolio Managers Guide to Investment

Here are certain points to guide you through the act of investment for the
client:

• Identify Investment Objectives: a wealth manager must be aware

of his client’s investment objectives. Whether the client wants
abnormal, returns, consistent returns, tax benefits or hedge against
inflation, the client should inform his wealth manager.

• Invest in Available Funds: a wealth manager must work out

emergency funds and ensure to invest only in these available funds.
He should not mix the terms savings and investments. He should
make a strategy to invest the saved funds when an upper limit of
savings is crossed.

• Aware of Limitations: a wealth manager must be aware of his

client’s limitations. In particular, he must be aware of the duration of
the investment. Investments with short or medium durations are
preferred.

• Aware of Risk Level: a wealth manager must be aware of the

client’s risk profile, while keeping an eye on the objectives of their
investments. He must diversify the portfolio by including different
types of assets and investments.

• Diversify: a wealth manager must remember to diversify; not to put

all eggs in one basket. He must try to diversify amongst financial
instruments, among companies and among industries he plans to
invest in.

• Aware of All Investments: a wealth manager must just forget about

an instrument after investing in it, but keep a check on the client’s
portfolio. This would allow him to reduce the risk through
diversification. If needed, modify their investment strategy. This
would ensure optimum performance of the portfolio.

18
 • Aware of Areas of Investment: a wealth manager must decide
where the client’s money should be invested; whether it is in shares,
fixed deposits, mutual funds, insurance, holding cash, etc.

A rule of thumb followed by most wealth managers is given in the table on

the next page. The table tells us what percentage of the client’s funds can
be invested in which avenue, equity or debt or if it should remain in liquid
form, as non-marketable financial assets.

Optimal Investment Decision

Age Strategy Equity Debt Liquid

At 30 years Aggressive 70% 20% 10%

By 50 years Moderate 50% 30% 20%

Retirement Conservative 20% 40% 40%

The client’s personal investment plan depends upon the wealth managers
decisions. Hence, they are required to decide prudentially regarding the
amount, duration, risk level and avenues of the client’s investments.

Financial Products

Financial products are at the heart of a financial service provider's business;

they are what are ‘sold’ to clients. Like any other business, therefore, a
financial service provider must be market-driven and aim to identify and
meet customers' needs on a profitable basis. Customers may be private
individuals or businesses and their financial service needs will range from
needing somewhere safe to keep surplus money to being able to borrow to
meet a cash shortfall or being able to send money to a relative in a rural
area. Someone providing financial services, therefore, has to decide
whether to offer their customers one product or several products and how
much to charge in order to make a sustainable business.

As we have understood in the previous section of this project, wealth

management is the comprehensive mix of asset, debt, tax and risk
management strategies into one single financial solution. Hence, it is
imperative that a wealth manager possess the awareness and knowledge of
the vast and extensive catalogue of financial products & services on offer in

19
 today’s market, in order to advice his clients’ accurately. This catalogue will
be opened and examined in the following pages.

To begin with, the table given on the next page might provide a comparative
picture of investments in various assets or avenues.

Comparative Picture of Investments

Type of Value
Duration Risk Safety Return Liquidity
Asset Appreciation

Governmen Medium Low High Low / Low No

t Securities / Long Moderate

Bank Medium Low High Low / High No

Deposits Moderate

Post Office Medium Low High Low / Low / No

Savings Moderate Moderat
e

20
Debentures Medium Moderat Moderat Moderate Low / No
/ Long e e Moderat
e

Preference Medium Moderat Moderat Moderate Moderat No

Shares / Long e e e

Convertible Medium Moderat Moderat Moderate / Low / Sometimes

Debentures / Long e / High e / Low Low Moderat
e

Bonds Medium Moderat Moderat Moderate Low No

/ Long e e / Low

Mutual Medium Moderat High / Moderate / Moderat Yes

Funds / Long e Moderat High e / High
e

Equity Long High Low Unpredictabl High / Unpredictable

Shares e Low

Physical Long Moderat Low Unpredictabl Low Unpredictable

Assets e / High e
(e.g.: Gold,
Silver, Real
Estate)

Identification of the Right Investment Avenue

Investment Products are the tools of the trade for financial advisors; hence it
is vital that they understand the various options available. It is essential that
wealth managers have an in-depth knowledge of this range of investment
classes before combining them into a portfolio or selecting specific assets or
investment products.

21
Though investment opportunities are thriving all the time and in almost all
situations, often they may not be very easy to identify. A shrewd and
discerning wealth manager will usually find opportunities for making money
in places, and in situations, where a less discerning one will not. The best
investment opportunities are often found in the most unlikely places and
situations.

For example, in the beginning of 1994, few could have predicted that the
shares of the then relatively unknown company like Infosys Technologies,
focusing primarily on Y2K software projects, would provide one of the best
investment opportunities of the last decade.

Let us consider some typical situations, which provide excellent investment

opportunities:

1. Changes in Government Policies:

Major changes in government policies often benefit some companies by

opening up new avenues for growth and higher profits and such companies
provide excellent investment opportunities for investors who are quick in
recognizing the implications of such policy changes. In the early 1980s,
removal of price controls over cement ushered in a period of high growth for
ACC and other cement companies. In 1988, the lifting of price controls over
aluminium boosted the profits of companies, like Hindustan Aluminium and
Indian Aluminium. Changes in government policy can also sometimes affect
a company adversely. If you are a shareholder and are quick to foresee the
implication of such a change, you can sell your shares before their prices
begin to fall. Shrewd investors reacted quickly to these disadvantageous
budgetary provisions and immediately offloaded their steel shares. However,
these detrimental changes in excise and customs duties did not necessarily
imply the death-knell of the steel industry. The long-term prospects of well-
managed steel companies continue to be bright, notwithstanding the
inevitable erosion of their profits in the short run due to increased
competition from cheaper imports.

2. Technological innovations:

We are living in a society, which is being increasingly dominated by

technology. Accordingly, alert investors on the lookout for big gains will find
suitable investment opportunities in companies, which go in for technological

22
innovations in a big way. For example, IT services companies, bio-
technology companies and telecommunication companies are major
beneficiaries of technological changes.

3. Anticipating the future:

The best investment opportunities are available to those who can

successfully anticipate the future. If you can identify the future areas or
directions of growth, you would have identified when and where to invest for
maximum returns. Making an accurate assessment of future conditions and
future growth areas is not as easy as it sounds; it involves a lot of study and
analysis. If you want to be a successful investor, such study and analysis
are very necessary. Investment is an activity, which by its very nature
involves looking into the future. Unless one looks into the future and forms a
personal viewpoint on what it would be like, they will not be able to decide
where and when to invest their money. For an investor, anticipating the
future is unavoidable. The best way to anticipate the future is to be always
alert to what is happening around you. The seeds of the future are present
today.

4. International trends:

Globalisation is the buzzword since the 1990s. No country in the world can
now hope to remain immune from the influence of international economic
trends. As a result, it has now become imperative for Indian stock market
investors to keep a close watch on international economic developments
and to analyse their likely impact on the performance of Indian companies.
In the 21st century, a stock market investor who is aware of what is
happening in the larger world beyond India’s borders and who keeps a close
tab on major international developments will definitely find himself in a more
advantageous position vis-à-vis an inward-looking investor whose
awareness is confined only to what happens within the country.

Financial Products & Services

23
The broad range of customer’s needs have put a big challenge before
wealth managers to come up with different business models to service these
different segments. The major players in the segments are large Indian
domestic brokerage houses, professional portfolio managers, banks and
even mutual fund houses.

The factor that determines success of wealth managers in the Indian

markets is the ability to tap proper channels and diversification of portfolio.
Indian mutual fund industry has come up ages in terms of managing wealth.
During the market plunge in May 2006, mutual fund industry grew like never
before and proved itself as a true contrarian fund that the market could
recon with. Mutual fund industry has been coming up with different options
for investors. Particularly retail investors have been putting their money in
mutual funds, which is a good sign for the future of the Indian capital
markets.

While on the subject of retail investors in wealth management, there are

various avenues available in the capital markets now. The trigger lies in the
SIP or systematic investment plan. However, ELSS or Equity Linked Saving
Scheme is one of the best options available in the markets today.
The main benefit of ELSS is the tax advantage under Section 80C, where
the assessee gets the deduction from its taxable income up to Rs.100,000
per year on investments under the scheme. These funds also give
handsome returns in the future.

Among the various other options available in the market presently, the real
estate sector in India today, is witnessing a wide spectrum of changes and is
certainly a preferred investment avenue for the investors. The euphoria
about this sector can be assessed by the number of mutual funds vying for
this sector. Presently, they are intended for HNIs, the days may not be far
for wealth managers looking at this segment for his retail clients as well. The
changing demographic equations, the rising income levels, increasing
urbanization and the spread of township projects have been the major
success factors for growth in residential property. At the same time,
commercial space requirements across a range of industries have seen the
increase in demand for extra space. Hence, this option of investment may
be a good avenue in the present context.

In the present scenario, apart from the common investment in precious

metals like gold and silver, art has also become a reliable capital asset. Now
financial institutions are prepared to invest in art as part of a diversified
portfolio. Analysts believe that investment in art for HNIs too would fetch
more gains in the future, in comparison to equity shares.

24
Mutual Funds
A mutual fund is a form of collective investment that pools money from many
investors and invests their money in stocks, bonds, short-term money
market instruments, and other securities. The income earned through these
investments and the capital appreciations realized are shared by its unit
holders in proportion to the number of units owned by them. The value of a
share of the mutual fund, known as the net asset value per share (NAV), is
calculated daily based on the total value of the fund divided by the number
of shares currently issued and outstanding.

The NAV is the current market value of a fund's holdings, usually expressed
as a per-share amount. For most funds, the NAV is determined daily,
after the close of trading on some specified financial exchange, but some
funds update their NAV multiple times during the trading day.

The flow chart below describes broadly the working of a mutual fund:

Mutual Fund Operation Flow Chart

25
Mutual Funds – Organization

There are many entities involved and the diagram below illustrates the
organizational set up of a mutual fund:

Organization of a Mutual Fund

Mutual Funds - The Global Perspective

Mutual Funds as a concept developed in the early 20th century. But the idea
of pooling together money for investment purposes started in Europe in the
mid-1800s mainly in Netherlands and Scotland followed by Belgium,
England and France. Though today the largest market of Mutual Funds is
USA yet the first Mutual Fund that was launched in USA is the New York
Stock Trust in 1889 followed by the widely known open-ended
Massachusetts Investors Trust in 1924, now called the MFS. These
developments led to the establishment of Fidelity Investments that today is
the world’s largest MF Company and other companies like Pioneer, Scudder
and Putnum funds. MFs were initially termed as trusts.

26
The Indian mutual fund industry: Trends mirror the US

The mutual fund industry in the United States (US) and India share many
common traits. The US fund industry has a rather long history of eighty
years compared to its Indian counterpart which came into being with the
launch of the first scheme Unit 64. Considering the mutual fund industries in
both the countries share a few common traits, there could be some lessons
for the Indian Mutual Fund Industry and also the course it may take in times
to come.

Sharp growth in US fund industry

In the global context Mutual funds have long been a popular investment
avenue with assets under management (AUM) exceeding 60% of the gross
domestic product (GDP) in developed markets like the US. Historically, US
investors have been net buyers of equity mutual funds. Major drivers for that
behavior have been the need to build capital for retirement and the
knowledge that the average historical returns on equities have exceeded
that of bond funds. As in prior years, US households remain net buyers of
socks and bond through mutual funds and net sellers of these securities
through other means. The number of US households owning mutual funds
reached 54.9 million as of December 2006. As a result, close to half of the
estimated 114.37 million US households now own mutual funds, and an
estimated 96 million individual shareholders in those households invest in
funds.

The Indian mutual fund industry follows suit

In India mutual funds have been able to command significant investor

appetite only in the recent past with the increasing presence of private
sector mutual funds and a distinct shift in investor preferences towards
mutual funds. This has resulted in the AUM of mutual funds growing around
3.5 times from March 1999. Further the share of the Indian mutual fund
industry in the global pie has doubled in this period. The shift in investor
preference towards mutual funds has been facilitated by fiscal incentives,
availability of higher choices to investors, the gradual change in risk profile
of the investors, increasing returns from equity funds due to good
performance of equity markets as well as the attempts by the SEBI.

Comparative Analysis

The US Mutual Fund industry is twice as old as its Indian counterpart. The
AUM in US is more than 200 times the Indian counterpart at $10.57 trillion.
The Indian industry has to cover a lot of ground to narrow the gap. However,

27
in other areas, the distance between the two industries is not much. For
example, the breadth of the regulatory framework in Indian is more or less
comparable to the US. In the product offering too, the Indian fund industry is
very close to US. Their long history gives the US market more depth though.
The distribution channels in India have to improve substantially as the funds
have so far not been able to reach the smaller towns.

The way forward

While the AUM of the Indian mutual fund industry as a percentage of GDP
has increased from 3% in 1999 to about 5% in 2003, it still pales in
comparison to the size of this sector in other countries both in developed
and developing world.

Country AUM as % of GDP

India 5.16%
Australia 99.91%
Brazil 38.15%
Canada 43.99%
France 64.58%
Germany 10.67%
Hong Kong 259.12%
Japan 10.43%
Korea 25.27%
United Kingdom 24.95%
USA 71.50%

Table 1: Global mutual fund industry (AUMs as a percentage of GDP as

of 2009)

However, one must look at this more from the view of the huge growth
potential available for the Indian mutual fund industry even if it is able to

28
reach 35% levels of a country like Brazil leave alone the US or Hong Kong.
Indian mutual funds will thrive in the financial landscape if the Indian investor
is better informed about the benefits of investment in mutual funds as
compared to alternative investment avenues. Once this is done, this industry
would be on course to expand and meet the demands of the broad spectrum
of investors who would like to experiment with new investment opportunities.
This would pave the way for the mutual fund industry to become the primary
investment vehicle for the retail investors. Much would also depend on the
way the expectations are created and fulfilled by the fund industry.

Mutual Funds Industry in India

The Indian mutual fund industry has already opened up many exciting
investment opportunities to the Indian investors. We have started witnessing
the phenomenon of more savings now being entrusted to the funds. Despite
the expected continuing growth in the industry mutual fund is still a new
financial intermediary in India. The Indian equity market has gained
significantly in the last one year and mutual funds are not left far behind.
Both the avenues have created wealth for the investors. But the equity
market has attracted much more attention than the mutual fund market. The
reason behind this is in India the investment in equity market has been there
since long whereas the mutual fund market is still growing. For the creation
of wealth through this avenue a proper understanding of mutual fund is
must.
The origin of mutual fund industry in India is with the introduction of the
concept of mutual fund by UTI in the year 1963. Though the growth was
slow, but it accelerated from the year 1987 when non-UTI players entered
the industry.

In the past decade, Indian mutual fund industry had seen dramatic
improvements, both quality wise as well as quantity wise. Before, the
monopoly of the market had seen an ending phase; the Assets Under
Management (AUM) was Rs. 67bn. The private sector entry to the fund
family raised the AUM to Rs. 470 billion in March 1993 and till April 2007; it
reached the height of 4850 bn. Putting the AUM of the Indian Mutual Funds
Industry into comparison, the total of it is less than the deposits of SBI alone,
constitute less than 11% of the total deposits held by the Indian banking
industry.
The main reason of its poor growth is that the mutual fund industry in India is
new in the country. Large sections of Indian investors are yet to be
familiarized with the concept. Hence, it is the prime responsibility of all
mutual fund companies, to market the product correctly abreast of selling.

29
The mutual fund industry can be broadly put into four phases according to
the development of the sector. Each phase is briefly described as under.

First Phase - 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It

was set up by the Reserve Bank of India and functioned under the
Regulatory and administrative control of the Reserve Bank of India. In 1978
UTI was de-linked from the RBI and the Industrial Development Bank of
India (IDBI) took over the regulatory and administrative control in place of
RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end
of 1988 UTI had Rs.6, 700 crores of assets under management.

Second Phase - 1987-1993 (Entry of Public Sector Funds)

Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by
Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug
89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of
Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in 1990. The end of
1993 marked Rs.47, 004 as assets under management.

Third Phase - 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian
mutual fund industry, giving the Indian investors a wider choice of fund
families. Also, 1993 was the year in which the first Mutual Fund Regulations
came into being, under which all mutual funds, except UTI were to be
registered and governed. The erstwhile Kothari Pioneer (now merged with
Franklin Templeton) was the first private sector mutual fund registered in
July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more
comprehensive and revised Mutual Fund Regulations in 1996. The industry
now functions under the SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign
mutual funds setting up funds in India and also the industry has witnessed
several mergers and acquisitions. As at the end of January 2003, there were
33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust of
India with Rs.44, 541 crores of assets under management was way ahead of
other mutual funds.

Fourth Phase - since February 2003

30
This phase had bitter experience for UTI. It was bifurcated into two separate
entities. One is the Specified Undertaking of the Unit Trust of India with AUM
of Rs.29,835 crores (as on January 2003). The Specified Undertaking of
Unit Trust of India, functioning under an administrator and under the rules
framed by Government of India and does not come under the purview of the
Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and
LIC. It is registered with SEBI and functions under the Mutual Fund
Regulations. With the bifurcation of the erstwhile UTI which had in March
2000 more than Rs.76,000 crores of AUM and with the setting up of a UTI
Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with
recent mergers taking place among different private sector funds, the mutual
fund industry has entered its current phase of consolidation and growth. As
at the end of September, 2004, there were 29 funds, which manage assets
of Rs.153108 crores under 421 schemes.

Industry AUM

250000

200000

150000
AUM
100000

50000

0
1988 1993 2003 2004 2005 2006
Year

AUM (Rs in Crores)

GROWTH IN ASSETS UNDER MANAGEMENT

The following figure shows the growth in AUM of the Indian MF Industry from
March, 1965 to March, 2006. There has been a decrease in the AUM of the
industry from January, 2003 to March, 2003. The reason for the fall in the
AUM from Rs. 121805 crores in Jan 2003 to Rs. 79464 crores in March

31
2003 was because of the bifurcation of UTI into two separate entities – UTI
and UTI Mutual Fund.

Product Focus

From the time UTI was set up, till the entry of private players, the primary
focus of the MF Industry was to offer different products. During this time
there was an array of products categorized primarily based on two factors.
One was the way the schemes were traded and the other was through
different composition of debt and equity securities in the scheme.

By trading of schemes:

 Open Ended Schemes

 Closed Ended Schemes

In an open-ended scheme there are no limits on the total size of the corpus.
Investors are permitted to enter and exit the open-ended scheme at any
point of time at a price that is linked to the net asset value (NAV). In case of
close-ended schemes, the total size of the corpus is limited by the size of
the initial offer.
The entry and exit of investors is possible by only trading on the stock
exchanges. Due to liquidity constraints posed by close-ended funds, they

32
were soon rendered obsolete and most of the prevailing schemes today are
open-ended schemes.

By Composition of Debt and Equity in the Scheme:

 Growth Schemes
 Income Schemes
 Balanced Schemes
 Money Market Schemes

The funds were segregated based on the composition of debt and equity in
various schemes. Growth Schemes invested more in Equity with a long-term
perspective of Capital Gains where as Income Schemes invested in fixed
income debt securities. Balanced funds also known as Hybrid funds tried to
derive advantage of both debt and equity by investing in both. Money Market
Schemes invested in short term liquid securities.

In this Product Focus Stage the primary aim of the fund houses was to offer
an array of products and due too a very few number of players there were
no dearth of subscribers.

Distribution Focus

Till 2-3 years after the entry of private sector players in 1993 the product
focus approach was prevalent. To begin with, the private sector companies
introduced the same products offered from the pubic sector players and
promised higher returns. Soon they realized that they needed to make a
distinction on some other parameter as well, they focused on Distribution. As
it was difficult and time consuming to replicate the wide-spread distribution
structure of Agents set up by UTI, they encouraged third-party distribution
companies to distribute their products all over India. Specialist distribution
companies such as Karvy, Bajaj Capital, and Integrated Enterprises etc. had
emerged. Special focus was given to investor servicing so that investors
could experience better servicing standards from private players.

While the focus on improved Distribution and better customer servicing led
to private players being in a position to compete against UTI, but it also had
its share of problems. In a rush to sell high volumes and there by earn fee
based income many a times resulted in selling the wrong product to the

33
wrong customer. A Growth product, which is inherently risky, was sold to old
and retired people who should have been sold something which gave them
fixed and regular income. This led to the dissatisfaction of customers, which
led to a more customer ownership focus approach.

Customer Ownership Focus

The Asset management Companies started to segment their customers

according to their needs. The categorization happened into institutional
segment and individual investor segment. The institutional segment
consisted of treasury departments of Corporates, Trusts etc and suitable
products such as Institutional Income schemes and Money Market schemes
were targeted at them. The Individual investor was further segmented into
Young Families with small or no children, Middle-aged People saving for
retirement and Retired People looking for steady income. Suitable products
such as Growth and Balanced schemes for young families and Income
schemes for retired people were marketed. With the help of customer centric
approach the Mutual Fund Companies hoped to regain the confidence of the
investor.

Specialized Product & Service Focus

The trends in the recent past show that the Companies have been taking the
above customer centric approach further by designing and launching
dedicated products and services. As awareness levels of individual investors
go up, focus is on identifying one's investment needs depending on one's
financial goals, risk taking ability and time horizon. Investors chose
companies, which help them in the above through specialized products and
services.

34
Types of mutual funds

 Open-end Fund

An open-end(ed) fund is a collective investment which can issue and

redeem units at any time. An investor can purchase units in such
funds directly from the mutual fund company, or through a brokerage
house. Being open-ended means that, at the end of every day, the
fund issues new units to investors and buys back units from investors
wishing to exit the fund.

An open-ended fund is equitably divided into units which vary in price

in direct proportion to the variation in value of the funds net asset
value. Each time money is invested new units are created to match
the prevailing unit price; each time units are redeemed the assets
sold match the prevailing unit price. In this way there is no supply or
demand created for units and they remain a direct reflection of the
underlying assets.

Open-ended funds are available in most developed countries;

however terminology and operating rules vary. For example in the
U.S. they are called mutual funds, in the UK they are either unit trusts
or OEICs (Open-Ended Investment Companies).

 Closed-end fund

35
 Closed-end Fund is a collective investment scheme with a limited
number of units. New units are rarely issued after the fund is
launched; units are not normally redeemable for cash or securities
until the fund liquidates. Typically an investor can acquire units in a
closed-end fund by buying shares on a secondary market from a
broker, market maker, or other investor - as opposed to an open-end
fund where all transactions eventually involve the fund company
creating new shares on the fly (in exchange for either cash or
securities) or redeeming shares (for cash or securities).

The price of a share in a closed-end fund is determined partially by

the value of the investments in the fund, and partially by the premium
(or discount) placed on it by the market. The total value of all the
securities in the fund divided by the number of shares in the fund is
called NAV. The market price of a fund share is often higher or lower
than the NAV: when the fund's share price is higher than NAV it is
said to be selling at a premium; when it is lower, at a discount to the
NAV.

Like a company going public, a closed-end fund will have an initial

public offering of its shares at which it will sell, say, 10 million shares
for Rs.10 each. That will raise Rs.100 million for the fund manager to
invest. At that point, however, the fund's 10 million shares will begin
to trade on a secondary market.
Any investor who wishes to buy or sell fund shares at that point will
have to do so on the secondary market. Except for exceptional
circumstances, closed-end funds do not redeem their own shares.
Nor, typically, do they sell more shares after the IPO (although they
may issue preferred stock, in essence taking out a loan secured by
the portfolio).

 Equity Funds

Equity funds, which consist mainly of stock investments, are the most
common type of mutual fund. Equity funds hold a large part of all
amounts invested in mutual funds. Often equity funds focus
investments on particular strategies and certain types of issuers.

 Debt Funds

Debt funds are those that pre-dominantly invest in debt securities.

They are also known as ‘Income Funds’. Debt securities comprise of
long term instruments such as bond issues by central or state
government, public sector organizations, public financial institutions
and private sector companies.

36
  Funds of Funds

Funds of funds (FoF) are mutual funds which invest in other

underlying mutual funds (i.e., they are funds comprised of other
funds). The funds at the underlying level are typically funds which an
investor can invest in individually. A fund of funds will typically charge
a management fee which is smaller than that of a normal fund
because it is considered a fee charged for asset allocation services.
The fees charged at the underlying fund level do not pass through the
statement of operations, but are usually disclosed in the fund's annual
report, prospectus, or statement of additional information.

The fund should be evaluated on the combination of the fund-level

expenses and underlying fund expenses, as these both reduce the
return to the investor.

Most FoFs invest in affiliated funds (i.e., mutual funds managed by

the same advisor), although some invest in funds managed by other
(unaffiliated) advisors. The cost associated with investing in an
unaffiliated underlying fund is most often higher than investing in an
affiliated underlying because of the investment management research
involved in investing in fund advised by a different advisor. Recently,
FoFs have be classified into those that are actively managed (in
which the investment advisor reallocates frequently among the
underlying funds in order to adjust to changing market conditions) and
those that are passively managed (the investment advisor allocates
assets on the basis of on an allocation model which is rebalanced on
a regular basis).

Stocks

In financial markets, a share is a unit of account for various financial

instruments. The income received from shares is called a dividend, and a
person who owns shares is called a shareholder.

A share is one of a finite number of equal portions in the capital of a

company, entitling the owner to a proportion of distributed, non-reinvested
profits known as dividends and to a portion of the value of the company in
case of liquidation.

Stock typically takes the form of shares of common stock. As a unit of

ownership, common stock typically carries voting rights that can be
exercised in corporate decisions. Preferred stock differs from common
stock in that it typically does not carry voting rights but is legally entitled to

37
receive a certain level of dividend payments before any dividends can be
issued to other shareholders. Convertible preferred stock is preferred stock
that includes an option for the holder to convert the preferred shares into a
fixed number of common shares, usually anytime after a predetermined
date. Shares of such stock are called "convertible preferred shares".

A shareholder is an individual or company that legally owns one or more

shares. Shareholders are granted special privileges depending on the class
of stock, including the right to vote (usually one vote per share owned) on
matters such as elections to the board of directors, the right to share in
distributions of the company's income, the right to purchase new shares
issued by the company, and the right to a company's assets during a
liquidation of the company.

Trading

A stock exchange is an organization that provides a marketplace for either

physical or virtual trading shares, bonds and warrants or other financial
products where investors (represented by stock brokers) may buy and sell
shares of a wide range of companies.

There are various methods of buying and financing stocks. The most
common means is through a stock broker. Whether they are a full service or
discount broker, they arrange the transfer of stock from a seller to a buyer.
Most trades are actually done through brokers listed with a stock exchange.
There are many different stock brokers from which to choose, such as full
service brokers or discount brokers. The full service brokers usually charge
more per trade, but give investment advice or more personal service; the
discount brokers offer little or no investment advice but charge less for
trades.

There are other ways of buying stock besides through a broker. One way is
directly from the company itself. If at least one share is owned, most
companies will allow the purchase of shares directly from the company
through their investor relations departments. However, the initial share of
stock in the company will have to be obtained through a regular stock
broker.
Another way to buy stock in companies is through Direct Public Offerings
which are usually sold by the company itself. A direct public offering is an
initial public offering in which the stock is purchased directly from the
company, usually without the aid of brokers.

Selling stock is procedurally similar to buying stock. Generally, the investor

wants to buy low and sell high, if not in that order (short selling); although a

38
number of reasons may induce an investor to sell at a loss, e.g., to avoid
further loss. As with buying a stock, there is a transaction fee for the broker's
efforts in arranging the transfer of stock from a seller to a buyer. This fee can
be high or low depending on which type of brokerage, discount or full
service, handles the transaction. After the transaction has been made, the
seller is then entitled to all of the money. An important part of selling is
keeping track of the earnings. Importantly, on selling the stock, in
jurisdictions that have them, capital gains taxes will have to be paid on the
additional proceeds, if any, that are in excess of the cost basis.

Bombay Stock Exchange (BSE)

As the first stock exchange in India, the Bombay Stock Exchange is

considered to have played a very important role in the development of the
country's capital markets. The Bombay Stock Exchange is the largest of 22
exchanges in India, with over 6,000 listed companies. It is also the fifth
largest exchange in the world, with market capitalization of $466 billion.

The Bombay Stock Exchange uses the BSE Sensex, an index of 30 large,
developed BSE stocks. This index gives a measure of the overall
performance of the Bombay Stock Exchange, and is closely followed around
the world. Based on the Sensex, the BSE equity market has grown
significantly since 1990.

In addition to individual stocks, the BSE also has a market in derivatives,

which was the first to be established in India. Listed derivatives on the
exchange include stock futures and options, index futures and options, and
weekly options.

The Bombay Stock Exchange is also actively involved with the development
of the retail debt market. The debt market in India is considered extremely
important, as the country continues to develop and depends on this type of
investment for growth. Until recently, the debt market in India was limited to
a wholesale market, with banks and financial institutions as the only
participants. The Bombay Stock Exchange believes that a retail market will
bring great opportunities to individual investors through better diversification.

The BSE is also one of the busiest stock exchanges in the world, currently
ranking around number five in terms of annual transactions. The exchange
has experienced explosive growth with a four-fold increase in trading volume
over the last 15 years.

39
History of the Bombay Stock Exchange:

The Bombay Stock Exchange is known as the oldest exchange in Asia. It

traces its history to the 1850s, when stockbrokers would gather under
banyan trees in front of Mumbai's Town Hall. The location of these meetings
changed many times, as the number of brokers constantly increased. The
group eventually moved to Dalal Street in 1874 and in 1875 became an
official organization known as 'The Native Share & Stock Brokers
Association'. In 1956, the BSE became the first stock exchange to be
recognized by the Indian Government under the Securities Contracts
Regulation Act.

The Bombay Stock Exchange developed the BSE Sensex in 1986, giving
the BSE a means to measure overall performance of the exchange. In 2000
the BSE used this index to open its derivatives market, trading Sensex
futures contracts. The development of Sensex options along with equity
derivatives followed in 2001 and 2002, expanding the BSE's trading
platform.

Vision and Security of the BSE

The vision of the Bombay Stock Exchange is "Emerge as the premier Indian
stock exchange by establishing global benchmarks." That means the
exchange is thinking big in terms of customer service and trading activity.
That being said, the market has not only experienced explosive growth in
terms of trading volume, but also in terms of overall return to investors.

After compensating for inflation, the BSE has averaged a roughly 18%
annual return when measured by Sensex - the most popular stock index in
India - over the last 15 years. Other important indices originating from the
Bombay exchange include

 BSE 100
 BSE 500
 BSEPSU
 BSEMIDCAP
 BSESMLCAP
 BSEBANKEX

Protecting the interests of investors dealing in securities is one of the

primary objectives of the exchange. The exchange provides this additional
security by ensuring remedy of grievances whether this is against member
companies or member/brokers. Overall guidelines for the marketplace are
established by the Securities and Exchange Board of India (SEBI).

40
The Bombay Stock Exchange has a national reach in India, claiming a
presence in over 400 towns and cities throughout the country. The
exchange is operated through a unique and propriety computer system
known as the "BSE on Line Trading System" or BOLT. The exchange has
also received ISO 9001:2000 certification in the areas of surveillance and
clearing / settlement functions.

BSE Facts and Figures

The follow are some of the facts and figures that can help you get a better
feel for the volume of trading that occurs on the Bombay Stock Exchange:

 In 2007, the average volume of business conducted on the BSE

was approximately $30 billion each month.

 The number of shares traded each month on the BSE is in the

range of 40 - 50 million.

 The total market capitalization for the companies traded on the

BSE is in the area of $1.6 trillion. All of the above dollar values are
stated in USD.

Following is the timeline on the rise and rise of the Sensex through Indian
stock market history.

1000, July 25, 1990 On July 25, 1990, the Sensex touched the magical four-
digit figure for the first time and closed at 1,001 in the wake of a good
monsoon and excellent corporate results.

2000, January 15, 1992 On January 15, 1992, the Sensex crossed the
2,000-mark and closed at 2,020 followed by the liberal economic policy
initiatives undertaken by the then finance minister and current Prime Minister
Dr Manmohan Singh.

3000, February 29, 1992 On February 29, 1992, the Sensex surged past
the 3000 mark in the wake of the market-friendly Budget announced by the
then Finance Minister, Dr Manmohan Singh.

4000, March 30, 1992 On March 30, 1992, the Sensex crossed the 4,000-
mark and closed at 4,091 on the expectations of a liberal export-import
policy. It was then that the Harshad Mehta scam hit the markets and Sensex
witnessed unabated selling.

41
5000, October 8, 1999 On October 8, 1999, the Sensex crossed the 5,000-
mark as the BJP-led coalition won the majority in the 13th Lok Sabha
election.

6000, February 11, 2000 On February 11, 2000, the infotech boom helped
the Sensex to cross the 6,000-mark and hit and all time high of 6,006.

7000, June 20, 2005 On June 20, 2005, the news of the settlement between
the Ambani brothers boosted investor sentiments and the scrips of RIL,
Reliance Energy [Get Quote], Reliance Capital [Get Quote], and IPCL [Get
Quote] made huge gains. This helped the Sensex crossed 7,000 points for
the first time.
8000, September 8, 2005 On September 8, 2005, the Bombay Stock
Exchange's benchmark 30-share index -- the Sensex -- crossed the 8000
level following brisk buying by foreign and domestic funds in early trading.

9000, November 28, 2005 The Sensex on November 28, 2005 crossed the
magical figure of 9000 to touch 9000.32 points during mid-session at the
Bombay Stock Exchange on the back of frantic buying spree by foreign
institutional investors and well supported by local operators as well as retail
investors.

10,000, February 6, 2006 The Sensex on February 6, 2006 touched 10,003

points during mid-session. The Sensex finally closed above the 10K-mark on
February 7, 2006.

11,000, March 21, 2006 The Sensex on March 21, 2006 crossed the
magical figure of 11,000 and touched a life-time peak of 11,001 points
during mid-session at the Bombay Stock Exchange for the first time.
However, it was on March 27, 2006 that the Sensex first closed at over
11,000 points.

12,000, April 20, 2006 The Sensex on April 20, 2006 crossed the 12,000-
mark and closed at a peak of 12,040 points for the first time.

13,000, October 30, 2006 The Sensex on October 30, 2006 crossed the
magical figure of 13,000 and closed at 13,024.26 points, up 117.45 points or
0.9%. It took 135 days for the Sensex to move from 12,000 to 13,000 and
123 days to move from 12,500 to 13,000.

14,000, December 5, 2006 The Sensex on December 5, 2006 crossed the

14,000-mark to touch 14,028 points. It took 36 days for the Sensex to move
from 13,000 to the 14,000 mark.

42
15,000, July 6, 2007 The Sensex on July 6, 2007 crossed the magical figure
of 15,000 to touch 15,005 points in afternoon trade. It took seven months for
the Sensex to move from 14,000 to 15,000 points.

16,000, September 19, 2007 The Sensex scaled yet another milestone
during early morning trade on September 19, 2007. Within minutes after
trading began, the Sensex crossed 16,000, rising by 450 points from the
previous close. The 30-share Bombay Stock Exchange's sensitive index
took 53 days to reach 16,000 from 15,000. Nifty also touched a new high at
4659, up 113 points.

The Sensex finally ended with its biggest-ever single day gain of 654 points
at 16,323. The NSE Nifty gained 186 points to close at 4,732.

17,000, September 26, 2007 The Sensex scaled yet another height during
early morning trade on September 26, 2007. Within minutes after trading
began, the Sensex crossed the 17,000-mark. Some profit taking towards the
end, saw the index slip into red to 16,887 - down 187 points from the day's
high. The Sensex ended with a gain of 22 points at 16,921.
18,000, October 09, 2007 The BSE Sensex crossed the 18,000-mark on
October 09, 2007. It took just 8 days to cross 18,000 points from the 17,000
mark. The index zoomed to a new all-time intra-day high of 18,327. It finally
gained 789 points to close at an all-time high of 18,280.

The market set several new records including the biggest single day gain of
789 points at close, as well as the largest intra-day gains of 993 points in
absolute term backed by frenzied buying after the news of the UPA and Left
meeting on October 22 put an end to the worries of an impending election.

19,000, October 15, 2007 The Sensex crossed the 19,000-mark backed by
revival of funds-based buying in blue chip stocks in metal, capital goods and
refinery sectors. The index gained the last 1,000 points in just four trading
days. The index touched a fresh all-time intra-day high of 19,096, and finally
ended with a smart gain of 640 points at 19,059.The Nifty gained 242 points
to close at 5,670.

20,000, October 29, 2007 The Sensex crossed the 20,000 mark on the
back of aggressive buying by funds ahead of the US Federal Reserve
meeting. The index took only 10 trading days to gain 1,000 points after the
index crossed the 19,000-mark on October 15. The major drivers of today's
rally were index heavyweights Larsen and Toubro, Reliance Industries, ICICI
Bank, HDFC Bank and SBI among others.

The 30-share index spurted in the last five minutes of trade to fly-past the
crucial level and scaled a new intra-day peak at 20,024.87 points before

43
ending at its fresh closing high of 19,977.67, a gain of 734.50 points. The
NSE Nifty rose to a record high 5,922.50 points before ending at 5,905.90,
showing a hefty gain of 203.60 points.

21,000, January 8, 2008 The Sensex crossed the 21,000 mark in intra-day
trading after 49 trading sessions. This was backed by high market
confidence of increased FII investment and strong corporate results for the
third
quarter.
However, it
later fell
back due
to profit
booking.

Sensex Constituents

Name Sector
ACC Ltd. Housing Related
Ambuja Cements Ltd. Housing Related
Bajaj Auto Ltd. Transport Equipments
Bharat Heavy Electricals Ltd. Capital Goods
Bharti Airtel Ltd. Telecom
Cipla Ltd. Healthcare
DLF Ltd. Housing Related
Grasim Industries Ltd. Diversified
HDFC Finance
HDFC Bank Ltd. Finance
Metal, Metal Products &
Hindalco Industries Ltd. Mining
Hindustan Unilever Ltd. FMCG
ICICI Bank Ltd. Finance
Infosys Technologies Ltd. Information Technology

44
 ITC Ltd. FMCG
Larsen & Toubro Limited Capital Goods
Mahindra & Mahindra Ltd. Transport Equipments
Maruti Suzuki India Ltd. Transport Equipments
NTPC Ltd. Power
ONGC Ltd. Oil & Gas
Ranbaxy Laboratories Ltd. Healthcare
Reliance Communications Limited Telecom
Reliance Energy Ltd. Power
Reliance Industries Ltd. Oil & Gas
Satyam Computer Services Ltd. Information Technology
State Bank of India Finance
Tata Consultancy Services
Limited Information Technology
Tata Motors Ltd. Transport Equipments
Metal, Metal Products &
Tata Steel Ltd. Mining
Wipro Ltd. Information Technology

Life Insurance

Life insurance or life assurance is a contract between the policy owner and
the insurer, where the insurer agrees to pay a sum of money (SA) upon the
occurrence of the insured event. In return, the policy owner (proposer)
agrees to pay a stipulated amount (premium) at regular intervals.

Insured events that may be covered include:

• Death (Natural or Accidental)

• Diagnosis of a critical illness
• Permanent/Temporary disability
• Requirement for long term care
• Withdrawal of Premium

45
Life Insurance Products
Plans of Insurance

Term Insurance Endowment

Risk Cover Only Survival Benefit
No Survival Benefit Risk Cover

 Term Insurance

Term assurance is a straightforward protection tool. A policy holder

insures his life for a specified term. If he dies before that specified term is
up, his estate or named beneficiary (ies) receives a payout. If he does
not die before the term is over, he receives nothing. In the past these
policies would almost always exclude suicide. However, after a number
of court judgments against the industry, payouts do occur on death by
suicide after completion of one year (presumably except for in the
unlikely case that it can be shown that the suicide was just to benefit
from the policy). However, a death benefit will usually be paid if the
suicide occurs after the two year period.

The three key factors to be considered in term insurance are:

o Sum Assured (protection or death benefit),

o Premium to be paid (cost to the insured), and

o Duration of coverage (term).

 Endowment Policy – Maturity Benefit & Death Benefit

An endowment policy is a life assurance contract designed to pay a lump

sum after a specified term. Policies are typically with-profits or unit-
linked. A full endowment is a with-profits endowment where the basic
sum assured is equal to the death benefit at start of policy.

A low cost endowment is a with-profits endowment policy with reduced

basic sum assured (typically 1/3 of the target amount) with an element of
life assurance. The idea is that the life assurance element and basic sum

46
 assured repay the target amount on death. These plans were originally
designed to act as a mortgage repayment vehicle.

The variations of Endowment policy include:

 Children’s Plan
 Marriage
 Education

 ULIP (Unit Linked Insurance Plan)

Unit linked insurance plan (ULIP) is life insurance solution that

provides for the benefits of protection and flexibility in investment. The
investment is denoted as units and is represented by the value that it
has attained called as Net Asset Value (NAV). The policy value at any
time varies according to the value of the underlying assets at the
time.

ULIP provides multiple benefits to the consumer. The benefits include:

• Life protection
• Investment and Savings
• Flexibility
• Adjustable Life Cover
• Investment Options
• Transparency
• Options to take additional cover against
• Death due to accident
• Disability
• Critical Illness
• Surgeries
• Liquidity
• Tax planning

47
Premium Underwritten By Life Insurers

Insurer 2004-2005 2005-2006

First Year Premium
LIC 1165824 1372803
Private Sector 422309 754773
Total 1588133 2127576
Single Premium
LIC 899482 1478784
Private Sector 134148 272194
Total 1033630 1750978
Renewal Premium
LIC 5447422 6227635
Private Sector 216293 481387
Total 5663716 6709022
Total Premium
LIC 7512729 9079222
Private Sector 772751 1508354
Total 8285480 10587576

48
Market Share of Life Insurers

First Year Premium

100

80
Percentage

60

40

20

0
2004-05 2005-06
LIC
Year Private Sector

49
 Single Premium

100

80
Percentage

60

40

20

0
2004-05 2005-06
LIC
Year Private Sector

Renewal Premium

100

80
Percentage

60

40

20

0
2004-05 2005-06 LIC
Year Private Sector

50
 Total Premium

100
Percentage 80

60

40

20

0
2004-05 2005-06
Year
LIC
Private Sector

New Policies Issued: Life Insurers

Life Insurer 2004-2005 2005-2006

Private Sector 2,233,075 3,871,410

LIC 23,978,213 31,590,707

Total 26,211,198 35,462,117

Other Investment Products

 Derivates

In finance, a derivative is a financial instrument that is derived from an

underlying asset's value; rather than trade or exchange the asset
itself, market participants enter into an agreement to exchange
money, assets or some other value at some future date based on the
underlying asset. Examples of assets could be anything from bars of
gold, to a stock, or even an interest rate. A simple example is a
futures contract: an agreement to exchange the underlying asset (or
equivalent cash flows) at a future date. The exact terms of the
derivative (the payments between the counterparties) depend on, but

51
may or may not exactly correspond to, the behaviour or performance
of the underlying asset.

There are many types of financial instruments that are grouped under
the term derivatives, but options/futures and swaps are among the
most common. Options are contracts where one party agrees to pay
a fee to another for the right (but not the obligation) to buy something
from or sell something to the other.

For example, a person worried that the price of his XYZ stock may go
down before he plans to sell it may pay a fee to another person (the
"writer" or seller of a put option) who agrees to buy the stock from
him at the strike price. The buyer is using an option to manage the
risk that his stock may go down, while the writer of the put option may
be using the option to earn the fee income and may have the view
that the stock will not go down.

In contrast to a put option, a call option gives the buyer of the option
the right to buy the underlying asset at a later date and at the
specified price (this specified price is known as the option's strike).

Later, contracts known as interest rate swaps appeared, where one

party agrees to swap cash flows with another. For example, a
business may have a fixed-rate loan, while another business may
have a variable-rate loan; each of the businesses would prefer to
have the other type of loan. Rather than cancel their existing loans (if
this is possible, it may be expensive), the two businesses can achieve
the same effect by agreeing to "swap" cash flows: the first pays the
second based on a floating-rate loan, and the second pays the first
based on a fixed-rate loan (in practice, the two will net out the
amounts owing). By swapping the cash flow, each has "converted" or
"swapped" one type of loan into another.

Derivatives can be based on different types of assets such as

commodities, equities or bonds, interest rates, exchange rates, or
indices (such as a stock market index, consumer price index (CPI) —
see inflation derivatives — or even an index of weather conditions, or
other derivatives). Their performance can determine both the amount
and the timing of the payoffs.

The main use of derivatives is to either remove risk or take on risk

depending if one were a hedger or a speculator. The diverse range of
potential underlying assets and payoff alternatives leads to a huge
range of derivatives contracts available to be traded in the market.
The main types of derivatives are futures, forwards, options and

52
 swaps. Derivatives are increasingly being used to protect assets from
drastic fluctuations and at the same time they are being re-
engineered to cover all kinds of risk and with this the growth of the
derivatives market continues. It is, indeed, ironic that something set
up to prevent risk will also allow parties to expose themselves to risk
of exponential proportions.

 Commodity

A commodity is something that is relatively easily traded, that can be

physically delivered, and that can be stored for a reasonable period of
time. It is a characteristic of commodities that prices are determined
on the basis of an active market, rather than by the supplier (or other
seller) on a "cost-plus" basis. Examples of commodities include not
only minerals and agricultural products such as iron ore, crude oil,
ethanol, sugar, coffee, aluminum, rice, wheat, gold, diamonds, or
silver, but also so-called "commoditised" products such as personal
computers.

A commodities exchange is an exchange where various

commodities and derivatives products are traded. Most commodity
markets across the world trade in agricultural products and other raw
materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk
products, pork bellies, oil, metals, etc.) and contracts based on them.
These contracts can include spot prices, forwards, futures and
options on futures. Other sophisticated products may include interest
rates, environmental instruments, swaps, or ocean freight contracts.

Commodities trading

Commodities exchanges, usually trade futures contracts on

commodities. Such as trading contracts to receive something, say
corn, in a certain month. A farmer raising corn can sell a future
contract on his corn, which will not be harvested for several months,
and guarantee the price he will be paid when he delivers; a breakfast
cereal producer buys the contract now and guarantees the price will
not go up when it is delivered. This protects the farmer from price
drops and the buyer from price rises.

Speculators also buy and sell the futures contracts to make a profit
and provide liquidity to the system.

53
 Real Estate

With the development of private property ownership, real estate has

become a major area of business. Purchasing real estate requires a
significant investment, and each parcel of land has unique
characteristics, so the real estate industry has evolved into several
distinct fields. Specialists are often called on to valuate real estate
and facilitate transactions.

Rising demand for real estate, corporatization of the sector, greater

transparency, shift in the regulatory outlook have all contributed to the
metamorphosis of real estate from an asset to an investment class.
Investment returns in Real Estate have outstripped other investment
avenues. Thus an investment foray into real estate through a fund
was the need of the hour.

Recent Developments – Indian Real Estate to take off-

 50 mn sq.ft. of retail space to be developed by 2006-07

 Leading corporates foray into real estate
 Property prices in some metros surge by 100%
 Mill lands turn into lifestyle destinations

 IPO

An initial public offering (IPO) is the first sale of a corporation's

common shares to investors on a public stock exchange. The main
purpose of an IPO is to raise capital for the corporation. While IPO’s
are effective at raising capital, being listed on a stock exchange
imposes heavy regulatory compliance and reporting requirements.
The term only refers to the first public issuance of a company's
shares.

If a company later sells newly issued shares (again) to the market, it

is called a 'Seasoned Equity Offering'. When a shareholder sells
shares it is called a "secondary offering" and the shareholder, not the
company who originally issued the shares, retains the proceeds of the
offering. These terms are often confused. In distinguishing them, it is
important to remember that only a company which issues shares can
make a "primary offering". Secondary offerings occur on the
"secondary market", where shareholders (not the issuing company)
buy and sell shares with each other.

54
 Art Fund

Art is an investment alternative that helps you diversify. Art as an

investment can be a great hedge against inflation and does not follow
the sometimes sudden market shifts of stocks and bonds. Quality art
consistently appreciates over time.

Why invest in art?

 Asset class has established its return credentials

 Market depth increasing every day
 Auctions now proven mechanism for liquidity
 Contemporary art grows as economies globalize: the story is still
unfolding in India, China and Korea
 Strong resident focus now driving growth in these countries
 Insurance and logistics provide safety net
 Early mover scenario is still on offer.

55
Model Portfolios

In preparing an Investment Program, the investor or the advisor would have

to deal with investors at different stages of their life-cycle and therefore with
different needs. Each type of investor may be advised to have some typically
suitable model portfolio. Jacobs gives four different portfolios, summarized
below.

The exact percentage allocations have been recommended for the investors
in the U.S.A. Besides, the percentage allocations can change depending
upon specific facts about an investor, or also in the light of his changing
conditions. However, the following four portfolios are still of general
applicability and the mutual fund distributors in India are well-advised to
consider them as the basis to develop similar model portfolios for Indian
mutual fund investors.

Investor Recommended Model Portfolio

50% in Aggressive Equity Funds
25% in High Yield Bond Funds, and
Growth and Income Funds
Young, Unmarried Professional
25% in Conservative Money Market
Funds

10% in Money Market

30% in Aggressive Equity Funds
Young Couple with Two Incomes and two 25% in High Yield Bond Funds, and
Children Long Term Growth Funds
35% in Municipal Bond Funds

30% in short-term Municipal Funds

Older Couple, Single Income
Recently Retired Couple
35% in long-term Municipal Funds
25% in moderately Aggressive
Funds
10% in Emerging Growth Equity
35% in conservative Equity Funds
for capital preservation/income
25% in moderately Aggressive
Equity
for modest capital growth
40% in Money Market Funds

56
Investors in the Accumulation Phase:

During this phase, clients are looking to build wealth because their financial
goals are quite some time away and investments can be made for the long-
term. Another point to be noted here is that the risk tolerance level for the
investors can greatly influence the percentages. For this purpose, the earlier
classification of the investors (based on the “risk quiz”) into the three main
categories: Low risk, Moderate risk and High risk will be used.

For such clients, the following asset allocation may be appropriate:

Moderate
Asset Low Risk High Risk
Risk
Diversified Equity, Sector and Balanced 40% 60% 80%
Funds
Debt funds and Monthly Income Plans 45% 30% 15%
Liquid Funds 15% 10% 5%

Investors in the Transition Phase:

During this phase, one or more of the client’s goals are approaching and
clearly in sight. If a salaried executive is planning to retire at 60 years of age,
he should start preparing about 3 years in advance by gradually transitioning
from growth to income generating investments. Likewise, a couple in their
mid 40s who have children approaching the age of higher education or
marriage, should gradually start converting some of their equity investments
into income and cash funds to prepare for these financial commitments.

Investors in the Distribution or Reaping Phase:

This is the cashing out stage. For example, if the client has retired,
investments need to generate income for a comfortable post-retirement life.
Hence, the financial planner has to ensure there is enough investment in
fixed income funds to support the client. If the post-tax returns expected are
8% per annum, then the client needs to set aside about 150times their
monthly requirement in an income fund, and opt for a monthly dividend plan
or systematic withdrawal plan.

57
Some investments should certainly be left in growth assets like equities,
because only these can provide a hedge against inflation. This is because
while expenses will rise over the years, the inflows from fixed income
investments may not. All other things being constant, a typical asset
allocation for clients in the retirement stage could be:

Moderate
Asset Low Risk High Risk
Risk
Diversified Equity, Sector and Balanced 10% 20% 30%
Funds

Debt funds and Monthly Income Plans 80% 70% 65%

Liquid Funds 10% 10% 5%

If the cash inflow from income funds is not sufficient to meet the monthly
retirement, a retired client can adopt a couple of strategies:

Sell some of their fixed and hard assets, because this will release fresh cash
flow into the system which can help fund the gap, or

Make small monthly withdrawals from the principal of both their equity and
fixed income investments to bridge the gap. There is no rule that clients
should not gradually draw down on principal, as long as they don’t outlive all
their sources of money.

In case of a client who wants to buy a home or fund a child’s education, the
financial planner can advise the client to liquidate a combination of equity
and fixed income investments to come up with what’s required. The decision
on how of equity and fixed income funds to redeem should be determined by
the client’s other goals, what residual asset allocation is appropriate for
these remaining goals, as well as the state of the markets (when equity
markets are down, liquidating income funds may be a better option).

Investors in the Inter-Generational Transfer Phase:

Younger clients up to their early 50’s would depend on life insurance policies
to take care of the next generation in event of death. For older investors,
who want to transfer their wealth, the recommended investment strategies
will depend upon the beneficiaries:

Children: If the children are grown up, then leaving behind a balanced
combination of growth and income funds may be appropriate for them.

58
Grandchildren: If the grandchildren are young, then growth funds may be
best, as this group has a lot of time available for the investment to grow in
value.

Charitable causes: Typically, income funds are best to support such

endeavors, as they have the capacity to provide current income.

Investors in the Sudden Wealth Stage:

The financial planner should advise clients who acquire sudden wealth:

To take into account the effect of taxes, because this one time windfall may
be greatly reduced after taxes have taken their bite. To keep the money in
safe, liquid investments while they take their time on deciding what to do
with the money. This advice is very useful because clients tend to spend the
money immediately, or just give it away recklessly in the first flush of getting
a big amount. By giving themselves time, clients will act more rationally and
they can then be advised to make the appropriate investments at a later
stage.

Financial Planning for Affluent Investors

The wealthy investors can be classified into two groups:

Wealth-Creating Individuals:

For such investors, a 70% to 80% allocation to diversified equity and sector
funds would provide the kind of aggressive plan that they may be looking for.
It should be kept in mind that wealthy investors have a higher risk bearing
capacity as even the incurrence of losses may not seriously impair their
lifestyle or ability to fund their normal, routine expenses.

Wealth-Preserving Individuals:

For such investors, a conservative portfolio with a 70% to 80% exposure to

income, gilt and liquid funds would be appropriate, with the remaining in low-
risk diversified equity or balanced funds. The financial planner should
recommend a low-risk investment strategy for such clients, because these
investors have enough already, do not need to bear any risk, and are likely
to go through unnecessary trauma if their investments decline in value.

59
Client Portfolios
Portfolio of Mr. X
Age – 40
Occupation – Businessman (Automobiles)
Salary – 35 lakhs p.a.

Sr. Investment
No Product Amount
Life Insurance
1 (Term) 3,000,000
2 Mutual Funds 1,500,000
3 Shares 1,000,000
4 Fixed Deposits 1,000,000
5 Gold 500,000
6 PPF 500,000
Total 7,500,000

60
 7%
Portfolio of Mr. X
7%

13% 40% Life Insurance (Term)

Mutual Funds
Shares
Fixed Deposits
Gold
13% PPF

20%

Mr. X is a moderate risk-taker. He invests majority of his money in safe

investment tools like insurance, mutual funds, FDs, PPF etc. He has
invested only Rs. 10 lakhs in shares, which is a mere 13% of his total
investment. Thus one can safely assume that he prefer to play it safe. His
investments in other products are detailed out in the above pie chart.

Sr.
No Mutual Funds Amount
SBI Magnum Contra 200,00
1 Fund 0
200,00
2 HDFC Equity 0
100,00
3 Birla Tax Relief 96 0
100,00
4 Birla MIP 0
200,00
5 DSP Cash Plus 0
500,00
6 Reliance Equity 0
100,00
7 Reliance Regular Saver 0
100,00
8 Reliance Tax Saver 0
1,500,00
Total 0

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 Mutual Funds
7% 7% 13%

13%

33% 7%
7%
13%
SBI Magnum Contra Fund HDFC Equity Birla Tax Relief 96
Birla MIP DSP Cash Plus Reliance Equity
Reliance Regular Saver Reliance Tax Saver

However in case of Mutual Funds, Mr. X. has a slightly aggressive

approach. He has invested 33% in Reliance Equity Fund, which is a
diversified equity fund. His other investments are in debt based mutual funds
and 14% in ELSS funds for the purpose of tax saving.

Sr.
No Shares Amount
100,00
1 Reliance Energy 0
Reliance 200,00
2 Industries 0
200,00
3 ICICI Bank 0
100,00
4 HDFC Bank 0
Infosys 200,00
5 Technologies 0
100,00
6 Reliance Power 0
100,00
7 DLF 0
1,000,00
Total 0

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 10% 10%
Shares
10%

20%

20%

20%
10%
Reliance Energy Reliance Industries ICICI Bank
HDFC Bank Infosys Technologies Reliance Pow er
DLF

When it comes to shares Mr. X. is very focused on the Blue-chip stocks. His
ideology is simple i.e. to only invest in a company with strong fundamentals.
One can see from the graph above that he has invested in the big
companies of the Sensex.

Portfolio of Mr. Y
Age – 42
Occupation – Businessman (Export - Import)
Salary – 45 lakhs p.a.

Sr. Investment
No Product Amount
Life Insurance 3,500,00
1 (Term) 0
2,000,00
2 Mutual Funds 0
1,500,00
3 Shares 0
1,000,00
4 Fixed Deposits 0
500,00
5 Gold 0
2,000,00
6 Real Estate 0

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 500,00
7 PPF 0
11,000,00
Total 0

Portfolio of Mr. Y
5%

18%
31%
Life Insurance (Term)
Mutual Funds
Shares
5%
Fixed Deposits
Gold
9% Real Estate
PPF

18%
14%

One can argue that Mr. Y. is a more of a risk taker than Mr. X. He has
invested Rs. 15 lakhs in shares compared to Rs. 10 lakhs of Mr. Y. Overall
he has invested a larger amount than Mr. X. He is more comfortable with
investments. He has also invested in Real Estate. His investment products
are detailed in the above graph.

Sr.
No Mutual Funds Amount
Franklin Prima 500,00
1 Plus 0
400,00
2 Reliance Equity 0
200,00
3 Fidelity Tax Adv 0
100,00
4 ING Income 0
300,00
5 Fidelity Equity 0
300,00
6 ABN MIP 0
Reliance Tax 200,00
7 Saver 0
2,000,00
Total 0

64
 Mutual Funds
10%
25%
15%

15%
20%
5% 10%
Franklin Prima Plus Reliance Equity Fidelity Tax Adv ING Income
Fidelity Equity ABN MIP Reliance Tax Saver

Being more prone to risk, Mr. Y. has invested more than 50 % of his mutual
funds investment in Diversified Equity Funds. He has also invested 20 % in
ELSS tax saver funds.

Sr.
No Shares Amount
Larsen & 300,00
1 Tubro 0
Reliance 200,00
2 Industries 0
200,00
3 SBI 0
100,00
4 TCS 0
200,00
5 TISCO 0
100,00
6 Wipro 0
100,00
7 DLF 0

65
 200,00
8 Grasim 0
100,00
9 ONGC 0
1,500,00
Total 0

7% Shares
20%
13%

7%
13%
7%

13% 13%
7%
Larsen & Tubro Reliance Industries SBI
TCS TISCO Wipro
DLF Grasim ONGC

Mr. Y. also prefers to invest in blue-chip companies of the Sensex. He has

diversified his investments in various sectors so as to broaden his
investment horizon and minimize his risk.

References
Books:

• Association of Mutual Funds India (AMFI) Module

• Arindam Banerjee, Wealth Management, 2nd edition, ICFAI
University Press, 2007

Periodicals:

• Security Markets module of NCFM

66
 • Financial Markets module of NCFM
• ICFAI University Press on Wealth Management

Websites:

• www.wikipedia.com
• www.investopedia.com
• www.moneycontrol.com
• www.valueresearchonline.com
• IRDA (Insurance Regulatory Development Authority)
• Mutual Fund websites

Annexure I
Questionnaire

1) Do you invest on your own or through a financial advisor?

□ Own □ Financial Advisor
2) What percentage of your income do you normally save?
□ 20% - 30% □ 30% - 40% □ 40% -
50% □ More than 50%

67
3) What percentage of your savings do you invest?
□ 20% - 30% □ 30% - 40% □ 40% -
50% □ More than 50%
4) Rank the following attributes, in the context of your financial decision-
making, from 1 (Highest Priority) to 4 (Lowest Priority).

Attributes Rank
Risk
Returns
Liquidity
Security

5) You just received a substantial sum of money. How would you invest
it?
a. In something that offers moderate current income and is very
safe
b. In something that offers high current income with moderate risk
c. In something that offers high total return (current income plus
capital appreciation) with moderately high risk
d. In something that offers substantial capital appreciation even
though it is high risk

6) Which of the following statements best describes your reaction if the

value of your portfolio suddenly declined 15%?
a. Very concerned - I cannot accept fluctuations in the value of
my portfolio
b. Would not bother me if the amount of income I received is
unaffected
c. Be concerned about a temporary decline even though I invest
for long-term growth
d. Accept temporary changes due to market fluctuation

7) Which of the following investments would you feel most comfortable

owning?
a. Certificates of Deposit
b. Government securities
c. Stocks of older, established companies
d. Stocks of newer, growing companies

68
 8) How optimistic are you about the long-term prospects for the
economy?
a. Pessimistic
b. Unsure
c. Somewhat optimistic
d. Very optimistic

9) What are the various financial instruments you invest in?

□ Mutual Funds
□ Insurance
□ Stocks
□ Gold
□ Real Estate
□ Commodities
□ Derivatives
□ Others __________________________

10) How experienced are you at investing? (Tick any one)

□ Inexperienced □ Moderately experienced □

Experienced

11)Have you already started investing in mutual funds?

Company Scheme Amount

12). What is your main purpose of investing?

□ For tax saving

□ For receiving dividends
□ For capital appreciation
□ Others, please specify _________________________________

13). What is your investment horizon?

□ Upto 6 months
□ Upto 1 year
□ Upto 3 years

69
 □ Upto 5 years
□ Beyond 5 years

Name _____________________
Age _____________________
Occupation _______________
Annual Income ______________
PAN No _______________
Address _______________
_____________________
_____________________
Conact Nos _______________
_______________
No of Family
Members _______________

Sign

_____________

Date
_____________

Place
_____________

70